9
Trends in Minority-Owned Businesses

Thomas D.Boston

During the past quarter century, minority-owned businesses have undergone a significant transition. Small-scale, personal-service businesses—beauty salons, barber shops, etc. —no longer predominate; they have been replaced by businesses in a diverse array of industries from which Blacks had, heretofore, been excluded for reasons of education, experience, or race. Between 1960 and 1980, minority-owned, personal-service businesses decreased by 49.1 percent, while minority-owned finance, insurance, and real estate businesses increased by 185.7 percent; business services increased by 175 percent; and wholesale industries increased by 111.8 percent (Bates, 1987; see Table 9–1).

One factor that may have helped accelerate this trend, from the mid-1960s through the 1980s, was public-sector, affirmative-action programs in contracting and procurement. These programs created important points-of-entry for minority entrepreneurs, allowing Blacks unprecedented opportunities for diversification in choice of business ventures. This new stage in minority business ownership began with the abatement of racial segregation in the 1960s. Accelerating factors during the 1970s and 1980s were education and experience; Blacks were quickly gaining managerial and executive-level experience in the corporate sector, pursuing business degrees in greater numbers, and, in general, accumulating greater endowments of human-capital attributes closely associated with self-employment activities.

By the late 1980s and early 1990s, decreases in the percentage of personal-service establishments among Black-owned businesses bottomed



The National Academies | 500 Fifth St. N.W. | Washington, D.C. 20001
Copyright © National Academy of Sciences. All rights reserved.
Terms of Use and Privacy Statement



Below are the first 10 and last 10 pages of uncorrected machine-read text (when available) of this chapter, followed by the top 30 algorithmically extracted key phrases from the chapter as a whole.
Intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text on the opening pages of each chapter. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

Do not use for reproduction, copying, pasting, or reading; exclusively for search engines.

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II 9 Trends in Minority-Owned Businesses Thomas D.Boston During the past quarter century, minority-owned businesses have undergone a significant transition. Small-scale, personal-service businesses—beauty salons, barber shops, etc. —no longer predominate; they have been replaced by businesses in a diverse array of industries from which Blacks had, heretofore, been excluded for reasons of education, experience, or race. Between 1960 and 1980, minority-owned, personal-service businesses decreased by 49.1 percent, while minority-owned finance, insurance, and real estate businesses increased by 185.7 percent; business services increased by 175 percent; and wholesale industries increased by 111.8 percent (Bates, 1987; see Table 9–1). One factor that may have helped accelerate this trend, from the mid-1960s through the 1980s, was public-sector, affirmative-action programs in contracting and procurement. These programs created important points-of-entry for minority entrepreneurs, allowing Blacks unprecedented opportunities for diversification in choice of business ventures. This new stage in minority business ownership began with the abatement of racial segregation in the 1960s. Accelerating factors during the 1970s and 1980s were education and experience; Blacks were quickly gaining managerial and executive-level experience in the corporate sector, pursuing business degrees in greater numbers, and, in general, accumulating greater endowments of human-capital attributes closely associated with self-employment activities. By the late 1980s and early 1990s, decreases in the percentage of personal-service establishments among Black-owned businesses bottomed

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II TABLE 9–1 Percentage of Minority Self-Employment in Various Industries, by Industry Group, 1960 and 1980 Industry 1960 1980 Percent Change Construction 16.7 16.5 –1.2 Manufacturing 4.1 6.0 46.3 Transportation, communication, and utilities 3.9 6.0 53.8 Wholesale 1.7 3.6 111.8 Retail 25.4 25.4 0.0 Finance, insurance, and real estate 1.4 4.0 185.7 Business services 2.4 6.6 175.0 Repair services 5.2 6.9 32.7 Personal services 28.9 14.7 –49.1 Other services 10.3 10.3 0.0 Total 100.0 100.0 –   SOURCE: Bates (1987). Reprinted by permission. out as the new generation of Black business owners emerged—younger, better educated, and with more managerial and supervisory experience. And these new owners relied, to a great extent, on public-sector markets. For the first time, a significant number of Black businesses emerged in large-scale, public-works construction contracting and subcontracting, architectural and engineering services, management and consulting services, data processing, computer sales and services, public relations, and other industries closely tied to public-sector procurement opportunities. These opportunities, in turn, expanded the diversification, revenue sources, and employment capacity of Black-owned businesses. By the 1980s, obtaining public-sector contracting and procurement was a fundamental business strategy for a significant portion of successful minority business owners, because public-sector affirmative-action programs afforded minority entrepreneurs substantial growth and revenue opportunities. In 1987, Black-owned firms with revenues of $1,000,000 or more earned 12.8 percent of their gross revenue from the public sector, while nonminority male-owned businesses of a similar size earned only 6.1 percent of their revenue from such sources (U.S. Bureau of the Census, 1991:204); for firms with revenues between $500,000 and $999,999, percentages of revenue from the public sector were 9.3 percent for Black-owned and 5 percent for nonminority male-owned businesses. In 1995, I mailed a survey to 1,412 businesses owned by ethnic minorities and White women located in the Atlanta metropolitan area to

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II determine the number and kinds of industries/businesses owned, and their sources of income (Boston, 1998). The survey population was drawn from databases maintained by public and private agencies in the Atlanta metropolitan area.1 Of the 1,412 surveys mailed, 316 responses were received (approximately 22 percent response rate), including 223 from Black-owned businesses. Industries represented and percent of total sample were as follows: services, 40 percent; construction, 24 percent; wholesale,14 percent; manufacturing, 7 percent; transportation and communications, 5 percent; retail, 4 percent; finance, insurance, and real estate, 2 percent; and nonclassified industries, 2 percent. Among the firms in service industries, the largest concentrations were in computer and data processing followed by engineering and architecture, services to buildings, management and public relations, commercial printing, personnel supply, other business services, and advertising. Of the businesses responding to the survey, 71 percent were owned by Blacks; 14 percent, by White women; 7 percent, by Hispanics; 5 percent, by Asian and Pacific Islanders; and 1 percent, by Native Americans. The survey results for Black-owned businesses revealed that 42.5 percent are located within the city limits of Atlanta. Among those businesses, in response to why they chose their present location, 25.4 percent gave cost considerations as the most important factor, 14.7 percent cited the need to be close to their customers and clients, 12.8 percent said convenience and accessibility was most important, and 12.6 percent said that they did so to be close to home. Among businesses located in the suburbs, 25.7 percent indicated they did so to be close to their customers and clients, 16.8 percent cited convenience and accessibility, 14.1 percent indicated cost considerations, and 9.8 percent indicated that they worked from a home office. In regard to employment, 45.7 percent of all workers employed by the Black-owned businesses lived in the city. Data also reveal that Black-owned businesses hired 21.5 percent of their workforce from low-income, inner-city neighborhoods. More precisely, 24.6 percent of employees in businesses located in the city lived in low-income, inner-city neighborhoods, and 19.2 percent in suburban businesses were from low-income neighborhoods. Finally, survey results indicate that 83.6 percent of employees in Black-owned firms were Black. Among businesses located in the city, 81.8 percent of their employees were Black, and 84.9 1   The Atlanta Business League, the City of Atlanta Office of Contract Compliance, Atlanta Public Schools Office of Contract Compliance, Fulton County Office of Contract Compliance, Georgia Minority Supplier Development Council, Dekalb County Office of Contract Compliance, Grady Health Systems Disadvantaged Business Enterprise Program, and the Metropolitan Atlanta Rapid Transit Authority.

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II percent of employees in Black-owned businesses located in the suburbs were Black. The survey also revealed a significant reliance on government contracting. In 1995, in particular, the mean percentage of revenue derived from the government sector, for all groups, was 31.5 percent. Of that, the highest amount, 34.4 percent, went to Black-owned businesses; and the lowest amount, 19.1 percent, went to businesses owned by White women (Table 9–2). Dependence on the government as a source of revenue varied considerably by industry. For example, 50.9 percent of the gross revenue of construction firms came from the public sector, whereas public-sector revenue totaled 11.5 percent for manufacturing (Table 9–3). Minority participants in the city of Atlanta’s minority business programs are among the most successful in the metropolitan area. In 1993, the average revenue of 770 Black-owned businesses participating in the City of Atlanta and Fulton County’s program was $606,208.00; in contrast, the U.S. Bureau of the Census (USBC) (1996) indicates that the average revenue of all 23,488 Black-owned businesses in the Atlanta metropolitan area, in 1992, was $44,668.00. MAJOR IMPROVEMENTS FROM THE PAST Aldrich and Waldinger (1990) assert that minority business success is built on the interaction between opportunity structures and group char- TABLE 9–2 Mean Percentage of Minority-Owned Revenue from the Government Sector, by Group, 1995 Survey Minority Group Mean Percent Respondents to Question Number of Respondents to Survey Percent of Survey Respondents Black 34.4 207 223 70.6 American Indian/ Alaskan Native NDa 3 3 0.9 Asian American/ Pacific Islander 33.2 16 17 5.4 Hispanic American 28.6 20 21 6.6 White women 19.1 41 45 14.2 Unclassified 13.7 6 7 2.2 Total 31.5 293 316 100 Note: Ownership lists based on businesses registered with seven public agencies in Metropolitan Atlanta, Georgia. Survey conducted by Thomas D.Boston. aNot determined.

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II TABLE 9–3 Mean Percentage of Minority-Owned Business Revenue from the Government Sector by Industry, 1995 Survey Industry Mean Percent Number of Respondents to Survey Percent of Survey Respondents Agriculture 0.0 2 0.6 Construction 50.9 52 16.5 Manufacturing 11.5 13 4.1 Transportation, communication, utilities 20.6 18 5.7 Wholesale 27.0 35 11.1 Finance, insurance, real estate 24.9 14 4.4 Retail 35.0 18 5.7 Consumer services, repair, health 32.4 42 13.3 Business services, law, computer 28.2 111 35.1 Other 29.2 11 3.5 Total 31.5 316 100 Note: Ownership lists based on businesses registered with seven public agencies in Metropolitan Atlanta, Georgia. Survey conducted by Thomas D.Boston. acteristics. Opportunity structures include favorable market conditions, the ability to provide products and services beyond those aimed at specifically ethnic markets, and the ease of access to business opportunities, competitive environments, and government policies. Group characteristics include selective migration, culture, aspirations, ethnic and social networks, organizing capabilities, ability to mobilize resources, and the extent to which government facilitates or constrains resource acquisition by/for the group. During the 1960s, these conditions were not favorable for minority entrepreneurs, especially Blacks; but as conditions improved, so did the aggregate characteristics of minority-owned businesses. In 1960, few Blacks occupied the kinds of managerial, administrative, and technical jobs in the corporate sector that typically equip employees with the experience needed to become successful entrepreneurs. As recently as 1987, only 18.5 percent of Black business owners reported having prior managerial, executive, and supervisory experience; whereas 30.0 percent of nonminority male business owners reported having such experience. Similar figures for Hispanic business owners and other minorities were 18.8 and 26.6 percent, respectively. In addition, 48 percent of nonminority male business owners had close relatives who were business

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II owners or were self-employed; this was true for only 27.8 percent of Black business owners (U.S. Bureau of the Census, 1991:50, 58). During the 1960s, Blacks were excluded from the nation’s prestigious country clubs and business associations—i.e., places where networking and important deal making occur. Blacks were educated in second-rate schools, confined mainly to segregated neighborhoods, and constituted a disproportionate percentage of low-wage, low-skill workers. As a result, Blacks’ access to capital, credit, and business opportunities was lower compared to Whites. This deficit directly affected the types of businesses Blacks were able to start and operate. During the time that segregation was legal, it was not uncommon for Blacks to encounter racial barriers even when they attempted to service Black consumers. This was particularly true in certain industries outside of personal service and retail. T.M.Alexander, Georgia’s first Black licensed insurance agent, recounted how segregation created both legal and psychological barriers between Black entrepreneurs and Black consumers (Alexander, 1992:66). For many years, Blacks had been shrewdly taught to place their confidence in Whites and to look with doubt and suspicion upon their own race. This was a sad but true fact of life that hampered many Black companies. My White competitors would stress the unavoidable failures of Black business in an effort to capture the Black market. White salesmen of all kinds could enter large numbers of Black homes with little sales resistance. I could not. Ironically, the White agents would enter Black homes without the usual courtesy one would expect essential to good salesmanship. Coleman and Cook observed (1976:46): It is not unreasonable to assume that during the nineteenth century and until the 1960s, prospective Black businessmen were rather reluctant to start a business beyond the “mom-and-pop” variety. For indeed, any large-scale enterprise would have been, in all probability, dependent in some way upon White suppliers and/or White consumers either or both of which would have probably proved hostile. Furthermore, Black entrepreneurs faced the very real possibilities of receiving either physical harm or destruction of their property by antagonistic White competitors or bigots. In 1972, at least 35 percent of all Black-owned businesses operated in just four industries—food stores (6.3 percent), eating and drinking establishments (7.6 percent), personal-service establishments (18.5 percent), and auto repair/garages (2.9 percent) (Table 9–4), typically thought of as “mom and pop” enterprises. In 1972, average revenue of the 34,693 personal-service establishments was only $9,223. The average for businesses

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II TABLE 9–4 Characteristics of Black-Owned Businesses in Selected Industries, 1972 to 1992 Characteristic 1972 1977 1982 Percent Change 1972 to 1982 Total Black-owned firms 187,602 231,203 339,239 80.8% Receipts of Black-owned firms $ (000), Total $5,534,000 $8,645,000 $12,444,000 124.9% Number of Black-Owned Firms in Selected Industries 66,273 65,620 68,688 3.6% Food stores 11,887 10,679 9,187 –22.7% Eating and drinking 14,346 13,008 11,629 –18.9% Personal service 34,693 35,035 40,394 16.4% Auto repair and garages 5,347 6,898 7,478 39.9% Percent of All Black-Owned Firms 35.3% 28.4% 20.2% –42.7% Food stores 6.3% 4.6% 2.7% –57.3% Eating and drinking 7.6% 5.6% 3.4% –55.2% Personal service 18.5% 15.2% 11.9% –35.6% Auto repair and garages 2.9% 3.0% 2.2% –22.7% Receipts of Black-Owned Firms in Selected Industries $1,432,805 $1,941,936 $2,349,686 64.0% Food stores $570,572 $785,776 $882,737 54.7% Eating and drinking $437,088 $572,331 $675,230 54.5% Personal service $320,125 $399,274 $560,809 75.2% Auto repair and garages $105,020 $184,555 $230,910 119.9% Percent of All Receipts in Black-Owned Firms 25.9% 22.5% 18.9% –27.1% Food stores 10.3% 9.1% 7.1% –31.2% Eating and drinking 7.9% 6.6% 5.4% –31.3% Personal service 5.8% 4.6% 4.5% –22.1% Auto repair and garages 1.9% 2.1% 1.9% –2.2% Average Revenue of Black Firms All black firms $29,499   Selected firms $21,620 Food stores $48,000 Eating and drinking $30,468 Personal service $9,227 Auto repair and garages $19,641 aData adjusted by the U.S. Census Bureau to exclude 1120C corporations (Internal Revenue Service Tax Form 1120C).

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II 1982 1987a 1992a 1982a to 1992a 308,260 424,165 620,912 101.4% $9,619,000 $19,763,000 $32,197,000 234.7% 66,312 89,359 114,100 72.1% 8,919 8,952 8,466 –5.1% 11,406 11,834 13,832 21.3% 38,709 56,772 76,988 98.9% 7,278 11,801 14,814 103.5% 21.5% 21.1% 18.4% –14.6% 2.9% 2.1% 1.4% –52.9% 3.7% 2.8% 2.2% –39.8% 12.6% 13.4% 12.4% –1.3% 2.4% 2.8% 2.4% 1.1% $2,214,792 $3,472,210 $4,785,902 116.1% $820,155 $1,001,462 $979,773 19.5% $619,093 $1,084,468 $1,785,569 188.4% $551,099 $959,696 $1,468,760 166.5% $224,445 $426,584 $551,800 145.9% 23.0% 17.6% 14.9% –35.4% 8.5% 5.1% 3.0% –64.3% 6.4% 5.5% 5.5% –13.8% 5.7% 4.9% 4.6% –20.4% 2.3% 2.2% 1.7% –26.6%   $51,854   $41,945 $115,730 $129,090 $19,078 $37,249

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II in all four industries was $21,620, compared to $29,499 for all Black-owned businesses. Between 1972 and 1982, the industry composition of Black-owned businesses changed significantly. Although the total number of Black-owned businesses increased by 80.8 percent, and Black-business revenues increased by 124.9 percent, the number of businesses in the four predominant industries increased by only 39.9 percent, and their total revenue increased by only 64 percent. As a result, the share of all Black-owned businesses decreased from 35.3 percent to 20.2 percent (a 42.7 percent decrease), and their share of business revenue decreased from 25.9 percent to 18.9 percent (a 27.1 percent decrease). The share of food stores decreased by 57.3 percent; eating and drinking establishments, by 55.2 percent; personal-service establishments, by 35.6 percent; and auto repair/garages, by 22.7 percent. Similarly the share of revenues accounted for by both food stores and eating and drinking establishments decreased by 31 percent, personal-service establishments, by 22.1 percent; and auto repair/garages, by 2.2 percent. Between 1982 and 1992, the number of Black-owned personal-service and retail establishments continued to fall, but not as dramatically as in the previous decade. Black-owned businesses comprising the four predominant industries decreased from 21.5 percent in 1982 to 18.4 percent in 1992 (a 14.6 percent decrease). During the previous 10 years, their industry share decreased by 42.7 percent. By contrast, the loss of Black business revenue accounted for by these industries was greater between 1982 and 1992 than it was in the previous decade. Revenue share decreased from 23.0 percent to 14.9 percent between 1982 and 1992 (a 42.6 percent decrease), compared to 27.1 percent the previous decade. The changing character of Black-owned businesses mirrored changes in the Black population. Desegregation and affirmative-action policies in higher education allowed a significant increase in the proportion of Blacks who attained business and engineering degrees. Bates (1997:9) reports that between 1976 and 1992, the number of Blacks receiving education degrees decreased by 63.2 percent (from 14,209 to 5,226); in contrast, the number receiving business degrees increased by 92.9 percent (from 9,489 to 18,304); and the number receiving engineering degrees increased by 161.3 percent (from 1,370 to 3,580). At the same time, major corporations initiated affirmative-action policies to recruit more minorities into managerial and professional positions. Coupled with the decline of urban infrastructures and the enactment of open housing policies, a growing number of middle- and upper-income Blacks moved to the suburbs. At the same time, major chain stores and franchises (e.g., fast-food chains, convenience stores, drug stores, commercial dry cleaners, one-stop gas stations, etc.) moved into Black

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II urban communities and captured consumer markets that heretofore were the exclusive domain of Black business owners. Thus, traditional Black-owned businesses lost their “protected” markets to population dispersion and stiffer competition from non-Black businesses. As minority-owned businesses diversified, more minorities also entered the business arena. Between 1987 and 1992, Hispanic-owned businesses had the highest rate of increase at 82.7 percent (from 422,373 to 771,708), while businesses owned by minorities other than Blacks and Hispanics increased 61.0 percent (from 376,711 to 606,426); and businesses owned by Blacks increased 46.4 percent (from 424,165 to 620,912). In total, minority-owned businesses increased by 63.4 percent, whereas businesses owned by nonminority males increased by only 26.9 percent during the same period. In 1987 the ratio of nonminority male-owned businesses to minority-owned businesses was 7.16:1; in 1992, 5.56:1 (U.S. Bureau of the Census, 1991, 1997). Between 1982 and 1992, the number of Black-owned businesses grew at a rate of 7.25 percent annually—twice the growth rate of all small businesses. In addition, the employment capacity of Black-owned businesses grew at 11.02 percent annually. Because of this, the 620,912 Black-owned firms in 1992 had an employment capacity equal to 2.3 percent of the Black workforce. LOTS OF ROOM FOR IMPROVEMENTS YET TO COME Although minority-owned businesses have experienced high growth rates, they still account for only 11.4 percent of all small businesses in the United States and only 6.1 percent of small business revenue. In contrast, businesses owned by nonminority males constitute 58.6 percent of all small businesses and 76.0 percent of small business revenue. Current figures are an improvement over 1987, when the 424,165 Black-owned firms comprised 3.1 percent of all small firms and accounted for just 1 percent of all small business revenue, and the average gross revenue per Black business, $46,593, was exactly 25 percent of the gross revenue of businesses owned by nonminority men and 32 percent of the average revenue of all U.S. firms. Blacks also had smaller annual revenues than Hispanics ($58,555) and other minorities ($93,222). By 1992, there had been some marginal growth; the 621,912 Black-owned firms comprised 3.6 percent of all small businesses, but their gross revenue was still only 1 percent of all small business revenue. Average 1992 revenues ranged from $249,800 for nonminority male-owned firms; $192,680 for all small businesses; $94,400 for Hispanic-owned businesses; $164,400 for businesses owned by other minorities; and $51,855 for Black-owned firms. The relative disparity for Blacks was wider than other minorities in a

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II number of key areas. For example, in 1996, only 60.1 percent of Blacks still owned the business they owned in 1992, whereas the average for all the other groups was 68.9 percent. The next lowest percentage was women-owned businesses at 66 percent; the highest was nonminority males at 70.5 percent. In regard to the reason for the change in ownership, 26.0 percent of Blacks indicated that their business no longer existed, as opposed to being sold or transferred to another owner; overall, 18.3 percent of ex-owners cited this as the reason. Further, 20.7 percent of Blacks indicated that their business was unsuccessful at the time it was discontinued, compared to 14.1 percent of all ex-owners. Finally, 23.9 percent of Black ex-owners indicated that the reason their business was unsuccessful was because they lacked access to business or personal loans or credit, whereas only 11.5 percent of all ex-owners cited this as a reason. The differential rate of Black business terminations and the reasons given for it are signs that Blacks continue to encounter problems not experienced by Whites or other minorities. Finally, although 44.5 percent of all small businesses earned $10,000 or less in 1992, this was true for 46.6 percent of Hispanic-owned businesses, 35.1 percent of businesses owned by other minorities, 38.5 percent of businesses owned by nonminority males, and 56.1 percent of businesses owned by Blacks (U.S. Bureau of the Census, 1991, 1997). STRENGTHS AND WEAKNESSES OF DATA AVAILABLE FOR DESCRIBING TRENDS Trends noted above are based on two data sets—the Survey of Minority-Owned Business Enterprises (SMOBE) and the Characteristics of Business Owners (CBO). USBC compiles SMOBE, the data set most widely used to study minority-business trends, for businesses owned by Blacks, Hispanics, Asians, Pacific Islanders, Native Americans, Alaska Natives, and White women. The data are compiled from income tax returns and surveys, and include industry type, size of firm, number of firms, legal form of organization, gross receipts, number of paid employees, annual payroll, and geographic location. The first survey was conducted in 1969; since 1977, it has been conducted every five years. Income tax data are derived from any of three Internal Revenue Service business tax forms— 1040 Schedule C (sole proprietorship, i.e., unincorporated business or self-employed person), 1065 (partnership), or 1120 or 1120 S2 corporation. 2   An 1120 S corporation is an IRS designation for legally incorporated businesses with 35 or fewer shareholders. One advantage of the S corporation is that its shareholders do not face the double tax liability encountered by shareholders of regular corporations for whom

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II City Affirmative Action Plan Coverage Percent Goal of Plan Percent Change In the No. of Businesses 1982– 92 Percent Change in the No. of Businesses 1987– 92 GRAND RAPIDS Construction Contracts 10% 96% 58% GREENSBORO Construction 10% 80% 48% HAMPTON No Plan   79% 26% HARRISBURG Construction 15% 49% 17% HARTFORD Construction Contracts 10% 72% 43% HOUSTON Construction 10% 36% 36% JACKSON No Plan   105% 47% JACKSONVILLE Goods and Services 10% 47% 27% KANSAS CITY Contracts 10% 29% 16% KANSAS CITY Construction 16% 45% 24% LAKE CHARLES Procurement 10% 55% 31% LOS ANGELES Construction 16% 26% 32% LOUISVILLE Credit-MBE Bids 15% 51% 34% MACON No Plan   137% 41% MEMPHIS No Plan   82% 34% MIAMI Goods and Services 50% 89% 85% MILWAUKEE All Projects 15% 60% 39% MINNEAPOLIS Construction Supplies 10% 101% 85% MONROE Goods and Services 10% 59% 23% NEW HAVEN Construction Projects 15% 71% 27% NEW YORK CITY Construction Contracts 10% 102% 39% NEWARK Construction 25% 63% 22% NORFOLK No Plan   35% 7% OAKLAND DOT Funded 30% 18% 24% OMAHA Construction 20% 81% 54% ORLANDO Construction/Services/Supplies 18% 90% 75% PASADENA No Plan   57% 40% PHILADELPHIA Construction Services. 15% 43% 30% PHOENIX All Areas 12% 76% 55% PLAINFIELD Contracts 25% 72% 27% PORTSMOUTH No Plan   25% 12% RALEIGH Construction—SW Raleigh 9% 147% 65% RICHMOND Construction 30% 68% 43%

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II City State Number of Firms, 1982 Number of Firms, 1987 Number of Firms, 1992 Total Sales, 1982 (000) Total Sales, 1987 (000) Total Sales, 1992 (000) Total Employment 1982 Total Employment 1987 Total Employment 1992 Date Affirmative Action Plan Initiated RICHMOND CA 623 660 874 29,402 25,465 29,703 351 407 405   ROCHESTER NY 498 655 926 17,999 21,001 23,699 244 366 365 ---------- SACRAMENTO CA 843 809 1,313 12,424 21,652 42,511 150 226 359 1985 SAN ANTONIO TX 989 1,273 1,477 25,597 41,865 68,583 363 602 1,073 1980 SAN FRANCISCO CA 1,980 1,965 2,230 80,193 99,296 220,799 1,264 1,209 2,005 1984 SAN JOSE CA 998 961 1,351 30,516 36,739 48,252 515 295 567 1983 SEATTLE WA 1,063 1,040 1,569 36,011 37,997 83,569 719 722 1,498 1986 SHREVEPORT LA 827 1,018 1,216 27,063 29,054 32,066 477 385 697 1980 SPRINGFIELD MA 265 429 515 8,441 13,748 13,058 69 105 95 1984 ST PETERSBURG FL 566 788 919 17,889 29,158 26,528 219 343 198 1981 ST. LOUIS MO 2,164 2,235 2,481 89,543 83,826 98,443 1,307 1,255 1,060 --------- STOCKTON CA 260 299 374 6,478 11,901 15,855 79 139 180 1979 TACOMA WA 287 287 442 5,451 10,719 13,144 72 101 190 1971 TALLAHASSEE FL 310 501 799 12,885 41,893 33,944 158 597 371 1982 TAMPA FL 606 800 1,118 20,263 88,342 70,478 392 695 845 1985 TULSA OK 680 738 1,114 12,368 26,533 31,751 139 379 431 1981 TUCSON AZ 259 247 448 7,863 7,592 10,521 150 126 137 1986 WASHINGTON D.C. DC 8,966 8,275 10,111 268,488 411,941 451,861 3,417 4,085 4,277 ---------- WILMINGTON DE 332 377 544 12,485 16,991 41,932 223 286 1,488 1981 WINSTON-SALEM NC 513 703 1,061 15,052 26,305 34,285 302 399 324 ---------- WICHITA KS 588 601 746 18,068 71,164 18,709 ------------- 335 --------- 1983 YOUNGSTOWN OH 330 337 451 7,650 7,910 17,300 113 113 298 1980

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II City Affirmative Action Plan Coverage Percent Goal of Plan Percent Change In the No. of Businesses 1982– 92 Percent Change in the No. of Businesses 1987– 92 RICHMOND No Plan   40% 32% ROCHESTER Construction Projects 10% 86% 41% SACRAMENTO Procurement 20% 56% 62% SAN ANTONIO Construction 14% 49% 16% SAN FRANCISCO Public Works 30% 13% 13% SAN JOSE No Plan   35% 41% SEATTLE Construction Consulting 21% 48% 51% SHREVEPORT Construction 10% 47% 19% SPRINGFIELD Construction Contracts 5% 94% 20% ST PETERSBURG Construction 5% 62% 17% ST. LOUIS Contracts 10% 15% 11% STOCKTON Procurement 15% 44% 25% TACOMA Contracts Purchasing 15% 54% 54% TALLAHASSEE Contracts Over $100,000 15% 158% 59% TAMPA No Plan   84% 40% TULSA No Plan   64% 51% TUCSON Construction 17% 73% 81% WASHINGTON D.C. Construction 35% 13% 22% WILMINGTON Construction 15% 64% 44% WINSTON-SALEM No Plan   107% 51% WICHITA Construction 10% 27% 24% YOUNGSTOWN Construction 20% 37% 34%   SOURCE: Statistical data collected from the U.S. Bureau of the Census, 1985, 1990, 1996. Data on local area goals provided by Minority Business Enterprise Legal Defense and Education Fund, “Report on the Minority Business Enterprise Programs of State and Local Govenrments, 1988.”

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II and address discrimination as a matter of national concern. The test is whether there is a “rational relationship” between the remedy and the government’s interest. Congress subsequently wrote affirmative-action provisions into the Surface Transportation Assistance Act of 1982, the Foreign Assistance Act of 1983 as well as its 1985 extension, and the Surface Transportation and Uniform Relocation Assistance Act of 1987. STRICT SCRUTINY BECOMES THE LEGAL STANDARD In April 1983, the Richmond, Virginia, City Council voted to enact an affirmative-action plan in contracting (National Cooperative Highway Research Program, 1992; Dixon, 1990; Stoelting, 1990; Rice, 1991). The purpose of the plan was to increase the participation of minority-owned businesses in public construction contracts awarded by the city. In the course of the public hearings, evidence was introduced indicating that (1) even though the city had a 50 percent Black population, over the previous five years only 0.67 percent of the city’s prime construction contracts went to minority firms; (2) six local construction associations had virtually no minority members; (3) widespread discrimination existed in the local, state, and national construction industries; and (4) the proposed ordinance was consistent with the Fullilove decision. The plan was enacted for a period of five years and included Blacks, Hispanics, Asians, and Alaska Natives. It required recipients of prime construction contracts to subcontract at least 30 percent of the contract’s value to minority firms. A waiver from the goal was provided in cases where no suitable minority firms were available. Five months after the enactment of the plan, the city invited bids for the installation of plumbing fixtures at the city jail. The J.A.Croson Company submitted the only bid on the project. Prior to doing so, the company contacted several minority businesses. One, Continental Metal Hose, expressed an interest in serving as a subcontractor on the project, but had to obtain a price quotation for fixtures before it could submit its bid. The supplier Continental contacted for a bid had already submitted a bid to Croson and refused to provide a quote to Continental. Another supplier refused to provide Continental a quote until it had obtained a credit check, a procedure that would take a minimum of 30 days. Because of this, Croson submitted its bid without the minority requirement. Shortly after the bid opening, Croson submitted a waiver requesting release from the minority requirement. Continental learned of this and informed the city that it could supply the fixtures. Continental’s quoted price, however, was $6,183.29 higher than the price Croson had stipulated in its proposal. Croson was given 10 days to comply with the minority requirement. Instead the company argued for a waiver or the right to

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II increase the contract price. The city rejected both requests and decided to rebid the contract. Croson filed suit in the district court claiming that the program was unconstitutional. The District Court upheld the constitutionality of the city’s program. The U.S. Court of Appeals, using Fullilove as a standard, affirmed the district court’s decision. Croson then appealed to the U.S. Supreme Court. The Supreme Court vacated the earlier decision and remanded the case back to the Fourth Circuit Court where the district court’s decision was reversed; the Fourth Circuit Court ruled that the plan violated the equal protection clause of the Fourteenth Amendment because the city’s plan did not conform to the “strict scrutiny standard” —meaning that the “factual predicate” underlying racial preference programs must be supported by adequate and specific findings of past discrimination; generalized findings are not sufficient. The City of Richmond then appealed the Fourth Circuit Court’s decision to the U.S. Supreme Court. This time the Supreme Court affirmed the Circuit Court’s decision. It was the first time a majority, rather than a plurality, agreed that strict scrutiny would be applied to racial preference programs. In 1987, the majority ruled that Sections 1 and 5 of the Fourteenth Amendment limit the powers of states, in contrast to the more sweeping powers of Congress—i.e., Congress is not required to meet the strict scrutiny standard, but states and localities are. The decision held that the program denied certain citizens the opportunity to compete for a fixed percentage of contracts based solely on their race. Justice Sandra Day O’Connor argued that all classifications based on race, whether benefiting or burdening minorities or nonminorities, will be subject to strict scrutiny. In establishing its program, the city of Richmond initially relied on statements of minority business owners attesting to their exclusion from the skilled trades and encounters with discrimination in the industry and the fact of only 0.67 percent of contracts being awarded to minority businesses. The Supreme Court ruled, however, that the city’s findings did not provide a strong enough basis of evidence to implement a remedial race-based program, because the evidence did not point to specific discrimination. Richmond was also criticized for including Hispanics, Asians, American Indians, and Alaska Natives in its plan when there was no evidence of past discrimination against them. The Court was also critical of the city’s plan because it allowed all minorities to be eligible no matter where they resided, and the Court viewed the 30 percent minority requirement as a quota. The Croson decision left little doubt about how the Court would rule on state and local affirmative-action programs that did not conform to the strict scrutiny standard. The only question was whether it would

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II apply the same standard to programs of the federal government. The distinction between the powers of federal, state, and local agencies to implement racial mandates was dissolved in June 1995 by the Supreme Court’s decision in Adarand Constructors v. Pena and the U.S. Department of Transportation. The Supreme Court ruled in a 5-to-4 vote that strict scrutiny must be the standard of review for race-based programs of the federal government as well (Greenhouse, 1995). In making this shift, the Court voided all previous rulings that interpreted the equal protection clause of the constitution as having a different application at different levels of government. By the time the Croson decision was rendered, Atlanta had become the focal point for cities interested in implementing affirmative-action programs. By the mid-1980s, Atlanta’s program, established in mid-1970, had become the model for most of the nation’s municipal affirmative-action programs. Atlanta’s leaders viewed Croson as a challenge to the achievement of civil rights. As a result, the expense of complying with the decision’s strict scrutiny standard was secondary in importance to the need to demonstrate nationally that the strict scrutiny standard could be met and that affirmative action is a legal remedy for past injustices. In 1989, the city of Atlanta commissioned a disparity study supervised by economists Andrew Brimmer and Ray Marshall; it was commissioned at more than $500,000 and completed in 1990. The study covered contracting and procurement in the city of Atlanta and Fulton County. In an effort to ensure compliance with strict scrutiny standards, state and local governments also began to commission disparity studies. Unfortunately, the Supreme Court’s decision left numerous questions unanswered regarding, specifically, what evidence is required to meet strict scrutiny standards; thus, the evidentiary standard is being redefined constantly. Uncertainty about appropriate evidence, along with the absence of a standard measure of cost, led to a situation whereby the very extensive, and expensive Atlanta Disparity Study set the initial methodology, and the market price. Other public agencies gave in to a classic case of what economist Joseph Stiglitz calls “the dependence of quality on price” —i.e., using price as an indicator of quality. Agencies all over the country used Atlanta as a yardstick. Eventually, state and local governments spent more than $13 million on disparity studies; the Urban Mass Transit Administration spent an additional $14 million between January 1991 and June 1992 (La Noue, 1993). In 1990, 34 disparity studies were commissioned at an average cost of $243,913, according to the Joint Center for Political and Economic Studies. The University of Maryland, Baltimore County, maintains a clearing-house of disparity studies. In 1996, their inventory consisted of 102 studies conducted in 27 different states and the District of Columbia. La Noue

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II (1994) found that by the summer of 1994, state and local governments had spent more than $40 million on disparity studies. Persistent legal challenges forced agencies to add more and more dollars to the disparity-study coffers to patch up weaknesses in existing studies or conduct new ones. For example, nine agencies in the Memphis metropolitan area paid $1.3 million for a disparity study. The cities of Miami and St. Louis spent hundreds of thousands of dollars on disparity studies and were forced to repeat these expenditures because the initial studies did not withstand court challenges. The difficulty in meeting the standard resides in the fact that the kind of evidence required has not been clarified. Oddly, the Supreme Court imposed the strict scrutiny standard in the Croson decision, but did not take the opportunity in the subsequent Adarand decision to clarify its specific evidentiary requirements. What is needed is a Judicial Commission to set the guidelines for compiling evidence and to determine which methods are acceptable and which are not. In the meantime, the Croson requirement has become practically impossible to meet and as a result federal, state, and local programs are being dismantled. The vagueness of the guidelines for meeting strict scrutiny and the exorbitant (sometimes extortionist) cost of complying with the Croson decision are major impediments to equal treatment. By March 1991, just two years after Croson, of the slightly more than 200 programs nationally, 66 had been challenged legally, 33 had been voluntarily terminated, and 65 were under reevaluation. Between 1982 and 1992, cities with affirmative-action plans saw Black businesses increase 65 percent; cities without plans, 61 percent. After Croson, between 1987 and 1992, cities with affirmative-action plans saw Black businesses increase 41 percent; cities without plans, 36 percent. Although a 5 percent differential may not be statistically significant, these numbers represent livelihoods. Strict scrutiny is indeed both “strict in theory” and “fatal in fact.” Despite the obstacles, by the late 1980s and early 1990s, a new Black entrepreneurial class had emerged in metropolitan areas across the country. And, despite the growing challenges to minority business programs, local governments and the federal government continued to support these programs and to appropriate funds in an attempt to have them comply with legal guidelines. POSSIBLE FUTURE TRENDS At the dawn of a new century, it is a good time to take stock of the economic progress of minority-owned businesses. Another reason to do this is because the economy is experiencing one of the most vigorous and long-lasting periods of growth in peacetime history. The current recov-

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II ery, which began in 1991, has brought unemployment to its lowest level in a quarter of a century. Equally important is the fact that growth has accelerated, while core inflation, now just 2.2 percent, is the lowest in 32 years. In general, the economic status of Blacks has improved during this period of growth. In particular, poverty among Blacks is at the lowest level since the government began tracking the figures in 1959. In 1998, the average household income of Blacks increased by 3.6 percent, while the income of Whites increased by 2.2 percent. But these general improvements hide the fact that there are still large employment and income disparities between Blacks and Whites. Even though average household income among Blacks improved, it is still only 63 percent that of Whites. Even though the poverty rate among Blacks might be the lowest on record, 30 percent of Black families still live below the poverty line. And while the rate of unemployment among Whites is 3.7 percent, it is 9.2 percent for Blacks. Twenty years ago, Blacks comprised 20 percent of all unemployed workers; that percentage has not changed, even though Blacks now constitute only 11.2 percent of the labor force. In fact, racial disparities have not changed significantly over the last 20 years. The current economic expansion forces the government to face a rather unsettling reality: the economy is now posting its best performance in peacetime history, yet large racial disparities in income and employment still remain; thus economic growth is necessary but not sufficient to reduce these disparities. Between 1982 and 1992, the number of Black-owned businesses grew at a rate of 7.25 percent annually, and their employment capacity grew at a rate of 11.02 percent annually. If the current growth rate is maintained between 1992 and 2010, there will be about 2 million Black-owned firms. Likewise, if employment in these firms continues to grow at 11.02 percent annually, these firms will employ approximately 2.3 million workers by 2010. That will be equivalent to 12.1 percent of the projected 2010 Black workforce. Now, if we add subchapter regular corporations, the total employment capacity of Black firms will be even greater. If current trends hold, approximately 80 percent, or 2.5 million, of the new jobs Black firms create will go to Blacks. This trend, if sustained through the first decade of the next century, has important implications for Black unemployment and upward mobility. It will be useful to check the validity of this theory by examining the 1997 census of Black-owned business data when they are released around the year 2000. If these trends are valid, promoting the growth of Black-owned businesses means reducing society’s unemployment burden, providing jobs

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II where they are most needed, and improving the income status of people who are too often trapped below the poverty line. Assisting Blacks in creating employment opportunities through supporting business development initiatives is a fundamental strategy for the new century. The changes currently taking place among these businesses are significant, and the possibility of reducing racial disparities through promoting their continued growth is promising. Past policies, centering on promoting general economic growth with the assumption that employment growth will “trickle down” to Blacks, have reduced Black unemployment in terms of absolute numbers but failed to narrow the racial income and employment gap. Promoting Black-owned businesses has the potential to succeed where other policies have failed. Not only do such policies help remedy past injustices, but they also make good sense, economically and socially. IMPORTANT QUESTIONS FUTURE RESEARCH MUST ANSWER The U.S. Supreme Court has not disallowed the use of race-based remedies to redress identified discrimination, though it has made it exceedingly difficult to do so. Nevertheless, the possibility still exists. Objective research is needed to establish the criteria and the methodology for meeting the strict scrutiny standard. From a practical standpoint, many successful minority-owned businesses are dependent on government programs. In the short run, gaining equal access to government contracting and subcontracting in the absence of such programs, or replacing this revenue source, will be difficult. As such, the decrease of affirmative action is likely to have some significant adverse consequences on a rather large sector of minority-owned businesses. It is, therefore, important for researchers to measure the magnitude of this impact and estimate the costs and benefits of alternative strategies for minority business development. The current growth trend of Black-owned businesses, projected to the year 2010, has some significant employment implications. Research is needed to examine this trend more rigorously. Black-owned businesses are growing at twice the rate of all small businesses, but some are experiencing limits to their continued growth as a result of their more limited access to equity and debt capital. Many of these business owners are now willing to give up equity for growth, but potential investors are not convinced that there is adequate capacity and profitable outlets for investments in Black-owned businesses. Researchers can facilitate this process through publishing and disseminating findings that accurately document the state of Black-owned businesses.

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II Disposable income of Black households is approaching $0.5 trillion. In addition, Blacks comprise a significant percentage of some major urban markets and are trendsetters in other industries such as specialty clothing, sports, and entertainment. Thus research regarding the income, spending, and demographic patterns of minorities is worth further consideration. Such research will aid in the identification of business opportunities and serve the unmet needs of minority households and is worthy of a university research center for minority business strategies and dynamics. REFERENCES Aldrich, H., and R.Waldinger 1990 Ethnicity and entrepreneurship. Annual Review of Sociology 16:111–135. Alexander, T., Sr. 1992 Beyond the Timber Line: The Trials and Triumphs of a Black Entrepreneur. Edgewood, Md.: M.Duncan. Bates, T. 1987 Self-employed minorities: Traits and trends. Social Science Quarterly 68(3):539–551. 1990 The characteristics of business owners database. Journal of Human Resources 25(4): 752–756. 1991 Major Studies of Minority Business: A Bibliographic Review. Washington, D.C.: Joint Center for Political and Economic Studies. 1997 Race, Self-Employment and Upward Mobility: An Illusive American Dream. Baltimore: The Johns Hopkins University Press. Borjas, G., and S.Bronars 1989 Consumer discrimination and self-employment. Journal of Political Economy 97(3): 581–605. Boston, T. 1995 Characteristics of Black-owned corporations in Atlanta: With comments on the SMOBE undercount. Review of Black Political Economy 23(4):85–99. 1996 Five-year review of the equal opportunity program of the City of Atlanta. Report to the Atlanta City Government (September). Unpublished report. 1998 Affirmative Action and Black Entrepreneurship. New York: Routledge. Clayton, E. 1996 Statement of Congresswoman Eva Clayton before the U.S. House of Representatives. Committee on Small Business, Hearing on H.R. 3994, The Entrepreneur Development Act of 1996. Appendix, pp. 73–77. Coleman, L., and S.Cook 1976 The Failures of Minority Capitalism: The Edapco Case. Phylon 37(1):44–58. Dixon, D. 1990 The dismantling of affirmative action programs: Evaluating City of Richmond v. J.A.Croson Co. Journal of Human Rights VII:35–57. Evans, D., and L.Leighton 1989 Some empirical aspects of entrepreneurship. The American Economic Review 79(3): 519–535. Farlie, R., and B.Meyer 1996 Ethnic and racial self-employment differences and possible explanations. The Journal of Human Resources xxxi(4):757–793.

OCR for page 190
America Becoming: Racial Trends and Their Consequences - Volume II Greenhouse, L. 1995 By 5–4 justices cast doubt on U.S. programs that give preferences based on race. New York Times (Dec. 6):1, 21. La Noue, G. 1993 Social science and minority set-asides. The Public Interest 111:49–62. 1994 Standards for the second generation of Croson-inspired disparity studies. The Urban Lawyer 26(3):485–540. Minority Business Enterprise Legal Defense and Education Fund 1988 Report on the Minority Business Enterprise Programs of State and Local Governments. Unpublished report. National Cooperative Highway Research Program 1992 Minority and disadvantaged business enterprise requirements in public contracting. Legal Research Digest 25(September):1–28. Nucci, A. 1992 The characteristics of business owners database. Discussion paper, Center for Economic Studies, U.S. Bureau of the Census. CES 92–7. Rice, M. 1991 Government set-asides, minority business enterprises, and the Supreme Court. Public Administration Review 51(2):114–122. Stoelting, D. 1990 Minority business set-asides must be supported by specific evidence of prior discrimination. Cincinnati Law Review 58:1097–1135. U.S. Bureau of the Census 1985 Survey of Minority-Owned Business Enterprises: Black, 1982, MB82–1. Washington, D.C.: U.S. Government Printing Office. 1990 Survey of Minority-Owned Business Enterprises: Black, 1987 (SMOBE) MB87–1. Washington, D.C.: U.S. Government Printing Office. 1991 Characteristics of Business Owners, 1987, CBO87–1. Washington, D.C.: U.S. Government Printing Office. 1996 Survey of Minority-Owned Business Enterprises: Black, 1992, MB 92–1. Washington, D.C.: U.S. Government Printing Office. 1997 Characteristics of Business Owners, 1992, CBO92–1. Washington, D.C.: U.S. Government Printing Office. Walker, M., Jr. 1986 The SBA 8(a) programs, minority set-asides, and minority business development. Paper prepared for Race, Values and American Legal Process, April 11, Georgia State University, pp.1–78.