A New Kind of Business

Policymakers should take a good look at growth companies founded by African Americans.
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African Americans are starting their own companies -- and creating jobs -- in unprecedented numbers. A closer look at those growth companies reveals characteristics that should make policymakers sit up and take notice

A new generation of African Americans is transforming America's black business community. For the most part, they are in their thirties and forties, well educated, and experienced in business, and they are electing self-employment in growing numbers. They are building companies in skill-intensive service industries, such as finance. In the past decade black-owned companies in business services, manufacturing, and construction have more than tripled their employment rolls. Those emerging growth industries are ones in which the presence of African American owners has historically been minimal. Today's owners have no interest in operating traditional mom-and-pop stores catering to minority customers. The emerging black businesses are larger in scale, have lower failure rates, and generate more jobs than their traditional counterparts.

Historically, small businesses owned by African Americans have been concentrated in inner-city ghettos, selling goods and services to neighborhood customers. Those businesses -- barber shops, beauty parlors, mom-and-pop food stores, and the like -- have been in a state of continuous decline since the 1960s. Partial desegregation in housing, the workplace, commercial establishments, and public accommodations contributed to their decline. While desegregation widened the range of retail and service markets accessible to black consumers, it did not lead to significant white patronage of black-owned businesses.

(An interesting aside: prior to the 1960s, black college graduates avoided the world of business. The most common undergraduate major in 1965 was education. By 1980 college enrollment among African Americans had more than tripled, to 1.1 million, and the most popular undergraduate major was business. A deeply rooted historical pattern had been altered: black college graduates were pursuing careers in business in unprecedented numbers.)

The emerging growth companies are a striking contrast to their inner-city predecessors. They are targeting a largely nonminority marketplace -- often other businesses -- and usually find it more profitable to locate in a central business district or in outlying areas than in the inner city.

What effect does the new form of black enterprise, located outside the urban ghetto, have on the core city African American job seeker? The question is of particular importance because the massive losses of blue-collar manufacturing jobs in large corporations over the past two decades have essentially blocked the traditional route to upward mobility for black men. One of the few employment options left for urban black workers, particularly men in blue-collar occupations, is in small companies.

I have recently completed a study of employment patterns among small businesses within 28 large metro areas. The patterns differ sharply: although more than 93% of the black business employers rely on minorities to fill 50% or more of their jobs, nearly 60% of the nonminority employers have no minority employees. Part of the reason for that pattern of hiring differences is that most white-owned companies operate in nonminority areas, while most black-owned companies are in minority neighborhoods.

Among businesses operating in urban minority communities, 32.9% of the white business employers have no minority workers on their payrolls. In complete contrast, nearly all the black-owned companies have minority employees, and for 93.1% of those companies, at least 75% of their employees are minority workers.

Among black employers located in nonminority sections of large metropolitan areas, 86.7% have a workforce in which half the employees or more are minorities. Most rely on minority employees for at least 75% of their workforce. Among the white-owned small businesses in those same areas, most have no minority employees whatsoever. Black businesses located outside the minority community are much more likely to hire minority employees than nonminority-owned businesses located within minority residential areas. Whatever the geographic location, white-owned businesses tend to hire whites, while blacks hire blacks.

That is not surprising, since among small businesses generally, employees are most commonly members of the immediate family, relatives, or friends. The relevance of social networks to job access helps explain why the racial composition of the workforce employed by black-owned businesses differs from that employed by nonminority enterprises.

If most of the jobs available in the small-business sector are in white-owned companies (and they are), and most of the white-owned companies prefer to hire relatives, friends, and friends of friends -- few of whom are black -- then black job seekers will fare poorly in that sector. The logic of network hiring, furthermore, suggests that an expanding black business community is what will generate jobs for African Americans. Those companies, after all, have already demonstrated their hiring practices. Policymakers should be asking if there is any way to speed up that process.

Current public programs, such as most enterprise-zone efforts, often fail because their emphasis on ghetto locations means minority businesses with the best growth potential are left out. Those are the emerging companies choosing not to locate in the inner city, and present public policies have not reversed that geographic preference. Policies to assist the more capable businesses, wherever they are located, would make more sense. The record shows that programs that target assistance to lower-income, less educated entrepreneurs simply produce mass business failure. It is the viable companies, after all, that create business expansion and jobs.

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Timothy Bates is a professor of policy analysis at the New School for Social Research, in New York City. His most recent book, Banking on Black Enterprise: The Potential of Emerging Firms for Revitalizing Urban Economics, is published by the Joint Center for Political and Economic Studies, in Washington, D.C.

Last updated: Jul 1, 1994




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