6 - Black and Hispanic Underrepresentation in Business Ownership in a Majority-Black City

Summary

Introduction

Before and during bankruptcy, Black and Hispanic business owners were extremely underrepresented compared to their populations in the City of Detroit. This chapter examines both Black-owned and Hispanicowned businesses.

Black-owned businesses nationwide: previous studies

As far back as 2007, I conducted research on Black business development in Michigan (Darden, 2007). Past research revealed that Black-owned firms in Detroit and other cities in Michigan were suffering from limited market size, as was the case in the US as a whole. In other words, most Black-owned businesses relied on Black consumers to remain in business. Other researchers came to the same conclusion (Fairlie and Robb, 2007a).

According to Bates (1993), such racially restrictive markets were due to racial residential segregation and discrimination. He noted that white merchants continued to open stores in Black neighborhoods, but Black merchants were historically excluded from white neighborhoods. The typical Black business was characterized as a small business concentrated in predominately Black neighborhoods. The socioeconomic characteristics of the Black neighborhoods were very low. Throughout the early period, before the Civil Rights Acts of the 1960s and based on data going up to 2002, Blackowned businesses continued to experience limited access to capital, which influenced the size, location, and type of such businesses. This lack of capital also influenced the type of Black-owned business. Research revealed that firms in construction, manufacturing, and wholesale trade usually required a larger amount of capital than small personal service businesses and retail establishments (Ong, 1981). As a result, fewer Blacks are represented in these types of firms (Darden, 2007).

Research also suggests that the limited access of Blacks to capital is related to the higher loan denial rates Black business owners have experienced even after controlling for differences in creditworthiness (Cavalluzzo et al, 2002). It has also revealed that Black business owners were required to pay higher interest rates or put down more collateral than white business owners (Fairlie and Robb, 2007a). The limited access to capital forced Blacks into types of businesses with higher turnover rates, such as small retail (Reynolds and White, 1997; Robb and Fairlie, 2007b). Bates (1997) noted that fewer Black-owned businesses compared to white-owned businesses obtained a larger supply of capital to open manufacturing and wholesale businesses, which have lower turnover rates. Also, a lower supply of human capital influences failure rates and reduces the amount of profits (Darden, 2007).