Local banking markets and barriers to entrepreneurship in minority and other areas

James Prieger ()

Journal of Economics and Business, 2023, vol. 124, issue C, No S0148619523000012

Abstract: This empirical study investigates the linkages among entrepreneurship in the form of establishment entry, local banking markets, and broadband availability, focusing on minority areas in the US. Lack of access to banks and lack of competition in the market for small business loans can make it more difficult for an entrepreneur to overcome the liquidity constraint to starting a new business. Broadband internet access can facilitate startups directly by enhancing firm profitability and indirectly by stimulating competition in the loan market, lowering the cost of access to finance, and enabling access to financial capital from fintech lenders. The barriers to new business creation erected by local banking markets are hypothesized to be even higher in minority areas, given the greater difficulty minority entrepreneurs face in raising financial capital. The empirical results show that broadband availability, local bank density, and competition in small business loans all facilitate startups. Broadband lowers barriers for entrepreneurs as hypothesized through both the direct and indirect channels. Broadband availability attenuates the barriers from insufficient access to local banks and lack of competition in small business loans from banks. For some industries, higher bank density and greater loan competition facilitate startups more in minority areas than in mostly white areas. Given that minority areas have many fewer banks per capita and much less loan competition than mostly white counties, the results imply that minority areas face even higher barriers to entrepreneurship from insufficient local formal financial resources. The moderating effect of broadband on local financial constraints applies even more so to Black communities; thus while the barriers for Black entrepreneurs may be higher, access to broadband has a greater alleviating effect on those barriers. Business creation in Hispanic areas also faces obstacles from the local banking environment, but broadband does not appear to help reduce them, although it still has a positive direct effect on entry. Additional evidence shows that broadband helped small businesses in minority areas procure more bank loans. Broadband access can thus help entrepreneurs in general, Blacks in particular, and to a lesser extent Hispanics surmount the liquidity constraint to starting a business. The implications of the results are discussed with reference to current and proposed policy to promote broadband availability, usage, and digital equity.

Keywords: Establishment births; Startups; Entrepreneurship; New business formation; Liquidity constraint; Broadband (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:124:y:2023:i:c:s0148619523000012

DOI: 10.1016/j.jeconbus.2023.106108

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