Race and Entrepreneurial Success

1
Race and Entrepreneurial Success

• Robert W. Fairlie
• University of California, Santa Cruz
• The Diversity in Business Conference Sponsored by
  the CJTC
• November 13, 2008

2
Importance of Entrepreneurship

• More than 1 in 10 workers, or 13 million people,
  in the United States are self-employed business
  owners.
• Job Creation
• Small Business Administration reports that 2/3 of
  new jobs are created by small businesses
• Innovation
• Economic growth
• Wealth accumulation
• The self-employed hold nearly 40 percent of total
  U.S. wealth (Bucks, Kennickell, and Moore 2006).

3
Contributions of Minority Businesses

• Important contribution to U.S. economy
• Total sales of nearly 700 billion
• Hire nearly 5 million employees
• Annual payroll of 120 billion

4
Contributions of Minority Businesses

• California economy
• Total sales of nearly 200 billion
• Hire 1.3 million employees
• Annual payroll of 31 billion
• Bay Area
• 183,000 firms with 53 billion in sales
• Santa Cruz
• 611 firms with predicted 130-175 million in sales

5
New Book on Race and Entrepreneurship

• Race and Entrepreneurial Success Black-, Asian-
  and White-Owned Businesses in the United States
  (MIT Press 2008), with Alicia M. Robb
• Extensive project on race, gender and
  determinants of business success
• Uses most up-to-date and widely used government
  datasets and confidential, restricted-access
  microdata from the U.S. Census Bureau

6
Main Goals of Study 1. Document recent trends in
business ownership and outcomes by race 2.
Identify the determinants of success among small
business owners 3. Explain why African-American
firms underperform the national average 4.
Explain why Asian-American firms outperform the
national average
7
Introduction

• Minority businesses make important contributions
  to U.S. economy
• Large racial differences in business ownership
  and performance

8
(No Transcript)
9
(No Transcript)
10
(No Transcript)
11
(No Transcript)
12
(No Transcript)
13
(No Transcript)
14
(No Transcript)
15
(No Transcript)
16
Identifying the Determinants of Business Success

• Use confidential, restricted-access data from the
  U.S. Census Bureau (Characteristics of Business
  Owners)
• Statistical analysis
• Four business outcomes survival rate, profits,
  employment and sales
• Determinants of success
• Education level of owner
• Prior work experience in family business 11-38
  better performance
• Prior work experience in similar business 19-41
  better performance
• Startup capital (e.g. firms with 100,000 startup
  capital generally had outcomes that were twice as
  good as firms with 5-25,000 startup capital)

17
Importance of Access to Financial Capital

• Stock Market

18
(No Transcript)
19
The Stock Market

• Implications for wealth
• Stock values
• Mutual funds
• 401(k)s and retirement funds
• College funds
• Entrepreneurs wealth important for investing in
  business, use as collateral for loans, and for
  weathering storms
• Consumers

20
(No Transcript)
21
The Housing Market

• Largest single asset held by most families
• Represents 60 percent of wealth for home owners
• Home equity lines of credit
• Upside down on mortgages and defaults
• Bankruptcies

22
Federal Response to Financial Crisis

• 700 billion financial bailout
• Fannie Mae 100 billion
• AIG 150 billion
• U.S. Auto Industry
• General Motors, Ford and Chrysler are lobbying
  for 25 billion in loans
• What about small businesses?

23
What About Small Businesses?

• WSJ Article We do not have any pockets to line,
  pork to add, or monetary promises to make. I can
  promise a vote, and our word that will we not use
  our money to add to our overhead by purchasing
  another failing business. We will not hold
  400,000 executive getaways on your tab.I think
  its only fitting some of the smaller fish in the
  pond have access to the funds.
• Obama/Biden Small Business Emergency Rescue
  Plan
• SBA provides direct emergency loans to small
  firms
• Expand government guarantees
• Eliminate capital gains taxes on investments in
  small startups

24
(No Transcript)
25
Wealth Inequality

• Median net worth
• Whites Blacks
• 67,000 6,166

26
(No Transcript)
27
Prior Work Experience

• Prior work experience in family members business
• Whites Blacks
• 23.3 12.6

28
(No Transcript)
29
Asian-American Business Performance
30
(No Transcript)
31
(No Transcript)
32
(No Transcript)
33
Summary of Findings

• Large racial differences in business performance.
• African-American businesses underperform the
  national average because of low levels of startup
  capital, limited opportunities to work in family
  businesses and less education.
• High levels of startup capital and education
  contribute to Asian-American business success.

34
Why Do We Care?

• Total earnings inequality would drop by roughly
  20 percent if black business ownership and
  performance improved to white levels.
• Nearly 1 million new jobs for minorities would be
  created if there was only a 10 percent increase
  in both the number of minority-owned firms and
  the average number of employees per firm.

35
What Can We Do?

• Remove constraints to successful business
  ownership
• Increase wealth accumulation and improve access
  to financial capital
• Increase educational attainment
• Provide mentoring, internships, or
  apprenticeship-type training
• Focus on training programs that are
  industry-specific, targeted towards economically
  disadvantaged groups, and emphasize prior
  hands-on work experience
• Policies may have broader effects of increasing
  overall entrepreneurship