Minority and Immigrant Entrepreneurs: Access to Financial Capital. Robert W. Fairlie University of California, Santa Cruz

Transcription

1 Minority and Immigrant Entrepreneurs: Access to Financial Capital Robert W. Fairlie University of California, Santa Cruz Chapter for the International Handbook on the Economics of Migration January 5, 2012

2 1. Introduction A large literature examines the impact of financial capital on small business formation and performance. The findings from this literature indicate that access to financial capital is one of the most important determinants of small business creation and success. Many previous studies also examine the barriers that disadvantaged minorities face in obtaining access to capital for their businesses. These studies find that access to capital, wealth inequality, and lending discrimination create substantial barriers for minority business success. Wealth inequality represents a troubling and persistent root of this problem because the owner's wealth can be invested directly in the business or used as collateral to obtain business loans, and the disparities are extremely large. For example, in the United States, African-Americans and Latinos have median wealth levels of $8,650 and $13,375, respectively, which are one-ninth to one-thirteenth white levels (U.S. Census Bureau 2011). Much less research, however, has focused on access to and use of financial capital among immigrant entrepreneurs. Anecdotal evidence suggests that immigrant entrepreneurs rely heavily on informal sources to finance their businesses instead of banks or other institutions, but there is little direct evidence from nationally representative datasets carefully documenting these patterns. The lack of research on the advantages and disadvantages that immigrant entrepreneurs face in obtaining capital for creating and maintaining successful businesses may represent an important omission from the literature. A better understanding of the constraints faced by immigrant entrepreneurs may shed light on whether there is untapped potential for this group and whether their contributions to host country economies can be even greater. The entrepreneurial success of immigrants is well known. For example, business ownership is higher among the foreign-born than the native-born in many developed countries 2

3 such as the United States, United Kingdom, Canada and Australia (Borjas 1986, Lofstrom 2002, Clark and Drinkwater 2000, 2006, Schuetze and Antecol 2006, and Fairlie et al. 2008). 1 Businesses owned by some immigrant groups are also very successful with higher incomes and employment than native-owned businesses. Immigrants are found to contribute even more to specific sectors and regions of host country's economies (Fairlie 2008). In particular, much recent attention has been drawn to the contributions of immigrant entrepreneurs to the technology and engineering sectors of the economy (Wadwha, et al. 2007, Saxenian 1999, 2000). Immigration is also found to increase innovation measured as patents and even have positive spillovers in innovation for others (Hunt and Gauthier-Loiselle 2010, Kerr and Lincoln 2010). In an attempt to attract immigrant entrepreneurs, many developed countries have created special visas and entry requirements for immigrant entrepreneurs (Schuetze and Antecol 2006). This chapter reviews the literature on access to financial capital among ethnic minority entrepreneurs and businesses. Access to capital among immigrant entrepreneurs is also examined. Because of the lack of previous research on access to capital among immigrant-owned businesses newinformation is provided from a nationally-representative government source from the United States. Several key questions regarding access to financial capital among small businesses owned by immigrants are examined using newly available Census data. First, do immigrant entrepreneurs have access to less or more startup capital than non-immigrant entrepreneurs? Second, what are the sources of financial capital used by immigrant business owners? Do these sources differ from those used by non-immigrant business owners, especially from informal sources compared with bank loans and other more formal sources? Finally, the single largest asset held by most households is equity in their home which can be invested 1 Interestingly, immigrants are found to have lower business ownership rates than non-immigrants in Germany (Constant and Zimmermann 2006; Constant, Shachmurove and Zimmermann 2007). 3

4 directly into business starts or used as collateral to obtain business loans. Do immigrants and natives differ in rates of home ownership and do these differences have any impact on differences in rates of business formation? 2. Previous Research on Financial Capital and Minority Businesses One of the most important barriers facing would-be entrepreneurs from starting businesses and small businesses from growing is inadequate access to financial capital. Starting with entry, the importance of personal wealth as a determinant of entrepreneurship has been the focus of an extensive body of literature. Numerous studies using various methodologies, measures of wealth and country microdata explore the relationship between wealth and entrepreneurship. 2 Previous research has examined the relationship between wealth and entrepreneurship using data from the United States (e.g. Evans and Jovanovic 1989; Evans and Leighton 1989; Meyer 1990; Holtz-Eakin, Joulfaian, and Rosen 1994; Fairlie 1999; Holtz-Eakin and Rosen 2004; Hurst and Lusardi 2004; Zissimopoulos and Karoly 2007, 2009; Bates and Lofstrom 2008; Demiralp and Francis 2008), Europe (e.g. Blanchflower and Oswald 1998; Lindh and Ohlsson 1996, 1998; Johansson 2000; Taylor 2001; Giannetti and Simonov 2004; Holtz-Eakin and Rosen 2004; Nykvist 2008; Schafer, Oleksandr and Weir 2010) and developing countries (e.g. Yu 2010; Paulson and Townsend 2004).Most studies find that asset levels (e.g. net worth) measured in one year increase the probability of starting a business by the following 2 For example, see Evans and Jovanovic (1989), Evans and Leighton (1989), Meyer (1990), Holtz-Eakin, Joulfaian, and Rosen (1994), Lindh and Ohlsson (1996, 1998), Black, de Meza and Jeffreys (1996), Blanchflower and Oswald (1998), Dunn and Holtz-Eakin (2000), Fairlie (1999), Earle and Sakova (2000), Johansson (2000), Taylor (2001), Holtz-Eakin and Rosen (2004), Hurst and Lusardi 2004, Fairlie and Krashinsky (2012), Zissimopoulos and Karoly (2007, 2009), Giannetti and Simonov (2004), Nykvist (2005), and Bates and Lofstrom (2008), Schafer, Oleksandr and Weir 2010, Yu 2010, and Paulson and Townsend Also, see Parker (2009), Kerr and Nanda (2010), and Fairlie and Krashinsky (2012) for recent discussions of the literature. 4

5 year.this finding has generally been interpreted as providing evidence that entrepreneurs face liquidity constraints, although there is some debate over the interpretation (Hurst and Lusardi 2004; Fairlie and Krashinsky 2012). Although a large body of previous research provides evidence that is consistent with low levels of personal wealth resulting in lower rates of business creation, less research has focused on the related question of whether low levels of personal wealth and liquidity constraints also limit the ability of entrepreneurs to raise startup capital resulting in undercapitalized businesses. The consequence is that these undercapitalized businesses will likely have lower sales, profits and employment and will be more likely to fail than businesses receiving the optimal amount of capital at startup. Evidence on the link between startup capital and owner's wealth is provided by examining the relationship between business loans and personal commitments, such as using personal assets for collateral for business liabilities and guarantees that make owners personally liable for business debts. Avery, Bostic and Samolyk (1998) find that the majority of all small business loans have personal commitments. The common use of personal commitments to obtain business loans suggests that wealthier entrepreneurs may be able to negotiate better credit terms and obtain larger loans for their new businesses possibly leading to more successful firms. 3 Cavalluzzo and Wolken (2005) find that personal wealth, primarily through home ownership, decreases the probability of loan denials among existing business owners. If personal wealth is important for existing business owners in acquiring business loans then it may be even more important for entrepreneurs in acquiring startup loans. Examining the relationship between startup capital and business performance directly, previous research indicates a strong positive correlation. Firms with higher levels of startup 3 Astebro and Berhardt (2003) find a positive relationship between business survival and having a bank loan at startup after controlling for owner and business characteristics. 5

6 capital are less likely to close, have higher profits and sales, and are more likely to hire employees (Fairlie and Robb 2008). The estimates are large and consistent across outcomes. This positive relationship is consistent with the inability of some entrepreneurs to obtain the optimal level of startup capital because of borrowing constraints. Because these entrepreneurs are constrained in the amount of startup capital that could be used to purchase buildings, equipment, and other investments, their businesses are less successful than if they could have invested the optimal amount of capital. To be sure, the positive correlation, however, may alternatively be partly due to potentially successful business ventures being more likely to generate startup capital than business ventures that are viewed as being potentially less successful. Financial constraints are one of the most significant issues affecting minority business creation and performance. To get an idea of the potential importance of access to financial capital in contributing to racial disparities in business ownership, one only has to look at the alarming levels of wealth inequality that exist. Estimates from the U.S. Census Bureau (2011) indicate that half of all black families have less than $8,650 in wealth, and half of all Hispanic families have less than $13,375. Wealth levels among whites are $113,822, which is 9 to 13 times higher. Low levels of wealth and liquidity constraints may create a substantial barrier to entry for minority entrepreneurs because the owner's wealth can be invested directly in the business or used as collateral to obtain business loans. Investors frequently require a substantial level of owner's investment of his/her own capital as an incentive (i.e. "skin in the game"). Racial differences in home equity may be especially important in providing access to startup capital. Less than half of blacks in the United States own their own home compared with three quarters of whites, and the median equity in their homes is $35,000 compared with $59,000 6

7 for whites (Fairlie and Robb 2008). Homes provide collateral and home equity loans provide relatively low-cost financing. Without being able to tap into this equity many minorities will not be able to start businesses. Previous studies find that relatively low levels of wealth among blacks and Hispanics contribute to why these groups have low business creation rates in the United States. Indeed, recent research using statistical decomposition techniques provides evidence supporting this hypothesis. Fairlie (2006) finds that the largest single factor explaining racial disparities in business creation rates are differences in asset levels. Lower levels of assets among blacks account for 15.5 percent of the difference between the rates of business creation among whites and blacks. This finding is consistent with the presence of liquidity constraints and low levels of assets limiting opportunities for blacks to start businesses. The finding is very similar to estimates reported in Fairlie (1999) for men using earlier data from the Panel Study of Income Dynamics (PSID). Estimates from the PSID indicate that 13.9 to 15.2 percent of the black/white gap in business start rates can be explained by differences in assets. Fairlie and Woodruff (2009) examine the causes of low rates of business formation among Mexican-Americans. One of the most important factors in explaining the gaps between Mexican-Americans and non-hispanic whites in rates of business creation is also assets. Relatively low levels of assets explain roughly one quarter of the business entry rate gap for Mexican-Americans. Lofstrom and Wang (2008) using SIPP data also find that low levels of wealth for Mexican-Americans and other Latinos work to lower self-employment entry rates. Apparently, low levels of personal wealth limit opportunities for Mexican-Americans and other Latinos to start businesses. 7

8 Although previous research provides evidence that is consistent with low levels of personal wealth resulting in lower rates of business creation among minorities, very little research has focused on the related question of whether low levels of personal wealth and liquidity constraints also limit the ability of minority entrepreneurs to raise startup capital resulting in undercapitalized businesses. The consequence is that these undercapitalized businesses will likely have lower sales, profits and employment and will be more likely to fail than businesses receiving the optimal amount of startup capital. Estimates from U.S. Census microdata indicate that black and Hispanic-owned businesses have very low levels of startup capital relative to non-hispanic white-owned businesses (U.S. Census Bureau 1997, Fairlie and Robb 2008). For example, less than 2 percent of black firms start with $100,000 or more of capital and 6.5 percent have between $25,000 and $100,000 in startup capital. Black-owned firms are also found to have lower levels of startup capital across all major industries (U.S. Census Bureau 1997). These low levels of startup capital are found to be a major cause of worse outcomes among black-owned businesses. Using earlier CBO data, Bates (1997) finds evidence that racial differences in business outcomes are associated with disparities in startup capital. More recent estimates indicate that lower levels of startup capital among black firms are the most important explanation for why black-owned businesses have lower survivor rates, profits, employment and sales than non-minority owned businesses (Fairlie and Robb 2008). Asian firms are found to have higher startup capital levels and resulting business outcomes. Minority and non-minority entrepreneurs differ in the types of financing they use for their businesses. Previous research indicates, for example, that black entrepreneurs rely less on banks than whites for startup capital (U.S. Census Bureau 1997). Blacks are also less likely to use a home equity line for startup capital than are whites, which may be partly due to the lower rates of 8

9 home ownership reported above. On the other hand, black business owners are more likely to rely on credit cards for startup funds than are white business owners. Using earlier data, Bates (1997, 2005) finds large differences between black and white firms in their use of startup capital. Black firms are found to be more likely to start with no capital, less likely to borrow startup capital and more likely to rely solely on equity capital than white firms. Bates (2005) also finds that loans received by black firms borrowing startup capital are significantly smaller than those received by white firms even after controlling for equity capital and owner and business characteristics such as education and industry. Previous research also indicates that minorityowned businesses are more likely to use credit cards and less likely to use bank loans to start their businesses than non-minority owned businesses (U.S. Department of Commerce 2008). Additional evidence on racial differences in access to financial capital is provided by self-reports by owners with unsuccessful businesses on why their businesses were unsuccessful. Black business owners were two to three times more likely as all business owners to report "lack of access to business loans/credit" or "lack of access to personal loans/credit" as a reason for closure (U.S. Census Bureau 1997). Hispanic business owners were also more likely to report these two reasons. Minority firms also have trouble securing funds from venture capitalists and angel investors. Private equity funds targeting minority markets are very small relative to the total, which is problematic because these funds appear to be important for success (Yago and Pankrat 2000). The disparity in access does not appear to be driven by performance differences. Bates and Bradford (2008) examine the performance of investments made by venture capital funds specializing in minority firms and find that these funds produce large returns. Venture capital funds focusing on investing in minority firms provide returns that are comparable to mainstream 9

10 venture capital firms. Funds investing in minority businesses may provide attractive returns because the market is underserved. EVIDENCE OF LENDING DISCRIMINATION A factor that may pose a barrier to obtaining financial capital for minority-owned businesses is lending discrimination. Much of the recent research on the issue of discrimination in business lending uses data from various years of the Survey of Small Business Finances (SSBF) conducted by the U.S. Board of Governors of the Federal Reserve. The main finding from this literature is that minority-businesses experience higher loan denial probabilities and pay higher interest rates than white-owned businesses even after controlling for differences in credit-worthiness, and other factors. 4 Cavalluzzo and Wolken (2005) found that while greater personal wealth is associated with a lower probability of denial, even after controlling for personal wealth, there remained a large difference in denial rates across demographic groups. They also found that denial rates for blacks increased with lender market concentration, a finding consistent with Becker's (1957) classic theories of discrimination. Using earlier data, Cavalluzzo, Cavalluzzo, and Wolken (2002) found that all minority groups were more likely than whites to have unmet credit needs. Blacks were more likely to have been denied credit, even after controlling for many factors related to creditworthiness. In fact, denial rates and unmet credit needs for blacks widened with an increase in lender market concentration. The fear of denial often prevented some individuals from applying for a loan, even when they had credit needs. Blacks and Hispanics most notably had these fears. Blanchflower, Levine, and Zimmerman (2003) conducted a similar analysis 4 See Blanchard, Yinger and Zhao 2004, Blanchflower, Levine and Zimmerman 2003, Cavalluzzo, Cavalluzzo, and Wolken 2002, Cavalluzzo, and Wolken 2005, Coleman 2002, 2003, and Mitchell and Pearce

11 with similar results, but did not have access to some of the proprietary information available to researchers from the Federal Reserve. However, they did find that black-owned businesses were more likely to have a loan application denied, even after controlling for differences in creditworthiness, and that blacks paid a higher interest rate on loans obtained. They also found that concerns over whether a loan application would be denied prevented some prospective borrowers from applying for a loan in the first place. The disparities between the denial rates between whites and blacks grew when taking these individuals into consideration along with those that actually applied for a loan. Bostic and Lampani (1999) include additional geographic controls and continue to find a statistically significant difference in approval rates between blacks and whites. IMMIGRANT-OWNED BUSINESSES Much less research, however, has focused on access to and use of financial capital among immigrant entrepreneurs. Anecdotal evidence suggests that immigrant entrepreneurs rely heavily on informal sources to finance their businesses instead of banks or other institutions, but there is little direct evidence from nationally representative datasets carefully documenting these patterns. One exception is provided by U.S. Census data suggesting that there may be significant leveraging of personal wealth by immigrant entrepreneurs. Asian-immigrant businesses have substantially higher levels of startup capital than non-latino white owned businesses, but comparisons of overall personal wealth indicate similar levels between non-latino whites and Asians (Fairlie and Robb 2008). The use of rotating credit associations among some immigrant groups has been argued to be important in financing immigrant businesses, but perhaps an equal 11

12 number of studies suggest that they play only a minor role (see Light, Kwuon, and Zhong 1990, Yoon 1991, Bates 1997 for example). 3. New Estimates on Capital Use among Immigrant-Owned Businesses To address the limited previous research on capital use among immigrant-owned businesses this section presents new estimates from a nationally-representative, U.S. government data source. The main reason for the lack of previous research on access to financial capital among immigrant entrepreneurs has been data availability. Datasets with large enough sample sizes and information on immigrant status typically do not provide information on financial capital. An exception is provided by a newly available dataset that includes information on both immigrant status and on the sources and levels of financial capital use -- the 2007 Survey of Business Owners (SBO). For the first time since 1992, the U.S. Census Bureau collected information on whether business owners are immigrants and the amount of startup capital used by the business as part of its main business owner data collection effort. These data, as well as data from the 2010 Current Population Surveys (CPS), are used to conduct a detailed analysis of access to financial capital among immigrant entrepreneurs in the United States. IMMIGRANT BUSINESS OWNERSHIP AND PERFORMANCE Before examining capital use among immigrant-owned businesses it is useful to first examine patterns of immigrant business ownership and performance. 5 Previous research indicates higher levels of business ownership among the foreign-born than the native-born in many 5 Estimates of business ownership and outcomes from these sources that are presented here are generated from special tabulations of confidential data, public-release microdata, and published sources from the U.S. Census Burea and Bureau of Labor Statistics. More details about the data sources are provided in the Data Appendix. 12

13 developed countries including the United States, the United Kingdom, Canada, and Australia (Borjas, 1986, Lofstrom 2002, Clark and Drinkwater 2000, 2006, Schuetze and Antecol, 2006, and Fairlie et al., 2008). The latest estimates from 2010 Current Population Survey (CPS) microdata confirm this finding. Table 1 displays estimates of self-employed business ownership rates in 2010 for immigrants and non-immigrants. The self-employed business ownership rate is the ratio of the number of self-employed business owners to the total number of workers. Business ownership in the CPS captures ownership of all types of businesses including incorporated, unincorporated, employer and non-employer businesses. The estimates indicate that business ownership rates are higher for immigrants than non-immigrants. Indeed, 10.5 percent of the immigrant work force owns a business, compared with 9.3 percent of the nonimmigrant work force. The difference in business ownership rates of 1.2 percentage points implies that immigrants are more than 10 percent more likely to own a business than are nonimmigrants. The business ownership rate captures the stock of business owners in the economy at a given point in time, but does not capture the dynamics of business creation. It is useful to examine business formation among immigrants because it captures the startup potential of this group. New businesses are often associated with economic growth, innovation, and the creation of jobs. To investigate, I estimate the rate of business formation for immigrants and compare it to non-immigrants. Table 2 displays estimates of business formation rates for Immigrants are found to create businesses at a faster rate than non-immigrants. The business formation rate per month among immigrants is 0.62 percent; that is, of 100,000 non-business-owning immigrants, 620 start a business each month. This rate of business formation is much higher than the U.S. born rate of 0.28 percent, or 280 of 100,000 U.S.-born non-business owners per month. Although 13

14 higher rates of business ownership have been documented extensively in the previous literature, the finding of substantially higher immigrant-owned business formation rates is a relatively new and important finding. Combined with the previous finding of slightly higher business ownership rates among immigrants relative to nonimmigrants, it indicates that immigrants move into and out of business ownership at a much higher rate than non-immigrants. 6 The performance of businesses started by immigrants is examined next using data from the newly released 2007 Survey of Business Owners (SBO). The SBO is considered the most upto-date, comprehensive dataset on minority businesses in the United States.For the first time since 1992, the U.S. Census Bureau collected information on the immigrant status of business owners in its main database collecting information on the ownership characteristics of U.S. businesses. Table 3 reports estimates from specially commissioned tabulations from the 2007 SBO for the average sales and employment of immigrant and non-immigrant owned businesses. 7 Immigrant owned businesses represent 13.2 percent of all businesses in which foreign born status of the owners can be determined. Immigrant-owned firms have $434,000 in average annual sales and receipts. The average level of sales is roughly 70 percent of the level of non-immigrant owned firms at $609,000. Immigrant-owned businesses are slightly more likely to hire any employees than are non-immigrant owned businesses, however, they tend to hire fewer employees on average. Among immigrant owned businesses that hire employees these firms hire an average of 8.0 employees with an average payroll of $253,000. Non-immigrant owned 6 Conditional on two groups having similar business ownership rates, the only way that one group can have a higher business entry rate is if it also has a higher business exit rate (see Fairlie, 2006, and Fairlie and Robb, 2008, for more discussion). 7 The 2007 SBO microdata are not publicly available (see Data Appendix). 14

15 businesses that hire employees hire an average of 11.9 employees with an average payroll of $429,000. There are interesting differences by race and ethnicity for immigrant owned businesses. Hispanic immigrant owned businesses have an average sales level of $257,000 compared with $465,000 for Asian immigrant owned businesses. Asian immigrant owned firms are more likely to hire employees than Hispanic immigrant owned firms (36 percent compared with 20 percent), but have roughly similar levels of employment and payroll conditioning on being an employer firm. On average, businesses owned by Hispanic immigrants are smaller than businesses owned by Asian immigrants. Average sales levels can be influenced heavily by a few outliers of very successful firms and may be misleading of the more common performance levels of immigrant-owned firms. An examination of the entire sales distribution for immigrant and non-immigrant firms reveals some interesting differences between immigrant and non-immigrant firms. Immigrant firms are less likely to have very low levels of sales and are more likely to be in the middle of the sales distributions. Immigrant firms are slightly less likely to have sales at the very high end of the distribution defined as $1,000,000 or more, but are slightly more likely to have sales in the $500,000 to $999,999 range than non-immigrant firms. Overall, 11.4 percent of immigrant firms have sales of $500,000 or more, which is similar to the percentage of non-immigrant firms at this level. Asian immigrant owned businesses tend to have higher levels of sales than immigrant owned businesses overall. They are more likely to be represented in the highest sales categories with 13.7 percent having sales of $500,000 or more, which is higher than for non-immigrant owners at 11.8 percent. Hispanic immigrant businesses have lower sales than the immigrant total 15

16 and non-immigrants. Among Hispanic immigrant firms, 7.4 percent have sales of $500,000 or more. Overall, immigrant businesses have lower average sales and hire fewer employees than non-immigrant businesses. They are less likely to have very high levels of sales of $1,000,000 or more. Hispanic immigrant owned firms tend to have lower sales and employment and Asian immigrant owned firms have higher sales and employment. Although immigrant owned businesses are not substantially underperforming non-immigrant owned businesses, there might be some untapped potential among this group of business owners. One potential barrier is access to financial capital. Limited access to financial capital may restrict immigrant business success partly explaining why performance is lower than for businesses owned by non-immigrants. CAPITAL USE AMONG IMMIGRANT-OWNED BUSINESSES In addition to providing new information on the immigrant status of the business, the 2007 SBO is the first U.S. Census survey since 1992to include information on levels of startup capital. Given the importance of access to startup capital for business performance found in the previous literature, this information is extremely valuable for identifying potential barriers to business success. Table 4 reports estimates for the amount of startup capital used by immigrant and non-immigrant owned businesses from specially commissioned tabulations from the U.S. Census Bureau. Distributions for startup capital levels are reported because categorical responses were included on the questionnaire instead of write-in values. Immigrant firms are less likely to use low levels of startup capital than are non-immigrant firms. Combining the bottom two categories, 51.7 percent of immigrant firms start with less than $5,000 in startup capital compared with 59.1 percent of non-immigrant firms. At the other end of the distribution, 16

17 immigrant owned firms are more likely to be represented in the highest startup capital levels. Nearly 20 percent of immigrant owned firms started with $50,000 or more in startup capital compared with 15.9 percent of non-immigrant owned firms. The distributional estimates make it clear that immigrant owned businesses start with higher levels of startup capital than nonimmigrant owned businesses. Similar to the patterns found for sales and employment, Hispanic immigrant firms have lower levels of startup capital than the immigrant total and Asian immigrant firms have higher levels of startup capital. Among Hispanic immigrant firms, only 10.3 percent have startup capitals of $50,000 or more. Among Asian immigrant firms, 29.0 percent have startup capitals of $50,000 or more. The finding of relatively high levels of startup capital among Asian-owned firms supports previous results indicating high startup capital levels (Fairlie and Robb 2008). TYPES OF FINANCING Do immigrant businesses differ in the types of financing they use from non-immigrant businesses? The 2007 SBO includes information on sources of capital used to start or acquire the business and sources of capital to finance expansion or capital improvements for the business. Table 5 reports sources of startup capital for immigrant and non-immigrant owned businesses from specially-commissioned tabulations from the 2007 SBO. The reported totals are not restricted to sum to 100 percent because business owners were instructed to mark at all that apply among a list of potential sources of startup capital. The most common source of startup capital for both immigrant firms and non-immigrant firms is from personal or family savings. Roughly two-thirds of both immigrant and non-immigrant owned report this source of startup capital. The second most common source of startup capital used by immigrant businesses is 17

18 personal or business credit cards (11.1 percent). Another common source of startup capital is a business loan from a bank or financial institution, but immigrant businesses are slightly less likely to use this source than are non-immigrant businesses (8.3 percent compared with 11.2 percent). Immigrant business owners also commonly use personal and family assets (other than savings) and home equity loans to finance business starts. Interestingly, only a small share of immigrant-owned businesses report receiving business loans or investments from family and friends. Consistent with higher levels of startup capital, Asian immigrant owned firms tend to use all sources of startup capital more often than the immigrant total. Hispanic immigrant firms, in contrast, tend to use less of the reported sources of startup capital. Asian immigrant firms are similarly likely to rely on business loans from banks or financial institutions for financing startups as are non-immigrant firms. The main finding from these results is that immigrant and non-immigrant business owners rely on similar sources of startup capital to start their businesses. Immigrant owned firms rely heavily on personal and family savings to fund startup activities. They also rely heavily on credit cards, bank loans, personal and family assets, and home equity loans. These are also the most common sources of financing by non-immigrant owned businesses in the United States. In terms of sources of capital used to finance expansions reported in Table 6, immigrant owned businesses report personal and family savings as the most common source (36.1 percent). Immigrant owned businesses also commonly rely on personal and business credit cards and business profits and assets to finance expansions of their businesses. The reported totals for sources of capital used for expansion do not differ substantially between immigrant and nonimmigrant owned businesses. 18

19 HOME OWNERSHIP The single largest asset held by most households is their home. More than two-thirds of families are home owners with a median home equity of $59,000 (U.S. Census Bureau 2008). Home equity represents 60 percent of all wealth. Home equity as well as other forms of personal wealth is important for starting businesses because they can be invested directly in the business or used as collateral to obtain business loans. Indeed, previous research indicates that home ownership and equity are found to be associated with entrepreneurship and obtaining business loans using Finish data (Johansson 2000), U.K. data (Black, de Meza, and Jeffreys 1996), and U.S. data (Fairlie 2011; Cavalluzzo and Wolken 2005).Although the SBO does not collect information on the use of home equity as collateral for loans, it does indicate that home equity loans are one of the most common sources of startup capital (see Table 5). This sectionexamines the question of whether immigrants and natives differ in rates of home ownership and whether these differences have any impact on differences in rates of business formation. Table 7 reports home ownership rates for 2010 for immigrants and the U.S. born from the CPS. These are the latest data available on immigrant home ownership rates. Immigrant rates of home ownership are much lower than the U.S. born home ownership rate. Among immigrants 52.1 percent own a home compared with 70.8 percent of U.S. born. What impact do these differences have on business formation patterns?to investigate this question I first examine the relationship between home ownership and entrepreneurship. Using matched CPS data on business formation for 2010, I examine the determinants of business formation as defined for Table 2. The following logit regression for the probability of entrepreneurship is estimated: 19

20 (3.1) Prof(y it =1) = F(α + γ 1 H it + β'x it + λ t ), where y it equals 1 if the individual starts a business by the second or subsequent survey month in the two-month pair and 0 otherwise, H it is whether the individual owns his or her home, X it includes individual characteristics, λ t are month fixed effects to control for seasonal variation, and F is the cumulative distribution function for the logistic distribution. The individual characteristics include gender, race/ethnicity, nativity, age, education, family income, marital status, region, urban status, and initial employment status. The parameter of interest is γ 1, which captures the relationship between whether an individual owns a home and entrepreneurship. All specifications are estimated with logit regressions using CPS sample weights.marginal effects and their standard errors are reported. 8 Marginal effects estimates are similar from probit and linear probability models, and are thus not reported. Table 8 reports estimates of (3.1). The base specification includes controls for individual characteristics. The estimates indicate that women are less likely to become entrepreneurs. African-Americans, Latinos, and Asians are also less likely to start businesses, all else equal. Entrepreneurship increases with age and married people are more likely to start businesses. The relationship between entrepreneurship and education is not linear. Entrepreneurship rates are lower for high school graduates than for high school dropouts (the left out category), but entrepreneurship rates are similar between those with some college and high school graduates. College graduates have higher rates of entrepreneurship and those with graduate degrees have the highest rates of entrepreneurship. Thus, there is a U-shaped relationship 8 The reported marginal effect provides an estimate of the effect of a 1-unit increase in the independent i variable on the self-employment entry probability. It equals the sample average of e X i /(1 e X ). ˆ ˆ 20

21 between entrepreneurship and education. 9 Business formation rates tend to decline with total family income, and entrepreneurship rates are higher among the unemployed and those not in the labor force. Turning to results for the two main variables of interest to this study, the logit estimates indicate that home owners are more likely to start businesses than non-home owners. The coefficient is large, positive and statistically significant. Home owners have a percentage point higher rate of entrepreneurship than non-home owners, which is more than 10 percent of the mean rate of entrepreneurship. In other words, home owners are roughly 10 percent more likely to start businesses than are non-home owners, all else equal. In the presence of liquidity constraints, the ability of owners to borrow against the value of their homes may make it easier to finance new business ventures. It is unlikely that the home ownership variable is simply picking up current or permanent income effects because the regressions control for family income, education, and unemployment. The logit regressions also indicate that immigrants have higher entrepreneurship rates than the native-born even after controlling for education, family income, region, initial employment status, home ownership and other characteristics. Immigrants have entrepreneurship rates that are 0.22 percentage points higher than U.S. born rates. The raw difference in entrepreneurship rates was 0.28 percentage points as reported in Table 2. The difference in these findings suggests that controlling for demographic factors and home ownership explains part, but only part, of why immigrants have higher entrepreneurship rates than non-immigrants. 9 See van der Sluis, van Praag and Vijverberg (2005) and van Praag (2005) for reviews of the evidence on the relationship between education and entrepreneurship. 21

22 Specification 2 of Table 13 reports logit regression estimates that include industry controls. Industries differ in their propensity for individuals to start businesses and the industrial composition may be related to education, home ownership, immigrant status and other characteristics. Construction has the highest rate of business creation followed by Professional Services. The lowest rate of entrepreneurship is found in Manufacturing. The addition of industry controls, however, has little effect on the results for the immigrant variable. It declines slightly from to The home ownership coefficient increases slightly to 0.38 percentage points. Industry controls are not included in the main specification because of endogeneity concerns. The main issue is that the choice of industry and the choice of starting a business may be simultaneously determined. Workers are not constrained to starting businesses in their current industry and may choose different industries depending on the goals of their businesses. But, these results provide a useful robustness check of the main results and indicate that the results are not sensitive to industry differences. Given that home ownership has a positive effect on entrepreneurship rates it is useful to conduct a simple back-of-the-envelope calculation of how much low rates of home ownership restrict the business formation rate of immigrants. Home owners have a higher rate of entrepreneurship than non-home owners and the home ownership rate is 0.30 loweramong immigrants (see Table 8). The product of these two estimates indicates that immigrant entrepreneurship rates would be higher if immigrants had home ownership rates that were at the same level as the U.S. born. In other words, the high rate of business formation among immigrants could be even higher if they had higher rates of home ownership, which might provide better access to financial capital. 22

23 4. Conclusions A review of the previous literature indicates that limited access to financial capital is one of the most important determinants of disparities in business creation and performance between minority businesses and non-minority businesses. Inadequate access to financial capital is found to be a constraint limiting the creation and growth of minority-owned businesses. Minorities are found to have wealth levels that are an order of magnitude lower than non-minority levels. Minority firms are also found to invest substantially less capital at startup. Previous research indicates that they pay higher interest rates on loans, are more likely to be denied credit, and are less likely to apply for loans because they fear their applications will be denied. There is less evidence in the previous literature on access to capital among immigrantowned businesses. Some previous evidence indicates a heavier reliance on informal sources of capital among immigrant business owners, but there is some disagreement over the importance of sources such as rotating credit associations. The estimates presented here from the 2007 SBO and CPS data provide a new detailed picture of capital use among immigrant-owned businesses in the United States. Immigrant owned businesses start with higher levels of startup capital than non-immigrant owned businesses. Nearly 20 percent of immigrant owned firms started with $50,000 or more in startup capital compared with 15.9 percent of non-immigrant owned firms.the most common source of startup capital for both immigrant firms is from personal or family savings with roughly two-thirds of businesses reporting this source of startup capital. Other commonlyreported sources of startup capital used by immigrant businesses are credit cards, bank loans, personal or family assets, and home equity loans. The most commonly reported source of capital used to finance expansions among immigrant owned businesses is personal and family savings followed by credit cards and business profits and assets. The sources 23

24 of startup capital used by immigrant firms do not differ substantially from those used by nonimmigrant firms. Immigrants, however, are found to have substantially lower rates of home ownership than non-immigrants. These differences in home ownership have implications for business formation rates because regression estimates indicate that home owners are roughly 10 percent more likely to start businesses than are non-home owners. Given low rates of home ownership among immigrants, business formation could be even higher if they had rates of home ownership more similar to non-immigrants. The findings presented in this chapter contribute to our understanding of the use of financial capital among minority- and immigrant-owned businesses, but more research is needed. Uncovering additional barriers to capital accessisespecially important because of the potential contribution of minority- and immigrant-owned businesses to their economies. Although minority- and immigrant-owned businesses already contribute greatly to their economies, there remains a lot of untapped potential for creating jobs and fostering innovation. Barriers to entry and expansion are potentially costly to productivity, especially because minorities and immigrants represent a growing share of the population in many developed countries. 24

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