Small Business

The Impact of Immigrant Entrepreneurs


While largely disconnected from formal business services, immigrant small-biz owners have been a big driver of economic growth in U.S. cities, a new study finds

Alfredo Melendez came to the U.S. from El Salvador at age 15, spoke no English, and had no money and no papers. Although he wanted to go to school, his uncle told him that wasn't an option. His uncle's advice: "Work hard, save your money, and do something with your life." Melendez found a job as a dishwasher at a restaurant outside Washington, D.C., and put in a year of 15-hour days before moving up to a higher-paying job at Dulles Airport. But when his younger brother, a restaurant cook, heard that the aging proprietor of a local takeout joint wanted out, Melendez sensed an opportunity.

He and his brother put together the $25,000 they needed to buy the restaurant by cobbling together their savings and small personal loans from family and friends. Soon, they were in business. They renovated the space, updated the menu, and within the first week they saw sales double, then double again. With the earnings from the restaurant, Melendez started investing in more properties, including an ethnic grocery store that he sold five years later for a profit of $205,000. His story is typical of how many foreign-born entrepreneurs achieve success on their own, without the help of formal business services.

Economic Impact Overlooked

At the national level, the immigration debate hinges on the impact of foreign workers on the labor market. Amid concerns about low-wage workers taking American jobs, some have cited recent studies showing the critical role that skilled immigrants play in the economy, including immigrant-founded companies like Google (GOOG), Yahoo! (YHOO), and eBay (EBAY) (see BusinessWeek.com, 1/3/07, "Open Doors Wider for Skilled Immigrants").

Yet back on Main Street, the role of immigrant entrepreneurs like Melendez remains largely taken for granted, a new study finds.

Local officials certainly haven't been blind to the country's record-level influx of new immigrants: Between 1980 and 2000, the immigrant population in Boston grew at a rate 3.57 times that of the nonimmigrant population in that city; in New York, the immigrant population grew at a rate 1.28 times that of the nonimmigrant population; and in Houston it grew at about the same rate as the nonimmigrant population. And while the entrepreneurial spirit of immigrants is a well-documented phenomenon—immigrants have been more likely to be self-employed than native-born residents in every U.S. census since 1880—the study released on Feb. 6 by the Center for an Urban Future, a New York City think tank, says immigrant entrepreneurs have been an overlooked and little-understood piece of cities' economies. The research shows that more businesses are being started by foreign-born vs. native-born entrepreneurs in major cities, driving growth in sectors from food manufacturing to health care.

Generating Jobs and Tax Revenues

Cities such as New York and Los Angeles have no shortage of economic development programs to help small businesses get off the ground, but Jonathan Bowles, the study's lead author, says too many of them haven't connected effectively with immigrant populations. He says partnering with community-level immigrant organizations for outreach campaigns and hiring more multilingual advisers could go a long way toward opening up these resources.

While largely disconnected from local economic development planning, immigrant entrepreneurs have already been a robust engine for economic growth in U.S. cities, the study shows. In Los Angeles, first-generation immigrants founded 22 of the city's 100 fastest-growing companies in 2005. In Houston, a telecommunications firm started by a Pakistani immigrant topped last year's Houston Small Business 100 list.

In New York, majority-immigrant neighborhoods such as Flushing, Queens, and Sunset Park, Brooklyn, have experienced job growth at a much higher rate than the city as a whole, the study shows. And although they may not be as glamorous of an economic growth engine as, say, a sports stadium, ethnic retail districts like Flushing's Main Street have helped to recapture tax revenues from suburban shoppers in much the same way.

Help from Cities Lacking

In an increasingly global economy of outsourcing and corporate mergers, the report suggests that small businesses will only become more important to cities' economies. And with new immigration expected to fuel population growth for the next few decades, the demand for businesses that serve the immigrant community—from ethnic foods to legal services—will only continue to swell. That presents cities with an incredible untapped resource, Bowles says.

Even without substantial help from the city, Jamaican-born Lowell Hawthorne turned a small bakery in the Bronx into the country's largest manufacturer of Caribbean beef patties, with a chain of more than 100 Golden Krust franchises. Ecuador native Hector Delgado grew his storefront travel agency, Delgado Travel, into a business with two dozen locations in the New York area and close to $1 billion in annual revenues.

A little attention could help more mom-and-pop shops grow into midsize businesses, Bowles says, or help more local businesses export their products outside the city. "We're just scratching the surface. Immigrants are already making substantial contributions to the economy, and local officials have done nothing to harness that growth," Bowles says.

Capital Crunch

The report gives recommendations for policymakers in New York and other cities for addressing existing obstacles faced by immigrant entrepreneurs as a result of language, cultural, and socioeconomic barriers and lack of access to credit. One solution focuses specifically on how cities can address the "capital crunch" faced by many immigrant startups. In addition to the rising costs of real estate, health insurance, and energy that are common to all small businesses, immigrant entrepreneurs often find it difficult to secure financing (see BusinessWeek.com, 1/22/07, "Rules for Raising Capital").

Alfredo Melendez says he was shocked at how little his past business successes seemed to matter when he went to a local bank seeking financing for his latest venture, a coffee house in Reston, Va. "They said, 'Do you have a business plan?' and I said, 'What is that?' They looked at me like I was a little insect." He was turned down by six more banks and the Small Business Administration before an old business contact—who happened to be on the board of directors of a new local bank—pulled some strings.

Melendez recently sold the coffee house for $1.72 million. "We have accomplished our ideal," he says. And after 21 years of working 14- to 16-hour days, he's looking forward to a vacation.


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