Journal of Ethnic and Migration Studies

Vol. 34, No. 6, August 2008, pp. 955973

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 entrepre-
neurship (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 Sensen-
brenner 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

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 entrepreneur-
ship.
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 three-
quarters 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).
 Journal of Ethnic and Migration Studies 957

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 know-
ledge (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-group-
specific resources in combination with the wider socio-economic context. To
illustrate, Portes and Bach (1985) observe that Cuban entrepreneurs in Miami
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 entrepre-
neurship 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 Mexican-
origin population relegates its members to low-wage labour and economic
stagnation.

Ethnic Enterprise and Economic Success

Research on ethnic entrepreneurship generally demonstrates that ethnic entrepre-
neurs 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 self-
employed workers earn less and experience lower earnings growth than similarly
skilled workers who are employees. Borjas (1990) concludes that the earnings of self-
employed 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).
 Journal of Ethnic and Migration Studies 959

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 self-
employed 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
960 Z. Valdez

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 owner-
characteristics 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. Self-
employed 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 self-
employment-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 under-
reporting. 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
 Journal of Ethnic and Migration Studies 961

(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 start-
up; 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
962 Z. Valdez

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 33 41 48
Medium ($25K$74,999) 36 43 39 35
High ($75K$150K) 40 25 20 17
Explanatory variables:
Education
High School 28 22 48 39
Some college 22 18 23 25
Bachelors degree 31 39 18 20
Professional/graduate 20 20 10 16
Work experience (10 years or more) 57 34 49 56
Managerial experience (1 year or more) 64 64 57 54
Start-up capital ($)
None 19 08 18 24
Low ($1$24,999) 29 18 41 44
Medium ($25K$49,999) 26 32 26 20
High ($50K) 26 42 15 12
Married 82 92 81 78
Entrepreneurial pursuit 29 19 33 34
Blocked mobility 12 10 11 10
Number of cases: 13,142 773 2,732 5,884

Source: Characteristics of Business Owners Survey (1992).

 Journal of Ethnic and Migration Studies 963

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 Korean Mexican Black

No borrowing 64.7 44.3 65.6 67.9

Borrow from bank 11.6 14.9 8.2 7.7
Borrow from family 5.0 11.3 6.7 3.8
Borrow from both 18.7 29.4 19.4 2.7
Total: 13,142 773 2,732 5,884

Pearson chi2(9) 271.7, p.00

Source: Characteristics of Business Owners Survey (1992).
964 Z. Valdez
Table 3. Sources of emergency cash by ethnicity (%)
White Korean Mexican Black

No borrowing 71.2 56.3 67.0 60.9

Borrow from bank 23.6 25.1 23.1 28.8
Borrow from family 3.4 14.2 7.1 6.6
Borrow from other source 1.8 4.4 2.8 3.7
Total: 13,142 773 2,732 5,884

Pearson chi2(3) 320.2, p.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.
 Journal of Ethnic and Migration Studies 965
Table 4. The effects of human, market and social capital on business owners earnings
b (se)

Ethnicity
Korean .102 (.061)
Mexican .146*** (.033)
Black .240*** (.039)
Human capital
Education
Some college .131*** (.017)
Bachelors degree .511*** (.018)
Graduate/professional .903*** (.023)
Mexican* graduate/professional .164** (.065)
Black* graduate/professional .090* (.040)
Work experience .095*** (.014)
Managerial experience .278*** (.019)
Korean* managerial experience .261*** (.074)
Mexican* managerial experience .126** (.041)
Black* managerial experience .122*** (.031)
Market capital
Start-up capital (per $100,000) 4.57*** (.032)
Korean* start-up capital 4.70*** (.015)
Black* start-up capital 2.10*** (.008)
Start-up capital: bank .139*** (.028)
Mexican* start-up capital: bank .208** (.069)
Black* start-up capital: bank .157*** (.048)
No emergency cash crisis .264*** (.016)
Emergency cash: bank .033 (.017)
Social Capital
Foreign-born .011 (.020)
Married .151*** (.020)
Black* married .098** (.036)
Relative is owner .018 (.013)
Start-up capital: family .065** (.024)
Start-up capital: business associate .044* (.020)
Emergency cash: family .227*** (.026)
Structural opportunity
Blocked mobility .086** (.024)
Entrepreneurial pursuit .023 (.017)
Black* entrepreneurial pursuit .081* (.032)
Government capital .193** (.070)

Constant 9.27*** (.035)

R-squared .34

Notes: Parentheses are standard errors. N22,531. *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
966 Z. Valdez

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 middle-
or 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 non-
Hispanic 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
 Journal of Ethnic and Migration Studies 967

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 entrepre-
neurship 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
968 Z. Valdez

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 embedd-
edness 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
 Journal of Ethnic and Migration Studies 969

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
970 Z. Valdez

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 confidential 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 affiliation facilitate entrepreneurship, some research suggests that a continued
reliance on ethnic [group] resources hinders longer-term economic success in entrepreneur-
ship (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.
[2] 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
financial capital that is rooted in class background*which includes the capacity to access
resources from market institutions*and that which stems from group affiliation (ie. social
capital).
[3] Obviously, the inclusion of these three measures of structural opportunity is not exhaustive,
but may hint at how structural opportunity affects economic success.
[4] 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 profit. 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.
[5] 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 non-
response bias is likely in this analysis, as item non-response for earnings information was
 Journal of Ethnic and Migration Studies 971

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.
[6] 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.
[7] 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.
[8] 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.
[9] A striking feature of the findings 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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