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Determinants of business success: an examination of Asian-owned businesses in the USA

Abstract

Using confidential microdata from the US Census Bureau, we investigate the performance of Asian-owned businesses. Using regression estimates and a special non-linear decomposition technique, we explore the role that class resources, such as financial capital and human capital, play in contributing to the relative success of Asian businesses. We find that Asian-owned businesses are more successful than white-owned businesses for two main reasons—Asian owners have high levels of human capital and their businesses have substantial start-up capital. Using detailed information on both the owner and the firm, we estimate the explanatory power of several additional factors.

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Notes

  1. 1.

    See Boyd (1991), Fratoe (1986), and Borjas (1986) for examples.

  2. 2.

    See Appendix 1 for a detailed explanation of our focus on Asian-owned businesses in general, rather than on Asian immigrants or specific Asian subgroups.

  3. 3.

    All research using the CBO must be conducted in a Census Research Data Center or at the Center for Economic Studies (CES) after approval by the CES and IRS, and all output must pass strict disclosure regulations.

  4. 4.

    The procedure for identifying firms owned by persons of Asian, Pacific Islander, Hispanic, American Indian, or Alaska Native ancestry was different than for black-owned firms, thus potentially resulting in more missing values for these groups (see US Census Bureau 1997).

  5. 5.

    Although sample weights are used that correct for non-response, there is some concern that closure rates are underestimated for the period from 1992 to 1996. Many businesses closed or moved over this period and did not respond to the survey which was sent out at the end of the period. Indeed, Robb (2000) showed, through matching administrative records, that nonrespondents had a much higher rate of closure than respondents. Racial differences in closure rates, however, were similar for the respondent and nonrespondent samples.

  6. 6.

    Excellent reviews of the literature can be found in Aldrich and Waldinger (1990), Boyd (1991), and Bates (1997). Zhou (2004) and Light (2004) provide more recent reviews of the ethnic entrepreneurship literature.

  7. 7.

    Another line of research hypothesizes that Asians have a high rate of self employment because they come from countries with high rates (or culture) of self-employment. Although estimates of self-employment rates are not available for all Asian countries with large immigrant populations in the USA, wide variation in self-employment rates exists across available countries in Asia (International Labor Organization 2005). Asian countries also do not have notably higher self-employment rates compared to other regions of the world. Previous research on the correlation between US self-employment rates and home country rates is also mixed (see Yuengert 1995; and Fairlie and Meyer 1996 for example).

  8. 8.

    The profit measure available in the CBO is categorical. We estimate a logit model for the cutoff of $10,000 to make it easier to interpret the coefficients and perform the decomposition described below. We also find similar results in estimating an ordered probit for all categories of profits, which is shown in specification 5 of Table 2.

  9. 9.

    The concern is that low levels of startup capital and industry choice may be partly determined by the ability of the entrepreneur.

  10. 10.

    These estimates are not overly sensitive to the exclusion of firms started before 1980 or the inclusion of the age of the firm (with the exception of the inheritance variable). In addition, estimates from the log sales specification are not sensitive to the exclusion of firms with extremely large annual sales.

  11. 11.

    The addition of startup capital and industry does not overly influence the estimated effects of the human capital, business human capital, and family business background variables. We also investigate whether our regression estimates are sensitive to alternative samples. First, we estimate regressions using a sample that excludes firms with less than $5,000 in startup capital. We do not use this restriction in the original sample because most businesses report requiring very little in startup capital, and in fact, many large successful businesses started with virtually no capital and because of concerns that the receipt of startup capital may be related to the potential success of the business (see Fairlie and Robb 2007a). Although mean outcomes among businesses that started with $5,000 or more in startup capital are better than those for all businesses, we find roughly similar estimates for most variables in the regression models. We also check the sensitivity of our results to the removal of part-time business owners. We estimate separate regressions that only include businesses with at least one owner who works 30 h or more per week and 36 weeks or more per year, which reduces the sample size by roughly 20%. Although average business outcomes are also better for this sample, we find similar coefficients on most variables. We also estimate regressions that include even tighter hours and weeks worked restrictions and find roughly similar results. Overall, the regression results are not sensitive to these alternative sample restrictions.

  12. 12.

    We also find roughly comparable mean total earnings for the two groups using Census microdata.

  13. 13.

    Business ownership may be an effective method of acquiring wealth and individuals who are adept at accumulating wealth perhaps through wage/salary work may be the same ones who are the most successful at starting businesses. See Bates (1990) for a discussion of endogeneity concerns of startup capital and Bradford (2003) for evidence on wealth accumulation among entrepreneurs.

  14. 14.

    We are thankful to Lingxin Hao for providing these estimates. See Hao (2007) for evidence on wealth differences.

  15. 15.

    In our subsample of active firms using the CBO microdata, we are able to isolate Asians from Native Americans and find that 11.5% of Asians had a loan from family members, compared with 6.2% of white owners.

  16. 16.

    In addition, previous research finds that this unregulated source of funding comes with usurious interest rates that can negatively impact the chance for a business to succeed (Light et al. 1990; Bates 1997).

  17. 17.

    The standard Blinder–Oaxaca decomposition of the white/minority gap in the average value of the dependent variable, Y, can be expressed as:\(\bar Y^{\text{W}} - \bar Y^{\text{M}} = \left[ {\left( {\bar X^{\text{W}} - \bar X^{\text{M}} } \right)\hat \beta ^{\text{W}} } \right] + \left[ {\bar X^{\text{M}} \left( {\hat \beta ^{\text{W}} - \hat \beta ^{\text{M}} } \right)} \right] \).

  18. 18.

    SAS programs are available for the non-linear decomposition technique at http://people.ucsc.edu/~rfairlie/decomposition, and a Stata program and help file is available by entering “ssc install fairlie” in Stata.

  19. 19.

    In contrast, the predicted probability evaluated at the means of the independent variables is not necessarily equal to the proportion of ones, and in the sample used here it is likely to be smaller because the logit function is convex for values less than 0.5.

  20. 20.

    The Asian/Other Minority group includes Native Americans, which represent 15% of all businesses in the category.

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Acknowledgments

We would like to thank Tim Bates, Lingxin Hao, two anonymous referees and seminar participants at Harvard Business School, University of Maryland, Dartmouth College, RAND, Moss Landing Marine Laboratories, California State University, the Consulate General of Sweden, Swedish Office of Science and Technology at the University of Southern California, the Diversity in Business Conference at the University of Washington, the UCSC Diversity Lecture Series, and the 2006 United States Association for Small Business and Entrepreneurship Annual Meetings for their comments and suggestions.

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Correspondence to Robert W. Fairlie.

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This research was partially funded by the Russell Sage Foundation and Kauffman Foundation. The research in this paper was conducted while the authors were Special Sworn Status researchers of the US Census Bureau at the Center for Economic Studies and California Research Data Center at UC Berkeley. This paper has been screened to insure that no confidential data are revealed. The data can be obtained at a Census Research Data Center or at the Center for Economic Studies (CES) only after approval by the CES and IRS. See http://www.ces.census.gov/ for details on the application and approval process. The views expressed here are solely the responsibility of the authors and should not be interpreted as reflecting the views of the Russell Sage Foundation, the Kauffman Foundation, the US Census Bureau, or the Board of Governors of the Federal Reserve System.

Responsible editor: Klaus F. Zimmermann

Appendices

Appendix 1

Asian Subgroups

Many previous studies of Asian business ownership delineate immigrants from non-immigrants. US born Asians and Asian immigrants may face different opportunities in the labor market and thus have different motives for entering business, which may then lead to different business outcomes. While we analyze immigrants separately from US-born Asians, the results reported here are for all Asians. This is due to finding similar business outcomes for the two groups and limitations of releasing detailed tables through the Census Bureau’s strict disclosure process for confidential and restricted-access data. Roughly 80% of Asian-owned businesses in the USA are owned by Asian immigrants. Therefore, the estimates of Asian business outcomes reported in this paper are being driven primarily by businesses owned by Asian immigrants.

Interestingly, when comparing businesses owned by Asian immigrants and non-immigrants, we find similar outcome measures. Published estimates from the 1992 CBO indicate that about 23% of Asian/Other Minority immigrant firms have employees, compared with 22% of Asian/Other Minority owners that were US born.Footnote 20 The distribution of sales by immigrant status from published 1992 CBO data also illustrates that the differences in sales’ distributions are not large across immigrants and non-immigrants for the Asian/Other Minority group.

In our subsample of active firms from CBO microdata, business outcomes are remarkably similar between Asian immigrant and nonimmigrant firms. The percentages of firms that have employees or profits of $10,000 or more are virtually identical. Immigrant firms are slightly less likely to close, but the difference is small. There are, however, some differences in the owner characteristics of immigrants and Asians that were born in the USA. For example, those that were born in the USA are younger and less likely to be married. They are also more likely to start businesses with little or no financial capital, more likely to have a family member that owned a business, and more likely to have worked for that business. Overall, however, Asian immigrant and US born owners are fairly similar, and the mean characteristics for all Asians are roughly similar to the Asian immigrant means.

Previous research using older CBO data yields similar outcomes among businesses owned by Asian immigrants and non-immigrants. Using 1987 CBO data, Bates (1997) reports business outcomes by immigrant status for Asians. Immigrants are separated into two categories, those with a level of high fluency in English (Asian Indian and Filipino) and those with a low level of fluency (Korean and Chinese), and are compared with nonimmigrant Asian Americans. The survival rates of firms in all three categories are virtually identical, ranging from 81.9% to 82.2%. While sales, employment, and profits are also similar, there are some slight variations. Koreans and Chinese average 1.7 employees, while nonimmigrant Asian Americans and high fluency immigrants average 1.2 employees. Koreans and Chinese have the highest levels of sales but rank in the middle in terms of profits. In estimating regressions predicting firm survival, Bates also finds that both Asian immigrants and Asian non-immigrant firms have higher rates of survival than white firms. The difference between Asian immigrants and non-immigrants is relatively small and not statistically significant.

Census data on self employed business owners from the 2000 PUMS provide additional support for grouping Asian immigrants and non-immigrants together. Self-employed immigrants and non-immigrants have nearly identical earnings at $53,400 and $56,600, respectively. Asian immigrants work slightly more hours in a given week but work nearly identical numbers of weeks during the year. While immigrants are much more likely to have dropped out of high school, the percentage that graduated from college (24.6) is nearly identical to that of non-immigrants (24.8). About 21% of immigrants have postgraduate education compared with 23.5% of native born Asians. Interest income, which is often used as a proxy for wealth, is also similar for immigrants and non-immigrants. Thus, while much of the literature delineates immigrants from non-immigrants, these various data sources indicate that there are more similarities than differences in business outcomes and combining the two groups for our analyses may not be problematic.

A similar issue is grouping Asians from different countries of origin. Many previous studies of Asian self-employment have focused on a specific subgroup of Asians, such as Japanese Americans (Light 1972; Bonacich and Modell 1980), Chinese Americans (Bates 1997), and Koreans (Min 1988; Bates 1994a; Yoon 1991, 1995). While differences in business outcomes exist across Asian subgroups, the differences are relatively small when compared with differences between Asians and whites. We examine the differences in outcomes across subgroups of Asians from our active CBO microdata sample. Asian Indian firms have the lowest closure rates and the highest proportion of employer firms, whereas Korean firms have the highest proportion of firms (over half) earning profits of $10,000 or more. Using the various outcome measures, we find that one subgroup does not outperform the others across all measures. Data from the newly released 2002 SBO indicate similarly positive business outcomes across almost all of the large Asian subgroups.

We also experimented with business outcome regressions with detailed Asian subgroup dummies and find that the coefficients on these dummies are not statistically significant for any of the subgroups. This result is consistent with Bates (1997) who includes dummies for Asian Indian, Chinese, Korean, and Vietnamese in his survival regressions—none of which are statistically significant. Providing additional support of our grouping Asian subpopulations, Boyd (1991) finds that there are not statistically significant differences in self-employment earnings between Asian subgroups, such as Chinese, Japanese, Korean, Asian Indian, Filipino, Vietnamese, and Other Asians. Given that the goal of this paper is to compare the relative performance of Asian-owned businesses with that of whites, combining these subgroups seems reasonable.

In working with confidential data for this paper, we were limited in the number of tabulations and regressions we could get released through the Census Bureau’s lengthy disclosure process. This restriction limited our ability to conduct an extensive analysis delineating Asians by immigrant status or subgroup. Because our focus is on the outcomes of businesses and not the selection process into business ownership, we are interested in explaining the relative success of Asians as a group, whether they are immigrants or native born and irrespective of their country of origin. Further work examining these subpopulations will make a valuable contribution in better understanding this population, but it is beyond the scope of this paper.

Appendix 2

Table 9

Table 9 Means of selected variables, characteristics of business owners, 1992

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Robb, A.M., Fairlie, R.W. Determinants of business success: an examination of Asian-owned businesses in the USA. J Popul Econ 22, 827 (2009). https://doi.org/10.1007/s00148-008-0193-8

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Keywords

  • Asian
  • Entrepreneurship
  • Business outcomes

JEL Classification

  • J15
  • L26