Minority business formation and survival: evidence for business performance and viability.

INTRODUCTION

Empirical analyses of the factors influencing business performance and viability have shown that minority businesses, compared with the non-minority population of small businesses in the United States, experience a lower business formation rate and a higher dissolution rate. Black, Hispanic, and other minority business owners have historically experienced severe economic problems when forming and maintaining business enterprises. Inadequate human and physical capitalization, as well as discrimination, have often restricted the growth in the number and size of minority-owned businesses. African American business owners have experienced particular problems in the formation and viability of their businesses. African American proprietors have cited many obstacles and difficulties, including limited demand for their products and services, racial discrimination, limited vocational or educational opportunities,(1) unpredictable business cycles in the economy, and limited access in securing credit for business ownership. These phenomena, in essence, have excluded many African Americans, as well as other minorities, from successfully participating in business opportunities and obtaining the financial and non-pecuniary (e.g., freedom, independence, profit potential) rewards associated with being self-employed.

There is evidence to suggest that minorities have had major difficulties starting businesses in a number of industries and occupations. Many scholars have cited numerous barriers to business performance and viability. These barriers have included (1) low levels of education in the minority community, (2) low earnings levels among the clientele, (3) unfavorable commercial bank behavior, (4) lack of starting capital (e.g., personal savings or wealth) to form a business entity, (5) competition by non-minority owned.businesses, (6) lack of political influence, (7) limited markets, (8) inability to collect debts, and (9) low financial returns on investment. These difficulties have traditionally hampered minority participation in many types of business activities which could facilitate substantial returns on net investment.

Black, Hispanic, and other minority-owned businesses are generally small. All small businesses in the United States, however, have a greater than 50 percent dissolution rate within their first five years of operations.(2) Larger firms, however, experience greater return on shareholders' equity and larger owner/executive compensation than smaller firms. Economies of scale and the rate of experience of larger firms play major roles in contributing to business performance. Empirical evidence also suggests that larger firms that are highly sophisticated in their strategies and planning procedures are even more viable.(3)

This article considers two facets of business performance and viability. First, explanations for business survival may be based on the characteristic of the individual business owner and on geographic location. Second, the ability of a business owner to have a viable business may be based on general economic conditions. In fact, the findings presented here may have major implications for the classification and definition of race and ethnicity in the next millennium, as well as for policy solutions related to the self-employed.

DEVELOPMENT OF HYPOTHESES

The hypotheses developed in this research study have several objectives, including the examination of the attributes of individual business owners, the identification of the business conditions experienced by minority business owners, and exploration of the factors that influence varying degrees of business success.

The research question addresses the hypothesis that businesses are more successful when business owners invest in human and physical capital. A primary objective is to test the importance of owners' human capital in fostering business performance and increasing business viability. The research objectives assert that the success of minority entrepreneurs rises with formal education, through continuing informal and non-formal education, through years of work experience, through length of business ownership, and with significant financial capitalization. The specific hypotheses relating to human capital, and the utilization of investment capital in business formation, were that: (1) minority business survival increased with the number of years of formal education of the owner; (2) minority business survival increased with greater work experience of the owner; (3) minority business survival was higher in the industries where starting capital requirements were low and did not hinder entry into particular lines of business; and (4) minority business survival increased with the utilization of commercial bank financing in business formation, where education served as a proxy for a sole proprietor's ability to obtain bank credit.

A Taxonomy on Minority Business Enterprise

Three important concepts are presented in the literature on minority business enterprise that should be noted here: accessibility to financial capital, business success, and business dissolution.

Accessibility to Financial Capital. Access to, or availability of, financial capital is influenced by the following factors: years since business was established, age of owner, educational attainment of owner, starting capitalization, percentage of borrowed capital, source of borrowed capital, source of equity capital, racial characteristics of owner, wealth holdings of owner, region or location of residence or business, and marital status of owner.(4)

Business Success. A business is successful if it assists in economic activity at the local level and weathers local business conditions. Business performance, survival, and viability are enhanced by how well an establishment contributes to the local economy, maintains positive accounting profits, and provides ample self-employment income for the business owner to remain successful. Another short-term economic indicator of business success includes the employment of local residents.

Business Dissolution. A business dissolution is when a business owner decides to terminate operations. Dissolution includes the voluntary termination of operations because net sales or profits are too low; the retirement of the business owner; or the decision of the owner to seek wage-and-salary employment as an alternative to self-employment. Business failure, on the other hand, can take many forms. Current data on business failures do not fully disclose whether a firm has dissolved or merely reorganized.(5)

OVERVIEW OF THE RESEARCH DESIGN

The data used in this research study are from both primary and secondary sources. The bulk of the primary data are from the U.S. Bureau of the Census, Characteristics of Business Owners (CBO) database that is not publicly available.(6) Special tabulations from the CBO database were obtained through the Center for Economic Studies of the U.S. Bureau of the Census.(7) The results in this article were verified by U.S. Census Bureau employees who have direct access to the raw data. The CBO database is comprised of two different information sources: survey response data and administrative records that are attached to each individual survey response.

Secondary data sources providing information on various facets of the characteristics of metropolitan areas were extracted from the 1987 and 1992 Survey of Minority-Owned Business Enterprises (SMOBE) and the State and Metropolitan Area Data Book: 1991. These publications provided summary information of firms, sales and receipts, legal form of organization, and number of employees.

The characteristics of business owners and their firms were surveyed by the Census Bureau in February 1991, requesting information as of 1987.(8) A follow-up telephone survey was performed if the surveys were not completed and returned to the U.S. Bureau of the Census by June 1991. Listed in Table 1 are the units of analysis defined as owner attributes and firm characteristics that exist in the 1987 and 1992 CBO databases and were given consideration in this study.

The geographic units of Metropolitan Statistical Area (MSA), county, and state were combined to create spatial variables to conform to various model specifications and research designs. This study, as presented in this article, selected the Census Regional Division as its geographic unit of analysis.(9)

Four classifications of ethnicity have been selected - Black (African American), Hispanic (Latino American), Asian/Other (Asian Americans, Pacific Islanders, Native Americans, and Alaska Natives), and White (Non-minority) - on the basis of the availability of comparable data from earlier censuses. This approach also facilitated comparisons with other research studies.

 
TABLE 1 
 
The Characteristics …