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Latino-Owned Businesses Scale More Slowly Than Others

September 21, 2020

The number of minority-owned businesses in the United States is on the rise. As ethnic minority groups migrate to new destinations, how does an increased minority population impact minority business formation and growth? In a recent study of Latino-owned U.S. businesses, researchers at the University of Tennessee, Knoxville’s Haslam College of Business and College of Law found that a higher Latino population rate encourages Latino business formation but that these businesses are slow to grow.

“Latino Business Formation and Growth in New Latino Destinations: A Social Capital Perspective,” co-authored by Adrian “Ace” Beorchia, a Ph.D. candidate in strategy, entrepreneurship and organizations; David Gras, assistant professor of management and entrepreneurship and Eric Amarante, associate professor of law, was chosen Best Conference Paper Proposal for the 2020 Advancing Management Research in Latin America Specialized Conference. The event was scheduled to be held in Mexico City in April but was cancelled due to the COVID-19 pandemic.

Using county population and minority business data, the researchers found that although the number of Latino-owned businesses in the U.S. has more than doubled since 1996, Latinos are scaling their businesses more slowly than other ethnic groups, particularly in terms of employment. While Latino-owned enterprises account for 24 percent of new U.S. startups and 13 percent of the nation’s businesses overall, they comprise only 6 percent of employer businesses (defined as those having at least one paid employee).

A number of factors play a role in the relatively slow growth of Latino-owned firms. For example, the researchers found that although the community solidarity in ethnic enclaves such as Miami’s Little Havana can reduce or eliminate some business expenses, this solidarity comes with a downside.

“Ethnic enclaves create their own economic ecosystem, which protects its members from outside discrimination,” Beorchia said. “However, ethnic minority business owners may also experience lack of access to important resources outside of the ethnic community, such as information, loans, capital, suppliers and customers.”

Connecting with these resources can be even more challenging for Latinos who migrate to newer ethnic communities. Historically, U.S. Latino populations have been concentrated in established immigrant destinations such as New York, Texas and California. However, better work opportunities, lower cost of living and lower crime rates are increasingly attracting Latinos to places as widespread as Tennessee, Delaware and South Dakota. These newer Latino communities often have little interaction with non-Latino populations.

“Latinos endure fear and mistrust in new destinations that lead to increased isolation from mainstream culture,” the authors wrote. “They may be perceived simultaneously as not fully American, nor fully from their native country.”

The researchers’ findings suggested that in new destinations, even more than in traditional ones, a larger Latino representation correlates with a higher number of Latino-owned businesses. However, the isolation of these newer Latino communities means their access to crucial social capital—potential resources available through social networks—is limited.

“While strong ties like family members or close friends are useful to obtain resources quickly,” Beorchia said, "weak ties such as friends of friends are extremely beneficial in providing diverse and important resources unavailable through strong ties.”

Expanding Latinos’ access to social capital creates growth opportunities not only for Latino-owned enterprises, but also for the U.S. economy as a whole. The study showed that if Latino businesses grew at the same rate as non-Latino businesses, they would add 5.3 million jobs to the U.S. labor market.

“We believe that as Latino and non-Latino businesses work together, the results will benefit all businesses in a community,” Beorchia said.

“Latino Business Formation and Growth in New Latino Destinations: A Social Capital Perspective” is available in the Academy of Management Global Proceedings: Mexico, Issue 2020.

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CONTACT:

Stacy Estep, business writer/publicist, sestep3@utk.edu