Race's Role in Startup Success

A talk with author Robert Fairlie about barriers that blacks and Latinos face in starting businesses and making them thrive

Blacks and Latinos start businesses at a lower rate than whites and Asians, and their companies are less likely to be profitable, less likely to hire employees, and more likely to close. A new book, Race and Entrepreneurial Success, explores the reasons behind those gaps.

Authors Robert Fairlie and Alicia Robb, researchers at the University of California at Santa Cruz, find that differences in startup capital, education, and experience working in other businesses explain the racial disparity in business success. Blacks, for example, have less than 10% the median personal wealth of whites and Asians, which limits the capital available to invest in businesses. (More data from the book are available here.) Fairlie and Robb base their conclusions on extensive research from the past quarter-century of data on business ownership, including access to Census Bureau surveys not publicly available.

Fairlie, a leading expert on minority entrepreneurship who has spent 17 years researching the topic, spoke recently with BusinessWeek's John Tozzi, and fielded questions from BusinessWeek readers about why these differences in business performance persist. Edited excerpts of their conversation follow.

Why is it important to study how race relates to entrepreneurial success?

Looking at businesses that are owned by different racial groups is important for a number of different things. One is wealth-building and inequality…If there are some racial groups that are not doing well in business ownership, then that's going to impede their ability to get ahead in society.

The other thing that I think is really important here is job creation. If you took all of the minority businesses in the U.S. and could increase just their number and the average employment size by about 10%, a relatively small increase, you would create about 1 million new jobs for minorities. That's a pretty large impact from relatively small changes in minority business ownership.

How do wealth differences between racial groups affect business success?

One of the most important determinants of success in business is access to startup capital. That's true for all entrepreneurs, not just true for minority entrepreneurs…[Startup capital] was the most important factor for determining why Asians do well in business, and it's the most important factor for why African-American businesses are not doing as well…Wealth inequality is transferring into business performance inequality. The groups that seem to have a lot of wealth are able to start better capitalized, faster-growing firms that do well. The ethnic and racial groups that don't have that access to capital because of low wealth—they're struggling.

Another factor you identify is human capital—things like education or working in similar businesses or working in family businesses. What role does the human capital gap play, and how does it compare to the role of financial capital?

Financial capital was the most important factor, but we did find that the education of the owner was also very important, especially in describing why Asian-owned firms did so well…About 50% of business owners have a parent or another family member who owned a business before starting their own business…The new real exciting finding is that this doesn't help you. It doesn't necessarily mean your business is going to do better—unless you work in that family business. If I'm a young adult and I work for my parents' business, then when I go to start a business it is going to be 10% to 40% better, because I've learned so much from my previous work experience at my parents' business. So it's a huge factor.

What role does discrimination play? Is there an aspect of that that accounts for the gaps you found?

We weren't able to look at that directly. We cite a number of studies that show pretty strong evidence of lending discrimination against black-owned firms…Then you get kind of this double impact. If wealth levels are really low among African Americans, that hurts their ability to borrow—to use [wealth] as collateral for a loan, or to just use their own wealth to fund their business. Then you've got lending discrimination on top of that, and you can see how all these factors kind of add up to limit the amount of startup capital that an African American entrepreneur can put into a business.

Is there a technological gap between minority- and nonminority-owned businesses that explains any of the disparities you found?

That's an interesting question. We were not able to analyze that in our data. I think that I've seen some work that shows that computer use and computer ownership among minority firms is lower than among white-owned firms.

Most of the policy debate around minority entrepreneurship is about either expanding government contracting opportunities and, to a lesser extent, access to capital. Are policymakers looking at the right things if they want to close this gap?

I do think that the policy debate is missing something important here. A lot of times when we're trying to train entrepreneurs, we'll go out and give them a business-plan course, a marketing course, an accounting course, a how-to-find-financing course, and that would be kind of the standard curriculum if you went to a small business development center. But we don't emphasize a lot of, "Maybe you should get some work experience at a small business in this area." …Maybe we could have some apprenticeship programs that set up would-be entrepreneurs who are minorities to go work in some other minority firms where they could get some of that human capital.

Is it a good idea to encourage entrepreneurship among people who are disadvantaged, given how risky it is? Would it be a better policy to focus on increasing education and access to white collar jobs and higher salaries?

In general, we want to encourage successful entrepreneurship and not just the number of entrepreneurs. But I think that the more important issue here is we want to remove the barriers for people who want to start businesses and want to start successful businesses. I think this is a very clear goal. You don't want to have certain racial groups—or certain groups in society in general, it doesn't have to be race—that face these barriers where they might have a really innovative idea for a great product or service, and they can't take it to market. Because they're facing this constraint, they don't have the capital to start the business. Maybe they've had some problem getting the human capital somewhere along the line to get the knowledge of how to do that, and I think that's a problem. That's a problem for our economy.

Flip through this slide show for a look at the gaps in access to capital and other problems that stifle business performance.

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