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Journal of Ethnic and Migration Studies

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The Effect of Social Capital on White, Korean, Mexican and Black Business Owners' Earnings in the US
Zulema Valdez Online Publication Date: 01 August 2008 To cite this Article: Valdez, Zulema (2008) 'The Effect of Social Capital on White, Korean, Mexican and Black Business Owners' Earnings in the US', Journal of Ethnic and Migration Studies, 34:6, 955 973 To link to this article: DOI: 10.1080/13691830802211265 URL: http://dx.doi.org/10.1080/13691830802211265

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Journal of Ethnic and Migration Studies Vol. 34, No. 6, August 2008, pp. 955973

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The Effect of Social Capital on White, Korean, Mexican and Black Business Owners Earnings in the US
Zulema Valdez

Previous research on ethnic entrepreneurship suggests that social capital facilitates enterprise. This study considers how social capital affects ethnic entrepreneurs economic success. Using the non-public Characteristics of Business Owners Survey, I examine the earnings-returns of four groups with disparate rates of business ownership in the United States: non-Hispanic Whites, Koreans, Mexicans and Blacks. Traditional sociological approaches rooted in social capital arguments emphasise the primacy of group membership in facilitating entrepreneurial participation, which is associated with economic success. My findings suggest that social capital facilitates entrepreneurial participation; however, it is human and market capital that are essential for economic success. Furthermore, I find that social capital sometimes has a detrimental effect on earnings. The article underscores the crucial role of human and market capital and the limits of social capital in facilitating entrepreneurs economic success. Keywords: Ethnic Entrepreneurship; Social Capital; Labour Market; Blacks; Koreans, Mexicans Confirming Granovetters (1985) notion of embeddedness*that social relationships rooted in kinship ties influence economic behaviour*the predominant explanation of ethnic entrepreneurship maintains that group membership facilitates entrepreneurship (Light 1972; Light and Bonacich 1988; Portes and Bach 1985; Portes and Rumbaut 1990; Sanders and Nee 1996; Waldinger et al. 1990). By generating social capital*the capacity to access resources based on group membership (Coleman 1988; Frank and Yasumoto 1998; Portes and Rumbaut 2001; Portes and Sensenbrenner 1993)*group affiliation affects the entrepreneurial outcomes of ethnic
Zulema Valdez is Assistant Professor of Sociology at Texas A & M University. Correspondence to: Dr Z. Valdez, Dept of Sociology, 4351 TAMU, Texas A & M University, College Station, TX 77843-4351, USA. E-mail: zvaldez@libarts.tamu.edu. ISSN 1369-183X print/ISSN 1469-9451 online/08/060955-19 # 2008 Taylor & Francis DOI: 10.1080/13691830802211265

956 Z. Valdez

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groups in the United States and elsewhere (Rath 2002; Sanders and Nee 1996; Waldinger et al. 1990). Researchers further observe that ethnic entrepreneurship is associated with economic mobility. For example, Korean entrepreneurs in the US are characterised as successful because, in addition to their extensive entrepreneurial activity, they are often situated in profitable enterprises (Portes and Rumbaut 1990: 23). Although social capital facilitates ethnic enterprise, and ethnic enterprise is associated with economic mobility, the distinct relationship between social capital and economic progress is unclear. Building on the premise that social capital facilitates ethnic entrepreneurship, this article examines how social capital affects the earnings of business owners among four groups with disparate rates of business ownership. Theorising Ethnic Entrepreneurship Ethnic entrepreneurship is defined simply as business ownership among immigrants, ethnic-group members, or both. The traditional sociological approach to ethnic entrepreneurship focuses on the specific characteristics of a given ethnic group. This supply-side approach posits that resource mobilisation based on group membership increases the likelihood of ethnic enterprise. Recent research extends this approach to include the demand side of entrepreneurship; that is, the opportunity structure of the host society (Portes and Rumbaut 1990, 2001; Waldinger 1986; Waldinger et al. 1990). Taken as a whole, the ethnic entrepreneurship paradigm maintains that the interaction of these components explains ethnic-group differences in entrepreneurship. Research also shows that social capital facilitates ethnic entrepreneurship. In particular, kinship ties foster social capital in the form of solidarity, trust and reciprocal obligations (Kim and Hurh 1985; Light et al. 1994; Yoon 1991). Social capital stemming from kinship ties generates economic resources*such as unpaid family labour, financial capital, business information and intra-family loans*that encourage ethnic entrepreneurship. The use of family labour, for example, increases the likelihood of success in ethnic entrepreneurship (Kim and Hurh 1985; Sanders and Nee 1996: 233). Moreover, Light and his colleagues (1994) find that threequarters of ethnic enterprises are family-owned with no paid employees. Finally, Sanders and Nee (1996) conclude that a pattern of family migration characterises those groups that engage in ethnic entrepreneurship; individual migrants are less likely to own businesses. Furthermore, researchers observe that cohesive kinship networks and extended family ties are characteristic of the cultural traditions of some ethnic minorities in the United States, such as those originating from China, Korea and Japan. Although family-owned businesses are not unique to ethnic minorities, social capital rooted in kinship ties and extended kinship networks is more common among these groups, when compared to Anglo-Americans who are more likely to emphasise nuclear family cohesion (Bonacich 1975; Bonacich and Modell 1981; Light and Bonacich 1988).

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Such extended kinship ties thus provide additional social capital to would-be ethnic entrepreneurs. Resources generated in this way can be regarded as ethnic resources (Light and Bonacich 1988; Sanders and Nee 1996).1 In addition to social capital, both human capital and class background facilitate ethnic entrepreneurship (Light and Bonacich 1988; Sanders and Nee 1996). Human capital constitutes cumulative work experience and educational attainment. I introduce the term market capital to capture access to resources related to class background*private property, wealth and bourgeois values, attitudes, and knowledge (Light and Bonacich 1988: 1819)*and to market institutions*borrowing from a bank or investment firm.2 There is a consensus among researchers that human capital and class background (ie. market capital) increase the likelihood of entrepreneurial participation and economic success (Bates 1994; Kim and Hurh 1985; Portes and Bach 1985; Portes and Rumbaut 1990, 2001; Sanders and Nee 1996; Waldinger et al. 1990; Yoon 1991; Zhou 1992). In synthesis, then, human capital such as skills, education and experience; market capital, which includes tangible material goods related to class background; and social capital, a more intangible resource that fosters group-based solidarity, trust and reciprocal obligations, combine to facilitate ethnic entrepreneurship (Portes and Sensenbrenner 1993: 1322). Although a consideration of human, market and social capital associated with a given ethnic group contributes to understanding the supply side of ethnic entrepreneurship, additional research has extended this approach to include the demand side. Towards this end, Waldinger et al. (1990: 250) and Portes and Rumbaut (1990, 2001) investigate how a given ethnic group interacts with or incorporates itself into the larger economy for a more comprehensive picture. The interaction model is composed of three sets of factors. Pre-migration characteristics are similar to supply-side concerns, and include the skills, work experience and entrepreneurial attitudes associated with an ethnic group before (and after) migration (Waldinger et al. 1990: 41). Circumstances of migration constitute the demand side of ethnic entrepreneurship*those factors that relate to the opportunity structure of the economy. For example, disadvantaged ethnic minorities may be more likely to engage in enterprise as a response to blocked mobility in the general labour market (Borjas 1990; Piore 1979; Waldinger et al. 1990). In contrast, more-advantaged workers may choose to opt out of the labour market to pursue non-pecuniary benefits associated with entrepreneurship*to be ones own boss or achieve greater autonomy in employment (Evans and Leighton 1989). Finally, post-migration characteristics refer to the cumulative social advantage experienced by a given group that may favor business success after arrival, such as the accumulation of human capital, English skills, business skills and placement in strategic occupations (Waldinger et al. 1990: 456). In sum, the combination of these three sets of migration characteristics also helps to explain ethnic enterprise. Likewise, Portes and Rumbaut (1990) argue that an investigation of ethnic entrepreneurship requires the consideration of ethnic-groupspecific resources in combination with the wider socio-economic context. To illustrate, Portes and Bach (1985) observe that Cuban entrepreneurs in Miami

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958 Z. Valdez

benefit from US immigration policy. Upon entry to the US, Cuban refugees qualify for US government loans, which they commonly use as start-up capital to facilitate their enterprises. Portes and Rumbaut (1990) conclude that ethnic differences in enterprise rest, in part, on such modes of incorporation. Overall, the ethnic entrepreneurship paradigm maintains that the interaction of the specific features of a given ethnic group with the opportunity structure of the larger economy provides a comprehensive explanation of ethnic entrepreneurship. The paradigm also characterises ethnic groups with negligible rates of entrepreneurship as disadvantaged; these groups are perceived as concentrated in socially isolated communities with limited access to resources and structural opportunities (Fratoe 1988; Lee 2002; Light 1972; Logan et al. 1994; Portes and Bach 1985; Wilson 1987). In particular, Black-owned businesses within the Black community have been depicted as derelict and undercapitalised (Silverman 2000: 83). Moreover, Lee (2002: 121) contends that Black business owners have historically experienced and continue to experience co-ethnic disadvantages in serving their own. Correspondingly, Portes and Rumbaut (2001: 278) claim that the Mexican-origin population is comprised of weak communities that have emerged under their precarious conditions of arrival and settlement. This groups social and economic disadvantages are presumed to constrain members ability to mobilise resources for enterprise. Portes and Bach (1985: 245) conclude that the lack of entrepreneurial activity among the Mexicanorigin population relegates its members to low-wage labour and economic stagnation. Ethnic Enterprise and Economic Success Research on ethnic entrepreneurship generally demonstrates that ethnic entrepreneurs are better off than their worker counterparts. For example, Sanders and Nee (1987) observe that, within the Chinese ethnic enclave economy, the earnings of Chinese employers are higher than those of their co-ethnic employees. Similarly, Portes and Bach (1985) argue that entrepreneurial activity partially explains the relative economic progress of entrepreneurial Cubans when compared to their Cuban and Mexican worker counterparts. Yet, Hamilton (2000: 628) shows that selfemployed workers earn less and experience lower earnings growth than similarly skilled workers who are employees. Borjas (1990) concludes that the earnings of selfemployed workers are not markedly higher than those of workers, net of human capital controls. Additionally, mixed findings among Korean entrepreneurs and more recent waves of Mariel Cubans challenge the notion that ethnic entrepreneurship is associated with economic mobility (Portes and Jensen 1989). For example, Light and Bonacich (1988: 278) report that some Korean entrepreneurs and their unpaid family members concentrate in low-skilled, low-wage industries, average 80 hours per week, and suffer from physical and mental exhaustion. The self-exploitation of Korean entrepreneurs calls into question the presumed upward mobility trajectory associated with ethnic entrepreneurship among this group (Bates 1997).

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Nowikowski (1984) echoes this sentiment. Regardless of high participation rates, Indian and Pakistani entrepreneurs in Britain remain managers of small workshops and petty traders, not members of the bourgeoisie proper. Others argue that some ethnic groups favour entrepreneurship as a survival strategy or economic lifeboat (Light and Roach 1996: 193), that is, as a last-ditch alternative to unemployment, rather than an avenue of upward mobility. As Hakim states, It cannot be assumed that the self-employed are invariably entrepreneurs who are building businesses that will eventually employ more people than themselves. The evidence to date suggests that most of the self-employed are only providing themselves with an alternative to the employee job . . . (1988: 430). Similarly, Bates (1997: 12) cautions that A paucity of empirical data coexists with numerous stereotypes about self-employment patterns, particularly regarding the experiences of Asian immigrants who create small businesses in the United States. These researchers challenge assumptions that ethnic entrepreneurship facilitates economic success, and highlight the need for research that explores this distinct relationship. Empirical Assumptions and Implications In this paper, I investigate how human, market and social capital affect the earnings of business owners. I also assess the effects of structural opportunity, with a consideration of blocked mobility, entrepreneurial choice and government support.3 In other words, I apply those essential determinants that link entrepreneurial participation to the economic outcomes of ethnic entrepreneurs. I draw on the unique Characteristics of Business Owners Survey (CBO) for this purpose*a nationally representative mail-in survey of individual proprietors or selfemployed workers, partnerships or Subchapter S Corporations,4 selected from a sample of business income-tax returns (Headd 1999). The CBO is administered by the US Census Bureau, and is a supplement to the Survey of Minority-Owned Business Enterprises and Survey of Women-Owned Businesses. The database consists of three separate surveys: a sole proprietors survey, an owners survey for each owner in a partnership or S Corporation, and a firm survey. I use the 1992 CBO (conducted in 1996), the third and most recently released survey. The CBO contains variables that are not found in any alternative dataset. It not only contains demographic information*including an oversampling of racial and ethnic groups, plus age, education and marital status*but also hard-to-find information on business practices and experience, earnings, sources of start-up capital and information about the firm. Access is restricted to protect the confidentiality of survey respondents. The Center for Economic Studies, the US Census Bureau and the Internal Revenue Service approve access and determine disclosure of the data. Because of access difficulties, these data are underutilised; however, previous studies have used the 1992 CBO to analyse business ownership and family background (see Fairlie and Robb 2004) and the 1982 and 1987 CBOs to analyse survivability and profits (see Bates 1997; Boden and Nucci 2000). My study

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contributes to this existing research by bringing these valuable data to bear on business owners earnings. In this analysis, I merge the owner and firm surveys to study individual ownercharacteristics combined with specific firm information. I include four groups in this analysis: non-Hispanic White, Korean, Mexican and Black males, for a sample population of 46,485 persons. Of this population, 18,603 (40 per cent) surveys were not returned and were thus coded as non-response (reflecting the non-response rate of the larger sample). From this reduced sample, missing observations on any of the variables of interest were dropped to create a common sample, retaining approximately 48 per cent of the original.5 This analysis is based on 22,531 unweighted6 non-Hispanic White (13,142), Korean (773), Mexican (2,732) and Black (5,884) male business owners. Tabular output represents a high risk of disclosure of confidential information; therefore, based on preliminary analyses, many of the original CBO variables were recoded due to small cell counts in the observed categories. Although this resulted in a loss of some detailed information, the overall effect of recoding on results was negligible. Dependent Variable The dependent variable used in this analysis is business owners earnings. Selfemployed workers and business owners often skip, refuse to answer questions on or under-report their earnings in surveys (Fairlie 2004). Yet, the non-response and under-reporting rates of government surveys such as the CBO are generally lower than those of non-government surveys (Moore et al. 2000). Government surveys such as the Current Population Survey (CPS), Public Use Microdata Samples (PUMS), and the Survey of Income and Program Participation (SIPP) have been used to assess selfemployment-workers and business-owners earnings (see Borjas 1990; Evans and Leighton 1989; Hamilton 2000; Portes and Zhou 1996; Sanders and Nee 1987). The CBO compares favourably to these surveys with regard to non-response and underreporting. Moreover, it provides superior information for analysing earnings returns not found in these other government surveys, such as years in business, managerial experience and the number of employees*a more than satisfactory measure of earnings. The original earnings variable consisted of 10 categories ranging from less than $5,000 to $150,000 or more. I recode the earnings categories to their midpoint and conduct the analysis using OLS (ordinary least-squares) regression.7 Independent Variables Human capital includes individual-level characteristics: education, and work and managerial experience. I construct a series of dummy variables for human capital, since the variables included in the original survey are categorical in nature. Education is defined as a series of dummy variables for the categories: high school or less

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(reference), some college, bachelors degree, and professional or graduate degree. Work experience is defined as less than ten years, or ten years or more (reference), and managerial experience as no or some (reference) experience. Market capital constitutes resources that are generated primarily by ones class position or background, such as personal savings, or the ability to borrow start-up capital from a market institution such as a bank. Additionally, market capital is associated with business stability, such as the ability to make a large investment of financial capital. Market capital variables include: the amount of capital used at startup; whether a business owner borrowed start-up capital from a national bank; whether he experienced an emergency cash crisis (ie. had no available cash to pay employees, rent etc.); whether, when faced with an emergency, the business owner borrowed emergency cash from a bank. Amount of start-up capital originally consisted of nine categories ranging from $0 to $1million dollars; here, each category is set to its midpoint. Borrowing start-up capital from a bank is defined as borrowing from a bank or investment company when starting a business (coded as 1), or other type of borrowing (coded as 0). No emergency cash crisis indicates business stability, and refers to those business owners who did not face an emergency cash crisis (coded as 1). Borrowing emergency cash from a bank is defined as borrowing from a bank or an investment company when faced with an emergency cash crisis (coded as 1), or other type of borrowing (coded as 0). Social capital represents the ability to access information or generate resources based on group membership. For example, kinship-based ethnic resources, such as having a family member who owns a business, help provide Asian business owners with useful business information or training (Portes and Sensenbrenner 1993; Sanders and Nee 1996; Yoon 1991), and thus constitute a social capital variable. Being married is another example of a kinship-based ethnic resource generated by social capital. To illustrate, Zhou and Logan (1989: 814) found that married Chinese entrepreneurs in New York, Connecticut and New Jersey increased their earnings relative to their unmarried counterparts. Social capital also includes economic resources rooted in group membership, such as start-up capital that is borrowed from family. Social capital variables include: whether the business owner is married or not married (single, divorced or widowed, coded as 0); having a relative who owns a business (reference) or not (coded as 0); whether the business owner borrowed start-up capital or emergency cash from family (reference). Social capital also includes whether the business owner is foreign-born (Light and Bonacich 1988), since immigrants are more likely than their native-born counterparts to rely on extended kin networks to facilitate business ownership and to be self-employed (Light et al. 1994; Sanders and Nee 1996). Finally, an additional social capital variable of interest*whether the owner borrowed start-up capital from a business associate*is included (although this variable is not necessarily associated with kinship ties or ethnic affiliation). Additionally, three structural opportunity variables are included in the analysis to capture the possibility of engaging in entrepreneurship as a response to the opportunity structure of the economy. Structural opportunity is measured by blocked

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mobility, entrepreneurial pursuit or government capital. Blocked mobility indicates entrepreneurship as a strategy of limited labour market opportunity. This variable was recoded from the original variable, reasons for starting a business. It is defined as similar work not available or to advance in ones profession (coded as 1). Blocked mobility does not include to work fewer hours or spend more time with family (coded as 0). Fulfilling an entrepreneurial pursuit captures entrepreneurship given opportunity and choice, and is defined as developing new ideas or becoming ones own boss (coded as 1). Government capital indicates government aid or support, and is defined as borrowing start-up capital from the government (small business loan or subsidy; (coded as 1) or no government borrowing (coded as 0)). Finally, some control variables are included that represent other influential background factors, such as years in business. Analysis Descriptive Analysis As shown in Table 1, non-Hispanic White business owners are the highest earners, with 40 per cent in the over-$75,000 bracket, followed by 25 per cent of Koreans. In contrast, 41 per cent of Mexican and 48 per cent of Black business owners are concentrated in the lowest category ($25,000 or less).8
Table 1. Characteristics of business owners by ethnicity (%)
White Korean Mexican Black Dependent variable: Business owners earnings Low ($0$24,999) 24 Medium ($25K$74,999) 36 High ($75K$150K') 40 Explanatory variables: Education High School 28 Some college 22 Bachelors degree 31 Professional/graduate 20 Work experience (10 years or more) 57 Managerial experience (1 year or more) 64 Start-up capital ($) None 19 Low ($1$24,999) 29 Medium ($25K$49,999) 26 High ($50K') 26 Married 82 Entrepreneurial pursuit 29 Blocked mobility 12 Number of cases: 13,142
Source: Characteristics of Business Owners Survey (1992).

33 43 25

41 39 20

48 35 17

22 18 39 20 34 64 08 18 32 42 92 19 10 773

48 23 18 10 49 57 18 41 26 15 81 33 11 2,732

39 25 20 16 56 54 24 44 20 12 78 34 10 5,884

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Generally, non-Hispanic White and Korean business owners report more human capital than Mexican or Black. Twenty per cent of non-Hispanic Whites and Koreans hold a professional or graduate degree and around 20 per cent of Mexicans and Blacks hold a college degree, while 48 per cent of Mexican business owners only completed high school (or less). Non-Hispanic White and Korean business owners are also more likely to report managerial experience (64 per cent each) than Mexicans (57 per cent) or Blacks (54 per cent). Finally, about half of the non-Hispanic White, Mexican and Black business owners report 10 years (or more) of work experience; Korean business owners, the most recently arrived immigrant group, report less (34 per cent). Non-Hispanic White and Korean business owners report more market capital than Mexicans and Blacks. Koreans are far more likely to start their businesses with $50,000 or more (42 per cent) than the other ethnic groups, which register 26 per cent (Whites), 15 per cent (Mexicans) and 12 per cent (Blacks). Indeed, a likelier scenario for this last-named group is starting a business with no capital at all (24 per cent). With respect to marital status, Koreans are more likely to be married (92 per cent) than all other groups, while Blacks are least likely to be married. Additionally, a surprisingly higher percentage of Mexican and Black business owners (33 and 34 per cent) than non-Hispanic Whites or Koreans (29 and 19 per cent respectively) describe business ownership as an entrepreneurial pursuit. Finally, there are no significant differences in blocked mobility across ethnic groups. Approximately 10 per cent of all groups report limited opportunities as a reason for starting a business. Table 2 displays the percentage of each group that uses market or social capital, or both, to acquire start-up capital. Most report no borrowing at all (around two-thirds of non-Hispanic Whites, Mexicans and Blacks; and 44 per cent of Koreans). Of those who do borrow, Koreans are more likely than any other group to use market capital* such as a bank or investment company*and social capital such as family; around 30 per cent combine sources (10 percentage points more than the other groups). Significantly, Koreans are at least twice as likely as the other groups to borrow from family. Black business owners lag behind; less than 8 per cent borrow from the bank, and less than 4 per cent from family.9
Table 2. Sources of start-up capital by ethnicity (%)
White No borrowing 64.7 Borrow from bank 11.6 Borrow from family 5.0 Borrow from both 18.7 Total: 13,142 Korean 44.3 14.9 11.3 29.4 773 Mexican 65.6 8.2 6.7 19.4 2,732 Black 67.9 7.7 3.8 2.7 5,884

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Pearson chi2(9) 0271.7, p0.00 Source: Characteristics of Business Owners Survey (1992).

964 Z. Valdez

Table 3. Sources of emergency cash by ethnicity (%)

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White Korean Mexican Black No borrowing 71.2 Borrow from bank 23.6 Borrow from family 3.4 Borrow from other source 1.8 Total: 13,142 56.3 25.1 14.2 4.4 773 67.0 23.1 7.1 2.8 2,732 60.9 28.8 6.6 3.7 5,884

Pearson chi2(3) 0320.2, p0.00 Source: Characteristics of Business Owners Survey (1992).

Table 3 reports the percentage of each group that uses market or social capital, or both, when faced with an emergency cash crisis. Non-Hispanic Whites are less likely to face an emergency cash crisis than all other groups; however, when necessary, they are more likely to borrow from the bank (23.6 per cent) than any other source. In contrast, the Koreans who face an emergency cash crisis are more likely to borrow from their family (14 per cent) than any other group. Multivariate Analysis I conducted an OLS regression analysis of business owners earnings. Since the sample is stratified by ethnicity (minority groups are oversampled), I present a model of significant two-way interactions by ethnicity (Table 4). Using Wald statistics to identify and drop insignificant terms did not generally alter the pattern of the main effects. Since ethnicity is combined with a number of interaction terms, the latter are used to disseminate its effects. Preliminary models added each set of factors separately (human, market and social capital, and structural opportunity). In this paper, only the final models are presented. Business Owners Earnings Table 4 displays regression estimates of the effects of human, market and social capital, structural opportunity, influential background characteristics (employee size, years in business) and significant interactions by ethnicity, all of which affect the earnings of all groups. There are, however, notable differences by ethnicity. Regarding human capital, although education, work experience and managerial experience increase the earnings of all groups, significant interactions by ethnicity show that educational attainment and managerial experience affect ethnic groups differently. In particular, Mexican and Black business owners who acquire a graduate or professional degree increase their earnings to a greater degree than similarly-educated non-Hispanic Whites or Koreans. Moreover, while managerial experience increases the earnings of all groups, ethnic minorities earn less for the same experience, when compared to non-Hispanic Whites.

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Table 4. The effects of human, market and social capital on business owners earnings
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b Ethnicity Korean Mexican Black Human capital Education Some college Bachelors degree Graduate/professional Mexican* graduate/professional Black* graduate/professional Work experience Managerial experience Korean* managerial experience Mexican* managerial experience Black* managerial experience Market capital Start-up capital (per $100,000) Korean* start-up capital Black* start-up capital Start-up capital: bank Mexican* start-up capital: bank Black* start-up capital: bank No emergency cash crisis Emergency cash: bank Social Capital Foreign-born Married Black* married Relative is owner Start-up capital: family Start-up capital: business associate Emergency cash: family Structural opportunity Blocked mobility Entrepreneurial pursuit Black* entrepreneurial pursuit Government capital Constant R-squared .102 (.146*** (.240*** .131*** .511*** .903*** .164** .090* .095*** .278*** (.261*** (.126** (.122*** 4.57*** (4.70*** 2.10*** (.139*** .208** .157*** .264*** .033 .011 .151*** (.098** .018 (.065** (.044* (.227*** .086** (.023 .081* (.193** 9.27***

(se) (.061) (.033) (.039) (.017) (.018) (.023) (.065) (.040) (.014) (.019) (.074) (.041) (.031) (.032) (.015) (.008) (.028) (.069) (.048) (.016) (.017) (.020) (.020) (.036) (.013) (.024) (.020) (.026) (.024) (.017) (.032) (.070) (.035) .34

Notes: Parentheses are standard errors. N022,531. *p B.05 **pB.01 ***pB.001 (two-tailed tests). Employee size and Years in business included as controls. Source: Characteristics of Business Owners Survey (1992).

Generally, there is a marked and positive relationship between market capital and the earnings of business owners. For example, as the amount of start-up capital invested increases, business owners earnings increase for all groups, and this relationship is even stronger among Blacks. That said, borrowing start-up capital

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from a market source may increase or decrease earnings, and these outcomes differ across groups. For example, non-Hispanic Whites and Koreans who borrow start-up capital from a bank lower their earnings compared to those who do not borrow from a bank. In contrast, the significant and positive interactions among Mexican and Black business owners suggest that these groups increase their earnings when they borrow from a bank compared to those who do not borrow. Additionally, business owners who do not report an emergency cash crisis outperform those who do, regardless of ethnicity. Social capital may also increase or decrease earnings. Being married generally increases earnings; however, the significant and negative interaction among Blacks indicates that married Black business owners earn less than those from other groups. Other social capital indicators*being foreign-born or having a relative who owns a business*do not markedly improve earnings. Moreover, borrowing start-up capital or emergency cash from a social capital source (family or business associate) actually decreases earnings. Being married is the only social capital variable that increases earnings; otherwise, it appears to have a neutral or negative impact. Finally, with respect to structural opportunity, Table 4 reveals an increase in earnings across all groups who engage in business ownership to combat blocked mobility; acquiring a government loan or subsidy, however, results in decreased earnings for all groups. Finally, Black business owners are the sole group for whom an entrepreneurial pursuit results in increased earnings. Discussion Overall, non-Hispanic White and Korean business owners report higher skills that are valued in a market economy and their businesses are more stable than those of Mexican or Black business owners. Sanders and Nee (1996: 232)) argue that middleor upper-class groups, such as Koreans and non-Hispanic Whites, have greater access to financial capital from banks or other market institutions, which facilitates their economic mobility. Evidence presented here supports their claim. Furthermore, findings reveal that human and market capital generally increase business owners earnings for all groups. When differences are noted by ethnicity, the relationship between human and market capital and earnings is usually made stronger. In other words, ethnic minorities with higher human and market capital enjoy even greater economic gains than similarly situated non-Hispanic Whites. Although market capital generally increases business owners earnings, borrowing start-up capital from a bank, a market capital source, decreases earnings for nonHispanic Whites and Koreans when compared to not borrowing at all. It is likely that non-Hispanic Whites and Koreans who do not borrow from a bank provide their own start-up capital (eg. personal savings); this strategy, the use of personal savings over a bank loan, actually indicates a better market position than those who need to rely on a bank to get their businesses going. Yet, this scenario is unlikely to occur among the more disadvantaged Mexican and Black business owners. For these

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groups, borrowing start-up capital from a market institution increases their earnings, while not borrowing from a bank probably signals their inability to do so. As the descriptive statistics show, many Mexican and Black business owners start their businesses with low or no start-up capital. Given this reasonable assessment, it is not surprising that, when non-Hispanic Whites and Koreans borrow start-up capital from a market source, their earnings decrease, while those of Mexican and Black business owners increase (Table 4). The ethnic entrepreneurship paradigm emphasises the salience of social capital, which generates information, economic resources and opportunities that facilitate ethnic entrepreneurship. The extensive entrepreneurial activity among Koreans is largely attributed to social capital. Reciprocal borrowing strategies and reliance on kinship-based ethnic resources for labour or business information are all instances of Korean social capital at work (Light and Bonacich 1988; Sanders and Nee 1996). In line with this research, my findings reveal the disproportionate use of social capital by Korean business owners when compared to the other groups (Tables 2 and 3). Korean business owners are more likely to borrow start-up capital and emergency cash from family. Interestingly, while Mexicans and Blacks are less likely than Koreans to borrow emergency cash from family, they are still more likely to do so than non-Hispanic Whites (who are more likely to turn to a market institution). These findings underscore the contributions of social capital, since they demonstrate the benefit of it among ethnic entrepreneurs. Furthermore, the ethnic entrepreneurship paradigm suggests that ethnic entrepreneurship is associated with economic mobility. Against these assumptions I find that, when social capital is applied to business owners earnings, economic mobility does not necessarily follow. In fact, being married is the only social capital resource that increases earnings for all groups (Table 4). This finding is consistent with previous research that shows that being married increases the likelihood of entrepreneurial participation and earnings among ethnic minorities (Light and Bonacich 1988; Sanders and Nee 1996). Overall, and with respect to most social capital variables, however, social capital has a neutral or negative effect on business owners earnings. Additionally, the opportunity structure is also thought to influence ethnic enterprise (Aldrich and Waldinger 1990; Portes and Rumbaut 1990; Waldinger et al. 1990). For example, Waldinger and his colleagues (1990) show that Koreans with foreign-earned capital or limited English proficiency sidestep blocked mobility in the labour market by engaging in enterprise. Portes and Rumbaut (1990, 2001) underscore the importance of opportunities outside of the ethnic group itself, such as the availability of government aid. To assess the effect of structural opportunity, this analysis considers three measures: blocked mobility, entrepreneurial pursuit and government capital. My findings reveal that a tenth of all entrepreneurs (regardless of ethnicity) report business ownership as a means to combat blocked mobility (Table 1). Hence, entrepreneurship is explained partially by blocked mobility; however, its influence is similar across groups. Furthermore, I find that blocked mobility partially explains

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economic success. Business owners who experience blocked mobility in the labour market earn more than those who do not. Waldinger (1986) and Bates (1994: 686) suggest that blocked-mobility business owners are skilled, but experience a glass ceiling in the labour market. As entrepreneurs, then, they have the capacity to translate their skills into profits. In support of this contention, my study reveals that blocked-mobility business owners outperform others. I find that business owners who express an ideology of entrepreneurship*who engage in business to develop new ideas, or become ones own boss (Headd 1999)*are more likely to be Mexican or Black, rather than Korean (Table 1). In particular, Black business owners who engage in business to fulfill an entrepreneurial pursuit actually increase their earnings (Table 4). These findings challenge the characterisation of Koreans as entrepreneurs and Blacks as reluctant, survival strategy merchants (Bailey and Waldinger 1993; Light and Bonacich 1988; Portes and Rumbaut 1990; Rath 2002; Waldinger et al. 1990). Surprisingly, Black business owners are more likely to satisfy the classic notion of the entrepreneur as an innovator or leader who seeks to maximise profits (Schumpeter 1934). Finally, the use of government capital is small across all groups; nevertheless, I observe that Blacks are twice as likely to use a government loan or subsidy as the other groups. It appears that the opportunity to acquire government support may increase business ownership among this most disadvantaged minority group. Yet, government capital is associated with diminished earnings for all groups. Overall, this analysis shows that human and market capital increase business owners earnings. Additionally, my findings reveal that human and market capital disproportionately increase the earnings of disadvantaged ethnic minorities (Table 4). Surprisingly, Mexican and Black business owners who are educated, have managerial experience, acquire start-up capital, and have access to market capital*a selective and distinct group*garner increased benefits from their substantial market position when compared to non-Hispanic Whites or Koreans, who are on average more likely to fall into this category. Furthermore, this analysis also demonstrates the limited and sometimes negative effect that social capital has on business owners earnings. Finally, and with respect to structural opportunity forces, findings indicate that business owners who experienced blocked mobility in the labour market earn more than those who do not. However, business owners who rely on government support to start their businesses do not fare as well, as their earnings decrease. Conclusion Scholars of ethnic entrepreneurship readily accept Granovetters notion of embeddedness in their explanations of ethnic entrepreneurship. Sanders and Nee, in particular, argue that ethnic entrepreneurs use of kinship ties, as circumscribed by cultural practices, is a special case of the more general embeddedness tendency described by Granovetter (1996: 246). Similarly, Portes and Sensenbrenner (1993): 1323) argue that group affiliation generates social capital that . . . affects the

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economic goals and goal-seeking behavior of its members. For example, they suggest that the use of relatives and friends of relatives by Dominican entrepreneurs, Cuban character loans granted to would-be Cuban entrepreneurs based on family reputation, or entrepreneurial opportunities that arise from extended kinship networks among Asians, are instances of social capital at work. Overall, the ethnic entrepreneurship paradigm maintains that social capital combines with human and market capital to explain ethnic entrepreneurship. Although additional research is necessary to understand fully how social capital affects economic mobility in a market economy, this paper provides an initial step in exploring this understudied relationship. Specifically, my analysis examines the relationship between social capital, as primarily embodied in kinship ties, and entrepreneurial economic success. In support of previous research, my findings suggest that social capital facilitates participation in ethnic enterprise; and that ethnic entrepreneurs are more likely to use social capital compared to Anglo-American entrepreneurs. Notably, I found that social capital does not generally affect business owners economic outcomes, and exceptions occasionally result in economic decline. Portes and Sensenbrenner suggest that, although group affiliation facilitates economic action, it can also constrain actors or even derail it from its original goals (1993: 1338). Social relationships are often fragile and unpredictable; economic behaviour stemming from such relationships is sometimes limited in scope. Furthermore, as Polanyi (1944 [1957]) convincingly argued 40 years before Granovetter (1985), social relationships in a market economy are constrained; ultimately, such relationships are embedded in the economic system. Social capital is rooted in long-term symmetrical relationships and reciprocal obligations (Polanyi 1944 [1957]). In a market economy, social relationships may generate social capital to provide some economic and non-economic support, but this support may only be compensatory, contingent and ultimately insufficient, especially in the face of market uncertainty or disadvantage. Generally, I find that social capital levels the playing field for disadvantaged ethnic minorities, but rarely improves (and sometimes worsens) their economic outcomes. These findings reveal the uncertainty that is inherent in resources generated by social relationships; uncertainty that is generally absent in more robust market relationships (and the human and market capital resources associated with them). The importance of access to human and market capital in the market economy is especially apparent in the case of ethnic minorities. As the capital increases, their earnings increase to a greater degree than similarly situated non-Hispanic Whites. Moreover, among business owners who are members of disadvantaged ethnic minority groups, the ability to borrow start-up capital from a market institution such as a bank increases their earnings-returns. Borrowing start-up capital from a bank does not have the same effect on the earnings-returns of non-Hispanic White and Korean business owners as on those of Mexican and Black, as it appears that those who seek out the additional support of a bank are less affluent than those who do not (but who probably use personal savings). Nevertheless, human and market

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970 Z. Valdez

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capital (albeit whether borrowed from a market institution as in the case of Mexican or Black business owners, or personal savings as in the case of non-Hispanic White or Korean business owners), increase business owners earnings. In sum, this research finds that social capital facilitates ethnic entrepreneurship; however, social capital does not translate into economic progress. Ultimately, human and market capital remain the primary predictors of entrepreneurial economic success in a market economy. Acknowledgements I would like to thank Rebecca Jean Emigh, Vilma Ortiz, Mark Fossett and the anonymous JEMS reviewers for their helpful comments. The research in this article was conducted while the author was a Special Sworn Status researcher of the US Census Bureau at the UCLA Census Research Data Center. This paper has been screened to ensure that no condential data are revealed. The author gratefully acknowledges fellowship support from the Center for Economic Studies. Notes
[1] Furthermore, research shows that extra-kinship social capital rooted in ethnic-group membership promotes entrepreneurship among co-ethnics (Light and Bonacich 1988: 18 19). For example, ethnic-group membership provides a basis for mutual aid. In particular, Japanese and Korean rotating credit associations are well-documented co-ethnic lending institutions that foster capital accumulation (Light 1972). Although ethnic resources rooted in ethnic afliation facilitate entrepreneurship, some research suggests that a continued reliance on ethnic [group] resources hinders longer-term economic success in entrepreneurship (Bates 1994; Kim and Hurh 1985; Sanders and Nee 1996; Yoon 1991). The relationship between extra-kinship social capital and economic success requires additional research; however, the primary focus of the present study is on the relationship between kinship-based ethnic resources and entrepreneurial economic success only. Market capital indicates, then, those economic resources that stem from the aggregate social class of a given ethnic group. The use of this term underscores the distinction between nancial capital that is rooted in class background*which includes the capacity to access resources from market institutions*and that which stems from group afliation (ie. social capital). Obviously, the inclusion of these three measures of structural opportunity is not exhaustive, but may hint at how structural opportunity affects economic success. A Subchapter S Corporation is a corporation with special tax status. Such corporations are appropriate for business owners who prefer to be taxed as if they were sole proprietors. A general corporation pays a federal corporate income tax on prot. If the corporation declares a dividend, stockholders are responsible for paying this as personal income. S Corporations avoid this double taxation and report the amount only once. The S Corporation combines the tax advantages of a sole proprietorship with the limited liability of a corporate structure. I regard unit non-response (ie. no response to the survey from a potential respondent) as unbiased, in accordance with previous CBO research (see Bates 1994, 1997; Boden and Nucci 2000; Fairlie and Robb 2004). Although non-response bias has been observed when using the CBO to assess business survival (Holmes and Schmitz 1996), there is no evidence that nonresponse bias is likely in this analysis, as item non-response for earnings information was

[2]

[3] [4]

[5]

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[6]

[7]

[8] [9]

only 5.6 per cent (Headd 1999). Furthermore, I conducted a preliminary assessment of item non-response*the failure of respondents to answer certain question(s) or item(s)*and did not observe a systematic pattern or bias by ethnicity or race. Unweighted data is appropriate, given that ethnicity is oversampled and included as an explanatory variable, and inferences are based on individual behaviour rather than the population. In addition, a preliminary analysis was conducted using ordinal logistic regression with earnings collapsed into three categories of earnings (low if less than $25,000; medium if $25,000$74,999; and high if over $75,000). Findings are consistent with those presented here; however, the OLS regression analysis provides a more complete picture of the data. The percentages of each group that are foreign-born, and of each group that borrowed government capital, are not displayed as they would violate disclosure policy. A striking feature of the ndings is the low percentage of all groups regarding use of government funds as start-up capital: 1.4 per cent for Black businesses, only 0.7 per cent for the rest.

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