Economic dynamism thrives in America's minority communities

The COVID crisis has accelerated a tremendous loss in productive capacity. The pandemic forced 10.0 million workers into joblessness and accelerated the financial ruin of roughly 100,000 small businesses. Concerningly, the pandemic-induced recession builds on a preexisting long-term decline in business dynamism. Policymakers must implement policy interventions to reverse the long-term secular decline in both entrepreneurial quality and startup formation in minority communities.

Startups and young companies energize job growth. So far, however, each iteration of stimulus relief has largely ignored the connection between business creation and economic growth. Even the recent $1.9 trillion American Rescue Plan is silent on investments for entrepreneurs who will undoubtedly play a leading role in replacing the millions of jobs erased during the pandemic.

Minority communities have borne the brunt of the pandemic’s deleterious impacts: their unemployment rates rose faster than white unemployment rates and remain elevated. Building Back minority communities requires concomitant labor market investments and policy interventions to strengthen these communities’ capacity to cultivate startup growth. Between 2010 and 2018, entrepreneurs in majority-minority communities created 493,879 new businesses and a total of 2.6 million new jobs. Basically, the average startup born in the wake of the financial crisis generated approximately 5.3 new jobs. Underinvesting in entrepreneurial dynamism leaves prosperity dividends on the table, especially for hard hit communities.

This report provides fresh insight into economic dynamism in minority communities and offers policy recommendations to rejuvenate entrepreneurship. An aim of this report is to strengthen minority communities’ potential to incubate new firms, nurture new micro-industries, and generate high-skilled job opportunities.

Major Findings:

Majority-Hispanic county startup formation rates consistently outpace all other racially identified county groups. On average, new firms in majority-Hispanic counties accounted for 10.3% of all firms.
Majority-Black counties have the lowest startup formation rates. Prior to the subprime housing crisis, startup rates in majority-Black counties crested at 8.3%, well below other counties and 14% lower than the national average. In absolute terms, Black communities experienced the steepest decline in startup job creation.
During the post-Great Recession era, startup employment was disproportionately concentrated in the Accommodation and Food Services sector. This pattern held for all three groups, though majority-Black counties over-indexed the other two county groups in food service jobs by at least 1.6 percentage points. However, majority-Black counties led in startup health care jobs: the Professional Services and Health Care sectors accounted for 11.6 % and 12.3% of startup employment in this county group, respectively.
Without policy intervention, startup job creation in majority-Black and Hispanic communities will skew toward lower quality and reinforce inequality. Business dynamism patterns in minority communities reveals a concerning tradeoff wherein old, less productive employment is replaced with low-paying jobs that are not necessarily more productive or technology-enabled.
Hispanic and Black communities embody ecological characteristics that are conducive to incubating quality startups, though not to the degree of historical innovation hubs. New data from Crunchbase indicate that majority-Black and Hispanic communities incubated nearly 300 high quality employer startups clustered in high-productive emerging industries such as software, biotechnology, information services, and 3D technology. This emerging industry distribution paints an encouraging narrative on startup quality and the innovation potential of majority-Black and Hispanic communities.

Policy Recommendations:

State economic development agencies and the federal government should work together to scale up an ecosystem of coordinated accelerator networks.
The federal government should invest a minimum of $1.0 billion in high-quality minority accelerator networks – anything less than a billion-dollar investment sets the stage for a race to the bottom.
State and federal agencies need to broaden their conceptualization of accelerators.
Federal agencies should partner with accelerators to create procurement set asides for young firms and high-quality startups.

Majority-minority communities have endured tremendous losses to their entrepreneurial dynamism and urgently need policy intervention. Incentivizing startup formation is not a singular palliative to recession rebounds. Yet, newly started companies, in combination with other factors, play a critical role in economic growth.¹ If Congress and the Biden Administration are genuine in their commitment to close racialized inequality gaps, then there must be thoughtful, meaningful investment in the capacity of minority communities to create the innovation necessary to renew their economies.

>> Read the full paper here. <<