Study of the Effect of Race and Wealth on Small Business Outcomes

The Office of Advocacy of the U.S. Small Business Administration awarded twelve research contracts to study small firms’ contributions to the economy.  BCT was awarded one of the contracts to study how wealth and other factors affect minority entrepreneurship as a means to help further the Office of Advocacy’s core mission of understanding the role small business plays in economic growth and development.

The notion that it “takes money to make money” is commonplace in public discourse. Indeed, some researchers find that the ability to start a business would be greatly impaired without some form of financial assets or net wealth.  Others, however, have found that some businesses do not require large amounts of startup capital, and therefore, one’s financial position has little to do with whether or not an individual is able to start their business. Understanding the role of wealth in predicting the likelihood of becoming self-employed may be particularly relevant for nascent minority entrepreneurs.

This research used the Panel Study of Entrepreneurial Dynamics (PSED) to uncover whether wealth affects the startup outcomes of minorities and non-minorities differently.  To study relationships, a logistic regression specification was employed.  BCT found that at first glance, net wealth was related to the likelihood that an entrepreneur would start a company.  However, a more fine-grained analysis showed that net wealth was positively correlated with the probability that a nascent entrepreneur would start a new company if the nascent entrepreneur was in the top 25 percent of the wealth distribution.  This research also showed that wealth affects the business outcomes of minority entrepreneurs slightly differently than it influences the business outcomes of their white counterparts.  These results showed that wealth as a predictor of the likelihood that a nascent entrepreneur will open a business may be more complex than previously thought.

The full study can be downloaded here: http://archive.sba.gov/advo/research/rs307tot.pdf

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