Disparities in Local Business
Economic Pulse, 2016 Issue 9
Local Business Disparities
Corpus Christi has earned the reputation of one of the best American cities for small businesses, particularly Hispanic-owned businesses. According to WalletHub, the area’s favorable business climate--second only to Laredo--is attributable to the ease with which to start a business and the high buying power of the Hispanic population.
Still quantitative data suggest that local Hispanic and other minority businesses collectively do not earn as much in revenues as their share of the business population suggests. This article summarizes some findings of a report that evaluates the extent of disparity between minority-owned businesses and other businesses .
The standard approach in most disparity studies concerning minority-owned businesses quantitatively compares the extent of their utilization against their availability. The most popular metric is the disparity index, which is the ratio of a measure of business utilization over a measure of business availability in a specific area or market. Business utilization is typically measured by the annual sales volume, and the most common measure of availability is the number of businesses.
The formula for the disparity index is: (Utilization) ÷ (Availability) = [(Minority Business Sales) / (Total Area Sales)] ÷ [(Number of Minority Businesses) / (Number of Total Businesses)]. The formula is equivalent to the ratio of minority businesses’ combined share of local business sales over their share of local businesses by number.
The objective of a disparity study is to evaluate the level playing field in the marketplace. The benchmark for the disparity index is one, which indicates the absence of disparity as the utilization of businesses is perfectly proportionate to their availability. An index close to zero indicates very little utilization of those businesses despite their availability. Businesses are considered underutilized if their disparity indexes are remarkably less than one, and overutilized if the indexes are remarkably above one.
Based on the 2012 Census Survey of Business Owners, which is available at the end of 2015, nearly 43 percent of all local businesses are owned by Hispanics, and over 37% are owned by women. A comparison of the corresponding statistics over the four business census periods beginning 1987 indicates that the shares of minority- and women-owned businesses in the Corpus Christi metro area have grown over the past 25 years or so.
Despite those seemingly high ratios of business formation for local Hispanics and women, they are in fact “underrepresented” when their shares of local business are compared against their shares of the local population. According to the 2014 Census of population, Hispanics or people of Latino origin make up 59% of the population in the Corpus Christi metro area, and 51% of the local population is female. So, these two minority groups by national standards are in fact dominant demographic groups in Corpus Christi.
The majority of local businesses, however, operate without any employees. Most of their owners are basically self-employed. The distribution of business formation also looks different if we focus on employer firms that operate with paid employees. Excluding businesses without employees, then the share of Hispanic business owners in 2012 reduced to below 20%, and the share of female business owners reduced to slightly above 16%. Their shares of all employer firms have in fact remained largely unchanged between 1987 and 2012.
In Corpus Christi, Hispanics, women and other demographic groups have contributed much to the growth in the total number of businesses. Between 2002 and 2012, the number of firms in the metro area grew by 20%, while the number of Hispanic-owned firms grew by more than 75%, and women-owned firms grew by over 60%. Despite their rapid growth in numbers, the growth of sales among Hispanic- and woman-owned businesses together has trailed the sales growth of other businesses in the area.
The relative sizes of local minority- or women-owned employers have also declined in the past two decades. In terms of the sales volume, the share of all minority employers together was 2% in 2012, as opposed to 3% in 2002 and 4% in 1987. Similarly, the corresponding share of women employers fell from 6% in 1987 to 3% in 2002 and 2% in 2012.
In 2012, minority and female business owners made up nearly half of all firms, but they generated only 3% of the total sales volume in the area. As such, the disparity index indicates that local minority- and women-owned firms together received only 6% (3% ÷ 49% = 0.06) of the business sales implied by their availability. The index is similar for the individual minority groups—0.05 for Hispanics and 0.06 for women. All those statistics are remarkably below the benchmark of one, implying significant underutilization of minority- or women-owned firms in the Corpus Christi economy. Their availability is more than 10 times greater than their actual market share in business sales.
While evidence of business disparities in the 2012 Census is similar to those of the historical past, the indexes appear to exhibit declining trends over time. This means that disparities between the extent of availability and utilization for minority- and women-owned businesses in Corpus Christi have widened.
Small businesses are the lifeblood of the local economy. And minority groups collectively make up about half of all business owners in Corpus Christi today. However, as for their counterparts across the United States, Hispanics and other minority entrepreneurs tend to limit their businesses to small sizes. Those entrepreneurs have persistently faced challenges that are common to many small businesses in addition to their unique factors, such as being new immigrants, and limited access to financial and human capital resources that limit their ability to grow a business or to compete with larger, national corporations.
Analyses based on the disparity index, which assumes the existence of equal opportunities, should be interpreted with caution. Looking at business sales—the final stage of the economic outcome—may understate the extent of disparity in a market.
Disparity might exist within the general population, in which minority groups and women might receive underinvestment in training and human capital, leading to disparity in productivity or business formation ability. School or community segregation might contribute to disparity in human capital investment.
In workforce employment, disparity might exist in promotions and training. In the process of business formation, potential business owners might be discouraged by anticipated market or lending disparity. Among business owners, barriers in growth capital or business networks might exist to affect the “availability” as well as performance of minority- and women-owned businesses.
Despite inequalities that may prevail in different stages leading to business formation and growth, conventional analysis based on the disparity index is limited to the outstanding population of minority- and women-owned firms, and thus excluding any “discouraged” businesses that have never entered or “deterred” businesses that have left the marketplace altogether due to the possible presence of inequitable treatments. From this perspective, the findings most likely understate the “true” extent of business disparities in Corpus Christi.
Jim Lee and Kent Byus, “Disparity Study for Corpus Christi and CCRTA,” final report submitted to Corpus Christi Regional Transportation Authority, April 2016.
This article is part of the series that focuses on economic disparities in South Texas.
Where Is the Money?
Ways to scale up a business
The challenges of the Hispanic business community are in fact not unique to Corpus Christi, but rather they are nationwide phenomena. According to a report released recently by researchers at Stanford Graduate School of Business, like those in Corpus Christi, more Hispanics or Latinos are starting business across the United States than the general population, but they remain smaller and generate less revenues than their non-Hispanic counterparts.
The following are the key findings based on their survey of 1,800 Hispanic-owned businesses on their size, revenues, financing, and other characteristics:
Size: Less than 2% of Hispanic-owned businesses have annual sales of over $1 million, compared with 4.9% among all U.S. businesses. The average Hispanic business has sales of $150,000 a year, compared with $573,000 among non-Hispanic-owned business. The average Hispanic-owned firm has 8.6 employees, compared with 12 at non-Hispanic-owned firms.
Family-Ownership: Over 90% of Hispanic businesses are family owned, compared with 85% of non-Hispanic businesses.
Self-Financing: The three major sources of financing for Hispanic businesses are personal savings, credit cards, and friends. For their non-Hispanic counterparts, the sources are personal savings, commercial loans, and personal bank loans.
Access to Capital: More than half of the entrepreneurs surveyed indicated inadequate funding was the major reason for their failure to grow. A large number of them said they had been turned down for funding, largely by banks.
Culture: Over half of those respondents said they had never requested outside funding, and about two-thirds of them said they felt uncomfortable sharing equity with outsiders due to the concern that they would lose control of their business.
Between 2007 and 2012, Hispanic businesses accounted for 86% of all new business in the United States but only about 1% of them received venture capital or angel investments. According to the survey, very few of those startups had even considered financing through those sources to begin with.
Those findings highlight the lack of a pipeline between investors and Hispanic-owned businesses, inadequate financial education, and cultural issues within the Hispanic or Latino community. The researchers concluded that Hispanic businesses could have generated an additional $1.4 trillion each year if they had been the same size of the average non-Hispanic business.
To help Hispanic entrepreneurs scale up their business activity,those Stanford researchers, led by Jerry Porras, initiated a six-week leadership program in 2015 that provided 78 Hispanic entrepreneurs with mentoring, and networking with venture capitalists and angel investors.
Show Me the Money!
At Texas A&M University-Corpus Christi, a similar workshop with panel speakers will be hosted by the Coastal Bend Business Innovation Center on May 5th, 2016. The topic “Where Is the Money?” aims at offering local entrepreneurs an opportunity to learn more about local financial resources available to them. Click here for detailed information and registration.