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A Flourishing Business Base Needs Minority Entrepreneurs

April 23, 2001|GLENN YAGO | Glenn Yago is director of capital studies for the Milken Institute, an independent, nonprofit economic think tank based in Santa Monica

Blacks and Latinos may be the primary victims of discrimination in lending, but the damage from so-called "redlining" extends far beyond racial and ethnic minorities. The future of the United States is now inextricably linked to the economic mobility of these groups, and underinvestment in their businesses threatens the nation's ability to deal with challenges in retirement and health policy--perhaps even national economic security.

Demographers generally agree that a few decades down the road the U.S. will be burdened by a huge, disproportionately white retired population, directly or indirectly dependent on an economic base of younger members of diverse racial and ethnic background. Yet despite civil-rights gains in the past half-century, access to capital continues to constrict the prospects of young minority entrepreneurs. If pension funds and other institutional investors fail to invest in emerging domestic markets, the economy will simply not be productive enough to generate the resources to cover the long-term health and retirement liabilities of aging baby boomers.

The last decade of technology-driven growth has been deep, but not broad. To sustain that growth, the economy must draw on entrepreneurs and workers who have not participated in the nation's economic boom. The rate of investment in firms owned by African Americans, Latinos, Asians and women, however, remains disproportionately small.

Increasing economic participation has always been the right thing to do for a country whose political legitimacy is rooted in socioeconomic mobility. But now, Americans have no choice: We must develop investment vehicles and secondary markets that broaden business ownership the way innovations in capital markets broadened homeownership after World War II.

This is not pie-in-the-sky. Well-funded and managed minority firms are successful--indeed, their sales are growing 34% per year. And there is every reason to believe that companies with equal access to capital and managers with education and experience succeed at the same rate, irrespective of race, gender or ethnic origin. Nevertheless, financial redlining remains a fact of American economic life. Turndown rates for business loans to African Americans and Latinos are three times as high as for whites with equivalent credit characteristics.

Research by the Milken Institute, the Federal Reserve Bank and others has demonstrated how constrained minority businesses are by unequal access to capital. Minority firms receive just 2% of all private equity investments and only 3% of the federal government's Small Business Investment Corp. dollars. This feeds a vicious cycle by limiting employment growth in minority communities.

The U.S. labor shortage is real. Work-force growth rates have fallen from 2.7% in the 1970s to less than 1.5% today. And two out of three of the workers who are entering the labor force are members of minority groups. Unless their skills are increased through training and on-the-job experience, the shortages will become acute.

The fate of capitalists and workers are inextricably linked. The average venture-backed company employs nearly 100 workers within five years and creates almost twice as many jobs as their nonventure-backed peers. Sales per employee have expanded twice as quickly for minority businesses as for Fortune 500 companies, growing at 16.5% as opposed to 7.9% for the largest firms.

By the same token, investors depend on new opportunities to achieve the financial and economic security that is only possible through healthy portfolio diversification. Emerging domestic markets are growing, profitable and free of the risk inherent in emerging markets abroad. Failure to invest in this business sector will lower productivity of capital and labor and act as a brake on the economy as a whole.

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