FINANCING SMALL BUSINESS CREATION - THE CASE OF CHINESE AND KOREAN IMMIGRANT ENTREPRENEURS

Conventional wisdom claims that entrepreneurship in the United Stares among Asian immigrants has been substantially promoted by the operatio n of rotating credit associations specifically and supportive social n etworks 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 for m 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 finan cing immigrant-owned firms. This study utilizes data from the U.S. Bur eau of the Census to analyze sources and amounts of start-up capital t hat financed small business creation for immigrant Koreans and Chinese . Data self-reported by over 2, 000 Korean/Chinese who opened new firm s during 1979-1987 are analyzed and compared with start-up statistics for nonminorities and Asian Americans who are not immigrants. The majo rity of start-up capital that financed small business formation came f rom family wealth (equity) and financial institution loans (debt). The se financing patterns typified all groups. High levels of start-up cap ital typify Korean/Chinese immigrant-owned firms reflecting their heav y reliance upon equity capital to finance small business creation. If no loan finds were forthcoming from friends, rotating credit associati ons, associates, family and other secondary debt sources, the average Korean/Chinese start-up would nonetheless possess substantially more f inancial capital than its nonminority cohort. Looking solely at firms utilizing loan funds to finance business creation, Korean/Chinese borr owers had lower mean loan sizes and lower debt to equity ratios than t he comparison group firms: the aggregate debt to equity ratios for non minorities and Chinese/Korean immigrants were 2.75 and 1.18, respectiv ely. Among the borrowing firms, financial institutions skim off the mo st attractive Korean/Chinese borrowers, mostly college graduates who i nvest substantial sums of equity capital into their start-ups. The non bank borrowers-particularly those borrowing from friends-were most dis advantaged, relative to nonminority small business owners. Controlling for firm and owner characteristics statistically the Korean/Chinese s tart-ups borrowing from friends and family Ir ere found to be penalize d by over $25,000 in loan size, relative to nonminorities, whereas Asi an nonimmigrant borrowers incurred no such penalty. Prevailing scholar ly literature misinterprets the realities of how Korean and Chinese im migrant entrepreneur finance entry into small businesses. These firms stand out for their particularly heavy reliance upon family wealth. No ntraditional debt capital sources are of secondary importance, and the y are utilized more by the weaker start-ups. (C) 1997 Elsevier Science Inc.