Title: Barriers to Entrepreneurship in Low and ModerateIncome Communities
1Barriers to Entrepreneurship in Low- and
Moderate-Income Communities
Milken Institute October 2009
2Overview
- The importance of entrepreneurial activity to
economic growth and social welfare. - The state of lending to businesses in low- and
moderate-income communities. - A newly constructed measure of loan bias.
- A review of datasets and the empirical and
theoretical literature. - Regulatory stumbling blocks that impede
entrepreneurial activity. - An alternative approach to trying to identify
those factors that help explain the differences
in entrepreneurial activity across geographical
region
3Economic Importance of Entrepreneurship
4Business Ownership Rates Vary Across Demographic
Groups
5Shares of Business Loans and Population
Uncorrelated
Loans to Businesses in Low- and Moderate-Income
Communities
Loans to Businesses in Low- Income Communities
6Measures of LI and LMI Loan Bias
- Deviation from proportionality of
- Share of loans to businesses in LI (LMI)
communities in a MSA - and the share of the total population in a MSA
comprised by LI (LMI) individuals - 1-(share of loans/share of population)
7Loan Bias Population and Business Loan Shares
Most Bias
Least Bias
8Shares of Business Loans and Income Uncorrelated
Loans to Businesses in Low- and Moderate-Income
Communities
Loans to Businesses in Low- Income Communities
9Measures of LI and LMI Loan Bias Income and
Loan Shares
- Deviation from proportionality of
- Share of loans to businesses in LI (LMI)
communities in a MSA - and the share of the total income in a MSA
comprised by LI (LMI) individuals - 1-(share of loans/share of income)
10Loan Bias Income and Business Loan Shares
Most Bias
Least Bias
11Entrepreneurial Activityin MSAs
- An examination of factors that may help to
explain variation in entrepreneurship across
geographic regions (MSAs) - Data for 204 MSAs from all 50 states
- Size of firms is used as a measure of
entrepreneurship - We consider establishments grouped into four
different size categories (0, 1-10, 10-100, and
100 plus employees) as well as all establishments
combined.
12Empirical Model
- ESTij a ß 1?Dij ß2?Pj ß 3?Fij eij
- ESTij establishments for MSA i in state j
- Dij demographic variables for MSA i in state j
- Pj tax rate for state j
- Fij financial variables for MSA i in state j
- eij error term
13Empirical ResultsDependent Variable Total
Number of Establishments in MSA
- The greater the total number of establishments
- the greater the share of population in the 25-44
age group, - the greater the homeownership rate,
- the greater the number of financial institutions,
- and the greater the total number of loans made in
an MSA to all businesses. - To the extent that a variable increases the
total, any tradeoff between that variables
effect on the size composition of establishments
diminishes.
14Empirical ResultsDependent Variable Proportion
of All Establishments with 0 Employees in MSA
- The greater the share of total establishments
that are 0 employee establishments - the lower the share of the population aged 25 to
44, - the higher the household income,
- the smaller the percentage of the labor force
with a college degree, - the smaller the share of the labor force with a
high school diploma or less, - the greater the race/ethnic mix of the
population, - the lower the state sales tax rate,
- the larger the number of financial institutions,
- the lower the number of branches per institution,
15Empirical ResultsDependent Variable Proportion
of All Establishments with 0 Employees in MSA
(Continued)
- The greater the share of total establishments
that are 0 employee establishments - the lower the deposits per institution,
- the greater the number of loans,
- the lower the average loan size,
- the lower the share of the total amount of loans
to businesses in LMI communities, - the larger the share of the total number of loans
to businesses in LMI communities, - and the lower the share of the total number of
loans made to businesses in low-income
communities.
16Empirical ResultsDependent Variable Proportion
of All Establishments with 1-10 Employees in MSA
- The greater the share of total establishments
that are 1-10 employee establishments - the lower the share of the population aged 25 to
44, - the higher the household income, the higher the
percentage of the labor force with a college
degree (in two of six regressions), - the higher the share of the labor force that has
a high school diploma or less (in three of six
regressions), - the lower the state sales tax rate,
- the lower the average loan size,
- the greater the share of the total amount of
loans to businesses in MI communities, - the lower the share of the total number of loans
to businesses in MI communities, - and the greater the share of the total number of
loans made to establishments with receipts of
less than one million dollars.
17Empirical ResultsDependent Variable Proportion
of Establishments with 11-100 Employees in MSA
- The greater the share of total establishments
that are 11-100 employee establishments - the greater the share of the population aged 25
to 44, - the higher the poverty rate,
- the higher the state sales tax rate,
- the higher the number of branches per
institution, - the higher the amount of deposits per
institution, - the higher the average loan size,
- and the larger the share of the total number of
loans to businesses in LI communities.
18Empirical ResultsDependent Variable Proportion
of Establishments with 100 plus Employees in MSA
- The greater the share of total establishments
that are 100 plus employee establishments - the higher the population of the MSA,
- the higher the share of the population aged 25 to
44, - the lower the household income,
- the lower the race/ethnic mix of the population,
- the lower the unemployment rate (this is a
marginal result in two of six regressions), - the higher the state sales tax rate,
- the larger the average loan size,
- the higher the share of the total number of the
loans to businesses in MI communities, - and the lower the share of the total number of
loans made to establishments with receipts of
less than one million dollars
19Key Findings and Policy Recommendations
- Researchers use different definitions and control
variables in their analyses hampering an
understanding of the factors that influence
entrepreneurship and thus policy. - One approach to addressing the problem of the
use of different definitions and control
variables is the construction of a single,
multiuse dataset through the creation of a data
consortium that pools information from different
public and private datasets. - Incentives provided through Capital Access
Programs (in which lenders, borrowers and the
government each contribute to a reserve fund to
cover loan losses) and other credit enhancement
programs may be appropriate to help decrease loan
bias not explained by economic factors.
20Key Findings and Policy Recommendations
- The financing received by businesses in many LI
and LMI communities diverges from what some might
consider appropriate, even when accounting for
income disparity. - Incentives provided through Capital Access
Programs (in which lenders, borrowers and the
government each contribute to a reserve fund to
cover loan losses) and other credit enhancement
programs may be appropriate to help decrease loan
bias not explained by economic factors.
21Key Findings and Policy Recommendations
- Financial variables are important to
entrepreneurship. - One potential way to increase small business loan
origination across MSAs is to increase the
securitization of such loans. This would allow
small business lenders to sell portions of their
loan portfolios and use the proceeds to originate
more loans, as well as lower their capital
requirements. - Discrimination appears to persist, particularly
as relates to capital access by black
entrepreneurs. - The continued difficulty of black-owned firms to
gain financing suggests the continuing need for
efforts to extend capital and other forms of
support to black entrepreneurs.
22Key Findings and Policy Recommendations
- Taxes and regulations are clearly potentially
important impediments to entrepreneurship - High bankruptcy exemptions have been found to
actually hurt borrowers by decreasing lenders
willingness to provide capital and should be
reviewed. The relationship found between lower
sales taxes and greater entrepreneurship suggests
one approach to mitigating this adverse effect
would be decreased taxes. - There appears to be consensus in the literature
that individuals can learn to become
entrepreneurs. - Well-developed training programs, with targeted
outreach, particularly to LI and LMI communities,
can extend entrepreneurship to a wider
population.