The Structure and Substance of African American Entrepreneurial Networks: Some Preliminary Findings
Nicholas Young, The College of Wooster; University of Chicago
Abstract
Introduction
Review of Literature
Opportunity
Recognition and Resource Acquisition Among African American Entrepreneurs: A More
Fruitful Starting Point
The
Structural Context of African American Entrepreneurial Opportunity
Data and Method
Conclusion
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Notes
References
Few ideas are more in need of continuous social science investigation than the problems African Americans have creating and managing successful entrepreneurial firms. Previous inquiries on this subject highlight deficiencies in human and financial capital as the primary factors responsible for the paucity of successful African American-owned ventures. I find this conclusion problematic. In contrast, in this paper I show why a focus on social structure may generate more fruitful sociological results than previous investigations. Using the network analytic framework, and data (n = 30) gathered from a probability sample of African American entrepreneurs, I find two (2) things: 1) the ability of many African Americans to recognize entrepreneurial opportunities is conditioned by their positions in social structure—e.g. many actors recognize entrepreneurial opportunities when they find “structural holes”—discontinuities between exchange relations; 2) many African American entrepreneurs, instead of assembling a large, diverse affiliation network, rely rather on a small, diverse core of alters that assist them in acquiring entrepreneurial resources and making important social and economic decisions.
Few would question the idea that African Americans, like other entrepreneurial actors, have difficulty creating and managing successful firms. Nor would many disagree that these problems make the African American experience somewhat unique, even though they would define their source differently. In the discourse of entrepreneurship, the idea that African Americans are not successful entrepreneurial actors has been the subject of much debate in the social sciences. Nonetheless, research on their experiences does not convey the textured difficulties of their entrepreneurial process, for it echoes the old, but still relevant themes of inadequate capitalization/ discrimination which have survived with remarkably little alteration since at least the 1970’s. But while there is some truth to such an analysis, the fuller story is much more complex.
Indeed, while scholars continue to generate very useful findings about the methods “white ethnic” entrepreneurs use to create entrepreneurial firms, social scientists appear caught in a conundrum when it comes to explaining the factors responsible for generating low self-employment rates among African Americans. Previous inquiries generated by a loose confederacy of scholars rests on a very fragile assumption: the primacy of inadequate financial and human capital resources over other sociological factors as the proximate variable circumscribing the creation and performance of African American firms. Try as they might, researchers have neglected to point up new ways to view and analyze this problem, and thus dislodge the human and financial capital arguments from their privileged positions.
With this paper, I attempt to challenge this ordinary way of thinking about this problem by refocusing the debate away from human and financial capital arguments and more toward an analysis of social structure in generating successful entrepreneurial action among African Americans. Indeed, while human and financial capital formulations continue to take center stage in this research and generate important baseline information, such explanations can no longer be given such a rationalized foundation. A social structural inquiry into how African American entrepreneurs recognize entrepreneurial opportunities and acquire the resources to bring the firm to fruition provides a more fruitful starting point for scholars attempting to uncover differences in firm type, formation, management, and strategy between African Americans and other entrepreneurial actors.
In this paper I attempt to make sense of this problem by focusing on the interaction of network structure and content for generating successful entrepreneurial action among African Americans. I argue that a more necessary starting point for researchers in this area is to understand how the entrepreneurial process is embedded in concrete social relations. An analysis of how actors recognize entrepreneurial opportunities and manage their social structure to acquire entrepreneurial resources may provide more fruitful insights into why entrepreneurs create specific firms and acquire specific resources. But conducting such an inquiry requires a set of methods and analytical concepts different from traditional ways of thinking about this issue. Hence my point of entry into this debate is to investigate through egocentric structural analysis the pattern and content of relationships among social entities conditioning what Bygrave (1989) calls the “entrepreneurial event” and facilitating the acquisition of entrepreneurial resources; or to put it another way, the relationships among social entities and the role each play in generating successful entrepreneurial action among African Americans.
This paper, then, has a distinctive logic. In the pages to follow, I present argument and evidence that develops the logic for the deployment of a network approach to this problem. I begin with a brief discussion of previous research.
To date, scholars have applied a strict structural paradigm in analyzing the entrepreneurial experiences of African Americans. The bulk of this research was published during the 1980’s. U.S. census enumerations taken between 1970 and 1990 served as the primary data sources. Ong (1981) used a cross-sectional regression model to analyze the factors influencing the size of the African American entrepreneurial community. Analyzing data from the 1970 and 1972 census on the entrepreneurial experiences of African Americans in 30 SMSA’s, he found few constraints on the demand (spending) side for products produced by African American retail and service-oriented entrepreneurial firms. Similarly, there were few constraints on the existence of supply side elements (products). In a possible extension of Ong’s investigation, Handy and Swinton’s The Determinants of the Rate and Growth of the Black Business Community (1984) also analyzed census data to investigate the factors affecting the rate and growth of African American businesses. From their analysis of 1972 and 1977 census data from several SMSA’s, they found substantial variation in the market performances of African American businesses. Handy and Swinton conclude that at least three factors are responsible for determining the rate and growth of African American businesses: 1) market demand and the availability of resources; 2) the growth and health of the local economy and the number of African American consumers; and 3) the availability of capital.
Although they leave many questions unanswered,1 Ong’s and Handy and Swinton’s analyses provided the conceptual framework for future empirical work in this area. They were the first prominent studies to provide structural explanations of the factors circumscribing the growth of the African American entrepreneurial community. After these studies, it wasn’t uncommon to observe literature comparing the methods used by African Americans and other ethnic groups to pursue and create entrepreneurial firms. In such a formulation, Bearse (1984) used an econometric approach to analyze and compare individual, group, and contextual factors explaining the variation in self-employment rates between African Americans, Latinos, and Asians. He identifies three factors responsible for the lower self-employment rates among African Americans: African Americans are 1) more likely than the other ethnic groups studied to have only one earner per family; 2) less likely to have assets or other sources of income at their disposal; and 3) more likely to have fewer years of education. Ando (1986, 1988) found from her research that African Americans, compared to other entrepreneurial ethnic groups, have relied more heavily on SBA guaranteed loans to finance their ventures. Chen and Cole (1988) found that African Americans firms, when compared to Asian and Latino enterprises had smaller capital compositions during and after the start-up phase. The average capital input used for start-up purposes for each was $10,000 for all firms, $7,200 for African Americans, $14,000 for Latinos, $20,000 for Asians, and $16,000 for non-minorities. They suggest African American firms are undercapitalized because of their comparatively low owner-equity investment from personal assets, low community response to firm-debt investment, and credit discrimination by financial institutions. Fratoe suggests the observed variation between entrepreneurial groups may be attributed to differences in “social capital.”2 Finally, Bates (1989a,1989b, 1993) asserts that the difference in failure rates between the two groups are partly due to the fact that African Americans tend to be less educated and use less capital in the start-up of their entrepreneurial ventures than Asians. He posits that inadequate capitalization is the primary factor circumscribing the creation and performance of African American firms.
As the reader may see, previous research has produced an undifferentiated matrix of results that highlight the paucity of human and financial capital traits among African American entrepreneurs. Inadequate access to financial capital is the major theme. As I argue above, however, a more fruitful analysis of the entrepreneurial process among African Americans requires an understanding of the sociological circumstances by which actors acquire these resources. Such an inquiry may highlight the significance of social relations in generating entrepreneurial opportunities. In the remainder of this paper, I illustrate why such an understanding alters our theoretical and empirical thinking about firm creation among African Americans.
Several scholars discuss the centrality of opportunity recognition for entrepreneurship. Kirzner (1973) argues that the process of discovery—recognizing and exploiting things others do not—is a proximate issue of entrepreneurship. Vesper (1980) suggests a search approach in identifying new venture opportunities. Stevenson et al. (1986) argue entrepreneurship is driven mainly by perceptions of opportunity. Timmons et al. (1987) maintain that opportunity recognition should be viewed as one of the most important steps in the entrepreneurial process. Christensen et al. (1989: 3) defined opportunity recognition as either a) perceiving a possibility to create new businesses, or b) significantly improving the position of an existing business. Gaglio and Taub (1992) hypothesized about how an actor’s alertness to an entrepreneurial opportunity can be linked to a set of cognitive strategies and skills.
The literature discussed above is convincing on at least this point: the ability to recognize a new venture opportunity is a critical first step in the entrepreneurial process. Taken together, however, this group of researchers appear to imply that actors recognize entrepreneurial opportunities independent of their social relations. Granovetter (1985: 486–87) warned against this type of thinking, suggesting rather that “ . . . the relegation of the specifics of individual relations to a minor role in the overall conceptual scheme . . . has the paradoxical effect of preserving atomized decision making even when decisions are seen to involve more than one individual.” Recognizing this, Hills et al. (1997) avoid the atomization implicit in these theoretical discussions by showing how “network entrepreneurs”—individuals who recognized entrepreneurial opportunities through their personal networks—identified significantly more opportunities than “solo entrepreneurs”—actors who stated the business idea was strictly their own.
The impact of social relations on economic behavior is clear: economic action between actors does not transpire in a vacuum, but rather is conditioned by ongoing structures of social relations. To produce more effective research results, a more sophisticated account of entrepreneurial behavior among African Americans must consider the embeddedness of entrepreneurial recognition and action in such structures.
Resource Acquisition Among African American Entrepreneurs: A Social Structural Approach
The importance of Hills et al. (1997) findings for this paper are not in its details but rather in its central message: the ability to recognize entrepreneurial opportunities is conditioned by one’s social structural position. However despite it’s apparent relevance, it nevertheless stops short of illuminating how actors manage their social structure to acquire resources to formulate the new venture. Similarily, both Bates (1994) and Handy and Swinton (1985) discuss the importance of financial resources for entrepreneurial success, yet they do not point up the strategies African American entrepreneurs use to acquire them. The network approach helps fill this gap by illuminating how relational ties act as channels for the transfer or flow of resources and how the network structural environment provides opportunities for and constraints on individuals action (Wasserman and Galaskiewicz 1994: xiii).
The Network Approach
For this purpose, a network will be defined as the assemblage of all individuals connected or linked by a certain type of relationship in a specific social context. In network analysis, the behavior of actors is measured in terms of structural constraints on their activity; individuals are considered to be interdependent rather than independent, autonomous units. The analysis of an individual’s behavior is based on the simultaneous investigation of their associations or relational ties, and how the pattern of these associations affect their behavior. Thus, the unit of analysis in the network analytic paradigm is not the individual or “ego,” but the constellation of actors (considered “alters”) that ego is directly or indirectly linked to.
Network Dynamics in Entrepreneurship Research
As suggested above, scholars have only recently recognized the importance of network theory for entrepreneurial research. While Aldrich et al. (1986) argued that few empirical results in entrepreneurship research have been generated to illuminate the contribution of network theory, Aldrich and Zimmer’s (1986) population perspective was the first theoretical discussion to highlight the significance of social structure in shaping the entrepreneurial process. Continuing this stream of thought, Birley (1985) found social networks useful in assembling the resources needed among start-ups in Indiana. She finds that entrepreneurs use networks to seek information on “what is available, advice on how to best proceed, reassurance that it will work, and resources of equipment, space, and money” (1985: 109). Butler and Hansen (1988) argue that networks are important in “initializing” the entrepreneurial process. According to Johannisson (1986, 1990a, 1990b, 1994, 1995), entrepreneurship is “personalized action.” He finds that entrepreneurs are most reliant on their personal network to launch the venture. He argues that the personal network is the entrepreneur’s most important resource during the initial stages of the venture because it affords the actor the opportunity to use network control to manage information, values, and gain and maintain resource flexibility to overcome the barriers and liabilities of newness. Building on this research, Ostgaard and Birley (1996) suggest personal networks play a vital role in new venture development.
Taken together, the above research shows the importance of network theory for understanding the entrepreneurial process. Having laid this foundation, I turn now to a discussion of how networks can be used to acquire entrepreneurial resources.
Entrepreneurs, Resources, and Social Structure
For this study, I define an entrepreneur as someone who does the following: a) recognizes a market need; b) recognizes an entrepreneurial opportunity that fills this market need; c) creates a new or improves upon a current innovation; d) acquires and formulates the resources to bring the firm or innovation to fruition. Quoting several sources, Brown and Kirchoff (1997) argue that the traditional view of entrepreneurial activity centers on the importance of resources in determining entrepreneurial activity. Indeed, entrepreneurship scholars have stressed the importance of resource acquisition for successful venture creation and performance (Vesper 1980). Entrepreneurs who acquire resources increase their range of strategic options (Romanelli 1987). Having access to resources increases a firm’s ability to take risks, to innovate, and to be proactive (Brown and Kirchhoff 1997: 35). However, while few would disagree with the proposition that resource acquisition is central to the creation and survival of firms, little is known about the methods entrepreneurial actors use to acquire them. The general image is one of entrepreneurs fanning out across environments without the benefit of a managed social structure. However, because resources environments are imperfectly mobile (Barney 1991) and not heterogeneous, entrepreneurial actors need to craft alternate ways of recognizing and securing them. How actors accomplish this is the subject of “structural hole” theory.
The issue of network control is the central theme of Burt’s (1994) “structural hole” theory. According to Burt, structural hole theory benefits from research that emerged in sociology during the 1970’s (Granovetter 1973, 1974—the strength of weak ties; Freeman, 1977, 1979—betweeness centrality; Cook and Emerson 1978—the power of exclusive exchange partners; and Burt, 1979, 1980—the structural autonomy created by network complexity). According to Burt, there is a competitive advantage to building certain relations. Structural hole theory describes how resources are defined by the brokerage opportunities in a network. Because actors are unevenly connected in the entrepreneurial arena, “holes” or gaps exist in the social structure linking actors to entrepreneurial opportunities/resources. Burt views these discontinuities between exchange relations as entrepreneurial opportunities to broker the flow and control of information between people on opposites sides of the hole. Recognition of a structural hole is an opportunity to access information about entrepreneurial resources circulating on either side of it.
The Structural Context of African American Entrepreneurial Opportunity
Burt’s analysis illuminates how networks shape career advancement within organizations. It is primarily concerned with how disconnected actors I call “social entrepreneurs”—actors who seek out purposeful social relationships—use network ties to find each other, and the implications of this process on promotion contest within the firm. The key question, however, is whether a structural hole effect can be found from an analysis of traditional entrepreneurial relations; e.g. relations that result in coordinated combinations of activities we call firms (Granovetter 1995: 128). In other words, can economic entrepreneurs—actors who seek out purposeful economic relationships—with relations to otherwise disconnected social groups use social holes for another purpose: recognizing entrepreneurial opportunities?
A probability sample of 30 African American entrepreneurs was generated from a heterogeneous listing of owner-managed African American businesses. Firms more than 5 years old were excluded from consideration. A questionnaire was created, and face-to-face interviews were used by the author to solicit responses from study participants concerning the following: 1) how they recognized their present entrepreneurial opportunity); 2) the name(s) of individual(s) used and type of entrepreneurial resource acquired; 3) the content of their entrepreneurial exchanges; and 4) dimensions of relation strength between alters.
The Embeddedness of Opportunity Recognition: The Structural Hole Effect
To assess the structural hole effect, respondents were asked to specify how they recognized their present entrepreneurial firm. As Table 1 shows, each respondent was given three choices from which to specify their process of identification. Well over half (66.6%) of the respondents answered that the recognition of their present entrepreneurial opportunity “came as a result of their interaction or shared conversations with others.” Another 30% cited that their recognition came “as a result of a particular event that occurred.” Only 3.3% stated that the entrepreneurial opportunity “suddenly appeared.” Additionally, closer inspection of the data reveals both an embeddedness and structural hole effect. The existence of actors I call “structural hole entrepreneurs” is best captured by the fact that one-third of the sample report recognizing their current entrepreneurial opportunity with the help of a disconnected alter—someone not known previously to ego. The embeddedness effect is evidenced by the fact that two-thirds of the results come from actors embedded in concrete social relationships.
Network Structure: Resource Acquisition
Data on network structure—the pattern of relationships among actors—are usually obtained with the use of name generators: questions that ask respondents for the names and characteristics of people with whom she/he had informal and or formal relations. They are listed in Table 2. They concern alters who assisted ego in the acquisition of entrepreneurial resources.
The first name generator question asked respondents to discuss what resource(s) he/she acquired in the formulation of her/his present firm, and to specify if anyone assisted them in securing each resource. Name interpreters—survey questions that ask respondents about the people cited on the name generators—were used to gather data on entrepreneurial relations with other alters. This question produced the information presented in Table 3.
The resource acquisition name interpreter question yielded a total of 53 relations. The minimum, mean, and maximum size of the resource acquisition network is 0, 1.5, and 3, respectively. African American entrepreneurial resource networks are composed mainly of other African Americans (81.7%), other entrepreneurs (39.8%), friends (44.8%), especially close alters (40.1%), and individuals they spoke with on a daily basis (50.1%). The most striking features of this table are the very high degree of racially-segregated resource networks and the percentage of entrepreneurs who assist their entrepreneurial friends in acquiring important entrepreneurial resources. Only 18% of the entrepreneur’s cited contacts are non-African Americans. This finding suggests that African American entrepreneurs are embedded in resource networks circumscribed by race. The fact that nearly 40% of the cited alters are other entrepreneurs suggests self-employed African Americans surround themselves with individuals who should be more likely to have knowledge of the entrepreneurial process and the existence and experience of acquiring entrepreneurial resources.
Network Structure: Social Support
In assessing network structure, it is often customary to ask about different kinds of relations actors have with similar or different alters. I asked respondents to name the individual(s) with whom they receive the following types of support: making a major life decision, borrowing money, and general advice on improving one’s business. A total of 195 relations were cited. Similar to their entrepreneurial resource networks, African American social support networks are composed mainly of other African Americans (93.6%), friends (66.6%), emotionally close alters (75.0%), and individuals they speak with daily (52.8%). The major difference is in the number of entrepreneurs in their networks. Whereas 39.8% of African American resource acquisition networks contain entrepreneurs, entrepreneurs make up only 19.3% of African American entrepreneurial social support networks. See Table 4.
What are the reasons for this striking difference in network structure? For starters, it makes perfect sense for entrepreneurs to seek out other entrepreneurs to assist them in securing entrepreneurial resources. Indeed, as Cooper et al. (1995) tell us, much of the new venture process involves seeking and interpreting information. Since entrepreneurs are, by their very definition, individuals who search for different types of resources in the formulation of their firms, it seems only logical they would seek the advice and assistance of other entrepreneurs in getting things done. The issue is how they conduct this search; e.g. do entrepreneurs act as atomized actors, or is the search process conditioned by their positions in social structure? As this paper shows, many African Americans seek the assistance of others in gathering and combining resources to bring the firm to fruition. Second, African American entrepreneurs do not appear much different from other individuals: when they desire social support they seek it from individuals who have demonstrated an ability or willingness to assist them in previous instances. In this case, many of these individuals just happen to be non-entrepreneurs.
Network Substance: Resource Acquisition and Social Support
Up to this point, my focus in this paper has been on highlighting the formal features of African American entrepreneurial networks. Indeed, having knowledge on the structure of African American entrepreneurial relationships illuminates our understanding of how networks ties condition the process of venture creation among African Americans. But focusing on structure alone presents a rather incomplete picture of this process. Such an analysis only tells us with whom African American entrepreneurial actors are interacting for the aforementioned types of support. To better understand the behavior of African American entrepreneurs, it will be important to analyze the content of the social tie involved in the preceding analysis. Thus, I turn now to a discussion of network content in this exploration of the African American entrepreneurial experience.
The contents of African American entrepreneurial resource networks are listed in Table 5. For the most part, African American entrepreneurs gather from their network contacts information about various entrepreneurial resources: financial capital, other network contacts, location site(s), and other resources specific to formulating the business. They cited a minimum (1.0), mean (2.3), and maximum (4.0) number of resources they acquired in the formulation of their firms. Many African American entrepreneurs received some assistance from their network contacts in acquiring each resource: financial capital (75% of all resource acquisition network contacts); location (100%); computers (100%); and other important entrepreneurial resources (20%).
Investigation into the content of African American social support networks show that African American entrepreneurs cite a minimum, mean, and maximum number of alters for the following support categories: advice about a major life change (0, 2.16, 4.0); borrowing money (0, 2.5, 7.0); and advice about improving one’s business (0, 1.5, 4.0).
The Interaction of Network Structure and Substance: The Importance of Network Size and Diversity Reconsidered
Granovetter’s (1973) seminal study of job mobility among managerial, professional, and technical workers showed that job searchers benefit from using weak, rather than strong ties in securing labor market and positions. Strong interpersonal ties, he argues, convey redundant information about labor market opportunities. In contrast, he finds that weak ties are sources of new information because they serve as bridges to otherwise disconnected social worlds. Burt’s (1992) “structural hole” conceptualization improves on Granovetter’s theory by arguing that weak ties act as a correlate, rather than a determinant of the amount of unique information actor’s acquire. He argues that the larger an actor’s network, and the more structural holes surrounding ego, the greater the exposure to valuable information. The key, he argues, is to increase the size and diversity of your network, and reduce the number of nonredundant contacts. To quote (1992: 13–16):
Size is the more familiar criterion. Bigger is better. Acting on this understanding, people can expand their networks by adding more and more contacts. . . . Size is a mixed blessing. More contacts can mean more exposure to valuable information, more likely early exposure, and more referrals. . . . The information benefits of a network define who knows about these opportunities, when they know, and who gets to participate in them...But increasing network size without increasing diversity can cripple a network in significant ways. What matters is the number of nonredundant contacts. Contacts are redundant to the extent that they lead to the same people, and so provide the same information benefits. In a dense network, each relationship puts the player in contact with the same people reached through the other relationships . . . [a] sparse network provides more information benefits. . . . The dense network is a virtually worthless monitoring device. Because the relations between people in that network are strong, each person knows what the other people know and all will discover the same opportunities at the same time.
This issue on network size is an important one. We are inclined to believe that larger, diverse networks lead to an increase of potentially helpful information/contacts. But is larger necessarily better? Will having diverse network contacts always translate to useful information? Is diversity really that important in formulating an entrepreneurial network? If so, what type of diversity is more important?
Scholars have demonstrated a hunger to believe larger, diverse networks translate to a significant increase in information benefits for actors. But the key question is what type of diversity is important and how many actors are needed in formulating an entrepreneurial or any other network? The benefits associated with a diverse network are numerous. Such benefits can either be derived from access to disconnected contacts or weak ties. Or benefits can be derived from access to a contact who can provide diverse resources either from social support or knowledge of entrepreneurial opportunities. As Table 6 shows, for African American entrepreneurs the type of diversity that matters is not alter-diversity, but rather content-diversity: African American entrepreneurs seek the assistance of many of the same alters they cited in the resource acquisition name generator question for social support. This finding suggests that African American entrepreneurs who may benefit from a well-structured network, either in terms of structural holes or weak ties, may also benefit from having access to well-endowed contacts: individual contacts that provide them with social support and valuable information about entrepreneurial resources. The issue is recognizing who these contacts are and the contribution each can make to improving one’s success in the entrepreneurial arena.
To argue, as I have in this paper, that the current “lack of capital (human and financial) research paradigm for the study of African American entrepreneurs is inadequate is to go against much of social science thinking. Indeed, much of what I have had to say in this paper will, no doubt, be viewed as an attempt to replace the current framework with a social structural approach. On the contrary, my purpose in conducting this research has been to illuminate the inadequacies of the ”lack of capital" perspective for explaining the paucity of African American entrepreneurs. Replacing this perspective was never my objective. To be sure, we have learned much from these studies. My aim in this paper is to dislodge it from it’s current position of privilege, and point up the importance of network structure and content in understanding the entrepreneurial process among African Americans. I look forward to constructing, along with others, the fruitful imaginative work of constructing creative scholarship that recognizes the importance of each in generating successful economic action among African Americans.
1. For
instance, Handy and Swinton do not attempt to identify possible reasons for the shortage
of capital and other resources.
2. According to Fratoe, “social capital” constitutes the
amount of social resources available in an actor’s network. Social resources are
important to the extent that they give actors a chance to pursue economic action with the
help of family members, friends, and acquaintances.
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