AMERICASBUSINESSOPINION

Small business financing sources between immigrants and natives in Puerto Rico

By Hazrat Hassan

This article examines the distinctions in little business financing sources among different congregations in Puerto Rico (Island-conceived Puerto Ricans, Puerto Ricans conceived in the United States and Immigrants). It is hypothesized that immigrants are relatively successful in obtaining funds from financial institutions because they are wealthier and might have a high representation in the financial sector, particularly in managerial positions, as compared to other groups. Also, immigrants could be positively self-selected into the entrepreneurial sector; therefore, financial institutions may attach a higher probability of business success to this group. The results from a multinomial legit model of financing sources support the contention that non-native owned businesses have a higher access to credit markets than natives owing perhaps, to their wealth status and economic power. [1]

Puerto Rico’s economy has in large part benefited from section 936 of the internal revenue code. This code allows US subsidiary firms to receive tax exemptions on the profits earned in Puerto Rico and, as such, has generated much needed employment in the Island.

Recently, however, the US congress has considered the elimination of section 936, creating concerns over alternative sources of employment in Puerto Rico. [2]

In response, the common-wealth administration developed the economic development model in 1993 to promote native entrepreneurial formation as a complement to capital imports. To accomplish this objective, the private and public sectors are expected to provide external support to the small business sector. Also, the success of the economic development model depends on the degree to which native entrepreneurs have access to funds from island financial institutions. Unfortunately, conventional wisdom suggests that natives have been relatively unsuccessful in obtaining these funds. [3]

This study seeks to explain if, in fact, differences in small business financing sources exist concerning various groups in Puerto Rico. The data used for this part of the study were drained from the 1995 survey of the needs and characteristics of small and medium sized enterprises (SNCE), conducted by the center for economic development of the university of Puerto Rico. [4]

The sample was partitioned into three major groups: island-born Puerto Ricans, Puerto Ricans born in the United States, and immigrants. The results from a multinomial legit model of financing sources support the contention that non-native owned businesses have greater access to credit markets than natives. Additionally, immigrants rely relatively more on commercial loans to finance their operations than Puerto Ricans and continental Puerto Ricans. [5]

This article then proceeds with possible explanations as to why these differences exist.

These potential sources are explored. First, it is hypothesized that immigrants are relatively successful in obtaining funds from financial institutions because they are wealthier than inborn business owners. As such, immigrants face fewer liquidity constraints (Evans and

Jovanovich, 1989) and might represent a group with greater investment return potential. It should be noted that income/wealth from both groups is generated entirely in Puerto Rico. [6]

Second, immigrants might be highly represented in the financial sector, particularly in managerial positions, perhaps implying institutional discrimination against natives. Third, immigrants could be positively self-selected into the entrepreneurial sector; therefore, financial institutions might attach a higher probability of business success to immigrants. The first two hypotheses are supported by the PUMS data. Immigrant business owners earn more income than the other groups, and earn twice as much interest income as Puerto Rican and mainland Puerto Rican entrepreneurs. Also, relative to the other groups, immigrants have the highest participation rate in financial managerial positions in Puerto Rico. However, the third hypothesis is not supported: Puerto Ricans and immigrants have negative self-selection rates than mainland Puerto Ricans. [7]

The results obtained in this reading profit insights into the specific factors that may affect the selection of financing sources by small businesses in Puerto Rico. Because the small business sector represents a growing and potentially profitable market for banks, these findings could help financial institutions to develop/revise their lending policies to foster small business formation among natives in Puerto Rico. The results from this study add to the call by extant development literature regarding the role of small businesses on economic growth and to the importance of formulating adequate policies to ensure that small entrepreneurs have access to capital markets. [8]

That is, several studies have shown that to foster small business growth in developing economies, appropriate policies are needed to facilitate small entrepreneur’s adequate access to capital markets for the accumulation of physical and human capital (Rondinelli and Kasarda, 1992; Braham et al., 1996; Binks and Ennew, 1996; Yamada, 1996; Daniels and Mead, 1998). For example, using survey data from Guatemala, Braham et al. found that nonprice rationing by banks is more common among lower wealth households, a situation that may restrict the development of small-scale, low-wealth producers in that country. [9]

References:

  1. Barham, B. L., Boucher, S., & Carter, M. R. “Credit constraints, credit unions, and small-scale producers.” World Dev, 1996.
  2. Bates, T. “Commercial bank financing of White-and-Black-owned small business start-ups.” Quart Rev ECo bussiness , 1991.
  3. Binks, M. R. & Ennew, C. T. “Growing firms and the credit constraint.” Small Bus Econ, 1996.
  4. Borjas, G. J. & Bronars, S. G. “Consumer discrimination and self-employment.” J Polit Econ, 2000.
  5. Borjas, G. J. “The self-employment experience of immigrants.” J Human Resource, 1986.
  6. Cole, R. A. & Wolken, J. D. “Financial services used by small businesses: evidence from the 1993 National Survey of Small Business Finances.” Fed Reserve Bull, 1995.
  7. Daniels, L. & Mead, D. C. “The contribution of small enterprises to household and national income in Kenya.” Econ Dev Cultural Change, 1998.
  8. Feldman, H. D., Koberg, C. S., & Dean, T. J. “Minority small business owners and their paths to ownership .” J Small Bus Management, 2000.
  9. Gabriel, S. A. & Rosenthal, S. S. “Credit rationing, race, and the mortgage market.” J Urban Econ,, 1991.

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Hazrat Hassan

Hazrat Hassan holds MS Finance from International Islamic University in Islamabad, Pakistan.

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