Small Bus Econ DOI 10.1007/s11187-017-9883-5

Minority entrepreneurship in twenty-first century America Timothy Bates & William D. Bradford & Robert Seamans

Accepted: 3 May 2017 # Springer Science+Business Media New York 2017

Abstract Prior to the 1970s, minority-owned small businesses were small in size and scope, and common in only a few industry niches. Business owners were severely capital-constrained, lacking in higher education, and training in skilled occupations. The median owner today, in contrast, is college educated, access to financing has expanded, and opportunities to serve corporate and public-sector clients are commonplace. Nearly 40% of all new firms created nationwide in 2015 were minority owned. Changing attitudes in mainstream society reduced traditional barriers. True equality of opportunity among small minority- and white-owned firms of similar size and scope has nonetheless not been achieved. This issue of Small Business Economics examines lingering barriers impeding the development of a more vibrant minority business community. Focusing on access to financing and government procurement markets, articles in this issue offer explicit analyses of enduring barriers, along with explanations of adoptive strategic firm behavior appropriate for reducing those barriers.

T. Bates (*) Wayne State University, Detroit, MI 48202, USA e-mail: [email protected] W. D. Bradford Business and Economic Development, University of Washington, Seattle, WA 98105, USA e-mail: [email protected] R. Seamans Stern School of Business, New York University, New York, NY 10003, USA e-mail: [email protected]

Keywords Minority-owned firms . Racial discrimination . Discrimination in financial markets . Overcoming discriminatory barriers JEL codes G21 . J16 . L2 . L26

1 Overview Minority entrepreneurship in the 1970s, 1980s, and 1990s was an exceedingly popular topic in academic circles, one generating influential books and numerous journal articles. Although enthusiasm has since waned, demographic trends may soon rekindle interest. Over half of all children age five and under living in the USA are minorities; the nation several decades from now will be one where non-Hispanic whites are in the minority.1 According to the 2016 Kauffman Index of Startup Activity, minority owners made up 39.3% of those nationwide starting new businesses in 2015 (Fairlie et al. 2016). The Latino share rose from 10.0% in 1996 to 20.8% in 2015, a trend overlapping with a rising share of immigrant new-firm owners—13.3% in 1996 to 27.5% (Table 1). African Americans and Asian Americans accounted for rising shares as well. 1 Pew Research Center projects that non-Hispanic whites will cease to be the majority group by 2055, and reports that the Census Bureau project this will occur by 2044. Pew also reports that over half of all children age five and under living in the USA are minorities. See: http://www.pewresearch.org/fact-tank/2016/06/23/its-officialminority-babies-are-the-majority-among-the-nations-infants-but-onlyjust/

T. Bates et al. Table 1 Nationwide shares of all new entrepreneurs, by race/ ethnicity and nativity, 1996 and 2015 Owner race/ethnicity:

1996

2015

White

77.1%

60.7%

Black

8.4%

8.9%

Latino

10.0%

20.8%

Asian

3.4%

5.7%

Other

1.0%

3.9%

Native born

86.7%

72.5%

Immigrant

13.3%

27.5%

Nativity:

Source: Current Population Survey data (Fairlie et al. 2016)

Minority business enterprise’s (MBE) potential contribution to the nation’s economy, meanwhile, is being under-utilized (Bates 2011). Labor productivity growth, measured as percent growth in output per hour, continues to be positive but the rate of growth has slowed across all OECD counties including the USA (CEA 2016a). Can this growth rate be sustained, or even increased? BUnless we unleash the potential of the minority population^ note Greenhalgh and Lowrey, Bthe past success of the U.S…. cannot be sustained in the coming decades^ (2011, p. 16). Seen in this light, declining scholarly interest strikes us as paradoxical. No aspect of minority entrepreneurship was more intriguing in the 1980s than the seeming success of Korean-immigrant entrepreneurs in Los Angeles (Light and Bonacich 1988), and the even greater apparent success of Cuban immigrant entrepreneurs in Miami (Portes and Jensen 1987; Portes and Jensen 1989; Portes 1987; Wilson and Portes 1980). In what appeared to be genuine economic development miracles, economically depressed inner-city communities were being revitalized. Subsequent scrutiny indicated the Light, Bonacich, and Portes teams had drawn bold, provocative conclusions from data incapable of supporting their findings. They over-reached. Both stuck their respective necks out, and the critics chopped off their heads (see, for example, Borjas 1990, Sanders and Nee 1987; Sanders and Nee 1992; Bates 1994). The stars of the minority entrepreneurship niche stood diminished. Their accomplishments, nonetheless, were important and enduring. Renaissance is now overdue.

1.1 Do minority entrepreneurs somehow differ from other entrepreneurs? Is the distinction between minority and non-Hispanic white entrepreneurs useful, and, if so, why? Key ingredients for creating and operating small businesses successfully are (1) involvement of skilled, capable entrepreneurs, (2) investment of, and access to sufficient debt and equity capital to exploit business opportunities and achieve efficient scale, and (3) access to markets for the firm’s products. Minority entrepreneurship’s uniqueness is clarified by viewing these prerequisites as barriers. Acquiring appropriate education, skills, and work experience; accessing financial capital; and exploiting market opportunities—overcoming these barriers—has traditionally been more difficult for minorities than for aspiring white entrepreneurs. These higher barriers often resulted in overly small, marginally profitable firms.2 The uneven but substantive alleviation of these barriers has been underway now for five decades (Bates 2011). Scholars initially analyzing MBEs claimed they were collectively insignificant (Brimmer and Terrell 1971; Osborne 1976). African-American owned firms, claimed Federal Reserve Board Governor Andrew Brimmer (1966), simply lacked the managerial and technical competence needed to compete successfully in the business world. While this view was possibly tenable 50 years ago, it misses a key point: the nature of minority business is derivative of broad social, economic, and political forces (Light 1972; Bates 1973; Bonacich and Modell 1981). Discrimination’s gradual attenuation has since generated a larger scale, more diversified MBE community. Its future composition may derive from expanding opportunities, or it may be constrained by evolving discriminatory barriers.

1.2 Development of the underdevelopment of the minority business community Scholars studying the MBE community’s trajectory are unanimous on one issue: self-employment and business ownership patterns only make sense when viewed in the context of prevailing constraints and opportunities (Waldinger et al. 2006). A push, pull dynamic has 2 Our minority entrepreneurship special issue focuses solely on firms operating in the USA. The unique challenges facing minorities pursuing entrepreneurial alternatives arise in specific social, political, historical, economic contexts, contexts that differ from nation to nation.

Minority entrepreneurship in twenty-first century America

continually shaped/reshaped MBEs collectively (Bates and Robb 2014; Waldinger 1986). Barriers limiting opportunities for paid employment often pushed minorities toward self employment, even among those preferring employee status (Min 1984). Alternatively, many wanted to own their own firms, and when attractive opportunities arose, they were pulled into ownership. This dynamic is clarified by briefly examining constraints and opportunities in historical context. Well into the twentieth century, traces of a caste system shaped MBE ownership and employment opportunities (Bonacich and Modell 1981). Career choices of the college educated were particularly hemmed in. Thus, 73% of all black Americans graduating from college nationwide between 1912 and 1938 became teachers or preachers (Holsey 1938). The few entering professional fields served black clients almost exclusively (Harris 1936). Merit still mattered, but the career choices open to the entrepreneurially inclined were greatly narrowed. The MBE community’s fundamental constraint was white stereotypes about suitable roles for minorities in US society. Self-employed Chinese, for example, concentrated traditionally in restaurants and laundries, fields where their presence was tolerated. Whites Braised no barrier to Chinese in the laundry trade, since this occupation was not one in which white males cared to engage^ (Light 1972, p. 7). Thusly limited, minorities often created ventures in their own communities catering to co-ethnics. Growing twentieth century ghettoization encouraged this orientation.3 The MBE community shaped by these constraints entered the 1960s as a relic of a declining era. As evolving mainstream attitudes gradually lessened traditional constraints, subsequent progress—expanding education and employment choices, greater access to financing, and the like—significantly altered the size and scope of the MBE community (Bates and Tuck 2014).

2 Barriers restricting minority-owned businesses America’s MBE community is profoundly different today than it was 50 years ago. The median owner is college-educated; aspiring entrepreneurs have acquired 3 Studies of Hispanic-owned businesses are notable for their rarity. The fact that U.S. Census Bureau databases inconsistently defined—and repeatedly redefined—BHispanic^ over past decades has not helped matters.

expertise in many fields where entry was traditionally restricted. This greater expertise is quite possibly the key factor driving minority business expansion (Bates 2011). Possessing strong human-capital, in turn, facilitates (1) accessing business financing and (2) entering the traditional high-barrier lines of business, such as manufacturing, wholesaling, finance, insurance, and real estate. Progress notwithstanding, the accumulated evidence that MBEs collectively face higher barriers than white small-business-owners is simply overwhelming (Parker 2009; Bates 2011). These persistent disadvantages are often rooted in discriminatory practices, past and present disadvantages that economists often struggle to recognize (Becker 1993). Influential studies of minority-entrepreneurship dynamics have often focused on both documenting those disadvantages and probing how they shaped venture performance (Bates 1997; Parker 2009). 2.1 Access to financing Large personal wealth holdings boost the odds of successful firm creation and operation by permitting owners to self-finance, serving as collateral for owners seeking loans, and buffering losses that often occur in the startup phase. BPersonal wealth has taken center stage,^ note Fairlie and Robb (2008, p. 28). Banks, importantly, are the primary loan source for small businesses, including startups, young firms, and established ventures (Robb and Robinson 2014; Bates 2011). Unfortunately, wealth disparities between white and minority households—particularly black and Latino households—magnify this barrier to business success for minorities (Bradford 2014; Asante-Muhammed et al. 2016). The low mean and median wealth holdings of black and Latino households are thus an important obstacle limiting their ability to launch small-firm startups successfully, particularly in high-barrier industries (Hao 2007; Lofstrom et al. 2014). If successfully launched, additionally, business ownership clearly facilitates wealth accumulation, easing this constraint as firms build capacity (Bradford 2014). In light of young firms’ reliance on financial institutions, bank-loan accessibility is a vitally important determinant of firm viability. This is problematic for MBE owners, because multiple studies indicate they have considerably less access to bank financing than whiteowned firms possessing comparable traits and risk profiles (see, for example, Cavalluzzo and Cavalluzzo

T. Bates et al.

1998; Cavalluzzo and Wolken 2005; Blanchflower et al. 2003; Blanchflower 2009). From the starting point of a 65.9% black loan-application denial rate, for example, Blanchflower et al. (2003) found this rejection rate was partially explained by factors like weaker credit histories, but after including extensive controls, black applicants were still 25% more likely than whites to be rejected when applying for loans. Later studies documenting similar outcomes were most often straightforward variants of the Blanchflower team’s (2003) methodological approach (see, for example, Mitchell and Pierce 2011). Some studies probed, as well, whether MBE owners receiving bank loans were charged higher interest rates than similar white borrowers. Indeed, they were (Blanchflower 2009; Hu et al. 2011; Bates and Robb 2013). Given the difficulty in obtaining bank loans, one might expect MBE owners to rely instead on other means of finance, as credit cards or loans from family and friends. Such explanations were originally suggested by Blanchflower et al. (2003, p. 940): Bif financial institutions discriminate against blacks in obtaining small-business loans, we may even expect to see them use credit cards more often than whites, because they have fewer alternatives.^ Chatterji and Seamans (2012) indeed found that credit-card proliferation was causally related to an increasing incidence of black entrepreneurship. Their study used staggered state-level interest rate deregulations, following the Supreme Court’s 1978 Marquette decision, which relaxed legal constraints on the rates card issuers were permitted to charge their customers carrying debit balances. Moreover, Chatterji and Seamans (2012) found these effects were magnified in areas where high levels of discrimination prevailed historically, including former slave states and states with antimiscegenation laws, thus suggesting discrimination’s active role as a barrier to bank loan access. Given the existence of this substantial body of evidence generated by methodologically sophisticated empirical studies, one might presume the longstanding question of whether racial discrimination exists in financial markets had been resolved. It has not been resolved, we believe, for two reasons. First, rarely explored are questions of why these large loan approval-rate and loan-term differentials exist. Second, because it would be irrational for profit-seeking bankers to discriminate against loan

applicants solely on the basis of race, studies demonstrating discrimination are often assumed to suffer from methodological shortcomings (Becker 1971; Becker 1993). Three articles in this special issue of Small Business Economics probe racial differentials in bank lending to small firms and related issues concerning MBE access to debt and equity financing. All three investigate whether viable strategies exist for lessening the barriers presently limiting MBEs seeking financing, and/or why these patterns of disparate treatment of MBEs are commonplace. In their article, Testing for Racial Bias in Credit Scores, Alicia Robb and David Robinson investigate whether advances in credit scoring may lessen the disproportionate borrowing constraints MBE owners seeking financing currently face. To that end, they develop and implement a novel test to determine if racial bias is present in business credit scores. Two common types of scores are (1) backward-looking measures of actual firm repayment histories, and (2) forward-looking measures of predicted repayment behavior. Racial bias in credit scores, according to their test, is absent if current forward-looking measures of credit worthiness predict future backward-looking measures similarly for white and minority business borrowers: if predictive credit-scoring measures are contaminated by racial bias, they should over-correct for race. Racially biased estimates of future repayment performance, in other words, should predict worse repayment outcomes from MBEs than actually occur. They find that predictive credit scores do not overpenalize MBEs. For MBE owners with personal wealth under $10,000, predictive scores actually under-predict future repayment delinquency slightly (Table 7, column 6), which is consistent with the observation that limited credit accessibility may disproportionately hurt MBEs at the low end of the wealth spectrum. Although such higher-risk firms are typically weak candidates for bank loans quite irrespective of owner race, many do rely heavily on trade credit, personal credit cards, and informal lending sources for funding. If credit scores were given greater weighting than they are presently in the loan-application evaluation process, the lending decisions of bankers would result in greater loan access for creditworthy MBEs. Robb and Robinson conclude their analysis by provocatively probing three underlying explanations illuminating the causes and consequences of bank under-financing of MBE credit needs.

Minority entrepreneurship in twenty-first century America

In their article, Are Minority-Owned Businesses Underserved by Financial Markets? Evidence from the Private-Equity Industry, Tim Bates, William Bradford, and William Jackson develop a theoretical framework explaining why profit-maximizing firms supplying debt and, or equity financing to small firms may chose to treat MBEs differently than equivalent white-owned firms. As Becker suggested (1993), a prevailing status quo of discriminatory treatment of potential MBE clients would enable debt- and equity-capital providers targeting MBEs to earn attractive financial returns. Emphasizing the relatively high search costs MBEs encounter in their quest for financing, Bates et al. hypothesize that the reservation prices minority owners are willing to pay for financing typically exceed those of equivalent white-firm owners. Becker, in his Nobel Prize lecture (1993), suggested that one could test for the presence of discrimination in financial markets by comparing the relative profits generated financing MBE and white-owned firms: higher profits, if forthcoming from MBE customers, indicate discrimination’s presence. Bates and his co-authors proceeded by conducting Becker’s test using data collected from private-equity funds that invest actively in both MBE and white-owned portfolio firms. According to their conceptual framework, MBE owners, facing fewer alternatives and higher search costs than otherwise identical white owners, are assumed to be willing to pay more for financing than their white counterparts. Financing MBEs is thus expected to yield higher profits than financing white-owned firms. Findings of three distinctly different empirical tests indicated that the realized financial returns forthcoming from equity-capital investments in MBEs consistently exceeded those derived from investing in white-owned ventures. The reality TV show, Shark Tank, provides a vehicle for expansion-oriented young firms seeking financing to entice investors (sharks) to invest in their businesses. Shark Tank appearances are important additionally because the show is widely viewed by potential outside investors. In their article, Bite Me! ABC’s Shark Tank as a Path to Entrepreneurship, Baylee Smith and Angelino Viceisza investigate the role of such business-pitch competitions in accessing early-stage financing and mentoring. The authors assembled data derived from analyzing the presentations of all contestant firms appearing on TV in the show’s first seven seasons (since 2009). Included were whether sharks offered each

contestant an intention-to-fund (ITF) commitment, the dollar amount of the ITF, and contestant firm outcomes subsequent to appearing on Shark Tank. An ITF is solely a good-faith offer to invest in the contestant’s firm, which may or may not reach fruition. Smith and Viceisza’s analysis entailed comparing firms receiving funding offers to those getting no offers. Of the 584 contestants under consideration, 55% got ITFs from the sharks. Outcomes broken out by contestant race reveal that minorities, 57% of whom were African Americans, made up 14% of the contestants and received 16% of the ITFs. Among contestants appearing on Shark Tank since 2009, 89% of the firms were still in business, and those receiving ITFs—especially those larger in dollar amount—were more likely to survive than those not offered ITFs. Based on their analysis of contestant traits and firm outcomes, Smith and Viceisza (this issue) conclude that participation in Shark Tank’s pitch competition improved firm longevity. Shark Tank, additionally, apparently operated in a race-neutral fashion: there were no negative differential impacts on racial/ethnic minorities. 2.2 Access to product markets Since 1969, the procurement powers of government have been used proactively to assist MBEs. Originating in the federal government, targeting procurement contracts to MBEs expanded throughout local and state government and corporate America in the 1970s. The kinds of minority firms dominant historically—beauty parlors, laundries, restaurants—typically lacked the requisite resources to compete successfully in these markets. The realization that competing effectively for such procurement contracts entailed transforming minority entrepreneurship fundamentally was immediately apparent to many. Opportunities created by Atlanta’s pioneering program Battracted Blacks out of corporatesector management, administrative, and executive positions and into entrepreneurial careers^ (Boston 1999, p. 14). The opportunity for MBEs to move beyond personal services and retailing fields and into mainstream markets has been the legacy of preferential procurement programs (Bates 2015). As multi-billion dollar government and corporate procurement markets opened up, minority self-employment rates in the industries most directly impacted rose, particularly among African Americans (Chatterji et al. 2014: Blanchflower 2009;

T. Bates et al.

Bates 2015). Employee numbers of MBE employer firms operating in the impacted industries soared as well, as firms gradually built capacity and took on ever-larger contracts (Bates 2006). Making headway in these markets was nonetheless challenging. BFront-company^ abuses received abundant media attention; the judiciary often threw out public-sector procurement preferences targeted to MBEs. Expanding MBE presence often generated resistance as procurement gatekeepers questioned whether minority vendors matched the competence of existing supplier firms (Bates 2015). Entrenched suppliers facing unwanted competition attributed expanding minority presence to reverse discrimination. Many preferential procurement programs, additionally, were poorly designed and administered. Seeming opportunities for MBEs were sometimes illusionary, even destructive (Myers and Chan 1996; Bates and Williams 1995). Although the first preferential programs often resulted in minimal growth in minority businesses due to design flaws and poor oversight, some recent initiatives have been redesigned to address these inadequacies. Two articles in our special issue examine how and why minority entrepreneurs seek to broaden the range of product markets in which they choose to compete for customers. Lois Shelton and Maria Minniti, Enhancing Product Market Access: Minority Entrepreneurship, Status Leveraging, and Preferential Procurement Programs, observe that preferential-procurement programs allow minority entrepreneurs to leverage their minority status effectively to gain access to product-market segments where minority presence traditionally has been minimal. Their study addresses three related issues: (1) How do preferential-procurement programs influence the product-market segments African American and Latino entrepreneurs choose to target? (2) Do these programs seeking to widen MBE access to corporate and public-sector procurement markets have differing impacts for higher- and lowergrowth minority entrepreneurs? (3) Do growing Black and Latino firms disproportionately target different product markets than similar growth-oriented white-owned firms? To address these questions, Shelton and Minniti first develop a conceptual model of how Black and Hispanic entrepreneurs identify business opportunities, evaluate those they identify, and proceed to exploit them. They then employed a qualitative research design to examine

how these product-market access decisions made were impacted by the opportunities preferential-procurement programs provided. They conducted detailed interviews with higher- and lower-growth Black, Hispanic, and White entrepreneurs in the Los Angeles area, and analyzed these data to uncover consistent patterns related to the opportunity identification, evaluation, and exploitation processes. They examined how these were related to the markets and customers served by minority entrepreneurs, and integrated these findings into their conceptual model. Shelton and Minniti conclude that preferentialprocurement, by improving the information available to minority entrepreneurs, and by altering their incentives and those of key resource providers, do alter market-access patterns. These programs, if well designed, therefore do effectively enable some minority entrepreneurs to achieve rapid expansion (higher-growth entrepreneurs) and others to overcome personal limitations and establish viable enterprises (lower-growth entrepreneurs) by leveraging their minority status. In their article, How Does Agency Workforce Diversity Influence Federal R&D Funding of Minority and Women Technology Entrepreneurs? An Analysis of the SBIR and STTR Programs, 2001–2011, Amol Joshi, Todd Inouye, and Jeffrey Robinson analyze an interesting variant of the procurement contract—research and development funding grants awarded to small businesses. Programs providing these contracts are administered by federal government agencies. Objectives include stimulating technological innovation and fostering technology transfer through cooperation between recipient firms and research institutions. A sample of 69,771 awards to 14,658 firms is analyzed, of which MBEs received 7% (4546), and the authors’ intent is to determine whether MBEs seeking follow-up funding on previous awards increased their likelihood of success by working w ith federal employees of similar backgrounds. They proceed by testing the hypothesis that greater federal-agency-level workforce racial/ ethnic diversity increases the odds of MBEs transitioning successfully from phase I to phase II R&D funding. Since funding decisions are made at the agency level, and the agencies making the funding decisions vary greatly in terms of workforce diversity, sufficient variance exists across agencies to make the analysis interesting. In the

Minority entrepreneurship in twenty-first century America

spirit of exploiting co-ethnic ties, Joshi et al. test whether greater homophily heightens the success rate of MBEs seeking phase II R&D funding. Two key findings emerge, the first of which aids MBE grant applicants indirectly. Agencies exhibiting greater workforce diversity, other factors being equal, approve a higher percentage of phase-II funding requests to MBEs and white-owned small businesses, relative to less-diverse agencies. A higher proportion of minority employees at the agency from which an MBE applicant seeks funding, however, has a positive but statistically insignificant impact on the likelihood of follow-up R&D funding approval for MBE applicants. Strong evidence of positive impacts rooted directly in homophily does not emerge. 2.3 Access to education and employment Strong interest in becoming entrepreneurs, in combination with gains in higher education, illustrate how declining barriers have translated into wider business ownership among minorities. Fewer than 300,000 African Americans were enrolled in colleges and universities nationwide in 1965 (Trent 1984). By 1980, the corresponding figure was 1,107,000. Whereas African Americans receiving bachelor’s degrees had traditionally majored most often in education, these degrees declined sharply in number by 2007, while interest in business and engineering rose substantially. While White college graduates, on balance, shifted their areas of study as well, changing patterns of undergraduate degrees granted were far more pronounced not simply for African Americans, but for Asian- and Hispanic Americans too (Carter and Wilson 1992; Carter and Wilson 1995; Ryu 2010). Among those seriously considering starting new firms, college-graduates of all races, African Americans and Hispanic males are heavily overrepresented (Reynolds et al. 2004). Kollinger and Minniti (2006) find that blacks are 1.79 times more likely to be nascent entrepreneurs than whites with identical socio-economic backgrounds. Blacks with college degrees, furthermore, have nascent prevalence rates nearly twice those of similarly educated whites (Table 2). Latinos as well, particularly college-graduate males, are more inclined than whites to be contemplating firm

ownership, Asian Americans, less so4 (Reynolds et al. 2004). The declining barriers facing non-white Americans, by way of summary, have transformed the nation’s minority-business community profoundly since the 1960s, a transformation driven disproportionately by well-educated young adults pursuing entrepreneurial career paths. With the work experience acquired and personal-asset holdings accumulated while working as employees, the decision to pursue entrepreneurship becomes popular among college-educated minorities aged 30 and above. The multi-faceted qualitative changes impacting minorities since the late 1960s—from limited career prospects to widening opportunities in business and government, in conjunction with expanded access to financing and mainstream product markets—underlies the rising popularity of entrepreneurship among highly educated minorities, and the subsequent growing size and industry diversity of the nationwide MBE community.

3 Expanding the research opportunities on minority entrepreneurship topics in the twenty-first century 3.1 Analyzing minority entrepreneurship, differing approaches The minority entrepreneurship literature lacks a unifying focus. Topics investigated and methodologies employed often reflect available data sources. Sociologists have historically relied on small, nonrepresentative firm samples frequently (Waldinger 1986; Light and Bonacich 1988; Min 1984). Economists have relied most often on databases of varying quality describing traits of the self employed and the firms they operated (Pierce 1947; Brimmer and Terrell 1971; Bates 1973). When sophisticated databases first appeared in the late 1980s, they were exploited immediately by economists (Bates 1989; Cavalluzzo and Cavalluzzo 1998), less so by sociologists. While the tools and methods of the two disciplines differ, the approaches are complementary, and each can learn from the other. 4 A complicating factor is that Asian-owned firms are overwhelmingly immigrant-owned, and the children of the self employed, unlike their Latino and black counterparts, are averse to pursuing business ownership.

T. Bates et al. Table 2 Nascent entrepreneurship prevalence rates by race/ethnicity White, not minority A. All adults

African American

Hispanic

5.7%

9.5%

7.1%

Male

8.6%

13.6%

10.3%

Female

5.1%

8.3%

5.1%

B. By gender (18 to 64)

B. College graduates (18 to 54) 1. Male Bachelor’s degree

9.8%

15.2%

11.0%

11.1%

23.4%

19.9%

Bachelor’s degree

5.6%

12.7%

n

Graduate/professional

7.6%

15.6%

n

Graduate/professional 2. Female

Source: panel study of entrepreneurial dynamics, national longitudinal sample Nascents, by definition, responded affirmatively when asked, Bare you, alone or with others, now trying to start a new business?^ and met additional criteria—(1) they are currently active in the startup effort and (2) anticipate full or part ownership of the new venture n Small sample size

Sociologists often focus on how recent immigrants alleviate the adjustment problems they experience in their new homeland. Limited access to salaried employment is a key factor pushing many toward self employment: Black of English, transferable education and work skills, lack of access to employment networks in the larger society, and racial prejudice and discrimination, often block immigrant workers from entering the labor market of the mainstream economy^ (Zhou 2004, p. 52). Dominant lines of analysis entailed examining the ethnic resources (social capital) of immigrant communities as factors facilitating firm creation and survival (Min and Bozorgmehr 2000). Such analysis Bfocuses on entrepreneurship as embedded in a social context, channeled and facilitated or constrained and inhibited by peoples’ positions in social networks^ (Aldrich and Zimmer 1986, p. 14). Analytical concepts like social capital and ethnic resources can be widely utilized by social scientists other than sociologists in their studies of entrepreneurship dynamics, but doing so productively requires understanding strengths and weaknesses of these tools. Overly broad definitions initially, and difficulty measuring ethnic resources meaningfully, certainly did not deter their widespread adoption as analytical tools (Waldinger et al. 2006). As a process of embeddedness taking place in stages, social capital is necessarily defined by the contextuality and conditionality of the process (Bankston and Zhou 2002). Types of social

capital—ethnic solidarity, for example—were situational coping mechanisms against the disadvantageous status immigrants found themselves in. Thus, social-capital forms facilitating firm operation did not originate in premigration experiences but were rooted, instead, in the fact that immigrants were treated differently than natives in America (Portes and Zhou 1992). Alejandro Portes and others advanced the ethnicresources discussion by, first, spelling out types of social capital important for assisting firms in ethnic enclaves, and, second, pointing out their downsides (Portes and Sensenbrenner 1993). Immigrant enclaves, speaking of downsides, generated boundaries rooted in kinship, language groups, and ethnic communities, fostering highly concentrated social networks. High density and strong ties, in turn, create positive and negative consequences: social norms are enforced and reciprocated (Kim and Aldrich 2005). Such networks tend toward conformity and promote familiar routines, often constraining entrepreneurial autonomy and creativity (Gargiulo and Benassi 2000). Creative use of co-ethnic resources and socialcapital concepts as analytical tools for understanding entrepreneurial dynamics became more commonplace in recent decades. Personal relationships between firm owners and their customers, suppliers, employees, and financers, and the consequences of those relationships were front and center. Ethnic ties, social resources—all are interesting concepts useful

Minority entrepreneurship in twenty-first century America

for explaining small-firm formation and outcomes. They are also difficult to quantify. Economists were less comfortable with such tools. Economists, by emphasizing human- and financial-capital utilization patterns and firm strategies as dominant explanations of entrepreneurial performance, were not rejecting co-ethnic resources as useful concepts. Their models rarely had the contextual specificity required to make these concepts useful. Perhaps less appreciative of the insights potentially derived from analyzing selfemployed subgroups in carefully defined contexts, economists are prone to rely on one-size-fits-all econometric models to explain small-firm outcomes. Thus, BHispanic^ may be used as a binary explanatory variable in models probing firm viability nationwide, making no distinction between immigrants, the native born, white Cubans, mulatto Dominicans, or mixed-race Mexicans, while ignoring, as well, firm location in ethnic enclaves versus other residential or commercial areas. Alternatively, economists often aggregate Asians, Hispanics, blacks, Native Americans, the native born and immigrant minorities, etc., defining them as simply Bminorities^ in their statistical modeling, without probing whether such aggregation may impact their empirical findings. The toolkits of economists and sociologists are nonetheless complements. A fundamental difference is not the tools themselves but, instead, that (1) minority entrepreneurship and (2) immigrant entrepreneurship among minorities, while overlapping, are distinct subfields within entrepreneurship, and are best studied as such. Since over half of the nation’s present-day MBEs are immigrant-owned, this distinction is important. Regarding differences, natives possess English language fluency; most Korean immigrants do not. Failure of employers to recognize educational credentials of immigrants educated in their native land limits opportunities, a constraint indigenous minorities do not face. Immigrant newcomers often prefer to shop in stores owned by co-ethnics, places where their homeland language is spoken, and product lines cater to their tastes. Stores of native-born minority owners often lack such customer loyalty. Ethnic ties, social resources—these contextual factors often have different meanings and significance in immigrant ethnic enclaves than in

neighborhoods where immigrants are less numerous. Economists, when studying MBEs, are typically analyzing a subfield distinct from the minorityentrepreneurship subfield sociologists analyze. Future research quality will be enriched if the research designs among economists conducting research on minority entrepreneurship are modified to consider and exploit these subfield differences. 3.2 Role of minority entrepreneurship in a digitizing world Our economy and society are increasingly reliant on digital technology. Firms use it to transact with their customers and suppliers, and rely on the Bbig data^ it generates to find new customers and create value for existing customers. All of this digitization is leading to dramatic changes in the organization of industries, markets, and firms (Martin and Seamans 2017). A number of recent research papers have speculated how automation will change the nature of jobs and work (Frey and Osborne 2013; Graetz and Michaels 2015). Less clear is how digitization will affect entrepreneurship and innovation. On the one hand, lower costs of communication may lead to more crowd sourcing of innovation (Altman et al. 2015), but on the other hand, concentrated market power of a few large companies may lead to less innovation (Wen and Zhu 2016). Even less clear are the implications for minority entrepreneurs. We hope that future work in this area is able to address a number of pressing questions. Do MBEs have access to the skills and training needed to compete effectively, and do MBEs have (digital) access to markets? The fact that the digital divide varies significantly with race (CEA 2016b) suggests it may be difficult for MBEs to build the necessary digital skills and to access (digitally) markets for growth. Is digitization changing the cost of market entry or lowering barriers to finance for MBEs? Or do the same problems outlined above persist? Research using data on online borrowing from prosper.com suggests the same problems persist (Pope and Sydnor 2011; Ravina 2012 ). The role of minority entrepreneurship in a digitizing world is an under-researched area; one with many opportunities for theoretical insight and empirical research, which will have applications for practitioners and policymakers.

T. Bates et al.

3.3 Probing racial discrimination’s roles in shaping minority entrepreneurship While the conventional wisdom (see Section 2 above) holds that minorities face higher barriers than whites when establishing new firms and striving for viability in existing ventures, skepticism concerning this scenario remains. Becker’s influential theoretical treatment of racially discriminatory business practices provides a common rationale for skeptics questioning whether the present status of MBEs reflects higher barriers, as opposed to less competence (Becker 1971). Although discriminatory practices certainly occur, they are irrational, Becker argues. Refusal to lend to minorities equally as creditworthy as white clients, for example, entails turning away profitable business opportunities. Rational, profit-seeking financers are therefore not inclined to discriminate against minority applicants solely because of their race. While the occasional banker averse to interacting with minorities may refuse to lend to MBE applicants, the cost of doing so is lost profits (Becker 1993). Sacrificing profits voluntarily is not only an aberration, but a possible threat to the very existence of firms engaging in such acts. Competitive pressures reward efficient firms pursuing maximum profits, not those committed to discriminatory practices. Becker’s position is difficult to defend not only because of abundant empirical evidence to the contrary (see Section 2), but, increasingly, on theoretical grounds. This perspective is buttressed importantly by key theoretical works foundational to the field of behavioral economics. Nobel laureate Daniel Kahneman (2011), among others (Massey 2007) challenge the premise that rationality consistently characterizes economic agents, documenting, instead, systematic biases in their thought processes. Enduring biases not easily erased by the competitive forces in the marketplace are common consequences (Tversky and Kahneman 1986). The individual lenses through which each of us view reality, in this view, derives (and evolves) from pattern recognition and inductive generalization, more so than deductive reasoning. BMost of your thoughts arise in your conscience experience without your knowing how they got there,^ (Kahneman 2011, p. 4). Humans use ingrained shortcuts, rules of thumb they rely on to interpret reality and to make judgments. One’s feelings, observations, and inclinations, rooted in coherent patterns of ideas in associative memory, become one’s beliefs, attitudes, and intentions.

As results of structured instruction and unstructured emulation within one’s family, for example, children learn to value and follow certain patterns of thought and action. Our attitudes and beliefs certainly evolve, but they do so constrained by our inclination to seek confirmation of what we already believe. Tendencies to think categorically are one consequence, an important one when encountering and interacting with persons and groups of differing races. Humans are Bpsychologically programmed to categorize the people they encounter and to use these categorizations to make social judgments^ (Massey 2007, p. 9). Once learned, racial schemas tend to persist. Whether or not we believe ourselves prejudiced, we hold in our heads schemas classifying people into categories based on race, gender, ethnicity, and other traits, categories yielding subconscious dispositions toward people, i.e., stereotypes. Are these schemas sometimes (or often) conducive to stigmatizing persons in racial groups other than one’s own? Audit studies and field experiments provide powerful, yet under-utilized tools for assessing whether dissimilar treatment of minority and white adults possessing identical traits harms minorities (Yinger 1998; Bertrand and Mullainathan 2004). The current body of empirical evidence confronting Becker’s theoretical approach is derived increasingly from audit studies and well-designed field experiments, a trend that has great future potential for expanding our understanding of racially discriminatory practices. For example, the Bertrand and Mullainathan (2004) study, which exemplifies the efficacy of utilizing these tools for quantifying discriminatory practices, provides a model of how (and why) future research on American racial dynamics can be productively designed and conducted. In their field experiment, Bertrand and Mullainathan (2004) investigated whether employers favored whites when faced with similar black and white job applicants. They proceeded by submitting 4870 fictitious resumes responding to ads in Chicago and Boston newspapers for over 1300 jobs in sales, clerical support, administrative support, and customer-services occupations. Whitesounding names like Emily Walsh were randomly assigned to 2435 resumes, and African Americansounding names like Jamal Jones were assigned to the others. Resumes of varying quality were randomly assigned roughly equal numbers of black-and whitesounding names. Resume postal addresses are randomly

Minority entrepreneurship in twenty-first century America

assigned as well. The experiment entailed isolating impacts of applicant names alone on employer responses: Birrespective of the skill and racial composition of the applicant pool, a race-blind selection rule would generate equal treatment of Whites and African Americans^ (Bertrand and Mullainathan 2004, p. 1006). Employer callback rates revealed, instead, large racial gaps: resumes with white male and female names, respectively, were 52 and 49% more likely to elicit calls from employers than those with black-sounding male and female names. Possessing stronger resumes and having addresses in better neighborhoods increased callback incidences, but more so for resumes with white than black names. Having black-sounding names, other factors being constant, clearly stigmatized job seekers as less desirable workers; most employers preferred Emily over Lakisha, and Greg over Jamal. That applicants with black-sounding names were being stereotyped negatively fits an outcome pattern occurring with such frequency that its dismissal as an aberration is implausible. Moreover, follow-on studies have been conducted, revealing that such biases continue to persist, including in academia (Milkman et al. 2012) and psychology (Shin et al. 2016), indicating that such stereotypes can persist even with high educational achievement. Findings consistent with those of Bertrand and Mullainathan (2004) emerged from the recent audit study of bank lending practices (Bone et al. 2014). In each case, the minority trait alone stigmatized applicants, whether job seekers or applicants for smallbusiness loans. If such evidence continues to accumulate, then economists, we suspect, will give growing weight to the theories and findings of behavioral economics, and question whether the profession’s underlying premise of rationality characterizing economic agents deserves to remain a premise, as opposed to a hypothesis.

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