Entrepreneurial Black households found to have highest business return rates

On average, Black households engaged in entrepreneurial activity have a higher rate of return on their business in comparison to Hispanic and white households, according to an Economic Commentary from the Federal Reserve Bank of Cleveland. Public policy encouraging and supporting minority entrepreneurship and innovation pays profits as well as social dividends, the study reveals.

The average yield of equity invested in a business, regardless of the household’s involvement in the business, is 5.6% for Black households, 4.6% for white households and 2.5% for Hispanic households. 

However, white households tend to have higher percentages of business ownership and entrepreneurship than their Black and Hispanic counterparts. About 15.4% of white households invest in private business in some form and the entrepreneurship rate is 12.4%. This rate is significantly higher than Black households, of which 5% are entrepreneurs and 0.9% are passive investors, and Hispanic households where business ownership rates are 6.4% and entrepreneurship rates are 5.6%. 

The authors note that the rates of entrepreneurship and business ownership among white households in comparison to Black and Hispanic households make the findings in the Economic Commentary even more puzzling. These inconsistencies challenge the policy question of how to close the racial wealth gap as well as address racial inequities in the business sector. The authors note that there is considerable public policy in the U.S. aimed at fostering entrepreneurial activity. “Identifying the potential for innovation and entrepreneurship among racial minority groups is important for those policies that strive to create a more inclusive ecosystem for innovation.”

In addition to these findings, Hispanic entrepreneurs’ businesses have a higher average of business growth than white or Black businesses. On average, Hispanic entrepreneurs’ businesses have grown 3.7 fold, followed by white entrepreneurs’ businesses growing 3.4 fold and Black entrepreneurs’ businesses 3.0 fold. 

According to the commentary’s authors, entrepreneurship tends to be the investment activity with the highest level of variance, unlike private equity investments. Private businesses typically face more difficulty in terms of financing or liquidation, and the authors note, “if such obstacles affect racial groups differently, then a systematic gap in rates of return across racial groups might emerge.”

There is also a substantial gap between racial groups in terms of household net worth (“what a household owns versus what it owes”). Self-identified white households have almost seven times the net worth of Black households and five times the net worth of Hispanic households. Further, in 2019, white households earned almost twice the income of average Black or Hispanic households. 

The authors of the Economic Commentary discuss the substantial racial gap in net worth even in households with similar income levels. White households tend to invest a larger share of their net worth in higher-yield, riskier assets, and Black households have been found to earn lower rates of return on their net worth than white households.  

The data in this report comes from the 2019 wave of the Survey of Consumer Finances (SCF). The calculations are also, “based on a household’s own assessments of the value of its business and its reports of business income.” Further, the authors note that estimates may be subject to survival bias, “an optimistic depiction of reality caused by focusing on successful members of a group.”