Entrepreneurship: Emerging Domestic Markets

Researchers studying the assimilation of minority groups into the majority population have long told a story that goes like this: a group of recent immigrants initially clusters in undesirable areas of a city; as people in this group achieve socioeconomic gains, they spread into other areas and interact more with the majority population; as the socioeconomic status of the group as a whole improves, more and more individuals move out of the initial area, thus signaling their near total assimilation; and the cycle begins again with a new minority group.

This narrative arc has been documented in the United States among Jews, Greeks, Irish, Italians, Asians, and others. But the story of progressive assimilation does not reflect the experience of black Americans, who remain residentially segregated from the majority population in cities across the country despite gains in educational attainment, income, and professional status. One consequence of this, Darden associate professor Greg Fairchild has found, is an increased likelihood of self-employment among affluent blacks.

Fairchild, whose research has focused on entrepreneurship and business development in inner cities and the effects of residential segregation on self-employment, presents the findings of a new study in a paper published in the Journal of Developmental Entrepreneurship, "Spatial Assimilation and Self-Employment: The Case of Black Americans." Using data from the 2000 Integrated Public Use Microdata Series (IPUMS) and the U.S. Census Bureau, Fairchild found that in cities where affluent blacks are highly segregated from affluent whites, blacks are more likely to seek self-employment.

Past studies on residential segregation and self-employment, including some of Fairchild's own work, have yielded conflicting results, in large part because they have relied on data much less precise than those Fairchild used in the current study. Moreover, they have not examined segregation by class as well as by race.

Fairchild's study is informed by two theories. The first, spatial assimilation theory, posits that members of minority groups who have achieved high socioeconomic status will be more integrated with the majority than low-status members of the same group. As many researchers have demonstrated, however, blacks in the United States remain segregated from whites at all socioeconomic levels. Fairchild writes, "One of the common misconceptions is that income, education, and human capital differences account for substantial variance in segregation." His examination of the data shows that 64% of affluent blacks (those with household incomes higher than the 75th percentile) would have to move in order to distribute themselves evenly with affluent whites.

The second theory informing Fairchild's study is labor market disadvantage theory, which presents self-employment as a strategic response to segregation and discrimination. When members of a minority group encounter obstacles to employment in the form of language barriers, undervalued skills, competition from the majority, and discrimination, aspiring entrepreneurs among them often recognize opportunity. Although they have poor access to capital, little wealth to draw on, and few contacts who can help them obtain the resources they require, they have two important advantages: access to low-cost labor and to a group of underserved consumers whose needs they understand.

The increased likelihood of self-employment among affluent blacks that Fairchild has identified may signal an increase in the number of minority-led firms, but it also represents missed opportunities for society as a whole, he notes. The businesses launched in black neighborhoods aren't necessarily those that will generate an abundance of high-paying jobs, develop wealth-generating intellectual property, or have good growth potential. Talented blacks starting businesses in their neighborhoods might well be those who, given access to different social and professional networks, could be middle or senior managers in large organizations. To Fairchild, an increase of affluent black entrepreneurs is a sign of their underemployment in the broader labor market and their continued underrepresentation in the country's large and powerful companies.

Various organizations are trying to address this labor market segregation. Fairchild notes the growth of CDFIs (community development financial institutions) and other nongovernment organizations that are trying both to facilitate business development in underserved areas and to create links between businesses across racial lines. Through a grant from the John D. And Catherine T. MacArthur Foundation, Fairchild and Josh Lerner, of Harvard Business School, are conducting a multiyear study of the best practices of CDFIs. Fairchild points to the BOC Network, an organization that provides financial and other business-development services to underserved entrepreneurs in New York City and Newark, New Jersey. An important part of the organization's approach is connecting minority small-business owners to service providers and markets outside of their own communities, often across racial lines. Such efforts, Fairchild argues, represent an important attempt to achieve some degree of business integration despite the persistent residential segregation in cities across the United States.