Helping minority entrepreneurs succeed would reduce wealth inequality, economist says

Minority-owned businesses could be the source of 2 million new jobs, says Fairlie.

African Americans aren't getting the same boost from self-employment that Asians and whites enjoy, largely because they lack financial capital, education, and opportunities to work in a family-owned business before setting out on their own, says a leading expert on entrepreneurship.

Business ownership has been the ticket to a higher standard of living for millions of entrepreneurs, but these persistent racial disparities hamper would-be African American business owners, according to economist Robert Fairlie, who says targeted support programs would yield big employment gains for African Americans and other minorities.

"If black business ownership and performance improved to white levels, total earnings inequality in this country would drop by roughly 20 percent," said Fairlie, a professor of economics at the University of California, Santa Cruz, and coauthor of the new book Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States (Cambridge, MA: MIT Press, 2008).

"If we're serious about wanting to reduce wealth inequality in this country, helping black entrepreneurs succeed is a worthwhile investment," he added.

Minority-owned businesses currently employ almost 5 million people in the United States, but with a little encouragement, they could be the source of 2 million new jobs, at least half of which would go to minorities, said Fairlie.

Race and Entrepreneurial Success is the first comprehensive examination of why some racial groups succeed in business while others struggle. Fairlie and coauthor Alicia M. Robb, a research associate in economics at UCSC, conclude that the lack of startup money for black businesses and the lack of prebusiness work experience severely hamper African American entrepreneurial success.

"Nearly half of all black families have less than $6,000 in total wealth, so the lack of capital is a huge impediment," said Fairlie. "And it's a catch-22, because without black-owned businesses, family members can't get the experience that turns out to be a vital factor in business survival and performance."

Entrepreneurs who work in a family business before starting their own company have business outcomes that are 10 to 40 percent better than those who lack that experience, said Fairlie. The authors used both business longevity and performance to determine business outcomes.

Other highlights of Race and Entrepreneurial Success include:

. Black business ownership rates are 45 percent of white rates, and average sales among black-owned firms are one-sixth white levels. (White-owned firms have average sales of $440,000, compared to only $75,000 for black-owned firms.)

. Racial patterns in business outcomes have remained largely unchanged over the past two decades.

. A 10 percent increase in both the number of minority-owned firms and the average number of employees per firm would create nearly 1 million new jobs for minorities and an additional 1 million more jobs for nonminorities.

. About one in 10 workers in the Unites States owns a business, yet business owners hold nearly 40 percent of total wealth in this country.

"The concentration of wealth among entrepreneurs underscores the social value of targeted policy initiatives designed to open the door to business ownership for more minorities," said Fairlie. One of the goals of government programs that promote minority-owned businesses is to reduce wealth inequality, he noted.

Fairlie suggests the creation of programs that would:

. Promote educational attainment to overcome disparities between Asians and black business owners (Asian business owners are twice as likely to have a college degree as are black business owners);

. Provide mentoring, internships, or apprenticeship-type training to help would-be business owners acquire necessary and relevant skills, as a substitute for the lack of opportunities to work in a family business.

"An added benefit of these initiatives is that they would improve business performance for all entrepreneurs, not just those from minority groups," noted Fairlie.


Note to reporters: Fairlie may be reached at or (831) 459-3332.