Study: Latinos Carried U.S. Through Recession

If President-elect Donald Trump really cares about supporting business and commerce in the United States, he might want to put a hold on that wall separating the U.S. from Mexico and the rest of Latin America. Research released yesterday (January 18) from Stanford’s Graduate School of Business at the State of Latino Entrepreneurship Forum on the Stanford University campus indicates that Latino-founded firms carried the U.S. economy during the Great Recession. “Contrary to what you may have heard, Latinos are not a drag on the U.S. economy. If anything, the U.S. economy has been a drag on Latino businesses,” Stanford Professor Doug Rivers said in front of an audience of about 100, which burst into applause in response.

Rivers, who serves as the co-faculty director for the Stanford Latino Entrepreneurship Initiative (SLEI), used U.S. Census Bureau stats to paint a very different picture than what emerged from the just-concluded U.S. presidential campaign. “It’s not widely known, but over the period from 2007 to 2012, the number of Latino businesses grew by a rate of 47%,” Rivers said, adding that the overall national average growth rate during the same time frame hovered around 2%.

“In fact,” he continued, “if you eliminate the Latino-owned businesses from the number of businesses created, the U.S. economy would have had fewer businesses in 2012 than it had in 2007.”

Housed under the GSB umbrella and founded three years ago, the SLEI, along with the independent Palo Alto-based nonprofit Latino Business Action Network (LBAN), has hosted the State of Latino Entrepreneurship Forum for the past two years. This year the forum focused on findings from a research report based on a 2016 survey of Latino business owners in the U.S. More than 4,900 businesses participated in the survey, doubling last year’s participation and making the survey one of the most robust of its kind.

NUMBER OF LATINO-FOUNDED BUSINESSES OUTPACES LATINO POPULATION GROWTH

“There are two very powerful realities that are going on right now,” said Jerry Porras, the other SLEI co-faculty director and Lane professor of organizational behavior and change at the GSB. First, Porras said, is the obvious and often talked-about Latino population boom. According to census data cited by Porras, Latinos now make up roughly 17% of the U.S. population — the majority of whom reside in California, Texas, Florida, and New York. That number is expected to nearly double within a few decades. Rivers, speaking after Porras, drove home the point by citing more federal data. In the 1990 census, for example, there were 22 million Latinos; in 2000, the population jumped to 35 million. And in the most recent U.S. Census of 2010, the population leapt to about 50 million.

“But as rapid as the growth of the Latino population has been,” Rivers said, “there is another story that hasn’t been told, which is the even faster growth of Latino entrepreneurship.”

Indeed, the second and less talked-about phenomenon Porras pointed out is the remarkable growth of Latino-founded businesses. “Over the last 15 years, every five years, one million new businesses have been added,” he said, noting that his statistics accounted for the “20% to 30%” of businesses that usually fail.

The growth has been astonishing: In 1992, there were fewer than one million Latino-owned businesses in the U.S., Rivers said, again citing census data. In 2012, the most recent data collected by the federal government, there were over 3.3 million Latino-founded businesses. “It tripled in a period of less than a quarter century,” Rivers said. “Latino businesses are growing faster than the population.”

But Rivers wasn’t done pouring on the data. In 1990, about 5% of businesses in the U.S. were owned by Latinos. But a switch flipped after 2000, and since then Latino business have been growing in number by about 7% per year. Now, that 3.3 million businesses represents about 12% of all businesses in the U.S. “Imagine if you were able to grow the U.S. economy at 7% a year. It would be truly impressive,” Rivers said.

SMALL BUSINESSES AN IMPORTANT DRIVER TO U.S. ECONOMY

According to one of the most prolific and successful immigrant entrepreneurs in recent decades, who also happened to be in attendance, a boom of Latino businesses could play an important role in a potential boost to the U.S. economy. “If you’re going to get a recovery and growth,” said Rupert Murdoch, the Australian-born magnate behind 21st Century Fox, “you have to get a mass formation of small businesses. History shows that growth out of a depression is always led by the formation of small businesses.”

Murdoch spoke onstage at the event for nearly an hour with Sol Trujillo, widely known for his work as CEO of Telstra, Australia’s largest telecommunications and media company, and a trade policy adviser for the Clinton and George W. Bush administrations. “For the last three decades, over 70% of new jobs created have not been created by the big companies — like the ones I run and Rupert runs — but they’re really created by small and medium-sized businesses,” Trujillo said. “And so that focus is important.”

Not only that, but businesses owned by an immediate family can pull that individual family out of poverty, Trujillo noted. For example, if a company is pulling in only $150,000 a year, that might equate to $80,000 or $90,000 of income for one family — enough to take them off government assistance. “That’s really important when we think about GDP and productivity and all of the driving variables as we grow an economy,” Trujillo concluded.

THE FUNDING GAP IN LATINO-OWNED VENTURES

That theory aligns with the GSB study’s findings. A remarkable 73% of Latino-owned businesses were started alone. Some 52% were founded by owners without a college education — though according to more U.S. Census Bureau data, the median annual salary for a high school graduate with no college coursework was about $25,000, much lower than Trujillo’s hypothetical example.

The data further shows that at least one major barrier to scaling and growing Latino-owned businesses: funding. More than half (56%) of Latino-owned businesses reported not using any sort of outside funding. Only 12% claimed to have earned either an angel or venture capital investment. The reason could be cultural, Trujillo posited. Or? “Latinos are not networked well enough into other sources of capital,” he surmised.

Indeed, according to the research, 71% of Latino-founded businesses were launched by first- or second-generation Latinos born in the U.S. Interestingly, of the businesses classified by the researchers as “larger firms” — those generating at least $1 million a year in revenue and employing more than 50 employees — 40% to 50% were founded by college-educated immigrants. Meaning about half of the most successful and important Latino-founded businesses are run by college-educated immigrants.

Scaling Latino companies is one main priority of the research and work from the SLEI and LBAN. “Latinos seem to like to start companies but are unable to grow them at a very high rate,” Porras said. “So, our focus was to say, ‘Let’s promote the growth of those big ones.’”

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