Black Capitalism Research Paper

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The term black capitalism, which came into frequent use in the 1960s, refers to an increased interest in business, investment, entrepreneurship, and, broadly, economic development as a component of an overall strategy of black advancement. It built on several centuries of interest among African Americans in business ownership and participation, which had been opposed and stifled by overt white opposition. It was seldom espoused simply as a desirable “free market” principle in its own right.

Early Approaches

Black capitalism represented a change from the earlier stress on community-based development, citizen participation, community organizing, and collective strategies in the War on Poverty. In its late-twentieth-century form, it also was a Republican alternative to Democratic Party priorities that had emphasized broad-based spending on education, housing, training, and public works projects. Black capitalism eventually was embraced by many black activists who saw political potential in developing strong economic institutions, both for-profit and nonprofit. They considered businesses to be potential platforms for political action. Thus, black capitalism was warily and partially embraced by some black nationalists, some separatists, and by the Nation of Islam, as compatible with their distinct objectives.

Starting in the 1960s the federal government encouraged African Americans to develop businesses, and thousands were started, but their economic impact was small. Their slow growth led federal policy makers, politicians, activists, and business leaders to look for ways to accelerate the process by using direct government and private financing, and consulting assistance targeted to those businesses that had the greatest chance of growing into substantial companies. They also encouraged increased government and corporate purchasing as a stimulus to growth. By the 1980s success was judged by normal business criteria, rather than social criteria.

In the early phases of black capitalism (1965–1970), federal policy encouraged primarily retail and service businesses. The policy was implemented through direct government and guaranteed loans, government-sponsored management and technical assistance, and government purchasing, but results were small: The thousands of businesses started with the help of federal loans and technical and procurement assistance did not become a substantial factor in community development as was originally hoped. A new view emerged—that federal policy should emphasize the creation and development of businesses that stand the best chance of becoming large and competitive, and economically significant. The new approach promoted acquisitions of larger, going concerns, the creation of sizeable venture financing companies, and new, stronger banking relationships from mainstream credit sources. This approach helped individuals who had an idea but seldom the right experience, training, or capital to run a successful business. Later, a job creation rationale was added to give the policy broader appeal. But the idea of building truly strong competitive businesses continued to be resisted by policy makers and bureaucrats charged with making Federal programs work.

The policy was a hasty response to the political and social pressures of the poverty program era. But managerial inexperience, poor locations, faulty business planning, market inadequacies, and capital shortages led to business failures. Shoplifting, employee pilferage, and other crime also increased business costs and raised risks. Racially discriminatory lenders, investors, and purchasing officers in government and corporations also impeded progress. The policy was defective, and the results were poor. The small retail and local service businesses had lower than average revenues, high costs, inexperienced management, weak capital structures, and other competitive handicaps. They concentrated in low-growth and low-margin sectors, and provided little full-time employment. Typically, they had poor locations and limited access to the wider general market. Manufacturing companies were grossly underrepresented.

For gross comparison, “minority” business receipts in 1978 were $35 billion in a $2 trillion economy—2 percent of total receipts. The goal became to increase aggregate demand, with better federal government and corporate procurement policies, to lift “minority” receipts by 1982 to $75 billion in a $2.5 trillion economy, or 3 percent of total receipts.

The Shift to Success

By 1980 to 1985, several things changed. First, there emerged a pool of African American managers and entrepreneurs with MBAs from top business schools. Second, the federal government changed its practice on delivering technical consulting assistance. Previously, management and technical assistance had suffered because of political pressures to give contracts and grants for these services to inexperienced or ineffectual local consulting organizations; the government began to give fewer but larger grants to the best of the consulting groups, and this paid off in better assistance to clients with demonstrated capacity to make consistent profits. Finally, early skeptics among the trade unionists and community activists, as well as among political Republicans and Democrats, came to recognize the value of a stronger African American business sector.

Corporate Action

The disappointing results from early efforts encouraged policy makers to look for better approaches. Federal practice moved upscale, to provide financing for larger businesses, including in manufacturing, and investment in firms with the potential to become publicly held. These operations sometimes became African American–led through acquisition. This approach was implemented through expanded venture capital, investments in promising businesses, corporate spin-offs, strengthened African American banks, and the use of existing private and government programs to increase purchasing and subcontracting from minority companies.

This tactic of building on strengths helped more businesses to become significant and competitive. An additional effect was saved and new jobs when the companies were located in labor-surplus or distressed areas— primarily in northeastern and midwestern cities and rural areas—and might otherwise have closed or moved away. So this approach also served the interests of the

Department of Housing and Urban Development, the Economic Development Administration, the Community Services Administration, and the Business and Industry Office of the Farmers Home Administration in the Department of Agriculture.

Venture Capital

Another step that made black capitalism effective was the growth of venture-capital firms created by farsighted companies. Although they quickly evolved into private firms with no government funding, they began by using government funds provided by minority enterprise small business investment companies (MESBIC) programs.

In 1970 the government had initiated a venture-capital program, the MESBIC, which began as an outgrowth of the previously established small business investment company (SBIC) concept. MESBICs, like SBICs, ran into financial and operating problems during the early and mid-1970s, and many of their investments did poorly or failed, but they recovered and became increasingly important financing sources in major transactions.

The MESBIC program continued to evolve, and it became more attractive to corporate investors when legislation made it possible to leverage private participation up to four times with funds at less than market interest rates. Used imaginatively by corporate sponsors, the MESBIC program provided significant equity and debt to businesses that became reliable contractors, suppliers, customers, and partners. The new thinking was that private venture-capital firms, corporate venture groups, insurance companies, investment-banking firms, and commercial finance companies could, in the right circumstances, increase their participation in these business ventures as normal business practice.

The policy worked through a network of sources to find, screen, structure, and close substantial investments, especially in the acquisition of manufacturing businesses. In the early stages, companies acquired had annual sales averaging $3 million, and were purchased for an average of $1 million. In one case, a precision screw products company was bought for $1.4 million, and a few years later, in 1978 it had sales of $3 million. The African American purchasers raised $30,000, and the remaining $1,370,000 was financed privately. This model became a basis for moving upscale and into the mainstream.

These business deals were notable only because they involved African Americans—such financings were normal in everyday business. The criteria used in selecting businesses for acquisition were not limited to specific industries or types of companies, though manufacturing was preferred. Tests of risk, profitability, manageability, and return on investment were applied. The pool of African American investor-managers remained a constraint. The flow of ventures and the availability of finances were greater than the supply of appropriate investor-managers. But the discrepancy narrowed as welltrained MBAs reached the career points where moving into these situations was appropriate.

Several major corporations established MESBICs and then capitalized them at higher levels—up to $10 million. These larger MESBICs were often industry specific. In some cases, they financed businesses that the sponsors felt could become consistent suppliers. In the entertainment industry, MCA had a MESBIC that financed entertainment-related projects and companies in music and records. MCA New Ventures and three other MESBICs put together a package of $5.3 million in cash, loans, and services for the record company T-Elect. With $7.5 million capitalization, the National Association of Broadcasters established a MESBIC that will work with the National Telecommunications and Information Administration of the Commerce Department and with the Federal Communications Commission to help African Americans acquire radio and television stations.

Ironically, MESBIC staffs—African American professionals—tended to approach investments more pragmatically than many white senior managers from sponsoring corporations. They continued to think in terms of social responsibility, and thus preferred deals that were most risky and least attractive according to normal investment criteria. Such differences in viewpoint led to conflicts: What was the real point—businesses that can grow and become competitive and profitable, or social tokenism?

Spin-Offs

In the late 1970s government representatives met with senior managers of General Motors, Eastman Kodak, Bankers Trust, First Pennsylvania Bank, Chase Manhattan, Hewlett-Packard, Levi Strauss, Kaiser Aluminum and Chemical, and others to discuss selling corporate units. No deals resulted, but the meetings served the purpose of raising expectations about black capitalism.

Corporations were encouraged to sell units that could operate independently. Spin-offs and independent acquisitions were carried out as straight business transactions at market prices and with normal fees to brokers and private financial participants. No subsidies or contributions from the corporate sellers or other private parties were sought. Applicable federal, state, and local loan and guarantee programs were used to augment private financing.

Commercial Banks

Another policy change toward African American business development was an effort to upgrade the 100 commercial banks. The Federal Reserve System, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, and the Commerce Department worked to improve the management, staff efficiency, marketing skills, and permanent capital base of these banks. These banks grew, some by acquiring branches of major banks, during the consolidation wave of the 1980s.

Corporate Purchasing

Another dimension was the growing interest from major corporations. The government encouraged purchases by providing operating grants to and encouraging corporate participation in the National Minority Purchasing Council (NMPC), which included many “Fortune 1000” companies. Through the NMPC, African American companies received $1.8 billion in purchases from corporate businesses in 1978, and this volume grew steadily over the next twenty-five years.

Government regulations and programs also encouraged or required purchasing, contracting, and subcontracting. For example, the government required companies bidding on government work worth more than $500,000 to “minority” subcontract participation. Opposition to this practice led to reversals in the courts, but it became normal business practice for many large companies.

The 8a Program

Federal procurement was a key element in accelerating black capitalism. The Small Business Administration’s 8a program directed government contracts to “minority” businesses. In 1977, federal policy called for the rate of federal procurement from “minority” businesses to increase substantially, from $1.8 billion annually to $3 billion. Steady increases continued over the next twenty-five years, providing a substantial revenue base. Offices of Small and Disadvantaged Business Utilization (OSDBUs) in every federal agency institutionalized this policy and increased awareness of it among bureaucrats.

Black capitalism, and the policies that followed, were initially based on the mistaken assumption that the government could help cure poverty by transforming some of the poorest into entrepreneurs and managers, almost overnight. A sober assessment of these policies led to new insights—that building on strength was a more sensible route.

The managers and entrepreneurs in whom the government and private investors invested emerged as the kinds of people whom venture capitalists and other private financiers normally bet on. The approach, thus, called for specially designed government loans and other such financing only to the extent that these approaches were needed to reduce perceived risks stemming from businesses’ locations or other unusual characteristics. Another tool that stimulated acquisition opportunities was tax incentives to sellers. These tax code provisions stimulated many sales of businesses in the 1980s and 1990s. Together, these evolving techniques, practices, and strategies made possible the phenomenon that came to be known as black capitalism.

Bibliography:

  1. America, Richard F. 1980. How Minority Business Can Build On Its Strength. Harvard Business Review 58: (May–June).
  2. Bates, Timothy M. 2001. Financing the Development of Urban Minority Communities: Lessons from History. Communities and Banking, Federal Reserve Bank of Boston. Sum: 12–15. http://ideas.repec.org/a/fip/fedbcb/y2001isump1215.html#provider.
  3. Bradford, William D. 2003. The Wealth Dynamics of Entrepreneurship for Black and White Families in the U.S. Review of Income and Wealth 49 (1): 89–116.
  4. Graves, Earl G. 1997. How to Succeed in Business without Being White: Straight Talk on Making it in America. New York: HarperBusiness.

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