HISPANIC ENTREPRENEURS IN THE 2000S

An Economic Profile and Policy Implications

By Alberto Dávila, Marie T. Mora

Stanford University Press

Copyright © 2013 Board of Trustees of the Leland Stanford Junior University
All rights reserved.
ISBN: 978-0-8047-7793-3

Contents

List of Figures and Tables………………………………………….ixPreface…………………………………………………………..xi1 A Macro View of Hispanic Self-Employment in the 2000s………………..12 Entrepreneurial Earnings of Hispanics in the 2000s…………………..153 Hispanic-Immigrant Entrepreneurs…………………………………..394 Education and Hispanic Entrepreneurs……………………………….605 Hispanic Female Entrepreneurs……………………………………..826 Strategic Issues for Hispanic Entrepreneurs—Credit Access…………….1027 Strategic Issues for Hispanic Entrepreneurs—Technology Usage………….1188 Current Policy Issues for Hispanic Entrepreneurs…………………….1369 In Closing………………………………………………………170Appendix A: Major Data Sets Used and Construction of Key Variables………179Appendix B: Details Behind the Empirical Analyses……………………..189Notes…………………………………………………………….205References………………………………………………………..211Index…………………………………………………………….219

CHAPTER 1

A Macro View of Hispanic Self-Employmentin the 2000s

Hispanics represented one out of every six peoplein the United States in 2010, up from one out of eight a decadeearlier. Arguably, this Hispanic population growth was the catalyst for thesharp increase in the number of Hispanic business owners in the 2000s. Forexample, the most recent version of the Survey of Business Owners (SBO)reports that the number of Hispanic-owned businesses increased by 43.7 percent,from 1.6 million to 2.3 million firms, between 2002 and 2007, tripling the14.5 percent growth in the number of businesses owned by non-Hispanics.

Figure 1.1 illustrates the rise in Hispanic entrepreneurship in the 2000s.The representation of Hispanics among the self-employed aged 25–64 increasedby 58.5 percent, from 8.2 percent to 13.0 percent, between 2000 and2010 (see Panel A). This increase outstripped the 36.4 percent growth amongHispanics workers in general during this time. While Hispanics remainedunderrepresented in the self-employment sector, these changes served to reducethe extent of the underrepresentation of this population by the end ofthe decade.

A closer examination of the self-employed indicates that the disproportionategrowth of Hispanics in the entrepreneurial sector stemmed fromtheir rising presence in the U.S. workforce and from the strengthening of entrepreneurialtendencies within the Hispanic population. Indeed, our estimatesreveal that Hispanic self-employment rates significantly increased from7.9 percent in 2000 to 9.1 percent in 2010, rising almost every year during thedecade. In contrast, despite increasing in the early 2000s, the self-employmentrates of non-Hispanic workers declined over the time frame. Hispanics particularlynarrowed their self-employment gap vis-à-vis non-Hispanics in thesecond half of the decade.

We provide in this chapter an overview of these changing entrepreneurialtendencies among the Hispanic population, which will set the stage for moredetailed topics discussed later in the book. This chapter also presents informationon the heterogeneity of the Hispanic population, such that one-size-fits-allpolicies affecting Hispanics overall could have disparate implicationsfor specific Hispanic groups.

Hispanic Self-Employment and Macroeconomic Conditions

The first ten years of the new millennium witnessed historically sharp variationsin the business cycle. This decade provided entrepreneurial opportunities,but it also brought with it significant challenges for entrepreneurs. Tobegin exploring this issue, we consider changes in the business cycle measuredby annual economic growth rates (i.e., the percentage change in realgross domestic product). While U.S. economic growth slowed from 4.1 percentin 2000 to 1.1 percent in 2001, it mostly recovered from this slowdownover the following few years, as the economy expanded by 3.5 percent in 2004.After 2004, the U.S. economy began to slow down, and eventually it hit aneconomic recession in 2008 (or the Great Recession, which technically startedin December 2007). The economy shrank by 0.3 percent in 2008, and despitethe fact that the Great Recession officially ended in June 2009, throughout2009 the economy contracted by another 3.5 percent. By 2010, economic outputrebounded, growing at an annualized rate of 3.0 percent.

With few exceptions, the self-employment rates of non-Hispanic workersmoved with economic growth. As the economy grew, in general so did non-Hispanicself-employment rates. When the economy slowed down, the entrepreneurialtendencies of non-Hispanic workers fell (although they kept fallingin 2010, despite the recovery). Through 2005, the self-employment rates ofHispanics changed in a similar fashion as those of non-Hispanics. In much ofthe second half of the decade, however, Hispanic entrepreneurial tendenciesmoved in the opposite direction from those of non-Hispanics. The Hispanicself-employment rate peaked at 9.3 percent in 2009, and while it declined to9.1 percent in 2010, it remained higher than at the height of the business cycle.

What might explain the resilience of Hispanic self-employment rates inthe face of a slowing economy in the second part of the decade? An answerto this question involves an understanding of the factors that influence theself-employment decision and self-employment survival. From an individualperspective, research on the factors related to business ownership points tothe relative returns to entrepreneurial employment, human capital, creditaccess from institutions and families (including family experience in self-employment),and preferences for business ownership. The group perspectivepoints to the importance of labor-market discrimination and social capital inleading to the entrepreneurship decision.

The self-employment decision has also been cast in terms of occupationand industry, as well as spatial differentials. For example, economists MagnusLofstrom and Chunbei Wang, in a 2009 study of the self-employment patternsof Mexican Americans, noted the importance of recognizing potentialissues related to heterogeneity in business ownership across industries, suchas differences in the “human and financial capital intensiveness” among ethnicgroups, which might lead to different barriers to entry across industries.Economists Timothy Bates and Alicia Robb (2008) further reported that minorityneighborhoods do not offer the same business opportunities as thebroader regional marketplace; they concluded that the housing market in minorityneighborhoods is associated with reduced business viability.

Of course, these are but some of the myriad issues related to business ownershipand survival in the entrepreneurship literature. The purpose of theforegoing discussion is to provide initial context; we delve more deeply intothe literature on these (and other) issues throughout this book.

For now, consider the impact of the economic slowdown in the 2000s onthe labor market for Hispanics. Panel A in Figure 1.2 shows the unemploymentrates of the Hispanic and non-Hispanic civilian population between2000 and 2010, based on our estimates from data from the U.S. Bureau of LaborStatistics. The unemployment rates of Hispanics exceeded those of non-Hispanicsin every year shown, although they tended to move together. Forexample, the unemployment rates for both groups rose steadily between 2000and 2003, and then declined through the middle years of this period. Afterreaching a trough of 5.2 percent in 2006, the Hispanic unemployment rateincreased sharply thereafter, increasing by 2.4 times to 12.5 percent in 2010.This result indicates that the Great Recession negatively affected employmentopportunities in general, but disproportionately so for Hispanics than for theworkforce overall.

Panel B in Figure 1.2 contains the labor-force participation rates (LFPRs)of both groups. The LFPRs show that Hispanics were more likely to bein the labor force than non-Hispanics, and the gap remained fairly steadythroughout the decade. In 2000, the LFPR for Hispanics of 69.7 percent wasthree percentage points higher than that for non-Hispanics. In 2010, the LFPRfor Hispanics had fallen to 67.5 percent, and that of non-Hispanics reached64.2 percent; for both groups, these were the lowest LFPRs in the entire decade.

Except during the Great Recession, the self-employment rates of non-Hispanicsappear in lockstep with their unemployment rates. Namely, until2008, self-employment rates for non-Hispanics tended to increase whenunemployment rates for non-Hispanics were rising, and they fell when unemploymentrates for non-Hispanics declined. For Hispanics, however, self-employmenttended to increase when unemployment rates for Hispanics wererising in the first and last part of the decade (except in 2010), but they alsoincreased in the middle of the decade (except for 2005)—a time when unemploymentrates for Hispanics were falling.

Self-employment activities in the Hispanic population throughout thedecade thus did not appear to be solely driven by cyclical conditions in thelabor market. In the following chapter, we provide a more detailed discussionof whether Hispanics and non-Hispanics were pushed into self-employmentat certain times because of a dearth of job prospects or whether the growingself-employment rates reflected increasing business opportunities that pulledthem into the entrepreneurial sector. The remainder of this chapter exploresother macroeconomic facets of Hispanic entrepreneurship.

The Representation of Microentrepreneurs AmongHispanic Business Owners

The foregoing discussion suggests a general increase in self-employment ratesamong Hispanics during the first decade of the 2000s. Indeed, during the economicexpansion as well as through the slowdown and recession, Hispanicparticipation in entrepreneurial activities intensified. While these trends indicatethat Hispanic entrepreneurs were creating jobs for themselves, how didthey fare in terms of creating jobs for other workers?

Using SBO data from 2002 and 2007, Hispanic-owned businesses createdon net four hundred thousand new jobs, as their total number of paid employeesincreased from 1.5 million to 1.9 million workers. Non-Hispanic-ownedbusinesses added more than six hundred thousand jobs over the five-yearperiod. This information indicates that Hispanic-owned enterprises disproportionatelycontributed to the creation of new paid-employment positionsbetween 2002 and 2007. At the same time, the growth in the number of jobscreated by Hispanics was smaller than the overall growth in the number ofHispanic-owned businesses, such that the average number of paid employeesper firm declined (from about 1 worker to 0.8 workers per firm). The averagenumber of workers per non-Hispanic-owned businesses also fell during thistime (from 2.6 to 2.3), but by a slightly smaller proportion. As such, the expansionin Hispanic entrepreneurship in the first decade of the millenniumoccurred mainly at the level of very small firms.

Another way to investigate these patterns is to consider the share of microentrepreneursamong Hispanic entrepreneurs. We define microentrepreneursas those businesses that have fewer than ten paid employees. We thusturn to the Public Use Microdata Sample (PUMS) of the 2007 SBO. (A comparableversion of the 2002 SBO does not exist.) As described in Appendix A,the 2007 SBO PUMS (released by the U.S. Census Bureau in August 2012)contains detailed demographic, socioeconomic, and business-related characteristicsbased on the 2007 SBO questionnaire. In these data, nearly all (98.1percent) Hispanic-owned firms had fewer than ten employees; this share wasslightly higher than the 95.4 percent of businesses owned by non-Hispanicsthat had fewer than ten workers. These numbers are high partly because thevast majority of firms, particularly those owned by Hispanics, did not haveemployees: employer firms represented about one in ten (11.1 percent) ofHispanic-owned businesses and one in five (79.1 percent) of other businesses.When focusing exclusively on employers, microentrepreneurs were slightlyoverrepresented among Hispanics in 2007, as 82.6 percent had fewer than tenemployees, compared to 77.9 percent among their non-Hispanic peers.

Moreover, turning to an alternative data set (the Current Population Survey,or CPS) that contains information on the number of employees workingfor the self-employed, we find that in every year between 2000 and 2010,microentrepreneurs represented higher shares of self-employed Hispanicsthan non-Hispanics, although the gap did not remain constant. ConsiderFigure 1.3, which presents these shares. Between 2001 and 2003, the increase inself-employment among Hispanics occurred with a rising incidence of microentrepreneurship.Perhaps more Hispanics perceived lucrative business opportunitiesin the small-business sector during the economic expansion, thusleading to more Hispanic-owned microenterprises. Rates of Hispanic microentrepreneursamong the self-employed fell between 2005 and 2007, when theeconomy was slowing down.

With the onset of the Great Recession, the representation of microentrepreneursamong both self-employed Hispanics and non-Hispanics increased(although more sharply for Hispanics), thus resulting in the highestmicroentrepreneurship rates for the decade (93.7 percent for Hispanics and89.3 percent for non-Hispanics) in 2010. In general, these results indicate thatthe rapidly growing population of Hispanic entrepreneurs affected microenterprisesin the first decade of the 2000s. Hispanic entrepreneurial growth appearsto have had a positive impact on job creation, but mostly at the scale ofsmaller firms, especially at the end of the decade. Later in this book, we returnto the issue of microentrepreneurship by exploring gender- and immigrant-relatedvariations in the shares of microentrepreneurs.

Another aspect related to firm size concerns the share of incorporated versusother types of businesses. Incorporated businesses tend to be larger thanunincorporated firms with respect to several dimensions, including numberof employees, sales, assets, and profits. Using data from the Public UseMicrodata Sample of the 2000 decennial census as well as from the 2001–10American Community Surveys (ACS), we estimate that Hispanic-ownedbusinesses had lower shares of incorporated firms in every year in the firstdecade of the 2000s than firms owned by non-Hispanics. The highest rate ofincorporated firms for Hispanics occurred in 2000 (at 28 percent). This wasalso the year when the gap in this rate between Hispanics and non-Hispanicswas narrowest.

Furthermore, changes in the ratio of Hispanic-owned incorporated versusunincorporated firms did not mirror such changes among other businessesoverall. The incorporated share among Hispanics fell sharply in 2001;reached its lowest level (21.4 percent) in 2002; and began climbing until 2005,when it reached 26.8 percent. After that year, there was a general decline inthe share of incorporated firms among Hispanic entrepreneurs, such that thedecade ended with 23.3 percent of self-employed Hispanics operating incorporatedfirms. For non-Hispanics, with few exceptions, their shares of incorporatedbusinesses rose throughout the decade (from 32.3 percent in 2000 to36.4 percent in 2010). Combined with the declining incorporated sharesamong Hispanic entrepreneurs after 2005, such changes led to a widening ofthe difference between Hispanics and non-Hispanics in these shares in thesecond part of the decade. These changes again point to the notion that therising self-employment rates of Hispanics during the economic slowdownand subsequent recession led to an increase in smaller-scale Hispanic-ownedbusinesses.

Industry and Geographic Region

Industry. An additional question relates to whether the growth in Hispanic-ownedbusinesses occurred evenly across the industrial spectrum in the2000s, or whether it remained concentrated in particular industries. Suchinformation is important to consider given the sensitivity of certain industries(e.g., construction) to macroeconomic events, while others (e.g., personalservices) tend to be more insulated. It is also important to consider the costof entering these industries, as suggested by the Lofstrom and Wang studymentioned earlier.

Focusing on 2000, Hispanic representation among entrepreneurs in transportationand warehousing, and to a lesser extent in construction, was higherthan among entrepreneurs in general, and this representation was smaller inprofessional services industries. However, given the rapid growth in the numberof Hispanic entrepreneurs in these industries during the decade, Hispanicoverrepresentation among entrepreneurs in transportation and warehousing,as well as construction, increased. By 2010, Hispanics accounted for 13.0percent of entrepreneurs overall, but Hispanic business owners represented16.8 percent of those in transportation and warehousing, 16.0 percent in construction,and 12.9 percent in professional services.

The case of construction warrants particular attention. As Timothy Batesnoted in his 2011 article on minority entrepreneurship, “Construction (absentdiscriminatory barriers) offers MBEs [minority business enterprises] majoradvantages lacking in many other industries. Lack of advanced educationcredentials and large financial investment are not usually a barrier to entry”(p. 245). In the first part of the decade when the housing bubble started, thepresence of Hispanic entrepreneurs rose in this industry despite a declinein their self-employment rate between 2000 and 2002—a time when non-Hispanicself-employment was rising in the industry. In fact, Hispanic self-employmentin construction in 2002 was at its lowest rate (at 14.0 percent) forthe decade. This suggests that the sheer numbers of Hispanics in the industry,and not an intensification of their entrepreneurial tendencies, enhanced theirrepresentation in the industry in the first few years of the housing bubble.
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