ENTREPRENEURIAL FINANCE

Ethnic Minority Entrepreneurship and Financing Ethnic Minority Businesses

Dr. Yong Wang

Objectives
To explore the nature of ethnic minority entrepreneurship To examine the situation ethnic minority entrepreneurs

face in securing debt/equity finance

To outline the enterprise support offered by the

government

Ethnic minority businesses

Significant growth in SME activity and self-employment

within this group over last two decades (Kloosterman and Rath, 2003; Ram and Jones, 1998) Often embedded in local communities Perhaps linked to low wage low skill levels of activity Perhaps pushed into this activity (self employment) because of the decline in traditional industrial jobs through de-industrialisation

Entrepreneurship and Minority Issues

There are similar issues in minority areas of

entrepreneurship including:

Female entrepreneurship Ethnic minority entrepreneurship Social entrepreneurship

Issues in minority entrepreneurship include: Participation rates Motivation Networks Diversification Integration into the mainstream Location Access to finance

Participation Rates
Ethnic minority participation rates are variable across

different ethnic minority groups

In the UK, there are 5 important ethnic groups: Indians Pakistanis Bangladeshis Chinese African-Caribbeans Self-employment rates vary from 7% up to 30%: with South

Asians up to 5 times those of Whites

- Deakins and Freel (2006)

Participation Rates
30 25 20 all
%

15 10 5 0
White Black Indian P/Bs Chinese

men women

Questions
Why some people within a community appear to be more

successful in running businesses than others?

Why some ethnic groups appear to have a higher level of

entrepreneurial activity?

Participation Rates
Self-employment rate is higher amongst Indian/Pakistani and

Chinese groups, but relatively low amongst African/ Caribbean's group.

Self-employment rates are likely to vary between the first and

second generations of a particular ethnic group. - Storey and Greene (2010)

Reasons for the differences in self-employment rate: Cultural differences Discriminatory barriers and the nature of the entrepreneurial

opportunities captured by ethnic entrepreneurs - Jones and Ram(2007)

Participation Rates
Why are African/Caribbeans under-represented in the

entrepreneurship?
Low level of family resources Lower levels of social capital

Differences in communal networks (Absence of these in

ACs?) The value base of the AC family unit may not be predisposed to running a family business The legacy of slavery has impacted upon AC culture

-Ram and Barrett (2006)

Participation Rates
High levels of unemployment in the AC group can shift

them into low-skill, highly competitive areas No-choice businesses Negative stereotyping of AC in the UK Less preferential treatment by banks, racist customer behaviour Greater dispersal of the AC group compared with the Asian groups may limit market potential Low level of home ownership, reducing collateral

-Ram and Barrett (2006)

Participation Rates
Will the gap between AC and Asian levels of

entrepreneurship be closed? Perhaps happening already. Why? Squeeze on traditional shops by the supermarkets. Increase in the number of Asian young people who want professional careers Perhaps also an indication that Asian businesses are moving up the value chain.

-Ram and Barrett (2006)

Participation Rates
Will the ethnic groups with higher rates of self-employment be more

likely to have fast-growth businesses?

Successful entrepreneurs regarded as role models in the

community
Particular ethnic communities may have denser cultural

connections enabling business growth About 25% of high-tech firms in Silicon Valley have their CEOs originally from either India or China (Saxenian, 2000)
-Storey and Greene (2010); Jones and Ram (2007)

Motivation
Interesting question: Is the discrimination faced by ethnic

minority the predominant motivating factor in business ownership?

Ethnic minoritiesmotivations change across different

generations:
1st generation--negative motives 2nd generation-positive motives 3rd generation-do not see themselves as ethnic minorities

Networks
South Asian ethnic minorities --networks are well

developed e.g. Asian Business Forums.

African-Caribbeans--networks are under-developed,

although parts of London and Birmingham have Black Business Forums

Chinese: strong close knit community--difficult to break

into community networks.

- Deakins and Freel (2006)

Diversification and Sector

Ethnic minority businesses (EMBs) concentrate on traditional

sectors

Retailing (South Asian) Wholesaling (South Asian) Clothing manufacturing (South Asian) Restaurants (Chinese/South Asian) Construction (African/Caribbeans)

Face declining demand due to increased competition New markets are difficult to break into for EMBs due to

hostility Result: requires a specific coping strategy

- Deakins and Freel (2006)

Integration into the Mainstream

Ethnic enclaves limit opportunities

-1. Resources: dependent on ethnic labour -2. Markets: limited in size and scope -3. Inward-looking Lack resources and channels to integrate into mainstream bodies; e.g. support, finance, business associations etc. Formal Institutions seen to be dominated by white, middle-class and institutionally racists

- Deakins and Freel (2006)

Location
EMBs tend to concentrate on particular locations: Inner city

areas in the UK
Problems: Poor conditions such as physical dilapidation, inadequate

parking, and vandalism.. (p.154) EMBs have to battle against such barriers as poor access to credit facilities, an impoverished customer base, out-dated run-down premises and, because they are often operating in insecure crime-ridden environments, expensive insurance cover (p.154)

- Ram and Smallbone (2003)

Access to Finance
EMB owners rely more heavily than other

businesses on personal sources and friends or family for finance.

Formal external sources: Banks Venture capital Alternative grants/loans

Discrimination against Ethnic Minority Businesses (US case)

Denied credit % Denied credit that owned own home %
24 21 58

Denied credit not owning own home %

59 53 100

All White AfricanAmerican Hispanic Asian

28 24 62

50 52

35 48

87 65

- Cavalluzzo and Wolken (2005)

Evidence of Ethnic Discrimination in the Credit Market

UK: EMBs were more likely to be rejected by bank managers than white-owned counterparts. EMBs had lower overdraft limits than white-owned businesses.
-Fraser (2005)
Higher rates of bank rejection amongst EMBs

-Smallbone (2003)

US: Black-owned small businesses are about twice as likely to be denied access to credit

-Blanchflower et al. (2003)

Access to Finance
Formal external sources: Banks Venture capital Alternative grants/loans Traditionally low take-up rates of such sources, which

are perceived by EMB owners as being whitedominated and therefore problematical.

Access to Finance
Some banks working on the relationships with EMBs;

yet practices vary between different banks and between different bank managers.
VC companies are dominated by men and white

middle class.
Asian business angels--extent is not known. EMBs have low participation in alternative schemes

such as the Small Firms Loan Guarantee Scheme. Other sources seen as not relevant.

Access to Finance
Under-funding remains a major problem for the ethnic

minority business - this threatens growth and survival.

Research has focused on the relationship between ethnic

small firms and banks. Herewith we need to disaggregate non-white businesses into separate parts
For Greek and Indian businesses obtaining bank finance

does not appear to be a problem. Why?

-Ram and Barrett (2006)

Access to Finance
Differences cross different EMBs: Chinese-owned businesses show a significantly better situation in

accessing start-up finance from banks than white owned firms

African and Caribbean owned businesses are below the level of

white-owned firms in accessing bank finance. -Ram and Smallbone (2003)

Bangladeshis have negative experiences of their attempts to get

bank loans. This may be due to institutionalised racism, or their own poor track records or poor business plans

-Ram and Barrett (2006)

Ethnic minority Finance

Possible Solutions: (African/Carribeans businesses) Has been addressed through Black-led enterprise support agencies

who have improved the business plans and offered financial assistance.
Training of staff in financial institutions to appreciate the dynamics of

ethnic-minority firms Employing qualified ethnic-minority staff in organisations with more influential capacity Extensive networking with black-led support agencies

Supporting Ethnic Minority Businesses

1. Mainstream agencies have adopted more inclusive

policies e.g., Business Links and Scottish Enterprise network now have targets to reach and support EMBs.
2. Establishment of small specialised agencies who have

focused on the needs of EMB owners: specialised agencies, however, have limited resources and limited programmes---focus on moving EMBs into the mainstream support programmes.

Supporting Ethnic Minority Businesses

The agencies at present do not reach out to ethnic

businesses They dont cater for the needs of ethnic businesses. Are the needs of ethnic businesses the same as other businesses Size might also be factor. Many are extremely small and this deprives them of finance and they may fall outside of the main catchments of the policies Locational factors may inhibit the raising of finance Reluctance of owners to utilise external assistance.

Supporting Initiatives A Typology

Specialist agencies/programmes targeting at EMB

clients
Black Business in Birmingham Bolton and Bury Enterprise Centre Enterprise 2000 Project of CEED (Bristol)

Mainstream provision focusing on EMB dimension Business Mentoring Programme of the Portobello Business Centre (London) 'New Business' Support Programme of Business Link Manchester Women s Enterprise Network. Business Link West (Bristol) Women into Business. Walsall Ethnic Minority Business Service

-Ram and Smallbone (2003)

Supporting Initiatives A Typology

Sector initiatives with an explicit EMB element

Coventry Clothing Centre

RUSICA Programme of Coventry Asian Business

Association
Finance initiatives targeted at EMBs Muslim Loans Fund. East London Small Business

Centre Enterprise Loan Fund. Business Link West

-Ram and Smallbone (2003)

Muslim Loan Fund: A Special Case

Until recently, for some ethnic groups such as Muslims

found it very difficult to get external finance. Muslims are unable to access interest bearing funds. In the UK this has been addressed through the establishment of the Muslim Loan Fund in 2001.

Supporting Initiatives A Typology

Strategic initiatives

Ethnic Minority Business Database, Enterprise Link,

Birmingham North London Cultural Diversity Forum Synergy Project, Business Link London North Knowledge Centre for Black and Minority Ethnic Business (Business Link, London)

-Ram and Smallbone (2003)

Supporting Ethnic Minority Businesses

Geographically each main location has a different

pattern of mainstream and specialised agency support: Examples:

London
Birmingham Leicester Glasgow

Local area support programmes

London: a mixture of mainstream --Business Links and well established specialised agencies local development agencies focus on social and economic development as well as business support special co-operative development agencies e.g., Greenwich CDA active EM business associations strong local Chambers of Commerce often with a high proportion of members who are EMBs. Majority of business population in some areas of London are EMBs, i.e., they are the mainstream businesses.

Local area support programmes

Birmingham: also a mixture of mainstream (Business Links) and well established specialised agencies local authority intervention, especially Birmingham City Council. network of specialised support supported through alternative funding e.g., Arrow Fund. strong Asian Business Forums. some 20% of business population are EMBs.

Local area support programmes

Leicester:
provision of support less well established
no strong specialised agencies local authority intervention less well established East Midlands Regional Development Agency recently established

and still developing policies. EM business associations established; e.g., Leicester Asian Business Association

Result: less co-ordinated support than London/Birmingham.

Local area support programmes

Glasgow: Specialised support only recently established Ethnic Minority Business Development programme (Glasgow City Council) New programme introduced at end of 1999. EMBs in Glasgow not catered for by mainstream agencies. Late development, however, has permitted integration of specialised support with mainstream development agencies.

Conclusions
EMBs and other minority groups are characterised by

diversity and plurality--high growth businesses across different sectors.

differences imply that some groups find it difficult to access finance; especially African-Caribbeans. South Asians have been more successful.

Evidence of discrimination is difficult to prove but cultural

Diversification and break-out are still important issues. Main cities: London, Birmingham, Leicester and Glasgow

--pioneers of support for EMBs but can still be seen to be undeveloped.

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Homework
Reading Material: Chapter 11: Carter, S. and Jones-Evans, D. (2006) Enterprise and Small Business: Principles,

Practice and Policy. 2nd ed., Harlow: Financial Times Prentice Hall.

Jones, T. and Ram M. (2007) Re-embedding the ethnic business agenda, Work Employment and

Society, 21(3), pp.439-457.

Ram M. and Smallbone D. (2003) Policies to support ethnic minority enterprise: the English

experience, Entrepreneurship and Regional Development, vol. 15, pp.151-166.

Storey, D.J. and Greene, F.J. (2010) Small Business and Entrepreneurship, FT Prentice Hall. Question: Q1: What factors account for the different levels of self-employment among ethnic minorities? Q2: Review the potential discrimination ethnic minority entrepreneurs may come across. How might

discrimination be rectified?