Entrepreneurship in America: An Equal Opportunity Endeavor?

We like to think of America as a land of equal opportunity, but we know that for all the progress we've made, we still could do better.

The entrepreneurship data help illustrate the point. Every year the Kauffman Foundation reports the rate of new business formation by sex and race, among other demographic characteristics (See the Kauffman Entrepreneurship Index, or KEI, at www.kauffman.org). African-Americans and women consistently rank behind whites and men.

If you want to know much about these disparities -- especially the reasons for them -- there's  a new book out from MIT Press, Race and Entrepreneurial Success, by Robert W. Fairlie and Alicia M. Robb, you'll want to read (full disclosure: Professor Fairlie does the calculations for the KEI, and Dr. Robb is now a senior research fellow at Kauffman).

I won't give away the ending entirely, but a few nuggets are worth noting:

--Having an entrepreneur in the family (or not having one, as the case may be) does not really explain who becomes an entrepreneur (or does not). What is important is whether an individual has worked in a family business (and thus because many minorities do not get that chance, they don't have the experience or the inclination to start a business of their own).

--Education and money matter in explaining start-up rates and success. That makes a big difference, since minorities (excepting Asian-Americans) lag in both.

For more details, read the book -- one of the most comprehensive studies of entrepreneurship by race and ethnicity ever done. 

Comments

[Charles Johnson]

It would seem at first glance that a big reason that blacks and other minorities cannot become entrepreneurs has to do with minimum wage laws.

Starting-up family businesses cannot always agree to pay the mandated going rate and hence blacks cannot get a lot of the skills they need to start a business. I would imagine that reducing or eliminating the minimum in the inner city especially would see a corresponding rise in entrepreneurship rates.

[Charity Espiritu]

Minimum wage laws have little to do with the heart of the matter here. Kauffman-funded research (pioneered by Timothy Bates, BCG, and others) indicates that the issue is not whether blacks and other minorities have the ability or skills to start up a business. In fact, the rate of starting up entrepreneurial ventures among African Americans is at par with their white counterparts. The issue here is sustainability. It takes a lot of capital, as well as access to it, to sustain a business. Other factors, such as discrimination, are also barriers to achieving entrepreneurial success among minorities. For example, many black entrepreneurs have a hard time getting a loan or a line of equity to grow their business because there is a perception that black businesses tend to tank within five years.

Again, the main reason why minority businesses fail is because of lack of capital to keep growing them. The policy solution here is to increase access to capital for minority entrepreneurs and dispel the myth that black-owned businesses cannot yield competitive returns. If you read research on venture capital investment in MBEs (minority business enterprises), it shows that venture capital funds in MBEs actually yield significantly higher returns in the market. William Bradford and Timothy Bates write, "Minority VC funds collectively earn yields on their realized investments that are higher than those of the broader VC industry, but these yields vary greatly from fund to fund. VC fund traits that predict high yields on individual investments are identified by estimating multivariate regressions explaining net investment returns."

[Theresa]

Only a small minority of entrepreneurs inherit a family business. Generally they start their own business. Perhaps the problem may be in achieving styles and belief systems of some cultures compare to others. If you believe that you could achieve then perhaps you will and some cultures may have a negative view on their potentialespecially by reading that they normally do not do well. Tell a learner that it is possible and maybe the general new mind set will create more entrepreneurs of all races.

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