T. Bates, FINANCING SMALL BUSINESS CREATION - THE CASE OF CHINESE AND KOREAN IMMIGRANT ENTREPRENEURS, Journal of business venturing, 12(2), 1997, pp. 109-124
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.