Ethnic Business Development: Toward a Theoretical Synthesis and Policy Framework

By Ibrahim, Gamal; Galt, Vaughan | Journal of Economic Issues, December 2003 | Go to article overview

Ethnic Business Development: Toward a Theoretical Synthesis and Policy Framework


Ibrahim, Gamal, Galt, Vaughan, Journal of Economic Issues


There has been a growing interest in both Europe and North America in the high rate of self-employment among ethnic minority groups. The evidence indicates that some ethnic minorities are disproportionately represented in self-employment (Razin 1993; Fairlie and Meyer 1996; Clark and Drinkwater 2000). Well-known examples are the South Asians in Britain; the Koreans, Japanese, and Chinese in the USA; and the Turks and North Africans in France (Barrett, Jones, and McEvoy 1996; Bates 1997; Hillmann 1999; Ram and Jones 1998). There are a number of seemingly conflicting explanations given as to why some ethnic groups enter self-employment. These range from economic efficiency explanations to more sociological ones that draw on cultural factors.

In this paper we will argue that such polarization of explanations is unnecessary and that, by drawing on the work of old intuitionalists (e.g., Veblen 1898) with their emphasis on path dependency and evolutionary behavior, a more unified, but more complex socio-economic argument can be forwarded to explain the disproportionate presence of ethnic entrepreneurs. The first section of the paper sets out the more cultural explanations. The next section covers orthodox economic explanations of entrepreneurial entry, and this is followed by a section on old institutional explanations. Policy implications are discussed in the final section of the paper, which, given the unequal distribution of entrepreneurs across different ethnic groups, not only considers ways of encouraging entrepreneurship but also possible routes in which this activity might best be concentrated.

Culturalist Approach

Cultural factors have been considered by many as the causal factors behind the over-representation in self-employment of certain ethnic groups such as the South Asians in Britain (Ram and Jones 1998; Barrett, Jones, and McEvoy 1996). The cultural argument represents an attempt to attribute entrepreneurship to non-economic factors such as social networks. It takes a Weberian approach to entrepreneurship, where capital accumulation is dependent on specific traditional values and modes of social organization such as those inspired by Max Weber's Protestant ethic thesis (1958), in which certain value systems and religions breed entrepreneurial spirit (Muhaimin 1990).

It has been argued that some ethnic groups are endowed with social institutions and cultural norms (ethnic resources) that foster entrepreneurial talent (Wilson and Portes 1980). For example, the success of South Asians in Britain is mainly attributed to tight and close kinship and peer networks which generate social capital in terms of employees, local customers, and financial sources (Rafiq 1992; Werbner 1990; Qadeer 2000). These tight social networks provide flexible and efficient possibilities for the recruitment of personnel, acquisition of capital, and exchange of information based on mutual trust among the members of the network (Werbner 1990).

The pioneering work of Ivan Light on protected markets (1972) and that on the ethnic enclave of Alejandro Portes and Robert Bach (1985) illustrate the significance of ethnic niches based on tight social networks, in which ethnic businesses transact in goods that are mainly consumed by co-ethnic customers. Isolation from mainstream markets has a dual effect as it shields ethnic businesses from mainstream competitors as well as providing an opportunity to those who cannot integrate into mainstream labor markets. Therefore ethnic businesses concentrate in niche markets with low costs of entry. These niche markets are often abandoned by mainstream communities and are characterized by relatively low levels of capitalization, long working hours, and poor pay (Waldinger, Aldrich, and Ward 1990). However, dependence on co-ethnic customers may restrict businesses in the long run, since their potential for sustainable economic growth is limited (Ram and Deakins 1996).

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