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The Importance of Family for Entrepreneurial Success

Monday, May 4, 2009

To increase low rates of business ownership among blacks, we need more opportunities for obtaining work experience.

Much has been written about the importance of the entrepreneur’s access to financial capital, as well as educational achievement, to the ultimate success of his or her enterprise. But an often overlooked aspect of success is the family background of the entrepreneur.

The children of business owners are two to three times more likely to own businesses than those whose parents don’t own a business. Clearly, business ownership runs in the family. But does it lead to success?

When entrepreneurs work in a family business before starting their own, their businesses are 10 to 40 percent more successful than they would be otherwise. Informal learning and apprenticeship that occurs while working in a family business gives valuable experience for the would-be-entrepreneur. Working in family business provides an excellent way to learn the “nuts and bolts” of running a business—who better to learn from than your parents?

Nearly four decades ago Nathan Glazer and Daniel Patrick Moynihan made the argument that the black family ‘was not strong enough to create those extended clans that elsewhere were most helpful for businessmen and professionals.’

Family businesses provide an important opportunity for family members to acquire human capital related to operating a business. This experience does not even have to be in the same industry, probably because general business experience is what counts.

Interestingly, less than 2 percent of businesses are inherited from family members. The main channel by which families transfer business success across generations is through work experience.

These findings are especially important for African-American business owners. During the 20th century, the black rate of business ownership was substantially lower than the white rate. A relatively low marriage rate and high incidence of single-parent households limit black youths’ exposure to family businesses. Indeed, roughly one-third of black business owners have a family member who owned a business, compared to slightly more than half of white business owners.

Most importantly, among current business owners only 13 percent of blacks had prior work experience in a family business, roughly half the national average.

Concerns about the negative consequences of weak family ties on business opportunities among African Americans are not new. In fact, nearly four decades ago Nathan Glazer and Daniel Patrick Moynihan made the argument in their seminal book, Beyond the Melting Pot, that the black family “was not strong enough to create those extended clans that elsewhere were most helpful for businessmen and professionals.”

More recently, research by Michael Hout and Harvey Rosen notes a “triple disadvantage” faced by black men in terms of business ownership. They are less likely than white men to have self-employed fathers, to become self-employed if their fathers were not self-employed, and to follow their father in self-employment.

Government programs for minority-owned or disadvantaged businesses are targeted toward alleviating financial constraints, but these programs do not provide opportunities for obtaining relevant work experience.

Given the importance of prior work experience in a family business on entrepreneurial success we would suspect that the lack of opportunities for this type of experience limit the likelihood of success. Indeed, the lack of work experience in family businesses contributes to why black-owned businesses do not perform as well as white-owned firms on average. Survival rates, employment, and sales among black firms are lower partly because of the lack of prior work experience in family businesses.

To break the cycle of low rates of business ownership and relatively worse business outcomes being passed from one generation of African Americans to the next, we need to address the lack of opportunities to work in family businesses. Government contracting programs and related loan programs for minority-owned or disadvantaged businesses are targeted toward alleviating financial constraints. But these programs do not provide opportunities for obtaining relevant work experience. Lacking that, our hopes for these programs must be tempered.

Robert W. Fairlie is a professor of economics and the director of the master's program in applied economics and finance at the University of California, Santa Cruz. He is the author of Race and Entrepreneurial Success: Black-, Asian-, and White-Owned Businesses in the United States (MIT Press, 2008).

FURTHER READING: Carl Schramm and Robert E. Litan write in “The Growth Solution” that America’s new economic realities require an entrepreneurial agenda. In “I Love My Work,” American Enterprise Institute president Arthur C. Brooks argues that work is an intrinsic source of pleasure and value.

Image by Darren Wamboldt/The Bergman Group.

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