Minority Report: Expanding Opportunity for All
In the new economy, small businesses, rather than Fortune 500 corporations, are the engine of American innovation and job growth. The Great Recession and subsequent jobless recovery have made this clear. Between 1992 and 2010, the economy gained 16.7 million jobs, 33 percent of which came from businesses with less than 50 employees and 32 percent from businesses with 50 to 499 employees. Between 2000 and 2010, the economy saw a net loss of 3.4 million jobs. Large businesses—those with 500 or more employees—accounted for 65 percent of that loss. In contrast, net employment in businesses with 50 to 499 employees was unchanged, while businesses with fewer than 50 employees experienced a 35 percent reduction.
Minority-owned small businesses play a crucial role in this economic picture. Such businesses employed 5.9 million workers in 2007, or 5 percent of the workforce. Furthermore, the number of minority-owned businesses, as well as their earnings and employment capacity, is growing at rates that far exceed the respective rates of growth for nonminority-owned businesses. Over the last decade, the rapid rise in revenue and employment among minority-owned firms suggests that those firms are extremely well positioned to help reduce the extraordinarily high rates of unemployment in minority communities.
But while minority-owned businesses have made tremendous advances over the last decade, they also face serious challenges. The ups and downs of the new economy are hurting all small businesses, but especially minority-owned firms. And while they can help make a dent in the unemployment problem, minority-owned businesses are still too much an afterthought in current thinking about the economy. Recent initiatives by the Obama Administration, such as the new Startup America campaign to accelerate entrepreneurship, show that policy-makers understand that entrepreneurship and small business lie at the heart of any recovery plan. Yet few policy-makers have homed in on the potential of minority-owned small businesses to help the United States out of the economic ditch.
Compounding minority business owners’ worries is the changing face of the global economy. Serious competitors to U.S. global economic leadership have emerged. In response, U.S. corporations have sought to become leaner, meaner, and more flexible, downsizing and transforming their operations by reducing the number of suppliers they depend on and requiring suppliers to have more capacity and demand flexibility. The government has also implemented changes in procurement policies that are somewhat analogous to the changes occurring in the corporate sector. To save more money, procurement departments are starting to bundle contracts and in-source more services. On top of these changes, new financial regulations have amplified the difficulties minority business owners face regarding access to capital. All of these developments have made it more challenging for minority business owners to increase their scale of operations. To ensure the continued development of these businesses, some changes in government policy need to be made.
The Lay of the Land
Over the last decade the growth of minority populations in the United States has been astounding. Newly released Census Bureau data indicate that between 2000 and 2010 the Hispanic/Latino and Asian populations increased by 43 percent each, the African-American population rose by 12.3 percent, while the white population grew by only 5.7 percent.
Less visible is the fact that business ownership among minorities is growing at an even faster rate. From 1982 to 2007, the number of African-American-owned businesses increased from just over 300,000 to 1.9 million, or by 523 percent; the number of Asian-American-owned businesses increased from 242,000 to 1.6 million, or by 545 percent; and the number of businesses owned by Hispanics and Latinos increased from 284,000 in 1982 to 2.3 million in 2007, or by 696 percent. Women-owned businesses also increased significantly, growing from 2.6 million to 7.8 million, or by 198 percent. Meanwhile, over the same period, white-owned businesses increased from 12.5 million to 22.6 million, or by 81 percent.
A milestone was achieved between 2002 and 2007. For the first time since the Census Bureau began compiling data on them in the 1970s, the number of minority-owned firms with paid employees, and the revenue from these firms, grew at a much faster clip than the respective increases for firms owned by whites. Specifically, the number of minority-owned firms with paid employees increased by 26.5 percent from 2002, while the number of white-owned businesses with paid employees increased by 2.3 percent between 2002 and 2007. Likewise, the revenue of minority-owned firms with paid employees increased by 54.9 percent over that time, while revenue of white-owned firms increased by only 24.1 percent. In all previous surveys, the growth of minority-owned businesses was concentrated almost exclusively among businesses that did not have paid employees.
Still, for all this progress, the revenue of African-American firms is significantly lower than the revenue of nonminority business owners and even other minority business owners. According to Small Business Administration (SBA) data, 95 percent of African-American firms earn less than $10 million, compared to $20 million for nonminority businesses. And while average revenues for nonminority-owned firms were $5.2 million, the average for African-American-owned and Hispanic/Latino-owned firms were $2.5 million and $3.8 million respectively. Clearly, there is much room for improvement for minority entrepreneurship.
The Important Role of Government Contracting
Until the civil rights movement of the 1960s and the legislation that followed, minorities had encountered centuries of racial inequality in the United States. Segregation and Jim Crow laws meant that African-American-owned businesses were confined in their operations to the resources, consumers, financial institutions, and distribution networks that existed within the African-American community. As a result, the types of businesses that emerged were those that were compatible with an enclave economy—small-scale personal service and retail establishments, or “mom-and-pop” enterprises.
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