Research Findings

Why some immigrant entrepreneurs thrive where African-American entrepreneurs cannot

August 7, 2019

It’s a puzzle that social scientists have tried to solve for decades: How can immigrants come to the United States and achieve more economic mobility than African Americans, even when they start out with equal amounts of human, financial, and cultural capital?

For a variety of reasons, immigrants commonly use entrepreneurship as a mobility strategy.

The mobility prospects for immigrants in wage and salary employment can be low. Immigrants’ credentials, such as a law degree from back home, may not be formally recognized in the United States. In addition, many immigrants may not know English well, and they may experience racial or ethnic discrimination when applying for jobs.

All of these factors push immigrants into self-employment. Immigrants who share an ethnic identity sometimes work together to build successful businesses, employing one another and helping each other learn of new business opportunities, many of which come from within their own co-ethnic communities.

African Americans work together to build successful businesses as well. Nevertheless, even after accounting for potential differences in educational attainment and labor market experience, African Americans confront unique forms of discrimination that allow immigrant entrepreneurs to outcompete and grow beyond many African-American-owned businesses.

Research shows that, in some cases, non-Black suppliers refuse to work with African-American entrepreneurs, non-Black customers feel uncomfortable purchasing goods and services from Black-owned businesses, and banks reject startup loan applications from African Americans because of the false belief that African Americans are more likely to default on their loans.

In a recent study of Mexican immigrants and African-American entrepreneurs in Chicago, I demonstrate another important but heretofore unacknowledged reason why immigrant-owned businesses are able to outcompete comparable African-American businesses: extra-localism.

Extra-localism refers to the use of social relationships outside of one’s local community that provide financing, supplies, or other inputs helpful for business ownership.

Unlike the African Americans in my study, immigrant entrepreneurs relied on co-ethnic suppliers outside of Chicago, which expanded their ability to find appropriate suppliers at a reasonable price.

The immigrant entrepreneurship literature mentions extra-local ties when discussing concepts such as transnationalism, in which immigrants maintain economic relationships with suppliers back in their home countries. Many immigrants in my study, however, relied on intra-national rather than transnational connections.

Put another way, while many studies show how a Mexican entrepreneur in Chicago might buy supplies from a cousin in Mexico, my study showed that many Mexican entrepreneurs in Chicago instead bought supplies from a cousin or friend in Los Angeles or Houston.

A highly active social network binds together immigrants in multiple cities and towns within the United States. By virtue of their migration histories, immigrants develop social networks in many places over time, and their co-ethnic networks span locations that are neither local nor international. Therefore, immigrant entrepreneurs are more likely to find suppliers and clients more cheaply and more regularly than their African-American competitors.

There are several implications of extra-localism for research and public policy.

First, the geographic limits on many African Americans’ trading partnerships segregate the larger social networks of which African-American business owners are a part. Combined with the segregation of African Americans in other domains of life, such as housing, this means that African Americans are less able to build social capital that provides important economic benefits.

Second, there are vibrant connections between immigrant communities across the United States, and many large immigrant communities throughout the world. The intra-nationalism that characterized the Mexican immigrant entrepreneurs of Chicago in my study are likely missed by studies that focus on local or transnational economic activity only.

Finally, many government policies aimed at helping African-American business owners in poor communities—such as set-aside loans, preferential procurement programs, and economic empowerment zones—are structured to help African Americans grow their financial capital, not their social capital.

Practitioners should create public policies that explicitly aim to build social capital in poor African-Americans communities, in addition to policies that help build financial capital. By strengthening programs that connect African-American business owners across the country, the government can help African Americans develop extra-local ties that parallel the kinds of intra-national networks on which immigrant entrepreneurs rely.

Donald Trump’s proposed 2020 budget aims to slash funding for the Small Business Administration (SBA), especially SBA programs that support minority business development. Today’s political climate requires creative solutions to support the growth of minority-owned businesses. One potential solution should be to foster and build social networks that help entrepreneurs find the best funders, suppliers, and clients, no matter where in the country they happen to be.

Read more

Mahesh Somashekhar, “Neither Here nor There? How the New Geography of Ethnic Minority Entrepreneurship Disadvantages African Americans,” Social Problems forthcoming.

Image: Melissa Gorman (CC BY-NC-ND 3.0)

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