Creating Jobs in Minority Low-Moderate Income Communities
(Al Pina, Chair-Florida Minority Community Reinvestment Coalition)
Economic Growth in the
A study by Brookings Institute concluded in our countries largest major cities that minorities account for over 40% of the cities population but contribute less than 5% of the GDP. This is a socio-economic factor that creates a major obstacle to the future economic growth for our country. The key is and always will be to produce good paying jobs in minority communities. The fuel to this job creation is capital.
The nation’s 4 million minority-owned firms face large disparities in accessing capital, making it even more difficult to weather the recession, according to a new report by the U.S. Commerce Department’s Minority Business Development Agency. With greater access to capital, minority-owned firms could create 16 million jobs and $2.5 trillion in annual revenue, the report concluded. The report found that minority-owned businesses outgrew their counterparts in the number of firms, employment and size of payroll from 1997 to 2002, but face significant long-term growth constraints. One of the biggest barriers is that minorities obtain less debt and equity, pay more for capital and are rejected more often for bank loans.
Minority-owned firms far surpassed the growth of all
Companies that receive equity financing grow sales at a faster rate, hire more employees and have a much greater economic impact than companies that have not received equity financing. The average venture backed company employs 100 workers within five years, and these firms create almost twice the amount of jobs as their nonventure-backed peers (Milken Institute). Specifically, small venture-backed companies experience a minimum of a 40% job growth each year as compared to a 2.5% decline of Fortune 500 companies.
For minority businesses to grow and develop inner city infrastructure critical to the support the
The Small Business Investment Company program (administered by SBA) was established in 1958 to provide increased access to venture capital for small businesses that would increase their ability to create jobs for the
Increasing access to SBIC capital for minority businesses will allow them to expand their current role in a local economy to a more viable role in both the regional and national economies. In addition, SBIC financing of minority-owned businesses serves a dual purpose. One it will provide a critical capital source to the fastest growing business sector (minority owned businesses) and secondly it will create a viable vehicle for greater minority participation in the workforce.
Yet minority businesses continue to lack access to the over 300 Small Business Investment Companies (SBIC) in the
In conclusion, stabilization of minority communities will not be accomplished without the development of minority small businesses. The development of inner city small business will allow for the creation of jobs, increased tax base for infrastructure development and the integration of two key inner city assets (consumption and labor) to be integrated into the regional economy. As the following figure demonstrates, small business development in inner cities is critical for job creation.
PROFILE OF MINORITY-OWNED BUSINESSES AND ACCESS TO EQUITY DATA:
· In the last 10 years, there has been a renewed interest by institutional investors in identifying businesses and real estate opportunities in emerging domestic markets. This growth in investor interest is driven, in part, by the recognition that changing demographics in the United States has resulted in a significant increase in minority purchasing power and business development by minority owned firms.[i]
· Over the next 40 years, 85% of the
· The current size of the United States Hispanic and African-American consumer market is larger than the GDP of all but nine countries in the world.[iii]
· The Internal Revenue Service predicts that Latinos will soon own 1-in-10 businesses. Overall growth rates in the number of minority-owned businesses are 3-to-4 times higher than for white-owned businesses.[iv]
· Minority firms’ sales are growing 34% per year—more than twice the rate of all other firms.[v]
· Small businesses provide approximately 75% of net new jobs in the nation.[vi] In
· Woman-owned firms, particularly among ethnic women, increased at a rate 5 times greater than all firms. The rate of African-American women owned firms increased by 12% annually, as compared to 2% for all firms and just under 4% for all woman-owned firms.[viii]
· Despite their growth, EDMs' ability to grow is constrained by their access to capital. Even after accounting for a variety of factors (education, experience, industry, and location) EDM firms receive less capital and on less advantageous terms.[ix] Latinos and African Americans are turned down for business loans at 3 times the rate of whites with equivalent credit characteristics.[x]
· Minority-owned firms tend to start their businesses with lower levels of personal wealth and face barriers when tapping traditional financing sources, contributing to lower rates of overall success and growth.[xi]
· In 2006, $130 billion was raised by private equity venture funds; approximately $25.5 billion was invested in 3,416 deals.[xii] The composition of EDM venture portfolios differ from mainstream portfolios. EDM venture portfolios are typically comprised of retailers, financial and business service entities, makers and distributors of consumer products, and computer software companies. These types of companies comprise only 10% of mainstream venture capital investments.[xiii]
· Although women own approximately 40 percent of all businesses in the
· Minority owners comprise 8% of all owner firms, with Hispanics owning close to 4%. However, minority-owned firms receive less than 2% of venture capital.[xv]
· Rural entrepreneurs account for 10% of all businesses but receive less than 2% of all venture capital.[xvi]
· Most providers of equity capital do not target mid-sized, traditional enterprises. Exceptions include minority-focused venture funds, Community Development Venture Capital funds, triple-bottom line funds, and increasingly, environmental funds. However, these models face constraints due to a lack of scale capital in the market at the particular risk/return/social impact offering.[xvii]
· A public pension fund's decision to invest in EDMs is driven first and foremost by its fiduciary duty and overarching mission to serve its members. Targeted investments in EDMs can play a part in the fund's overall strategy to identify investment opportunities where traditional sources of capital may have been overlooked, and to target investments in geographic areas that also benefit the economic climate where their beneficiaries live and work.[xviii]
· It is estimated that there is approximately $11 billion of public-sector pension fund commitments across all asset categories targeted at EDM and economic development related investments[xix]
· Despite the clearly identified opportunities, EDM businesses are projected to remain underserved by mainstream institutional investors due to a lack of relationships, the poor fit between EDM business types and mainstream venture capital preferences, and discrimination.[xx]
· Although the Initiative for a Competitive Inner City has demonstrated through its "Inner City 100" program that appropriate risk adjusted returns can be achieved, strong mechanisms do not exist to connect the larger universe of inner-city companies to potential investors.[xxi]
· Research continually concludes that the current system for capturing and sharing market data about lower income populations is too immature to be reliable.[xxii]
· Reaching underserved markets is a specialized process that requires an in-depth understanding of the market and having the ability to break through barriers like high information and transaction costs. [xxiii]
· The undercapitalization and lack of scale within the EDM market starves both individual businesses and their surrounding neighborhoods. Without scale, private investment may be insufficient to transform neighborhoods and companies and thus achieve the targeted returns. [xxiv]
[i] Toni Symonds,
[iii] Jeffrey M. Humphreys. "The multicultural economy, 2006" Georgia Business and Economic Conditions, 66:6 (2006) and Glenn Yago, Betsy Zeidman, Alethea Abuyman. Milken Institute, "A History of Emerging Domestic Markets"
[iv] Boyd (2006) from Janneke Ratcliffe, Center for Community Capitalism,
[v] Glenn Yago, Arron Pankratz, "The Minority Business Challenge" Milken Institute and the United States Department of Commerce (2000)
[vi] United States Small Business Administration, www.census.gov/epcd/www/smallbus.html from Janneke Ratcliffe, Center for Community Capitalism,
[ix] Glenn Yago, Betsy Zeidman, Alethea Abuyman. Milken Institute, "A History of Emerging Domestic Markets"
[x] Glenn Yago, Arron Pankratz, "The Minority Business Challenge" Milken Institute and the United States Department of Commerce (2000)
[xi] Robb and Fairlie, 2006, from Janneke Ratcliffe, Center for Community Capitalism,
[xii] PricewaterhouseCoopers and the National Venture Capital Alliance 2007 from Janneke Ratcliffe, Center for Community Capitalism,
[xiii] Janneke Ratcliffe, Center for Community Capitalism,