Ethnic business development: toward a theoretical synthesis and policy framework.

AuthorIbrahim, Gamal

There has been a growing interest in both Europe and North America in the high rate of self-employment among ethnic minority groups. The evidence indicates that some ethnic minorities are disproportionately represented in self-employment (Razin 1993; Fairlie and Meyer 1996; Clark and Drinkwater 2000). Well-known examples are the South Asians in Britain; the Koreans, Japanese, and Chinese in the USA; and the Turks and North Africans in France (Barrett, Jones, and McEvoy 1996; Bates 1997; Hillmann 1999; Ram and Jones 1998). There are a number of seemingly conflicting explanations given as to why some ethnic groups enter self-employment. These range from economic efficiency explanations to more sociological ones that draw on cultural factors.

In this paper we will argue that such polarization of explanations is unnecessary and that, by drawing on the work of old intuitionalists (e.g., Veblen 1898) with their emphasis on path dependency and evolutionary behavior, a more unified, but more complex socio-economic argument can be forwarded to explain the disproportionate presence of ethnic entrepreneurs. The first section of the paper sets out the more cultural explanations. The next section covers orthodox economic explanations of entrepreneurial entry, and this is followed by a section on old institutional explanations. Policy implications are discussed in the final section of the paper, which, given the unequal distribution of entrepreneurs across different ethnic groups, not only considers ways of encouraging entrepreneurship but also possible routes in which this activity might best be concentrated.

Culturalist Approach

Cultural factors have been considered by many as the causal factors behind the over-representation in self-employment of certain ethnic groups such as the South Asians in Britain (Ram and Jones 1998; Barrett, Jones, and McEvoy 1996). The cultural argument represents an attempt to attribute entrepreneurship to non-economic factors such as social networks. It takes a Weberian approach to entrepreneurship, where capital accumulation is dependent on specific traditional values and modes of social organization such as those inspired by Max Weber's Protestant ethic thesis (1958), in which certain value systems and religions breed entrepreneurial spirit (Muhaimin 1990).

It has been argued that some ethnic groups are endowed with social institutions and cultural norms (ethnic resources) that foster entrepreneurial talent (Wilson and Portes 1980). For example, the success of South Asians in Britain is mainly attributed to tight and close kinship and peer networks which generate social capital in terms of employees, local customers, and financial sources (Rafiq 1992; Werbner 1990; Qadeer 2000). These tight social networks provide flexible and efficient possibilities for the recruitment of personnel, acquisition of capital, and exchange of information based on mutual trust among the members of the network (Werbner 1990).

The pioneering work of Ivan Light on protected markets (1972) and that on the ethnic enclave of Alejandro Portes and Robert Bach (1985) illustrate the significance of ethnic niches based on tight social networks, in which ethnic businesses transact in goods that are mainly consumed by co-ethnic customers. Isolation from mainstream markets has a dual effect as it shields ethnic businesses from mainstream competitors as well as providing an opportunity to those who cannot integrate into mainstream labor markets. Therefore ethnic businesses concentrate in niche markets with low costs of entry. These niche markets are often abandoned by mainstream communities and are characterized by relatively low levels of capitalization, long working hours, and poor pay (Waldinger, Aldrich, and Ward 1990). However, dependence on co-ethnic customers may restrict businesses in the long run, since their potential for sustainable economic growth is limited (Ram and Deakins 1996). Social capital, in terms of dense relations and trust within communities, can stifle successful members of the community who attempt to "make the transition to membership in the larger, more extensive, and sophisticated exchange networks co-ordinated by formal institutions and the rule of law" (Woolcock 1998, 163). (1)

The examination of ethnic businesses on a solely cultural basis is limited. On the theoretical level, ethnicity as a form of culture is defined in a static manner, implying that ethnic entrepreneurs have cultural dispositions entrenched in their mindsets irrespective of time and place. This ignores the fact that culture is embedded in a historical context. Ethnic businesses in many Western countries belong to the second and third generations of migrants who have settled in the host countries. This invalidates some of the causes of the protected markets hypothesis such as language difficulties.

Wuokko Knocke (2000) has challenged the argument that intrinsic cultural factors are obstacles to labor market integration by showing that integration, segregation, or discrimination against ethnic minorities results from economic needs and structural labor market characteristics. Thus self-employment is a tool to avoid discrimination in the labor market or downward mobility (Srinivasan 1992). Market characteristics push ethnic minorities into self-employment (Moore 1983; Aldrich et al. 1981; Aldrich, Jones, and McEvoy 1984). Push factors in terms of unemployment, poverty, and discrimination influence the decision to become self-employed. Howard Aldrich et al. examined the motives behind Asian business owners entering self-employment in three British cities (1981). Their study, which investigated 600 small retailers, found a large number of well-qualified Asian shopkeepers compared with white shopkeepers. The study concluded that disadvantage in the labor market for paid jobs is the prime reason for self-employment among Asian people.

Economic Explanations

The main argument underpinning much of the orthodox economic explanation for people choosing to become entrepreneurs, or more generally self-employed, is the difference in the expected present value of earnings from self-employment compared with the expected present value of wages from being an employee. But this only explains the potential demand to become an entrepreneur. Actual entry into self-employment requires a number of barriers to be overcome that turn potential into actual. The main barrier is access to sufficient finance to set up in business which, in part, will depend on personal endowments. Preferring self-employment to wage/salary earning, according to Evans and Javanovic 1989, mainly depends on the level of wealth and liquidity constraints.

Alternatively, drawing on one of the functions expected of entrepreneurs, Robert Lucas emphasized the significance of managerial ability (1978), while Richard Kihlstrom and Jean Laffont (1979) highlighted the role of risk aversion. There are a number of functions that may be regarded as entrepreneurial, ranging from co-ordination of management functions to risk taking and arbitrage. Depending on which function is felt to be the most important, this may determine, to some extent, why some individuals are more likely to become entrepreneurial.

Although the approaches above reflect the expected utility modeling adopted by neoclassical economists, much of their economic analysis of racial issues has concentrated on the broader issue of ethnic differences in the labor market rather than the entry of ethnic minorities into business (Becker 1957). The conclusion of much of this work, which is also pertinent to the startup decision, is that in the long run, in an efficient market, racial discrimination cannot persist as it will reduce profits. Racial economic inequality among producers, employees, or consumers is a direct consequence of a taste for discrimination by the majority of Whites against the discriminated minority of Blacks. In this framework, discrimination is a short-term phenomenon arising from the tradeoff between profit and the utility derived from employers exercising the taste for discrimination (Naylor 1994).

The limitations of Gary Becker's competitive model to explain the persistence of an earnings gap between Blacks and Whites prompted a number of revisionist neoclassical models (see Darity 1989 for a comprehensive survey). Kenneth Arrow (1972) turned to models of imperfect information to explain racial economic differences. For Arrow and other proponents of statistical discrimination models (Aigner...

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