Why Are There So Few Black Entrepreneurs?
NBER Working Paper No. 3537
Black entrepreneurship has been unsuccessful in the U.S. The fraction of employed blacks that work in their own businesses is about one-third that of whites. Other measures of success such as net income, number of employees, and form of organization show large differences between blacks and whites. This paper examines explanations for these differences, particularly focusing on the frequently cited economic explanations of liquidity constraints and consumer discrimination. Liquidity constraints are examined by estimating logit equations for who is self-employed in a cross-section and who becomes self-employed in a panel. These estimates suggest that net worth is not an important determinant of the racial differences in self-employment. An examination of small business starting capital indicates that little capital is needed to start most business and beginning entrepreneurs do not usually borrow. Examining the industrial distribution of black and white businesses, I do not find a greater relative representation of blacks in industries requiring less starting capital. I also examine if black businesses are relatively more common in industries where white customers more frequently patronize black businesses. Little support is found for this hypothesis. I conclude that cultural differences may explain black/white differences in self-employment, but this explanation requires further study.