A History of Emerging Domestic Markets
Jun 01, 2007
Glenn Yago, Betsy Zeidman and Alethea Abuyuan
Publisher: Community Development Investment Review

Community Development Investment Review (Federal Reserve Bank of San Francisco)

In this article, Glenn Yago, Betsy Zeidman and Alethea Abuyuan of the Milken Institute write about the growth of America's ethnic consumer markets and business ownership i? 1/2 and how despite this growth, these businesses still have trouble getting the capital they need to expand.

They offer a history of these i? 1/2 emerging domestic markets,i? 1/2 and help explain why initiatives designed to help them have fallen short.


"The 2000 U.S. Census dramatically illustrated what many observers already knew: that America's racial and ethnic make-up is diversifying rapidly. Over the next 40 years, if projections hold, more than 85 percent of U.S. population growth will come from ethnic groups. In fact, the size and share of these ethnic groups is so significant that the combination of America's African-American and Hispanic consumer markets is larger than the GDP of all but nine countries in the world.

"With this diversity comes a change in the make-up of business ownership in the country. This is a trend that has been building over time. i? 1/2 Between 1997 and 2002 (the most recent comprehensive data on ethnic- and women-owned firms), the number of firms owned by African-Americans, Hispanics, and Asian-Americans grew at nearly three times the rate of all firms (with the number of African-American businesses increasing at almost four times the rate).

"Women-owned firms also show high growth rates, particularly marked among ethnic women entrepreneurs i? 1/2 increasing at a rate five times that of all firms. The number of firms owned by African-American women multiplied even faster, at nearly 12 percent annually, compared to 2 percent for all firms and just under 4 percent for all women-owned businesses.

"Furthermore, the added diversity has increased the range of places in which the new owners live or locate their businesses, leading to demands for capital in a wider variety of locations. With these changes comes a new investment opportunity, identified as "emerging domestic markets" (EDM). EDM refers to people, places or enterprises with growth potential that face constraints due to systematic undervaluation due to imperfect market information and access to resources. The markets include ethnic- and women-owned firms, urban and rural communities, companies serving low-to-moderate-income populations, and other small- and medium-sized businesses. EDM represents a variety of subsectors including people of color (African-Americans, Latinos/Hispanics, Asian Americans/Pacific Islanders and Native Americans), women and low-to-moderate-income communities (LMI) (both businesses located there and firms owned by LMI entrepreneurs).

"Despite their growth, the ability of EDM businesses to grow their revenue remains constrained. While still marked, the growth rate of EDM firms' sales does not match that of their numbers, indicating smaller size. The number of all ethnic firms grew by 5.6 percent from 1997 through 2002, while sales growth rose only 3.3 percent over the same period. On the other hand, while the number of all U.S. firms increased by just 2 percent, their sales grew 4 percent. It is worth noting, however, that African-American-owned firms increased their sales by a greater percentage than did all firms (4.5 percent compared to 4 percent).

"Hispanic-owned firms showed the greatest growth rate in terms of employment (2.1 percent over the period, compared to 1.4 percent for all firms). Even after controlling for a variety of factors (e.g., education, experience, industry, location), it is clear from research that EDM firms receive less capital and on less advantageous terms. Without equal access to the full array of financial products on the market, EDM businesses will not grow to their potential. And that would hinder the nation's economic growth.

"The history of investing in these markets i? 1/2 by both the private and public sectors i? 1/2 falls into two broad categories i? 1/2 people and places. On the one hand, initiatives have targeted "minorities," an obviously anachronistic term, given their growing share of the population and business ownership. On the other hand, there has been a focus on i? 1/2 underservedi? 1/2 geographies i? 1/2 those with large concentrations of LMI census tracts or subject to historic abandonment. Neither of these approaches is sufficient in and of itself."

View the full article and a series of related articles in the June issue of "Community Development Investment Review" on the Federal Reserve Board of San Francisco's web site. (Note: This link takes you to a web site outside of milkeninstitute.org. To return, hit the back button on your web browser.)