There is a long-standing economic phenomenon of ethnic immigrant groups concentrating as self-employed entrepreneurs in select industries. In the United States, this economic pattern is replicated across different sectors and diverse ethnic groups. This raises the possibility that there is a pattern of specialized entrepreneurship among certain immigrant groups in the U.S.
Kerr and Mandorff propose an economic model that attempts to shed some light on this unusual socio-economic pattern.
It begins with the notion that self-employed entrepreneurs benefit from social networks or capital.
Individuals are connected through religious or cultural events, friend circles, and other shared interests. These social events offer the opportunity to share customer trends, best practices, and business opportunities. Social groups can further provide informal support, risk sharing, financial loans, or even enforce compliance to standards.
Consequently, the advantages of concentrating within an industry would be affected by ethnic group size and social isolation.
Smaller tight-knit communities would theoretically drive greater self-employment industry concentration. The first reason is that smaller more isolated groups increase the likelihood of another entrepreneur in any given individual’s social network. Secondly, these communities possess stronger ties for conveying the afore-mentioned benefits to its members.
Social relationships in ethnic groups reduce the costs of acquiring sector-specific skills for entrepreneurship
Using census data, the researchers rigorously tested the model’s predictions with two instrumental variable specifications. Specifically, they found that:
- A ten percent decrease in group size increases industry concentration by six percent
- A ten percent increase in group isolation increases industry concentration by five percent
- A positive relationship in self-employment entrepreneurship and income
Beyond the theoretical implications, these findings are of managerial and policy importance. The research highlights the role of group choices in long-term economic outcomes. This phenomenon will likely continue to have profound social, economic and political implications. Finally, this model of ethnic specialization hints at the wider importance of social networks in entrepreneurship.
Contributed by Cornelius Saunders.
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