Americans used to view immigrants as laborers, never as entrepreneurs. Indeed, the words “immigrant” and “entrepreneur” first came together in a book title in 1988.1 Since then, however, public awareness of immigrant entrepreneurs has appreciably expanded even if it still lags behind what should be in place from the point of view of informed policy debate. A broader awareness is important. If one thinks of immigrants as laborers, the issue becomes how many jobs immigrants take from natives. However, if one thinks of immigrants as entrepreneurs, the issue that comes to mind is how many jobs do immigrants create.
It is obvious that these two conceptions introduce opposing policy conclusions. On the one hand, thinking of immigrants as laborers encourages one to espouse restrictive policies of immigration in the interest of reserving employment opportunities for the native born. On the other hand, if one thinks of immigrants as entrepreneurs, the policy goal becomes how to expand the influx of such immigrants in order to shore up and expand employment. If immigrants create jobs, then the USA needs more of them, not less.
A balanced approach to the economic implications of immigration requires attention to both sides, immigrants as employees and business owners. Regrettably, awareness of the need for balance lags well behind what informed debate requires. As matters stand, public discussion emphasizes immigrant workers to the virtual exclusion of immigrant entrepreneurs, unwittingly tilting debate participants toward the question of how much restriction we need. One might suppose that this imbalance of attention is justifiable since many more immigrants are employees than business owners. For many immigration-related issues, such as marriage patterns or health, that would be appropriate. However, strictly from an economic angle, that conclusion is unwarranted because answers depend on what and how much immigrant entrepreneurs do for the economy, not just how numerous they are. In what follows, I will sketch an outline of immigrant entrepreneurship that can and should be introduced into the immigration debate.
The broadest measure of immigrant entrepreneurship is the immigrant share of the self-employed population. Immigrants today are somewhat overrepresented among the nonfarm self-employed (that is, among business owners) as they have apparently always been throughout American history. In 2010, immigrants were 15.7 percent of wage and salary workers, but 17.7 percent of the unincorporated self-employed, and 15.3 percent of the incorporated self-employed. Immigrants were 13 percent more likely to be unincorporated self-employed business owners than were non-immigrants, and as likely to be incorporated self-employed as the native born (Figure 1).
Why should immigrants reliably demonstrate a higher self-employment rate than non-immigrants? The question has aroused decades of animated debate, especially but not exclusively among African-Americans. Rumors abound. The main rumor claims that the federal government has subsidized immigrant and refugee business start-ups in ways unavailable to the native born. This policy would be very unfair were it in place. Happily, the rumor is flatly wrong. First, the federal government does very little to subsidize startups for anyone, native born or foreign born. Possibly the government should do more, but it has never done much and does not do so now. The Jobs Act of 2012 relieves new technology firms of some regulation, but does not fund start-ups. Second, immigrants have always been more frequently self-employed than the native born, as illustrated in Table 1; the longevity of this difference suggests that whatever is causing the native/immigrant imbalance does not depend on transitory or recent government policy.
Self-selection is a common explanation for the preponderance of immigrants in self-employment. In this view, immigrants are risk takers; non-immigrants are not. That is, those who leave their home country and venture abroad are more enterprising and risk tolerant than those who stay in their home country, the non-immigrants. The immigrants are also more risk tolerant than the non-immigrant population in the country they enter. The higher risk-taking proclivity of immigrants, a psychological characteristic present before emigration, is said to explain why immigrants are more commonly self-employed than non-immigrants. Business ownership requires risk; immigrants are risk takers. If all that is so, then immigrants have what business ownership takes. This view is hard to reject out of hand has some merit, especially among high-end immigrant founders of Fortune 500 companies. Certainly, immigrants are healthier than non-immigrants because of self-selection. Generally, unhealthy people do not migrate to foreign countries, so the population of immigrants contains a higher proportion of healthy people than the population of non-immigrants. So plausibly, immigrants are also more willing to take business risks.
However, plausibility is not confirmation. Some research efforts have been made in the last half-century to show that immigrants, before they emigrate, exhibit greater risk tolerance than non-immigrants. No evidence has ever been presented to prove this claim. At best, the claim is speculative; at worst, failed efforts to confirm this claim amount to disconfirmation. What is more, everything we reliably know about the migratory process proves that immigrants try hard to reduce and avoid risk. When deciding whether to leave their homeland, or where to settle in their new country, immigrants reliably, massively and almost invariably decide to emigrate only if kin and friends have already emigrated and will settle wherever those kin and friends reside. When immigrants reach their host country destinations, their kin and friends help them find jobs and housing. This strategy makes practical sense; it minimizes the huge risks of unassisted immigration. In this sense, immigrants prefer to avoid or minimize risk when they can, and therefore are not risk takers by preference.
Self-selection of risk takers is not the strongest explanation for the long-term and persistent surplus of immigrants among the self-employed. Abundant evidence shows that immigrants experience disadvantage when seeking wage or salary employment. Most do not speak English well; lack local educational qualifications, lack personal contacts in this country and their foreign work experience is not credited in the United States. These barriers are lamentable, hard to remedy and reliably present whenever immigrants enter American labor markets. The native born do not experience these difficulties. Problems seeking employment account for much of the hardship of immigration. Some immigrants turn to self-employment out of economic despair when they cannot land a job at all or are seriously underemployed, as when medical doctors work at gasoline service stations. The self-employed work long hours, and frequently earn little per hour worked. Nonetheless, running a small business frequently offers underemployed or unemployed immigrants a better work situation, more independence and superior financial reward than does the general labor market. There is abundant evidence that immigrants’ disadvantage in the labor market plausibly accounts for their higher rate of self-employment.
What is more, the same result is evident among native-born workers during economic recessions. When native-born workers lose their jobs during a recession, they turn to self-employment; but when economic recovery arrives, their self-employment rate declines. These pitiful auspices do not diminish the vaunted capacity for innovation that defines entrepreneurs. As Ben Franklin proclaimed, “Necessity is the mother of invention.” People innovate when they have to do so; otherwise, they follow the path of least resistance. Whether native or immigrant, most business owners innovate because they must, not because they are psychologically more innovative than wage earners. Firms that do not innovate do not survive; and two-thirds of all startups end in failure within three years. Another earthy folk saying, “Root, hog, or die,” encapsulates this sober truth.
An echo of this conclusion even appears in the frequently encountered and, in this case, well-supported observation that native-born entrepreneurs have often displayed more disorderly careers than most native-born wage and salary workers. In other words, many of those native-born entrepreneurs who later became business owners first failed as employees. They could not hold a steady job. They changed careers often. The inference most commonly drawn from this reliable research—and drawn as well by economists Ross Levine and Yona Rubinstein in a working paper produced by the National Bureau of Economic Research2 and reported in the Atlantic magazine3—proposes that because of some unmeasured personality trait, an irrepressible propensity to innovate, those who later became entrepreneurs were often prior misfits in employing organizations. Nature gave these misfits an entrepreneurial personality; they were born to build structures, not to adjust to them.
No psychological evidence exists that proves this explanation. There is an alternative, purely situational explanation for which plenty of evidence exists. Over a decade or two of repeated failures, misfits in employment build weak resumes that contain many too many firings, resignations, lengthy periods of unemployment, and career restarts. Personnel managers view such people as unstable and undesirable. Their weak resumes prevent the future entrepreneurs from obtaining desirable wage or salary employment. Native-born thus become disadvantaged in the labor market, just like the foreign born, but for quite different reasons. In this case, native failures and misfits must start a business because no one will hire them, and they must innovate to survive.
The Fortune 500
All that said, a prominent case fits the self-selection explanation—that of immigrant founders of Fortune 500 companies. Though few, these are the heroic entrepreneurs who creatively destroy and rebuild whole economies. Immigrants are overrepresented in this category. According to a 2011 study by the National Foundation for American Policy, foreign-born entrepreneurs started nearly half the top venture-funded companies in the U.S., the cutting edge of innovation and the key to the nation’s economic future. Immigrants were starting these big companies at a rate five times greater than that of the American population. The roster of famous companies that immigrants started is long and distinguished, and includes E-Bay, Google, PayPal, Sun Microsystems, YouTube and Yahoo. These big firms depend on the Internet, and it is fair to conclude that immigrant entrepreneurs have made their greatest and most visible contributions in the technology sector, including biotechnology. It is implausible to suppose that the immigrants who started these companies did so because they could not land a decent job.
Rather, these talented entrepreneurs could have gone anywhere in the world; but they chose the United States for good reasons. The U.S. offers a relatively unregulated and open mass market as well as efficient capital markets, legal security of property, low income taxes and abundant venture capital. These advantages lure many foreign entrepreneurs to our shores with the skills and industrial vision already in place that support their business plans. Before coming to the U.S., they decide that this country would be the best place to set their plans in motion. In such cases, the United States contributes only the economic environment in which globe-hopping entrepreneurs decided to launch the venture they already envisioned at home. In other words, the American magnet picked the foreign entrepreneurs from their mother country’s population, and drew them to this country. Here, at last, we have pure self-selection at work.
But in many more cases, the United States contributes something to the successful completion of an immigrant’s still-undeveloped entrepreneurial vision. Most commonly, it is advanced education in a technical subject. The U.S. has more of the world’s great universities than any other country. These universities attract talented and ambitious students from many foreign countries. By no coincidence, these universities are near or abutting major entrepreneurial clusters such as Route 128 in Boston or Silicon Valley in the San Francisco Bay Area. Los Angeles also hosts as many high-tech companies as Silicon Valley, and many more immigrants, but because the Los Angeles metropolitan region is so vast, the visibility of these companies is less than in San Jose.
Thomas Edison was a native-born engineer, inventor and entrepreneur, but that was a century ago. The engineering profession has changed a lot since Edison. In the last 40 years, native-born Americans have been an ever decreasing presence in graduate schools of engineering and computer science in the United States. This situation does not arise simply because foreign scientists and engineers arrive with high skills already in place, although some do. Albert Einstein and Enrico Fermi were world-renowned immigrant scientists of an earlier generation. They came to the United States to teach, not to learn. However, most immigrant scientists and engineers acquire some or all their advanced education in this country. Once here, the foreign students hone their skills in science, medicine, mathematics and engineering. Starting a technology-based business requires advanced scientific education, and, according to the National Science Foundation, the immigrants simply get more of that than do the natives. Immigrants in science and engineering (S&E) occupations tend to have higher levels of education than natives. In most S&E occupations, the higher the degree level, the greater the proportion of the workforce is foreign born. In 2008, about a third of all S&E graduate students were immigrants. At the doctoral degree level, about half the workers in computer and mathematical sciences and in engineering were immigrants as were half the graduate students. Half the U.S. doctorates in S&E are immigrants, and those doctorates start new companies. S&E graduates start much more than their share of new companies. Nineteen percent of all scientists and engineers in the United States were self-employed in 2008, and two-thirds of these were incorporated firms. Since the foreign born are hugely overrepresented in S&E fields, this preponderance strengthens their self-employment profile.
These trends in higher education obviously tilt the social origins of U.S. entrepreneurs toward the foreign born. Whether they acquired their education abroad or in the United States, the foreign-born population in the U.S. includes a much higher proportion of people with advanced scientific, engineering and mathematical skills than does the native population. Foreign-born non-citizens filed 24 percent of all international patent applications that originated in the U.S. in 2008, a rate of contribution more than twice their share of the American population. The human capital that supports patent applications is also essential to entrepreneurship in those sectors of the economy that today are most open to innovation; so it is not surprising that foreign entrepreneurs are so prominent in them.
Why do native-born Americans lack interest in engineering and science? This outcome is not a uniquely American problem. Nonetheless, although governments of all developed countries are concerned about this in their own nations, the problem appears worse in the United States. Survey after survey shows that the U.S. K-12 education system does not provide young Americans with internationally competitive skills in mathematics and science. Federal and state governments could rectify this liability by directing more budgetary support to public education. Instead, they wring their hands, proclaim good intentions and do nothing. In all candor, there is a reason for their inactivity. Upgrading the public education system would cost a lot of money, which might have to come from the military budget, the nation’s No. 1 social program and a huge vested interest in Washington. Rather than upgrade the public education system in this country, it is less expensive for the United States to let foreign countries educate students at their expense, and then attract the most outstanding students to this country. Foreign countries paid pay for their education, but the U.S. gets the benefit of their skill. Russia taught Mikhail Baryshnikov to dance, but the United States gave him a bigger stage.
But this answer is not completely satisfactory. Even if the average level of science education and mathematical education is low in the United States, the country is big enough to generate many more top students than actually enroll in science and engineering, but does not do so. Two additional explanations require attention. First, the H-1B temporary work visa brings many foreign professionals into the United States. This visa is issued to individuals who seek temporary entry into the United States in a skilled, short-supply occupation such as engineering or computer science. It is issued for up to three years and may be extended to six years. In 2010, the United States issued more than 118,000 H-1B visas, down almost 25 percent from the nearly 155,000 issued in 2007. The American Engineering Association loudly complains that employers abuse the H-1B visa to obtain foreign engineers at cut-rate wages, which then deter Americans from studying engineering. This complaint probably has merit, but it would vastly exceed the province of this paper to evaluate that claim with data.
A second contributor is excessive remuneration in financial industries. The really big money in the U.S. is earned in finance. Engineers do not earn as much as bankers. As a partial result, native-born students favor finance over technology and science, leaving engineering to foreigners. A decade ago, 22 percent of Harvard freshmen declared that they intended to become bankers; few wanted to become engineers. The ability of big banks to pay exorbitant salaries has distorted the incentive structures that college students check daily; a product of corruption and market power, this distortion indirectly created an engineering niche for skilled foreign students to exploit.
International Trade
All tributes to immigrant entrepreneurs address their role in high technology industries, a role that fully merits encomiums, but recent research has discovered a new and hitherto ignored contribution of immigrants to the U.S. economy—international trade. Whether as employees or business owners, immigrants do much to stimulate U.S. international trade. One way is by taking employment in the international trade departments of major global corporations, where they teach mono-lingual and mono-cultural American managers how to sell their wares abroad. U.S. management needs their help. Years ago, Chevrolet wanted to advertise the Chevy Nova in Latin America, but the advertising department did not understand that in Spanish, “Chevy no va” means Chevy does not go. Unsurprisingly, the Nova failed to attract buyers in Latin America. Chevrolet needed Spanish speakers to teach them this lesson.
Immigrants also play a pivotal role as entrepreneurs in small and medium firms in the trade sector. Small and medium businesses contribute less to U.S. international trade than they do to other sectors of the economy. Big business dominates international trade to a greater extent than the economy in general. However, within the small and medium business sector, foreign-born entrepreneurs are drastically overrepresented in international trade, and their firms are appreciably larger than those of native-born entrepreneurs in the same industry. In 2007, for example, the average export value for Hispanic-owned exporting firms to the 20 Latin American countries was $1.1 million. Non-minority-owned exporting firms’ average export value to the same countries was $553,725. Trade with these 20 Latin American countries accounted for 81 percent of the total export value accounted for by Hispanic-owned exporting firms. The rest of the world accounted for 19 percent. The corresponding number for non-minority-owned exporting firms was 15.1 percent for Latin America; the rest of the world counted for 85 percent of their trade. Clearly the Hispanic-owned firms were doing much to expand U.S. trade with Latin America; without their help, U.S. trade with Latin America would be drastically lower. The same holds true, of course, for other countries. Immigrants from Poland expand American trade with Poland; those from Turkey expand American trade for Turkey; those from Liberia expand American trade with Liberia, etc. The reasons are pretty clear. Foreigners have social network connections abroad that can turn into business partners; they are fluent in the language of their homeland, and they understand its culture and legal system. These inherent capacities give foreign entrepreneurs huge advantages in the field of international trade.
One might suppose that immigrant-owned firms equally strengthen exports and imports. In that case, their activities would increase American trade, enhancing our standard of living, but would not change the balance between imports and exports. However, a preponderance of research suggests that foreign-born entrepreneurs contribute more to U.S. exports than to U.S. imports. How could that happen? The leading explanation fastens on the international dominance of the English language in science, government and business, as well as the lack of foreign language competence among Americans of working age. Because of the dominance of the English language in the world, many foreigners abroad can read and speak English well enough to export to American, Canadian, British, and Australian markets in English. Half the people in continental Europe claim to speak English. These foreign English speakers do not require the help of expatriates from English-speaking countries to assist them in exporting to English-speaking countries.
The converse is not true. Notoriously weak in foreign language capability, native-born Americans do not speak Polish, Urdu, or Tagalog. Therefore, when it comes to exporting American products to Poland, Pakistan, or the Philippines, immigrants from those countries are essential helpers. Sometimes American firms hire foreigners to surmount linguistic and cultural barriers to foreign markets; sometimes foreigners start their own import/export firms. Either way, the wheels of international commerce spin faster in the United States because immigrant entrepreneurs understand how to export American-made products. Cursing immigration in southern Alabama, farmer Jones does not realize that immigrants are selling his cotton abroad, raising the price he obtains for it.
The preponderance of foreigners in foreign trade is not unique to the United States. That preponderance exists in European countries as well. Whatever the country, foreigners always have international social networks, foreign language skills, and cultural knowledge that enables them to find, trust, and cooperate with business partners abroad more easily than do native-born people, especially those who are mono-lingual. However, because the United States has many immigrants, it acquires a bigger-than-average, immigrant-driven export sector. The U.S. badly needs this help. President Barack Obama has been consistently concerned about the poor export performance of the U.S. economy, and has funded support for exporting business firms. Clearly, the nation’s export balance needs improvement, but, bad as it is, it would be appreciably worse if the U.S. did not have immigrant help.
An obvious objection to this explanation might well start with precisely the historical dependence of the United States upon immigration. “We are a country of immigrants” is a truism of which politicians remind us every two years at election time. Why does a country of immigrants have such weak skills in foreign languages? The answer turns on the amazing success of the American assimilation machine. The sociological rule of thumb is still this: “from bilingual to monolingual in three generations.” Immigrants arrive speaking a foreign language; and then they learn English. That makes them bi-lingual. Their second-generation children acquire fluency in English, and usually retain capability in their parents’ mother tongue. They are fully or partially bi-lingual. However, the second generation does not teach their children the language of their immigrant grandparents. As a result, the grandchildren of immigrants grow up as mono-lingual English speakers. Whatever foreign language capability they acquire, they acquire in schools and colleges. This is why a “nation of immigrants” requires continuous infusions of immigration to open trade windows to foreign countries.
Super High Entrepreneurship
This essay began with the well-known preponderance of immigrants in business ownership. Although immigrants are more likely to become self-employed than the native born, that overall statistic conceals great variation among immigrant groups. This variation has and continues to stir great public interest. Some immigrant groups are overrepresented in self-employment; others are average or below average. Some immigrant groups exhibit super high entrepreneurship. Among the foreign born by country of birth, those with super high self-employment rates in 2000 were immigrants from Greece (26.9 percent), Syria (26.2 percent), Korea (25.4 percent), and Israel (25.2 percent). Rounding out the top 10 groups with the highest rates of self-employment were those born in Jordan (23.3 percent), Paraguay (23.3 percent), Iran (22.6 percent), Lebanon (22.1 percent), Hungary (19.5 percent), and Iraq (19.0 percent).
Conversely, some immigrant groups produce fewer self-employed people than others, and fewer even than the native-born population. Although labor market disadvantage affects all immigrants, those from English-speaking countries are somewhat exempted. Group profiles of self-employment also depend on money, skill, and education that various immigrant groups bring to business. Some immigrants arrive with much money, strong education, and many skills; others bring little of any. A comparison of Hispanics and Asians illustrates the difference that class-linked resources make in self-employment outcomes. In 2010, high-resource Asians were slightly underrepresented relative to the native born among the unincorporated self-employed, but strongly overrepresented among the incorporated self-employed. Low-resource Hispanics were slightly underrepresented among the unincorporated self-employed, and vastly underrepresented among the incorporated self-employed.
Whence arise such inter-group discrepancies with some foreign-born groups way above, and others well below the average self-employment level of the native born? The simplest answer addresses the class origins of foreign-born groups. These are quite different because the days when all immigrants were “the wretched refuse” of some “teeming shore” are well behind us. Immigrants today are still mostly working class, but are also middle class and even rich, and their presenting social class resources affect their chances in independent business.
Class resources have been catalogued as four distinct forms of capital. The oldest and the one instantly appreciated is financial capital—wealth one owns or can advantageously borrow. Rich people have this capital; poor people do not. Therefore, wealth is a class-linked resource. Having personal wealth confers a huge advantage in independent business. Wealthy foreigners arrive with that business advantage.
Another class-linked resource is human capital—formal classroom education and the degrees or titles that prove it. The rich have it; the poor lack it. Educational background is crucially important in finding wage or salary employment, but what is not obvious is how it influences self-employment chances. Those with more education earn more on average than those with less education, and this relationship holds in independent business as well as in salary or wage employment. On arrival in the U.S., some foreign groups are better educated on average than others. The variation affects every immigrant group’s chances and outcomes in independent business.
The third class-linked resource is social networks of strong and weak ties, which the self-employed possibly require more than salaried workers. These social networks confer information, training, advice, loans, and all kinds of support. Once I was interviewing a restaurant owner when his telephone rang. A friend, also a restaurant owner, wanted his recipe for tomato sauce. He provided it. This is an illustration of the value to the self-employed of social network connections. When these connections occur in a context of normative reciprocity, that is, the giving and repaying of favors, then the term “social capital” describes the relationship. People acquire network partners in their daily lives; some of these, especially the strong-tie partners, link to family, neighborhood, schools, and religion. When these linkages are in turn class-linked, then the self-employed connect to others of their social class.
That is usually the case. Rich people have rich friends; and poor people have poor friends. This like-to-like linkage has economic consequences. People of upper-class background have more and better resources to swap than do people of lower-class background. Thus, if tycoon Donald Trump is in one’s social network, one might possibly borrow a million dollars from him; if restaurant owner Angel Lopez is one’s network contact, $10,000 might well be the limit. In either case, one’s social capital connection provides access to financial capital and thus provides a direct substitute for actually being wealthy oneself. Conrad Hilton bought his first hotel with funds his rich aunt loaned him.
The fourth class-linked resource category is cultural capital. This somewhat nebulous term refers to values, attitudes, beliefs, and norms that affect a person’s choice of self-employment as an occupation as well as the manner in which a person undertakes it. Does not everyone on earth spontaneously and equally value entrepreneurship? That supposition is a common error. In a paper recently published, Leo-Paul Dana and I showed that Aleut natives on Kodiak Island, Alaska evince no interest in self-employment because their cultural heritage encourages them to hunt and fish for a living.4 That should not surprise anyone. In fact, everyone on earth acquires the vocational outlook of the cultural group to which he or she belongs, including famous business tycoons of Wall Street. Considering that immigrants are drawn from all over the globe, it would be surprising if the wide and heterogeneous category “foreign born” did not contain a wide variety of divergent, culturally linked views regarding entrepreneurship and business methods. Readers of The Islamic Monthly will appreciate that Islam prohibits the taking of interest on money, a practice that other faiths condone.
Average years of education are somewhat higher among the self-employed than among employees. It follows that groups such as Asians, Middle Easterners and Europeans, who arrive in the United States with higher-than-average educational levels than native whites should start more businesses in this country than do native whites, especially incorporated businesses. Incorporated firms are on average larger and more lucrative than the unincorporated, and their owners have superior human capital. But statistics also show that the strength of high-profile Asian entrepreneurs are most pronounced these days (it was not always) in the upper tier of the self-employed, the incorporated self-employed. This tier includes professionals such as doctors, dentists, attorneys and architects. Conversely, groups that arrive in the United States with lower average educational levels than the native whites, or whose native-born generation is younger than the native white average, such as Hispanics, predictably fall behind the native whites with respect to the self-employment rate they generate. But the Hispanics do relatively better in the lower tier of self-employment (unincorporated) than they do in the upper tier (incorporated). This difference arises because the educational and financial resources of the predominantly working-class Hispanic immigrants will not support upper-tier self-employment. Someday this could change.
That possibility raises the issue of what happens to the native-born children of immigrant entrepreneurs. In social science parlance, the native-born children of immigrants are second-generation immigrants; their parents are first generation. Unlike their immigrant parents, second-generation children have American professional and educational degrees as well as social capital that links them to the economic mainstream. They are not disadvantaged in labor markets as were their parents. Unsurprisingly, then, the native-born children of immigrants follow a more complicated entrepreneurial trajectory than did their parents. Second-generation immigrants are not reliably more active in business ownership than the rest of the native-born population. Sometimes they are, sometimes they are not. Research has identified three distinct patterns of self-employment among the second generation.
Second-generation starters. Starters exceed the self-employment rate of their immigrant parents. This pattern is common among working-class immigrant groups that require a generation to build the resources of human, financial and social capital that enable independent business. Salvadorans and Mexicans are examples. Second-generation starters follow the classic route of upward mobility that Abraham Lincoln once called “the natural course of labor.”
The middleman model. In the middleman pattern, the second generation retains the high rates of self-employment that characterized their parents’ generation. Middleman minorities had historical and long-term experience of self-employment abroad before settling in the United States. This experience, and the resources it supplied, enabled the immigrants to open and run larger and more lucrative businesses that offer a future to their native-born children, whose chances in the labor market are much better than they were for their parents. Middleman minorities also value self-employment more than others. Taken together, the enterprising value orientation of middleman minorities and the first generation’s business success encourage the second generation to remain in self-employment. A good configuration to this model characterizes public-school educated Cubans in South Florida and Chaldeans in Detroit.
Second-generation decline model. The children of self-employed immigrants abandon independent business when they find better economic opportunities in salaried employment. Among Koreans, for example, parents undertook small-business ownership out of necessity, but their well-educated, native-born children acquired resources of human, social and financial capital that enabled them to move up the class hierarchy into corporate business and the professions. The children leave the immigrants’ small businesses behind for others to run. That is exactly what their parents wanted them to do.
Who is an Entrepreneur?
Economists Levine and Rubinstein maintain that only the incorporated self-employed should be considered entrepreneurs. In their view, the proprietors of unincorporated business firms do not qualify as successful, as entrepreneurs or as successful entrepreneurs. Economists have debated this for decades, and only some have accepted this judgment. The alternative view treats all self-employed as entrepreneurs regardless of whether they are incorporated or unincorporated, big or small. That is my view too. Dismissing the unincorporated self-employed is snobbish and misguided, because it conflates income and scale of firm with innovation. Although the incorporated self-employed earn more and operate larger firms than do the unincorporated, what do the facts mean? All authorities, including Levine and Rubinstein, agree that the contribution of entrepreneurship to an economy is the innovation entrepreneurs introduce. True, innovation often enhances in scale as when innovating firms grow in size. Apple computer started small and grew larger because it innovated. More commonly, however, especially now, innovating small firms are sold to corporate giants whose innovation consists of buying small-firm innovators, then digesting their innovation. Either way, however, innovation and scale are conceptually different. Bigger does not equal more innovative; and bigger does not equal more entrepreneurial. There is no evidence that innovation is more common in incorporated than in unincorporated businesses. Hence, there is no warrant for restricting the term “entrepreneur” to owners of larger businesses.
Of course, incorporated firms earn higher revenues than unincorporated, and hire more workers, but they are not more innovative for this reason. Bigger? Yes. More important? Yes, but they are not more innovative. If anything, the opposite is true: Smaller firms are more innovative than bigger firms, so the unincorporated firms should be more innovative than the incorporated. Consider this illustration. During the 1980s, thousands of unincorporated, often tiny Korean grocery stores began to cut up vegetables and fruits, and sell them ready to eat. This innovation fit the growing health awareness of Americans, who increasingly chose to buy ready-to-eat fruits and vegetables from a grocery store for lunch rather than consume prepared restaurant food. Now all supermarket chains offer this option, but it took them an additional decade to introduce this innovation. Which tier was more innovative? Thousands of unincorporated Korean grocery stores or the incorporated grocery giants?
Deprecating the economic contribution of unincorporated business is also snobbish because the concept of “successful entrepreneur” so clearly conflates and confuses scale and income with success. Donald Trump rebuilt Atlantic City, New Jersey, and gets much public recognition for this achievement. Angel Lopez opened a Mexican restaurant in Los Angeles. No one cared. Trump is much richer than Lopez. Trump is a successful entrepreneur; Lopez is not, right? That is conventional thinking. But asking a different question yields a different and more persuasive answer. How many times has Donald Trump multiplied the huge cash advance his father handed him at age 23. Readers of Donald Trump’s Art of the Deal will find this information in his autobiographical book. Suppose Trump now has a billion dollars, and received ten million from his father at age 21. The numbers are purely illustrative. If so, Trump multiplied his money a hundred thousand fold in a lifetime of entrepreneurship. Now compare Trump with Angel Lopez, who snuck over the U.S. border at age 16, and went to work picking cantaloupe in Arizona. Lopez has a second-grade education; he received one dollar from his parents, but today he owns a Mexican restaurant chain in Prescott AZ. Suppose Lopez has multiplied his wealth two hundred thousand fold relative to what he had in his pants when he crossed the U.S. border. Who was the more “successful” entrepreneur, Lopez or Trump? Obviously, Donald Trump is vastly richer and more prominent than Angel Lopez, but those advantages of scale, realistically important as they are, do not define successful entrepreneurship. It is snobbish to proclaim that they do.
Firm Size
Assessing the contribution of immigrants to American business, their contributions to a handful of high-tech giants grab the headlines. This priority is understandable. Big firms command worldwide name recognition. They generate high-value exports and are expected to dominate the future. Nations depend on high-value exports to sustain a high standard of living. Today the economic future lies in technology, and, as noted above, immigrant entrepreneurs and scientists have made a huge contribution to this future. It is sobering indeed to consider how weak and perilous would be the economic situation of the United States today without the technology firms that immigrants have created and encouraged.
On the other hand, whether incorporated or unincorporated, most immigrant firms are small and medium, not big. The significance of these small and medium immigrant-owned firms deserves a separate evaluation from the Fortune 500 giants immigrants also started. Two points are relevant. First, immigrants’ small and medium firms include more than their proportional share of technological innovators; and in the science and engineering (S&E) field, their firms are larger than average. Although only about one-third of all self-employed workers in the United States work in incorporated businesses, about two-thirds of self-employed scientists and engineers work in such businesses. The rate of incorporated self-employment is much higher for individuals with S&E degrees (12 percent), or working in S&E occupations (8 percent) than for the U.S. workforce as a whole, where the comparable rate is 3 percent.
Second, although the big firms seize the headlines and bombard the public with advertising, small and medium firms actually pioneer many innovations that the big name firms later purchase and present as their own. So, even in the area of technological innovation, where immigrants are so numerous and active, the small and medium firms do more innovating, if underappreciated, work; and the big firms steal the applause rating. In the field of international trade, immigrant-owned firms are small and medium, not big. But, these firms have disproportionally expanded the exports of the American economy, which needs any help it can obtain in this area.
Unincorporated mom and pop firms constitute the vast majority of the businesses in the United States as well as of the firms that immigrants have opened. Most are small retail and service proprietorships. They are not glamorous and their owners work long hours at low dollar return per hour. This sector (retail and service proprietorships) contains much more than its share of immigrant-owned firms that generate employment and pay taxes now. We cannot always think about the golden future. If we are to reach the golden future, we have to survive the present, which requires creating jobs and paying taxes now, not 40 years from now. The public does not appreciate the enormity of small and medium firms’ contribution to total employment as well as to municipal tax collection, nor the oversized contribution immigrants make to this task. Conventionally defined as firms with 500 or more employees, big businesses represent less than one-half of 1 percent of all firms, but they create 51 percent of total employment. The small and medium firms are 99.6 percent of all firms, and they contribute 49 percent of total employment. When it comes to job creation during recessions, the balance is even more in favor of small and medium firms, even very small firms. From 2004 to 2010, the smallest firms (one to four employees) created a net of 5.5 million jobs; big businesses lost 1.8 million jobs during the same period.
Small retail and service proprietorships exist for various reasons. An extremely important reason is filling gaps in the retail and service sector that the giants leave. Wal-Mart will open wherever it is profitable for it to do so; but Wal-Mart avoids neighborhoods or villages that are sparsely settled, low income or crime ridden. Many places in the United States have one or more of these characteristics. Immigrant proprietors fill the gaps that giant corporations such as Wal-Mart leave behind. As a result, vast swathes of territory have local retail and service stores that otherwise would have none. When mom and pop stores sell goods and services, they collect a sales tax that funds metropolitan and local governments in income-starved areas. If one identifies the troubled cities and villages of America, which now exceed the untroubled, one concludes that immigrant proprietorships are an important part of the glue that holds these collapsing places together.
Conclusion
This resume has outlined the contributions of immigrant firms to employment and innovation against a background framed around the larger immigration debate. Facts do not speak for themselves; they require a background to makes sense. Immigration is a complex issue that requires careful and informed understanding. I make no effort in this essay to tell readers what to think about the big immigration question. In this case, the only question readers should address is whether the acquisition of rudimentary information about immigrant entrepreneurship would or should influence the way people think about the immigration debate. The answer has to be affirmative. Of course, it does. Looking at the entrepreneurship of immigrants, one has to acknowledge that the United States does not just tolerate immigrant entrepreneurs; it actively needs them.
1Ivan Light and Edna Bonacich. 1988. Immigrant Entrepreneurs: Koreans in Los Angeles. Los Angeles: University of California.
2Ross Levine and Yona Rubinstein. 2013. “Smart and Illicit: Who Becomes an Entrepreneur and Does It Pay?” NBER Working Paper #19276. www.nber.org/papers/w19276
3Jordan Weissmann. Aug. 16, 2013. “Entrepreneurship: The Ultimate White Privilege?” The Atlantic. www.theatlantic.com/business/archive/2013/08/entrepreneurship-the-ultimate-white-privilege/278727 <accessed Oct. 13, 2013>
4Ivan Light and Leo-Paul Dana. 2013. “Boundaries of Social Capital in Entrepreneurship.” Entrepreneurship: Theory and Practice, 37 (3): 1-22
This piece was featured in the fall/winter 2013 issue of The Islamic Monthly 