Small, imperfectly formed

A new study examines whether minority-owned small businesses are more likely to fail

One has to look a long time for an American politician of any political stripe who has failed to laud small businesses. Still, many have little clue as to what makes such businesses succeed or fail.

Federal agencies aimed at helping small business, such as the Small Business Administration and the Minority Business Development Agency, have been around for half a century, yet persistent differences remain between the performance of businesses founded by white, male entrepreneurs and the rest. Blacks are less likely to be self-employed, for example, and when they are their businesses, on average, have lower sales and profits than do their white- or Asian-owned counterparts. If researchers could explain the causes of these differences, policy-makers could (at least in theory) supply small businesses with more useful help.

Two researchers for the Census Bureau’s Centre for Economic Studies, Ron Jarmin and C.J. Krizan, recently published a working paper (PDF) attempting to understand demographic differences behind small businesses’ success and failure. They concentrated on the years 2002 to 2005, with three databases at their disposal: the Survey of Business Owners, conducted every five years; the Longitudinal Foreign Trade Transaction Database, which includes every US export transaction between 1992 and 2005; and a database co-developed by Mr Jarmin, which allowed the authors to track whether the owners of the firms in their sample had prior experience being their own bosses. By drawing from on the power of the Census’s data collection efforts, the authors hoped to create a more nuanced picture of business survival.

Some of their findings were not terribly surprising. A firm’s chances of survival, regardless of the race or sex of its owner, decreased in poorer areas; and the better the education of the founder, the more likely it was to succeed. Businesses owned by Asians, Hispanics, or Pacific Islanders were more likely to be exporters (not a small point, actually, as exporting firms in the sample performed better than average). Older entrepreneurs were more likely to use personal savings to start their businesses; younger owners were more likely to have to close up shop during the study period than were their middle-aged rivals.

However, the data also confirmed that black- and female-owned businesses tended to perform worse than the average. (They were also less likely to have been funded by bank loans, which might raise questions about the ineffectiveness, or lack of reach, of government programmes designed to help minority entrepreneurs obtain such loans.) Still, the businesses that survived, regardless of the owner’s race, tended to add employees at similar rates. Furthermore, after controlling for factors such as the education and race of the owner, there was no statistically significant difference in firms’ abilities to expand into different locations. Finally, black entrepreneurs were more likely to have a history of self-employment than their white counterparts. Messrs Jarmin and Krizan’s paper is not the first to suggest that black entrepreneurs, less likely to have other business owners in their family or personal networks, tend to “start small” when they venture out on their own.

Most researchers get to end their papers by speculating, usually without much fear of consequence, as to the policy implications of their work. The authors of this paper, not wishing to imply that the Census Bureau might have policy opinions, declined to do so. But the reader can make some guesses. One is that mentorship programmes may be particularly useful for promoting entrepreneurship among blacks. Another is that reaching out to businesses based on the owner’s race might be less useful than supporting businesses in poorer areas. And small businesses of all stripes would be helped by improving that other institution lauded by politicians: America’s education system.