Emerging Domestic Markets: Increasing Capital by Improving Data
Apr 01, 2007
Glenn Yago, Betsy Zeidman, Teresa Magula and Jon Sederstrom

With the demographic makeup of the U.S. population changing dramatically, ethnic groups now constitute majorities in four states (California, Hawaii, New Mexico and Texas) and the District of Columbia. If the purchasing power of the country's ethnic groups represented a single nation, it would constitute the world's seventh-largest economy.

Not surprisingly, the makeup of the nation's business ownership is changing as well. Ethnic-owned firms grew at twice the rate of all firms over the past 10 years, and the number of women-owned firms grew faster. Businesses in traditionally overlooked areas, such as low-income communities and inner cities, show market potential that defies stereotypical expectations.

Yet these business owners continue to face challenges accessing capital, thus hindering their opportunities for growth. Why, and what can be done about it?

This report, produced in conjunction with the Ford Foundation, shows that one crucial reason is the information gap about these businesses, which the Milken Institute refers to as emerging domestic markets (EDMs).

Without comprehensive, reliable demographic and financial information, and a functioning infrastructure to disseminate that information, financial decision makers (e.g., investors, lenders and funders), business leaders and public-policy officials will be unable to price risk and evaluate opportunities effectively. Furthermore, the lack of data constrains the development of innovative financial products.

This report surveys the current research on EDM data and offers an approach for data sharing, a "data consortium," that leverages existing resources and provides opportunities for improved analysis, policymaking, and product development.

In the course of preparing this report, Milken Institute researchers interviewed more than 100 experts and identified nearly 70 databases. Among their key findings:

  • Significant overlaps exist, as well as large holes in the quality and quantity of data. Many databases include relatively few survey units, and few effectively cover emerging domestic markets as a whole. Information often relies on self-reporting, which is notoriously unreliable.
  • Given the broad range of groups interested in emerging domestic markets, and their varying goals, the data needs - and even definitions of terms - often are not standardized, limiting comparison.
  • While there are several efforts to improve and aggregate EDM data, there is little information at the transaction level, except in proprietary databases. Yet this information is the most critical for assessing business opportunities and improving capital flows.
  • There is definite interest in forming a data consortium, assuming that privacy and confidentiality concerns can be assuaged. Legal and technological solutions can address these issues.

Excerpt: "In April 2006, Federal Reserve Chairman Ben S. Bernanke recognized the importance of community economic development data. 'By making companies, entrepreneurs, and investors aware of the new opportunities,' he said, 'and by promoting competition in underserved areas, such information helps put market forces in the service of community development.' A well-constructed data consortium could help eliminate information barriers and unleash the dynamism of the financial markets through knowledge building and product development. Ultimately, both the emerging domestic markets and the national economy would benefit."

Read more about emerging domestic markets.