Financing small business creation: The case of Chinese and Korean immigrant entrepreneurs

Abstract

Conventional wisdom claims that entrepreneurship in the United States among Asian immigrants has been substantially promoted by the operation of rotating credit associations specifically and supportive social networks generally. The rotating credit association (RCA) typifies the process whereby supportive peer and community subgroups assist in the creation and operation of firms by providing social capital in the form of loans. One problem with the RCA as an example of social resources is that there is no solid evidence that it is a major source in financing immigrant-owned firms. This study utilizes data from the U.S. Bureau of the Census to analyze sources and amounts of start-up capital that financed small business creation for immigrant Koreans and Chinese. Data self-reported by over 2,000 Korean/Chinese who opened new firms during 1979–1987 are analyzed and compared with start-up statistics for nonminorities and Asian Americans who are not immigrants. The majority of start-up capital that financed small business formation came from family wealth (equity) and financial institution loans (debt). These financing patterns typified all groups. High levels of start-up capital typify Korean/Chinese immigrant-owned firms, reflecting their heavy reliance upon equity capital to finance small business creation. If no loan funds were forthcoming from friends, rotating credit associations, associates, family, and other secondary debt sources, the average Korean/Chinese start-up would nonetheless possess substantially more financial capital than its nonminority cohort. Looking solely at firms utilizing loan funds to finance business creation, Korean/Chinese borrowers had lower mean loan sizes and lower debt to equity ratios than the comparison group firms: the aggregate debt to equity ratios for nonminorities and Chinese/Korean immigrants were 2.75 and 1.18, respectively. Among the borrowing firms, financial institutions skim off the most attractive Korean/Chinese borrowers, mostly college graduates who invest substantial sums of equity capital into their start-ups. The nonbank borrowers—particularly those borrowing from friends—were most disadvantaged, relative to nonminority small business owners. Controlling for firm and owner characteristics statistically, the Korean/Chinese start-ups borrowing from friends and family were found to be penalized by over $25,000 in loan size, relative to nonminorities, whereas Asian nonimmigrant borrowers incurred no such penalty. Prevailing scholarly literature misinterprets the realities of how Korean and Chinese immigrant entrepreneurs finance entry into small businesses. These firms stand out for their particularly heavy reliance upon family wealth. Nontraditional debt capital sources are of secondary importance, and they are utilized more by the weaker start-ups.