### Vance C. Smith, Jr., Commissioner



## Docket Management Facility U.S. DepartmentofTransportation 1200 NewJersey Avenue, SE West Building Ground Floor, Room W12-140 Washington, DC 20590-0001
RE: Office ofSecretary, DOT July, 7, 2010

Disadvantaged Business Enterprise Proposed Rule Changes DocketNo. OST-2010-0118
Dear Siror Madam, GEORGIA DEPARTMENT OF TRANSPORTATION One Georgia Center, 600 West Peachtree Street,**~** Atlanta, Georgia 30308 Telephone: (404) 631-1000



## USDOT Rule change Commentfrom GeorgiaDepartmentofTransportationEqual Opportunity Office. Georgia offers the flowing comments onthe proposedrule changes:


## PersonalNet Worth (PNW)Adjustment
1. Georgia agrees with the need to makeadjustment ofthe Personal NetWorth from $750,000to $1.3 million. However, Iwould strongly suggestthatyou considerthe Study commissioned bythe Congressional BlackCaucus Foundation. The Study called "Increasingthe Capacity ofthe Nation's Small and Disadvantaged Businesses (SDBs)" was conducted by Dr. Thomas D. Boston, CEO ofEuQuant www.euquant.com: (attached). Iwould recommendthattheincreased adjustments for the PNW be made by industry, instead ofthe flat rate that fits the entireDBE community. The adjustmentincrease ofthe PNWfor inflation alone is well within the financial growth indexes since 1998. Georgiawould recommend:



## a. Adjust PNWfor inflation and make adjustment orreview everythree years orannually as needed
b. SetPNW ceilingsbyIndustry 1. 

## Construction 11. 

## Manufacturing 111. 

## Professional Services

## DBECertification (UCP)
2. Georgia Department ofTransportation is the lead agency for the State Unified Certification Program (UCP). In as much Georgiahas a small dedicated staff, the proposed Rule change for certification 30 day reviews/timing, and hearing requirementrecommendation will have a negative impact on State making determinations on out ofState certification requests. By causingthe following:

There is a requirement to have 

## a completefile on theapplicantin caseofauditand otherreviews by USDOT or FHWA. 

### There is a possibilitythata State may have overlooked ordid not havethe same information when going from one state to another. Georgia and other States have experienced firms request for out ofstate certification, howeverthe file application, taxes, resumes and pertinent 

## information aredifferentfrom thehome Statesoriginalapplication. While the majority offirms do get certified from one State to another, the mere independence ofallowing the denial without ahearing is less burdensome on the outside State. Ifa home State firm is denied certification in an out ofState request, it would be burdensome forthe out ofState firm to begin a decertification process since they
were nevercertified in the first place. The denied firm can appeal. Uniform reciprocity without proper controls and will not work and possibility add to fronts.

There are 

## different standardsand frequency for On-sitesvisits, by each State. Georgia conducts on-sites every 6years. States vary on the issue and may conduct on-site anywhere from 3 to 10 years span. Some make the**r~quest** 

### for updated on-site which some ofthe home State are unwilling orunable to comply.

There is also the 

## issue oftrustingthe details ofanother States review. As quiet as it is kept, somejustdo not trust others UCP process. You cannot legislate orregulate trust. Ithas to be earned. The 8A reciprocal certification has caused more issue, because firms that are 8A certified feel empowered notto complete a application and have no information or site visit to verify the DBE status.


## National/Federalized Certificationwould not be a easy answerdue to the need to fully address the procedural matter ofhearings, denials, appeals, annual reviews, de-certifications, fraud and on-sites.



## 3. The 30Day

## Rulewould give preferenceto application/files from outofStatefirms. Home State firm applications, reviews, and decisions would be delayed. Certification Coordinators take each file independently, the 30 Day Rule give the advantageto out ofState firms overhome State firm who may be in line for making a determination. 

## Ninetyday (90) reviews and determinationwould be appropriateand consistentwith most States currentpolicies.



## • Please continueto allow each Stateto maketheirDBE certification decisions independently
as long as they follow the federal regulation standards.

2

## 4. TerminationsandSubstitutions
Georgia supports the need for continued documentation by primes before any terminations and substitutions ofDBEfirms can be made to prevent abuse and policy violation. 

## GeorgiaDOT appreciates the opportunityto commentonthis proposed DBERules and would be gladto participate further or answer any questions. You may contactme at 404-631-1972 ore-mail me at: mcooper@dot.ga.gov;

Director, Equal OpportunityOffice GeorgiaDepartment ofTransportation

CC: Vance Smith, Commissioner Gerald Ross, Deputy Commissioner and ChiefEngineer Matt Cline, General Counsel
Attachment: Congressional Black Caucus Foundation Study by Thomas Boston, Ph.D. Comments from DBE OrientationsJune 10,2010



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# IncreasingtheCapacityofthe Nation's SmallandDisadvantaged Businesses (SOBs)

October 16,2007

Submittedto: TheCongressionalBlackCaucusFoundation Preparedby: EuQuant (FormerlyBoston Research Group, Inc.)



# EUQUANT

# Increasingthe Capacityofthe

# Nation's Small DisadvantagedBusinesses (SDBs)

AEuQuantReport



# CommissionedbytheCongressionalBlackCaucus Foundation



# Q Principal Researchers: Thomas D. Boston,Ph.D. andLinje R. 

## Boston, M.S.



# October 16,2007

EuQuant (FormerlyBoston Research Group, Inc.) 100Galleria ParkwaySE, Suite 1440 Atlanta, GA 30339-5959

© 2007 by EuQuant. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided thatfull credit, including © notice, is given to source. Available electronically at: http://www.euguant.com.

# EuQuant (FormerlyBoston Research Group, Inc.) 

# E uQuant's mission is to make our clients, communities and employees successful through the creative analysis of data. 

# E uQuant specializes in data driven research on emerging markets and underserved communities. Our clients include Fortune 500 and Black Enterprise 100 corporations as well as governmental agencies at all levels.


# Acknowledgments

This report was made possible by the tireless efforts of several organizations and individuals. Before acknowledging their valuable contributions, we must reiterate that they are not responsible for any of the findings or views expressed. Additionally, the authors and EuQuant are solely responsible for all errors and omissions. This report was commissioned by the Congressional Black Caucus Foundation (CBCF). EuQuant is extremely grateful to CBCF for entrusting it with this unique and important opportunity and challenge. The unusually broad scope of topics examined and the unique analytical methods used in this reportwere made possible by an academic grant awarded to one ofthe authors by the Ewing Marion Kauffman Foundation. We thank the Foundation sincerely for its continuing support of research on entrepreneurship. This entire effort is due mainly to the vision and persistence of Ms. Denise James Gatling, Director of Global Supplier Diversity and Business Development of GlaxoSmithKline. We are deeply indebted to Ms. Gatling and to the Board of Advisers for the project. The Board consisted of business owners and experts in the field of minority procurement. We thank Attorney Anthony Robinson of the Minority Business Education and Legal Defense Fund for invaluable assistance and insight on legal and regulatory issues. We also thank Attorney Keith Wiener of Holland and Knight, LLP for assisting with the legal analysis of the Adarand Decision. The North Carolina Center for Minority Economic Development arranged several opportunities forthe authors to vettheir preliminary findings before experts. We are grateful to NCMED for this assistance. Finally, this research would not have been possible without the unique resources and data access made possible by Mr. Greg Willis of the Senate Small Business Committee and most importantly by Ms. Thuy Lindsey of the DoD Business Transformation Agency. These two government officials were extremely helpful but bare absolutely no responsibility forthe views expressed herein.



# AbouttheAuthors 

# Thomas "Danny" Boston is CEO of EuQuant and Professor of Economics at Georgia Institute of Technology. Dr. Boston is the author oreditorofsix books and numerous scholarly articles on entrepreneurship and related topics. He advised the U.S Department of Commerce on the benchmarking methodology currently used in the SDB Program. Linje R. Boston is COO and Chief Statistical Analyst of EuQuant.

# TableofContents Executive Summary..........................••..•.•..•..•........•...........•..........................................1
Section I. Background and Rationale ••.•..•...••...•......•••...••.................•....•.......•...... 

### 5
Section II. Objectives, Outlineand Data..................•..............................................9 Objectives

....................................................................................................

### 9 Outline

.........................................................................................................

### 9 Categories of Unique Data

.......................... .................................................

### 9
Section III. Current State of MinorityOwned Businesses

....................................... 

### 12
Section IV. Industries Examined inthe Report

.......................................................

### 13
Section V. Minority Business Disparities

- Characteristics and Causes

.................. 

### 19 Disparities by Industry, Race and Ethnicity

................................................

### 19 The Causes of Racial and Ethnic Disparities

...............................................

### 21
Section VI. GovernmentContracting Remainsthe MostViable Optionfor Minorities

..............................................................................................

### 22
Section VII. Disparities among MinorityCCR Vendorsthat are notSOB Certified

....27
Section VIII. The Small Disadvantaged Business (SOB) Program

...............................

### 31 Eligibility Requirements and Operation ofthe SDB Program

....................

### 31 HowGoals and Objectives ofthe SDB Program are Achieved

...................

### 33
Section IX. The ImpactoftheAdarand Decision onthe SOB Program

....................37 legal Background

.......................................................................................

### 37 The Meaning of 'The Compelling Governmental Interest Requirement'

..

### 39 The Meaning of 'The NarrowlyTailored legislation Requirement'

...........

### 39 Federal Government's Response toAdarand

............................................

### 39
Section X. Determiningthe CapacityofFirms butfor Discrimination

....................

### 41 Major Findings

...........................................................................................

### 41 Summary of Howthe New PNW Ceiling was Determined

........................

### .41 Detailed Explanation of Results

.................................................................42 ExplanatoryVariables

................................................................................42
Section XI. Determiningthe Relationship between SOB Capacityandthe New Personal NetWorth

............................................................................

### 46 Data

............................................................................................................

### 46 Methodology

.............................................................................................

### 46 Exploratory Data Analysis

............... ...........................................................

### 47 Other ExplanatoryVariables

......................................................................48 Regression Results

.....................................................................................48
Section XII. The Economic Impactofthe Small Disadvantaged Business Program

... 

### 51
Section XIII. Spatial Impactof Minority-Owned Firms

.............................................

### 54

iiTable 1.

Table 2. Table 3. Table 4.

Table 5. Table 6.

Table 7. Table 8. Table 9. Table 10. Table 11.

Table 12.

Table 13.

Table 14.

Table 15.

Table 16.

Table 17. Table 18.

Table 19. Table 20. Table 21. 

# List

# ofTables/Figures

Effect ofan Unanticipated Graduation on DBE Revenue in Georgia's DOT Program

............................................................................................................8 Categories ofSmall Business Concerns Analyzed

...........................................10 Small Business Contribution to Employment and GDP, 1998-2004

................12 Numberand Percent Change ofMinorityOwned Firms between 1982 and 2002

..................................................................................................12 Numberof Firms, Employees and Receipts by Industry, Race and Ethnicity

..16 Percentage ofTotal Firms, Receipts, Employees and Disparity Index by Industry, Race and Ethnicity

.......................................................................18 Difference between Population Percentand Business Ownership Percent

...19 Racial Disparities in AttributesAssociated with Business Viability

.................20 Disparity Index by Industry Race and Ethnicity

...............................................20 Numberand Employment in Minorityand Non-MinoritySBCs, 2006

............22 Numberof Minorityand Non-MinoritySBCs by Industry, Race and Ethnicity, 2006

................................................................................................23 Percent of Minority and Non-MinoritySBCs by Industry, Race and Ethnicity, 2006

................................................................................................23 Revenue of Minorityand Non-MinoritySBCs by Industry, Race and Ethnicity, 2006

................................................................................................24 Percent of Revenue for Minorityand Non-MinoritySBCs by Industry, Race and Ethnicity, 2006

.................................................................................25 Mean Years of Business Operation for Minority and Non-Minority SBCs by Industry, Race and Ethnicity, 2006

.............................................................25 Comparison between Percent ofTotal Revenue and Percent of Firms for Minorityfirms notSDB and OSBCs, 2006

........................................................28 Utilization, Availability and Disparity Index for Non-SDBs by Industry, 2006

.... 28 Regression Equation: Three-Year Revenue is Estimated for Minority Firms NotSDBs and OSBCs afterControlling for Business Attributes

.......................30 Number, Revenue, Availability, and Utilization ofSDBs and OSBCs, 2006

.....32 Matrixofthe Small Business Administration's Programs

...............................34 Correlation between Numberof Employees and Average Revenue, by Industry

...............................................................................................................43 Table 22a. Regression Equation forAdjusting the NetWorth Limitation

........................45 Table 22b. Estimated SDB Capacity (Le. 3-yearAverage Revenue) butfor Discrimination

... 45



### iiiTable 23. Table 24.

Table 25. Table 26.

Table 27.

Table 28. Table 29. Table 30. Firm Count and Average Revenue by Industry, 1995-97

................................48 Regression Equation: The Influence ofThree YearAverage Revenue on NetWorth is Estimated ControllingforAttributes of Firms in 8(a) Program, 1992 to2000

....................................................................................................49 Recommended Industry Specific PNW Ceiling

................................................50 Impact on Industry Final Demand of Minority Firms Participating in the SDB Program

...:

....................................................................................52 Impacton Industry Final Demand of Firms Graduatingfrom the SDB Program

...........................................................................................................53 Impact on IndustryJobs of Firms Participating in the SDB Program

...............53 Impact on IndustryJobs of Firms Graduating from the SDB Program

............53 Numberand Percent ofMinority-Owned Businesses in High and low PovertyAreas ofCentral Cities

........................................................................55

Figure 1. Effect ofGraduation on DBE Revenue

..............................................................8 Figure 2. Effect of Firm Capacity on Personal NetWorth

..............................................42 Figure 3. Structure of Regression Analysis

.....................................................................44 Figure 4. Plot of Net Worth

............................................................................................46 Figure 5. Boxplot ofOrganization Type on logAverage Total Revenue

........................47 Figure 6. Percent of Businesses in High Poverty Areas

..................................................54 Figure 7. Median Income of Neighborhoods, by Race and Ethnicity, 1999

...................55 Figure 8. Percent of High Skilled Businesses in low-Income Communities

...................56 Figure 9. Percent of lowSkilled Businesses in High-Poverty Neighborhoods

...............57 Figure 10. Race/Ethnic Compositions ofCentral City Areas where Businesses
are located

......................................................................................................57

iv

# ExecutiveSummary 

# E uQuant (formerly Boston Research Group) was commissioned by the Congressional Black Caucus Foundation to conduct a comprehensive study of the Small Disadvantaged Business (SDB) Program run by the U.S. Small Business Administration. The report seeks to increase the national and global competitiveness of SDBs by offering recommendations that are designed to increase theircapacity and success in federal procurement and in corporate supply chain relations. The primary recommendation is that the 

### $750,000 personal networth ceiling of the SDB program should be adjusted so that participants can build greater capacity. By building greater capacity, SDBs are able to operate more successfully in the public and private sectors. Their greater success adds significant value to overall economic output and generates jobs, income, and wealth in the general economy and especially in underserved communities. 

### Background andPurpose

• The government's Small Disadvantaged Business (SDB) Program was established to help mitigate the effects of discrimination on the performance of businesses owned by minorities and other socially and economically disadvantaged individuals.

• This comprehensive report assesses the impact of the SDB Program on minority-owned businesses and examines the contribution of SDBs to national output and employment.

• A major section of the report is devoted to exploring how the SDB Program's 

### $750,000 personal net worth (PNW) ceiling affects SDBs.

• After determining that the PNW ceiling is too low and that it adversely affects the operation of SDBs, new program changes are proposed.



### 1 • The recommendations are designed to increase the capacity ofSDBs so they will become more competitive in federal procurement and in corporate supply chains. 1

• The results are based on an examination of 

### 47,254 Small Business Concerns (SBCs)2 listed with the government's Central Contractor Registration (CCR) in 

### 2006.


### WhattheReadercan Expect
The report has thirteen sections. These sections describe the current status of minority-owned businesses, document the critical importance of government contracting to minority business viability, and examine the plight of more than 

### 10,000 minority-owned SBCs that are listed in the CCR but have never participated in the SDB program. The report considers how the U.S. Supreme Court Adarand Decision has changed the SDB Program. It measures the impact of the SDB Program on minority business performance and analyzes how the 

### $750,000 PNW ceiling has affected SDB capacity. Finally, it estimates the influence of the SDB Program on national output and employment and it analyzes where minority and non-minority-owned firms are located in relation to the most distressed areas ofcentral cities.

1 As used in this report, capacity is synonymous with the threeyear average revenue ofafirm.

2 A Small Business Concern (SBC) means any for-profit business that meets the industry and employment size standards as determined by the Office of Small Business Standards of the Small Business Administration (See Federal Acquisition Regulation FAR 19.101, at: http://acguisition.gov/faricurrent/htmI/FARTOCP19.html).This report does not examine SBCs that register with CCR as Womenowned Small Business Concerns, Veteran-owned or Disabled Veteran-owned Small Business Concerns.

### Findings3

In 2006, the SDB Program had an economic impact of$5.5 billion on U.S. final demand and created over 124,000 jobs. Minority-owned small businesses also contributed to the economic development of distressed central cities. In 2006, 31% of minority-owned businesses listed in CCR were located in high poverty areas of central cities as compared to 24% of non-minority-owned companies. 4

In some central cities a very high percentage of minorityowned businesses were located in high poverty areas: In Baltimore (69%), Philadelphia (60%), Detroit (50%) and Boston (48%). Despite the significant contribution that minority-owned businesses make to the U.S. economy, they still encounter large disparities in private sector business transactions. Consequently, they depend more heavily upon government contracting because access to government contracts is usually more equal than is access to private sector opportunities. While minority-owned businesses comprised 18% of all U.S. small businesses, they made up 35% ofthe 47,254 small businesses listed in CCR in 2006.
Between 2004 and 2006 the SDB program had a significant effect on the performance of SDB certified firms. The average revenue of SDBs was $2.8 million greater than the average revenue of identical firms that did notparticipate in the SDB Program.
SDBs experienced an annual disparity in revenue of $0.9 million in comparison to non-minority-owned smallbusiness concerns with similar characteristics.
There were 10,513 minority-owned small businesses listed in CCR in 2006 that had never been SDB certified. These firms experienced the greatest disparities of all small businesses thatsoughtfederal government contracting.

3 The study used regression analysis and decomposition analysis extensively to explain the differences in performance between minority-owned firms that never entered the SOB Program (10,513), active SOBs (6,758) and other small business concerns that were not minority-owned in 2006 (27,087). A multivariate propensity score matching procedure was used to measure performance differences between firms with identical characteristics thatwere SOBs and non-SOBs.

4 High poverty areas are defined as census tracts where poverty was 20% orgreater in 2000.



### 2 The $750,000 personal networth (PNW) ceiling ofthe SDB Program has not been adjusted for inflation in nine years. Therefore, the current real value of the ceiling is $558,070. Yet innovations in corporate supply chains and the increasing use of contract bundling in government procurement require SDBs to have greatercapacity.
The capacity of SDBs and the personal net worth of their owners is closely related. When capacity increases by 10%, PNW increases by 4%. Therefore, ifthe PNW ceiling is too low, it is impossible forSDBs to reach their optimum capacity. In a marketplace free of discrimination we estimated that the average capacity of SDBs would be $4.1 million. The current PNW ceiling prevents SDBs from achieving this average capacity.

A PNW ceiling that is set too low causes other economic hardships. For example, in February of 2007 seventeen firms were graduated out of the Georgia Department of Transportation Disadvantaged Business Enterprise Program when an audit revealed that their PNW surpassed the $750,000 ceiling. We interviewed the owners ofthese firms and tracked their monthly financial performance. The owners felt that they were being penalized for being successful and they complained that very few corporations solicited or engaged their services afterthey were de-certified. They also stated thatthe low PNW ceiling had not allowed them to build sufficient bonding capacity to compete successfully as prime contractors. During the first five months of 2007, their average monthly revenue decreased by 45% in comparison to 2005 and 2006. Many large businesses are incorrectly registered in CCR as small businesses. In a recent Congressional hearing, SBA Inspector General Eric Thorson stated that, uThe number 1 management challenge facing the SBA is that large firms are receiving small business contracts and federal agencies are receiving credit for these awards.us This report identified 442 companies registered as small businesses that exceeded the small-business size standard for their industry. In 2006, the average revenue ofthese 442 companies ($172 million) was forty-four times larger than the average revenue of legitimate small business concerns.

5 Chapman, Lloyd. 2006. "SBA Reauthorization Lacks Provisions to stop Fraud and Abuse." American Small Business league, July 20,2006: Accessed at: http://www.asbl.com/showmedia.php?id=275

### Recommendations 1) Increase the PNW ceiling for construction industries to $979,000, for manufacturing industries to $1,043,000 and for professional and scientific service and IT services industries to $1,026,000. The PNW ceilings should be adjusted annually for inflation. In addition SOBs that exceed the PNW ceiling should be given a two year transition period during which they remain eligible to participate in the SOB Program.

Rationale forthis recommendation First, the current 

### PNW ceiling has not been adjusted for inflation since it was established in 1998. If adjusted, the current 

### PNW would be $977,560. Second, the SOB Program was established to help mitigate the effects of discrimination. But it is very difficult for SOBs to achieve the capacity they would be expected to have in a non-discriminatory market because the PNW ceiling is too low and capacity and PNW are closely related. Third, the PNW regulation assumes that "one size fits all." Therefore, only one PNW ceiling has been set for all industries. This contrasts with small business size standards that are set for each industry. The single PNW ceiling does not take into consideration the level of capitalization required by different industries. 6 Finally, when SOBs are "graduated" from the program unexpectedly because of the 

### PNW ceiling, they face significant short-run decreases in revenue. For example recent data from the Georgia OOT indicated that when minority-owned firms were "graduated" from the OBE program because ofan audit of PNW, their monthly revenue decreased by 45% during the first six months following theirexit.

6 The research team was unable to determine why the initial PNW ceiling for the SOB program was set at $750,000 and we did not have access to PNW data for non-SOBs. Therefore, we could not determine the industry specific PNW for all small businesses; but only for SOBs. As a result, we had to use the current PNW ceiling as our starting point for making an adjustment.

3 

### 2) The SBA should establish race-neutral monitoring procedures for small minority-owned firms that are notSOB certified.
Rationale forthe recommendation First, it is important to know whether minorityowned firms have fair access to corporate supply chains and government procurement in the absence of SOB mandates. Results of this study indicate that they do not. For example the 10,513 minority-owned small businesses listed in CCR that were not SOB certified in 2006 experienced the largest disparities in government procurement awards and supply chain utilization among all CCR firms. Second, it is important to know why so many minority-owned businesses are not SOB certified. Some owners have indicated that the costs and paperwork involved in certification are deterrents while others maintain that the benefits of the program have been greatly reduced over time. A revision should be made to Standard Form 295 (Summary Subcontract Report) by including a category to record the utilization of minority firms that are not SOBs. Additionally, improvements should be made to the way that corporations and government agencies reportsubcontracting data. 

### 3) Reauthorize all preferential procurement benefits of SOB status including Price Evaluation Adjustment (designed to assist SOBs as prime contractors), Subcontracting Evaluation Factors and Monetary Subcontracting Incentives (designed to increase SOB subcontracting opportunities).

Rationale forthe recommendation First, SOBs add significant value to national output and employment. In 2006 SOBs added $5.5 billion to U.S. final demand and created 124,000jobs that would not have existed without the program. Second SOBs, in comparison to non-SOBs, add significantly to economic opportunity in high poverty areas of central cities. Therefore by reinstating SOB procurement incentives, the goals ofthe HUBZone Program will be reinforced. 7 Third,

7 If enacted, H.R. 1873, Sec. 214 would provide financial support to conduct of a study on the "feasibility and desirability" of providing financial incentives to contractors for meeting subcontracting utilization goals. PEAs allowed SOBs to receive a price benefit of up to 10% in specified industries.SOBs still face significant inequality in business transactions. For example, SOBs experienced an annual disparity in revenue of $0.9 million in comparison to non-minority-owned small-business concerns with similar characteristics. Finally, the procurement benefits are a major incentive for participating in the SOB Program. 4) Existing regulations that penalize large businesses for self-certifying as small business concerns (SBCs) should be enforced more vigorously and new penalties should be established. Additionally, the SBA Inspector General should audit the CCR annually to identify and penalize firms that are inappropriately self-certified as SBCs.8

Rationale forthe recommendation Inaccurate self-certification has been cited as a growing problem that is adversely affecting small business opportunity. This report identified 442 companies, that exceeded the small-business size standard for their industry, registered as small businesses. The average revenue of these firms was $172 million, which was forty-fourtimes larger than the average revenue of legitimate small business concerns.

They expired in 2004. The HUBZone Empowerment Contracting Program is part of the Small Business Reauthorization Act of 1997. It is designed to stimulate economic development and create jobs in hard-pressed urban and rural communities. Contracting preferences are given to small businesses that are located in a HUBZone and that hire employees who live in a HUBZone.

8 House of Representative Bill H.R. 1873: "Small Business Fairness in Contracting Act" passed the House on May 10, 2007 and has been sent to the Senate for consideration. Sec. 301- 303 of the bill contains language specifying penalties for large businesses thatfraudulently certify as small business concerns.

4 5) Additional studies are needed to further illuminate factors that may enhance the competitiveness ofSOBs. These additional studies should examine:

• What happens to firms following their exit from

the SOB Program;
• Ways of improving the global competitiveness of

SOBs;
• The extent to which government procurement

dollars are shifting from SOBs to other CCR groups; • The relationship of PNW and firm capacity for

non-minority-owned firms;
• The impact of the PNW ceiling on the ability to

secure bonding, financing and supply chain opportunities; and, monitor the performance of minority-owned firms that are not-SOB certified.

# BackgroundandRationale 

# I n his June 6, 2007 opening statement as Chairman of

the U.S. Senate Committee on Small Business and Entrepreneurship, Senator John Kerry noted that over the last decade minority entrepreneurs started more than 50% of the nation's two million new businesses. Minority persons will comprise 90% the country's 131 million new citizens between 1995 and 2050. These trends show the growing importance of minorities to the underlying growth and competitiveness of the American economy.9 President Bush's 2002 Small Business Agenda proposed a number of steps to increase small business access to federal contracting- including a reduction in contract bundling

. More recently, the Government Contracting and Business Oevelopment Office requested additional funds in the financial year 2008 to identify methods of improving opportunities for Small Oisadvantaged Businesses (SOBs) and other small business contractors. 

## Minority-owned businesses represent the fastest growing sector of all 

# u.s. firms. Despite their improving status and the value they add to the U.S. economy, they remain significantly under-represented in thenationalmarkets.

This under-representation is due in part to historical and contemporary practices of discrimination. These practices have constrained their access to markets and limited their endowment and accumulation of factors, that are essential for starting and operating successful dynamically-growing businesses

. The existence of unequal business practices in the private sector forces minority firms to rely more heavily on government procurement opportunities.

9 Kerry, John F

. 2007

. "Kerry Opening Statement on Minority Entrepreneurship Hearing" U

.S

. Senate Committee on Small Business and Entrepreneurship

. May 22, 2007, cited at: http:/ /sbc

.senate

.qov/record

.c(m ?id=7 4847 accessed 6/6/2007 10:37 a.m.


### 5 In fact, the SOB Program has been designed so that federal procurement can be used in remedying the effects of societal and marketplace discrimination

. The Program's benefits are structured to increase government procurement opportunities and minority business access to the supply chains of corporations thatare prime contractors tothe government. 

### Adjustments mustbemadetothe SDB Program
On July 30, 1998 the Government revised Federal Acquisition Regulations (FAR) governing eligibility criteria for participating in the SOB Program

. The revisions were in response to the U.S. Supreme Court 1995 Adarand Oecision and to President Clinton's mandate to "mend, rather than end" affirmative action. A major review of all federal affirmative action procurement programs was undertaken. The review was designed to ensure that the potential benefits of the program were narrowlytailored as mandated by the Adarand Oecision. Some federal procurement programs and policies were suspended temporarily, others were changed or terminated. Major changes to the SOB Program involved the use of industry benchmarks to establish SOB utilization goals and to determine the industries where the goals should be applied and a personal networth (PNW) of $750,000 was established for individuals participating in the SOB Program. 10 The new $750,000 PNW ceiling was also imposed on 8(a) program participants

. This meant that two PNW ceilings affected the 8(a) program

. Specifically, business owners' PNW cannot exceed $250,000 at the time they enter the program, and has to remain below $750,000 during the 9-year life time eligibilityforthe program

. The comprehensive revisions also required that SOBs be certified by the SBA or an organization approved by the agency to certify SOB status

. Finally, the benefits ofSOB status were expanded to include a Price Evaluation

10 The ceiling excluded the net value of the owner's primary residence and net assets in the business from the net worth determination.Adjustment (PEA) forSDBs bidding as prime contractors, Subcontracting Evaluation Factors and Monetary Subcontracting Incentives, to increase SDB subcontracting opportunities. The new regulation modified the Federal Acquisition Streamlining Act of 1994 (Pub. L. 103-355, Sec. 7102), by using benchmarking criteria to determine the specific industries where incentives would apply.
PEAs allowed SDBs to receive a price benefit on procurements in specified industries. This policy was accomplished by adding up to 10% to the price of bids or offers received from non-SDBs. To apply Subcontracting Evaluation Factors, the contracting officer awarded the highest pOints to the bidder with the most dollars targeted to SDB subcontractors in authorized industries. Monetary Subcontracting Incentives allowed contracting officers to make monetary awards to prime contractors of up to 10% of the value by which SDB utilization exceeded the authorized industry target; {See, U.S. SBA America's Small Business Resource, Federal Acquisition Regulation (FAR) Council Rules, final rule published on July 2, 1999).11 On December 9, 2004 the SBA's authority to use PEAs for civilian agencies expired and was not renewed as part of the Small-Cap and Business Reauthorization and Manufacturing Assistance Act of 2004 (Pub.L.108-447, Division K). The expiration covers all non-Department of Defense agencies, with the exception of the National Aeronautics and Space Administration (NASA) and the Coast Guard. 12

If the SDB Program is to continue to operate efficiently and accomplish its stated goals, several important adjustments should be made. This report identifies those adjustments and provides a rationale for them based on empirical research.

11 See also, Office of Management and Budget, Office of Federal Procurement Policy, SOB Procurement: Reform of Affirmative action in Federal Procurement. Accessed electronically at: http://www.whitehouse.qov/omb/fedreq/sdb-rethtm/ June 15, 2007. Code of Federal Regulations, Title 13, Volume 1, Revised as ofJanuary 1, 2005. From the US. Government printing office via GPO access [CITE: 13CFR124]. Available electronically at: http://SBAs.qov/library/ctrs/13ctr124.htm/.

12 See also, [Federal Register: April 19, 2006 (Volume 71, Number 75)] [Rules and Regulations] [Page 20304-20305) From the Federal Register Online via GPO Access [wais.access.gpo.gov] [DOCID:fr19ap06-21]. The Department of Defense, NASA and the Coast Guard operate under a separate statutory authority and continue to use these preferences.



### 6 The impOSition of the PNW ceiling is problematic for several reasons.



### 1) 

### For almost a decade, the $750,000 personalnetworth eligibility criterion has been cappedatthe samelevel. By 

### failing to 

### adjust the net worth ceiling for inflation, the 2007real value of$750,000 (1998) is$558,070.

The static cap has made it more difficultfor SDBs to win awards in corporate supply chains because global competitive pressures have forced corporations to reduce the number of suppliers they use. This means that suppliers must have larger capacities today than ever before. At the same time, government agencies have increasingly "bundled" procurement solicitations as a way of reducing administrative expenses and performance costs. 13 These changes require all corporate suppliers to have significantly greater capacity to enter core areas of supply chains or to participate as government prime contractors. Capacity in this report is specified as average firm revenue over a three-year period. The report examines the relationship between firm capacity and personal net worth. We found that the elasticity or responsiveness of personal net worth to changes in firm capacity is 40%. This means that when the capacity of a firm increases by 10%, personal net worth of the owner increases by 4%. Therefore, when a ceiling is placed on the personal net worth of individuals in the SDB Program, that ceiling also limits the capacity oftheirfirms.

13 House of Representative bill H.R 1813 reauthorizes the Small business Administration's procurement programs under the Small Business Fairness in Contracting Act. It scales back "contract bundling"

- the practice of grouping small government contracts together and awarding them as one large contract. House Small Business Committee Chairwoman Nydia Velazquez, D-N.Y., said the bill was needed to help small businesses gain more opportunities, because the federal government has been "bundling" individual contracts into mega-contracts out of the price range for small businesses to place bids.If the ceiling on personal net worth is set too low, firms that should be eligible to participate in the SDB Program are barred by the ceiling cap. This report finds that the ceiling on personal net worth is incorrect for several reasons. First, it has not been adjusted for inflation in nine years. Second, it does not allow SDBs to achieve the level ofcapacity that they would be able to achieve in the absence of discrimination. We note that industry benchmarks, used to establish goals for SDB utilization and identify industries where goals will be applied, are determined by the Department of Commerce (DOC). DOC's benchmarks are based on evaluating seventy major industry groups to determine how the share of federal contracts that SDBs actually receive compares to the share they would be expected to receive in the absence of discrimination. Similarly, this report argues that any net worth ceiling must at a minimum, allow SDBs to attain the capacity they would achieve in the absence of discrimination. Any ceiling that does not allow this level of capacity to be achieved is a burden on small disadvantaged business owners. Finally, the current PNW assumes that "one size fits all." Therefore, only one PNW ceiling has been set for all industries, including Construction Services, Manufacturing and Professional and Scientific Services. This practice contrasts with howthe SBA sets small business size standards, which are set foreach industry. 2) Corporate sector prime contractors argue that the ceiling does not allow SDBs to build the capacity needed to perform in core business areas of their supply chain. Furthermore, their incentive to mentor SDB suppliers is reduced because when SDBs build sufficient capacity, they may become disqualified by the PNW ceiling.



### 7 3) Some administrators ofthe SDB and DBE programs indicate that the PNW ceiling limits the number of available vendors with sufficient capacity to attain their program goals. 4) SDBs argue thatthe SBA's failure to adjust the PNW ceiling forces them to exit from the program prematurely. In addition, the low ceiling constrains their ability to secure capital and finance and the bonding capacity they are able to build, making it difficult for them to compete as prime contractors. At the same time, prime contractors do not employ theirservices ifthey are notSDB certified.



### In February of 2007, the Georgia DOT Disadvantaged Business Enterprise (DBE) program graduated seventeen DBEs after
an audit revealed the owners' PNW exceeded the program ceiling. During the first five months of 2007, these firms' averagemonthlyrevenuedecreasedby45% in comparison to 

### 2005 and 2006. Table 1 and Figure 1 

### describes what happened to 

### these seventeenfirms that experienced an unanticipateddecertification.

## Table 1 EffectofanUnanticipatedGraduationonDBE RevenueinGeorgia'sDOT Program Symbolfor Firm's MonthlyRevenue; Firm's MonthlyRevenue; GraduatedFirm 2005-2006 Jan-MayYTO 07 A $495,671 $ 290,200 B $ 1,668,657 $420,029 C $ 886,664 $ 284,000 D $ 2,375,602 $ 686,5 10 E $ 263,907 $ 89,075 F $103,440 $ 103,588 G $ 934,130 $1,062,276 H $ 878,940 $ 563,599 $ 1,073,963 $ 595,127

$192,217 $15,320 K $ 90,965 $824,579 Average $ 814,923 $448,573

Note: In February 2007 all firmsabove were graduated following a program audit

.



## Figure 1 EffectofGraduationonDBERevenue

$900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 Average Monthly Revenue 2005

- 2006



### 8 45%Decrease

$448,573

Average Monthly Revenue Jan-MayYTD 2007 PercentChange in MonthlyRevenue -41%

-75%

-68%

-71%

-66% 0% 14% -36% -45% -92% 806% -45%

# Objectives, OutlineandData

Objectives 

# This report documents the contribution of minority entrepreneurs and small businesses to the nation's well-being. It also identifies sectors ofthe economy where qualified, willing and able minority businesses continue to face unfair treatment. The conclusions are based on an examination of 

### 47,254 Small Business Concerns (SBCs)14 registered with the government's Central Contractor Registration (CCR) database. The firms analyzed in this study meet small business size standards established by the Office of Size Standards (OSS).15


### Outline
The study is organized into thirteen sections. The first section consists of the background, rationale and recommendations of the study. Section II outlines the objectives and data ofthe study. Section III explores the current state of minority-owned businesses while Section IV looks at the race and ethnic characteristics of minority businesses in the selected industries. Section V examines disparities between minority and non-minority business owners in the general marketplace. This section looks at the nature of disparities across

14As used in this report, a "Small Business Concern" means any business entity that meets the industry and employment size standards for small businesses and is organized for profit (even if its ownership is in the hands of a nonprofit entity). It must have a place of business located in the United States or its outlying areas and it must make a significant contribution to the 

## u.s. economy through payment of taxes and/or use of American products, material and/or labor, etc. "Concern" includes but is not limited to an individual, partnership, corporation, joint venture, association, or cooperative (See FAR 19.101). The full regulation is available at: http://acguisition.gov!far!current!html/FARTOCP19.html.

15 The report does not include firms certified as Women-owned Business Concerns (WOBCs), Veteran-owned or Disabled Veteran-owned Business Concerns (VO/DVOBCs).



### 9 different industries and summarizes the research findings that attempt to explain them. Section VI analyzes why government contracting remains the most viable option for small businesses owned by minorities. In Section VII, we examine the disparities among minority small businesses that are registered with CCR but do not participate in the SOB Program. The long standing persistence of disparities in private and government sector contracting, led to the establishment of the SOB Program, which is the focus of Section VIII. Section IX describes the effect of the U.S. Supreme Court's Adarand Oecision on the SOB Program. In the next section, we develop a methodology to determine the capacity of small businesses in the absence of discrimination. We follow this analysis in Section XI where we determine the relationship between SOB capacity and the new ceiling forthe personal net worth. Section XII analyzes the economic impact of the SOB Program on jobs and income. The final section of the report, Section XIII, describes the spatial impact of minority-owned firms; that is, it investigates the characteristics of communities where companies choose to locate. The primary objective is to determine whether minority-owned firms and SOBs as compared to Other Small Business Concerns (OSOBs) tend to locate in communities that experience greater economic and social distress, such as low income inner cities, high unemployment areas or areas where poverty is concentrated. The street addresses of companies are geo-coded and their neighborhood characteristics (poverty rate, median family income, unemployment rate and racial composition) are examined. 

### CategoriesofUnique Data
The primary database used in preparing this report was the CCR for the period 

### 2004 through 

### 2006. All companies, whether large or small, desiring to contract with the Federal Government must register with the CCR. Categories of small business concerns considered in this report are listed in Table 2.

## Table2 Categories ofSmall Business Concerns Analyzed (all firms are currently registered through the CCR System)
Number in Category CCR Database
1. Small Business Concerns (SBCs) 47,254 2. Non-MinoritySBCs; non-minorityfirms in all categories 28,017
3. MinoritySBCs; minorityfirms in all categories 19,237 4. Minority, not SOB; all minorityfirms excluding active SOBs and Graduated SOBs 10,513
5. SOBs (Small Oisadvantaged Businesses); all certified and active SOBs-- 8(a) firms are automaticallySOB Certified 6,758 6. Graduated SDBs; former SDBs that exceed industry or networth size standard 2,848 7. OSBC (OtherSmall Business Concerns), includes all non-minority SBCs exceptthose certified as SDBs 27,081

Total excludes firms registered as Women-owned Small Business Concerns and Veteran-owned/Disabled Veteran-owned Small Business Concerns. Total also includes firms in selected industries only.
Source: CCR, January 2007.

Category 1 lists the total number of SBCs that are registered with CCR as "Small Business Concerns" (47,254 firms). The second category consists of SBCs that are owned by non-minority persons (28,017 firms). They mayor may not be SDB certified. Category 3 is the total number of firms that are owned by minority persons, independent ofwhether they are SDB certified. The number of minority-owned firms that are registered with CCR and have never been SDB certified is 10,513 firms. These firms comprise Category 4. Category 5 consists of SBCs that are SDB Certified (6,758 firms). In considering this category, it is importantto keep in mind that all 8(a) certified firms are automatically SDB Certified. 16 Category 6 lists SBCs thatwere formerly SDB Certified but are no longer eligible due to their size or their owner's net worth. These firms are presumed to have graduated from the SDB Program (2,848 firms). Finally, Category 7 lists the total number of Other Small Business Concerns (OSBCs). These are firms that are not owned by minority persons and have never been SDB Certified (27,081 firms). The study examines prime contracting of SBCS. 17 To examine the relationship

16 All 8(a) Certified firms are automatically SOB Certified and activities forthese firms are not reported separately from SOB totals.

10 between SDB capacity and the net worth of business owners, we used data that preceded the establishment of the PNW ceiling to avoid the potential for statistical bias.

In this regard, historical administrative data on the 8(a) program was used because it contains information on Net Assets and SDB Capacity. The data, formerly referred to as ERDB, has detailed financial and owner attribute information on businesses that were involved in the 8(a) small business program between 1995 and 1997. The information includes unadjusted and adjusted personal net worth of business owners who enrolled in the program, the legal form of the company organization, the businesses SIC number, the 8(a) program status of the company (active, inactive, terminated), the racial and ethnic status of the owner, size of employment, the volume of non-8(a) and 8(a) sales and the Dun and Bradstreet number of the firm. Program data for 8(a) was used to investigate the relationship between personal net worth and capacity during a period when the $750,000 PNW was not in effect. These data were also merged with the Federal Procurement Data System (FPDS) data.
CCR and FPDS-NG data were used to analyze SDBs between 2004 and 2006. The Federal Procurement Data System

- Next Generation or FPDS-NG database contains information on all government awards to prime contractors. This data was used to supplement CCR data. The data contains pertinent information on the firms' specialization (NAICS code), the age of the business, the legal form of business organization, the race and ethnicityofthe owner, the gender ofthe owner and the program status ofthe firm (that is, SDB concern, 8(a) concern, Women-owned Business concern, Veteranowned Business Concern, or Disabled Veteran-owned Business Concern).

17 Oata regarding subcontracting activity ofSBCs are becoming more accurate and more readily available. Recently completed studies in this area suggest SOBs experience significantly greater disparities in access to subcontracting opportunities than they encounter in prime procurement opportunities. See Clark, M., C. Moutray and R. Saade 2006. "The Government's Role in Aiding Small Business Federal Subcontracting Programs in the United States," Office of Advocacy, U.S. Small Business Administration Small Business Research Summary. September 2006. No. 281. pp 1-31.Since the public version ofCCR does not contain revenue or employment information, we were granted clearance to access the private portion of the CCR database. This

11 access made available two additional pieces of information; the average total revenue, and the average employment, both overthe three years from 2004-2006.

# CurrentStateofMinority-Owned Businesses 

# It is widely recognized that small businesses are a

primary engine of innovation and job growth in the economy. During the period 1998 to 2004 small businesses produced 50.5% of the total gross domestic product of the United States. They accounted for 85% of the total value added in the construction industry, 33% of the total value added in manufacturing, 41% in wholesale trades, about 67% in professional and technical services and 48% of the total value added in retail trade. In 2004 small businesses added $4,717 billion to the U.S. GDP while large businesses added $4,593 billion (See Table 3).18


## Table3 SmallBusinessContributiontoEmploymentand GDP, 1998-2004

NumberofSmall Businesses with Employees NumberofJobs inSmall Businesses Percent ofAll Employees in Small Businesses PercentofValue Added in Construction Percent ofValueAdded in Professional and Tech. Service Industries Percent ofValue Added in Wholesale Industry Source: Kobe, Katherine. 2007

. Value 6,331,242 58,597,452 51.0% 85.5%

66

.6% 55.4%



### Between 1982 and 1992, the number of all small firms increased by 91% and the number of firms owned bV Whites increased by 66%. In comparison, firms owned by Blacks increased by 288% while firms owned by Asians and Hispanics increased by 353% and 454% respectively (Table 4)

. Between 1997 and 2002, the number offirms owned by Blacks increased faster than the numberoffirms owned by all otherracial and ethnic groups. However, this growth was largely confined to businesses withoutpaid employees.

18 Kobe, Katherine. 2007. The Small Business Share of GOP, 1998-2004, Small Business Research Summary, SBA Office of Advocacy, April 2007, No

. 299, pp 1- 37.



### 12 

## Table4 NumberandPercentChangeofMinority-Owned FirmsBetween 1982and2002
Percent

Race orHispanic 1982 2002 Change, Origincategory 1982- 2002 All Firms 12,059,950 22,974,655 90

.5% White alone, not Hispanic 11 ,234,999 18,609,599 65

.6% HispanicorLatino (any race) 284,011 1,573,464 454

.0% Black orAfrican American 308,260 1,197,567 288.5% American Indian and Alaskan Native 17,100 201,387 1077.7% Asian 240,806 1,103,587 358

.3% Source: Lowry, Ying 2007

.

# Industries ExaminedintheReport (Race, EthnicityandIndustryCharacteristics) 

# This report examined Small Business Concerns only in thefollowing industries:
Construction of Buildings Heavy Construction and Civil Engineering SpecialtyTrade Contractors Textile and Leather Manufacturing Paper, Printing and Related Manufacturing Chemical, Non-Metallic Minerals Manufacturing Plastics and Rubber Manufacturing Primary Metals and Machinery Manufacturing Computer and Electronic Manufacturing Wholesale Trade In Durable and Non-Durable Goods Publishing, except the Internet Internet Publishing, Telecommunications and ISP Professional, Scientific and Technical Services
The race and ethnic ownership characteristics of these businesses are given in detail in the 2002 Census Bureau's Survey of Business Owners (SBO). This section describes the industry characteristics ofsmall businesses with paid employees, as provided in the SBO data.
Construction of Buildings According to the 2002 SBO, there are 220,348 small firms with paid employees involved in the Construction of Buildings (NAICS code 236). They comprised about 32.3% of all firms in the industry. The combined sales and receipts ofthese firms was over $522 billion foryear 2002 (See Table 5). In the same industry, the five racial minorities together made up almost 5.5% oftotal small firms with paid employees, of which 5,789 firms were Hispanic-owned, 2,782 Asian-owned and 2,179 businesses owned by Blacks. In comparison, minorityowned small businesses received 2.9% of all industry revenue (See Table 6).

13 HeavyConstruction and Civil Engineering There were 51,122 small businesses involved in Heavy and Civil Engineering Construction (NAICS code 237) that had paid employees. Among the five minorities, Hispanics-owned 1,404 businesses, that was more than half oftotal minority firms. Of the rest, 542 businesses were Black-owned, followed by 402 American Indian and 361 Asian-owned firms. While the average employment for all firms was 22.6 workers perfirm, the same average for minority-owned firms was 15.6 persons per firm. There were a total of 42,748 workers employed by minorityfirms and 24,399 of them worked in firms with Hispanic ownership. Small business revenue in heavy construction was $205.6 billion in 2002; in comparison, small minority business receipts totaled $6.45 billion, or 3.1% of the total. Hispanic businesses ranked highest among minorities with almost $3.27 billion, followed by American Indian businesses that made $1.23 billion. Black businesses outnumbered American Indian businesses by 140 firms, but ranked third in terms of receipts and sales, making $899.0 million. SpecialtyTrade Contractors The 2002 SBO indicates that there were over 1.9 million small firms operating in the NAICS code 238, as Specialty Trade Contractors and 458,750 of these firms had paid employees. A total of 4,210,594 workers were employed in the industry which made over $205 billion in 2002. Minority businesses made up 6.8% of all firms and employed 209,571 workers. They received 4.5% of total revenue. Once again, Hispanic firms ranked first among the minorities in the number of businesses, number of employees and receipts. There were 17,954 Hispanic firms employing an average of 7.1 workers per firm, and making almost $12.4 billion in sales and receipts. Although there were more Black firms than Asian firms, the latter recorded slightly higher sales at $3.53 billion when compared with $3.51 billion made by Blackfirms.Textile and Leather Manufacturing Small businesses under the NAICS codes 313, 314, 315 and 316 together make up the Textile and Leather Manufacturing Industry. According to the SBO, firms with paid employees made up about 41% of the 60,892 small firms in this industry in 2002. Ofthese, 5,110 firms were minority-owned: Asians owned 3,539 firms, Hispanics 1,316 firms, and Blacks 129 firms. The total employment in the industry for firms with paid employees was 854,831 workers. The average employment per firm was highest in Hispanic-owned firms at almost 10 workers per firm, followed by Black firms with 7.5 workers. Asian firms on an average employed 4.5 workers which was lower than American Indian firms with 5.5 workers. Total receipts in all firms for the year 2002 were close to $132 billion; minorityowned firms received 1.0% oftotal revenue. Paper, Printingand Related Manufacturing Ofthe 69,600 small businesses in the Paper, Printing and Related Manufacturing industry (NAICS 322 and 323), 39,957 firms had paid employees. Total minority-owned firms in 2002 was 2,781; 1,313 of these were owned by Asians, 1,045 by Hispanics and Blacks owned 415 businesses. A total of 1.2 million workers were employed in this industry, at an average of30.6 workers per firm. Among minorities, Hispanic-owned firms employed 9,916 workers, at 9.5 workers per firm, Asian owners followed with 9,000 employees and Black firms with 3,490 employees. The total receipts for the industry in 2002 was over $253.5 billion and of the minorities, Hispanic businesses totaled over $1.1 billion, followed by $414.1 million for Black-owned firms.
Chemical, Non-Metallic Minerals Manufacturing There were 39,534 small firms registered under NAICS codes 325 and 327, in the Chemical and Non-metallic Minerals Manufacturing Industry; 21,594 of these firms had paid employees, and 5.7% of these were owned by minorities. The industry employed 1.4 million workers, and average firm employment was 63 workers, but minority owners employed only 15 workers per firm. Total sales for all small firms with paid employees was over $580 billion in 2002, but minority firms made just over$4 billion dollars.

Plastics and Rubber Manufacturing Almost 70% of small businesses in the Plastics and Rubber Manufacturing industry (NAICS 326) had paid employees, and each firm on an average employed over 79 workers. Of the 12,421 firms with employees, Hispanics and Asians owned over 90% of the 690

14 minority firms and employed 6,597 and 15,001 workers each. Asian firms were most successful recording $2.4 billion dollar revenues, followed by Hispanics with over $928 million and Blacks with $487.7 million revenue. Primary Metalsand Machinery Manufacturing The Primary Metals and Machinery Manufacturing industry includes firms registered under NAICS codes 331, 332 and 333. According to the 2002 SBO, 89,592 of the 142,403 firms in the industry employed a total of over 3.3 million paid workers. Among firms with paid employees, minorities owned 5.2% of all firms, and on average, each firm employed less than a third of the 37 workers that non-minority firms employed. The total revenue for firms with paid employees was over $655.7 billion in the year surveyed. Minorities' share of the revenue was almost a tenth, at $7.7 billion. Hispanics owned 2,487 firms, more than half of all minority firms, employed 29,358 workers and recorded revenues of over $4 billion. The 1,494 Asian-owned businesses employed 14,955 workers and listed revenue of $2.11 billion dollars. There were relatively fewer Black owners in the industry with just 313 firms employing 5,864 workers. Computerand Electronic Manufacturing According to the SBO, two out of every three of the 21,638 firms in the Computer and Electronic Manufacturing industry (NAICS 334) had paid workers. The industry also had the highest employee per firm ratio of 92 workers and employed a total of 1,313,608 workers. Minority firms employed significantly lower number of workers, on an average, 20 workers in each firm. Asians owned close to 70% of all minority-owned businesses in the industry and employed 17,500 workers. Hispanics ranked second in terms ofownership and total employment, with 6,029 workers in the 270 firms they owned. Black owners in this industry provided the most employment per firm among the minorities, employing 28 workers in each ofthe 84 firms they owned. The total revenue recorded for these firms was over $378 billion ofwhich minorities' share was less than a billion dollars in total.

Wholesale Trade in Durable and Non-Durable Goods A total of 657,593 firms were involved in Wholesale Trade of Durable and Non-durable goods in 2002. Registered under the NAICS codes 423 and 424, there were 317,846 firms which had a total of 5.7 million paid employees. Ofthe 13 industries examined in this report, firms in wholesale trade recorded the highest revenue of$4.26 trillion. The 38,171 minority firms made atotal of $40.66 billion in revenue (excluding Asian firms for which there was no revenue reported). There were 23,460 Asian firms and they provided jobs to 150,000 employees. Hispanic-owned firms came in next at almost 12,000 firms making a sum of $33.97 billion in revenue and employing over 84,000 employees. With combined revenue of $4.85 billion, the 1,877 African American firms employed an average of six workers in each firm. American Indians owned 765 firms, the second highest industry participation of the minority group and registered $1.84 billion in receipts. Publishing, exceptthe Internet Small businesses underthe NAleS code 511 are classified as the Publishing Industry. There were atotal of 24,337 firms with paid employees in this industry and 1,722 of them were minority-owned: Asians owned 3.7% of the firms, Hispanics 1.7%, African Americans 1.1% and American Indians 0.4% ofthe minorityfirms. In terms of employment, Asians employed 7,500 of the 16,157 workers employed by minority owners, followed by Hispanic and Black employers engaging 3,916 and 3,217 workers respectively. Financially, the small businesses in the industry received over $245.8 billion. Minorities received only 0.5% of the revenue while constituting over 7% of all firms. Among the minorities, African American firms performed the best, with $676 million in revenue, followed by Hispanics at $484.35 million.
Internet Publishing,Telecommunicationsand ISP Firms under the NAles codes 516, 517 and 518 collectively constitute the Internet Publishing,

15 Telecommunication and ISP industry. According to the 2002 SBO, 25,406 of the 91,997 firms in the industry employed atotal ofover 2 million workers. The industry revenue was over $511 billion. Minority firm ownership was 10.8% and the firms employed 1.2% of all employees. The 1,531 Asian-owned firms employed over 11,000 workers, more than double that ofthe next major group, Hispanics owned 745 firms and employed 5,314 workers and recorded revenue of almost a billion dollars. Black owners were the third most prominent group in the industry owning 394 firms and employing an average of 12 workers perfirm.
Professional, Scientific andTechnical Services Over 3.2 million firms in various areas of business ranging from architectural consulting to translation services, with a common NAles code of 541 were categorized under the Professional, Scientific and Technical Services Industry. Of these, 727,893 firms employed 10 workers per firm with reported total industry revenue of $911.5 billion. 63,966 firms, identified as belonging to minority owners, employed 382,008 workers and reported over $43.7 billion in revenue. Asians owned 30,000 firms, followed by Hispanics at 19,360 firms, Blacks at 11,014 firms, American Indians at 3,271 and 321 firms owned by Native Hawaiian. While Asians hired almost 6.5 workers per firm, Black firms had 6.4 workers, Hispanic 5.1 workers and American Indians and Native Hawaiian an average of 4.7 and 4.2 workers per firm. Financially, Asians reported over $23 billion in revenue, followed by Hispanic owners at over $11.5 billion and Black owners at over$7 billion in revenue.

## Table 5 NumberofFirms, Employeesin FirmsandReceiptsofFirmsin IndustryRace andHispanicOrigin

Industry Name

Construction ofbuildings Number offirms with paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Heavyand Civil Engineering Construction Numberoffirmswith paid employees Receipts forfirmswith paid employees ($'000) Total numberof employees Average employees perfirm SpecialtyTrades Contractors Number offirms with paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Textile and leather Manufacturing Number offirmswith paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Paper, Printing and Related Manufacturing Number offirms with paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Chemical, Non-metallic minerals Manufacturing Number offirms with paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Plastics and Rubber Manufacturing Number offirms with paid employees Receipts forfirms with paid employees ($'000) Total number ofemployees Average employees perfirm Primary Metalsand Machinery Manufacturing All Firms

220,348 $522,063,852 1,624,657 7.4
51,112 $205,628,844 1,156,027 22.6
458,750 $481,219,852 4,210,594 9.2
24,950 $131,992,127 854,831 34.3
39,957 $253,506,291 1,223,746 30.6
21,594 $580,832,157 1,362,970 63.1
12,421 $175,094,500 986,603 79.4

Number offirms with paid employees 89,592 Receipts forfirmswith paid employees ($'000) $655,772,165 Total number ofemployees 3,304,887 Average employees perfirm 36.9 Computerand Electronic Manufacturing Number offirms with paid employees 14,282 Receipts forfirms with paid employees ($'000) $378,094,641 Total number ofemployees 1,313,608 Average employees perfirm 92.0 All Minority

12,043 15,500,905 72,687 6.0
2,741 $6,449,085 42,748

15.6
31,454 $21,626,330 209,571 6.7
5,110 $1,331,959 30,538 6.0
2,781 $1,523,408 22,456 8.1
1,232 $4,008,408 18,679

15.2

690 $3,824,611 24,716

35.8
4,697 $7,700,960 55,816

11.9
1,313 $929,202

26,486

20.2



### 16 American Indian & Alaska Native

1,184 $1,443,428 5,500

4.6

402 $1,232,240 6,577

16.4
3,249 $2,189,873 19,262 5.9

126 $66,850 692 5.5

3 NA 40 13.3

73 $94,269 514 7.0 Asian

2,782 $3,783,550 14,374 5.2

361 $814,328 4,558

12.6
4,246 $3,531,454 27,918 6.6
3,539

NA 15,873 4.5
1,313

NA 9,000

6.9

554 $2,455,990 10,509

19.0

NA 309 NA $2,408,851 NA 15,001 NA 48.5

403 1,494 $721,884 $2,111,829 5,579 14,955

13.8 10.0

44 $62,278 428 9.7 915 NA 17,500

19.1 Black or African American

2,179 $3,088,438 14,103 6.5

542 $899,009 6,310

11.6
6,005 $3,516,097 34,723 5.8

129 NA 967 7.5

415 $414,122 3,490

8.4

155 $316,002 1,826 11.8

58 $487,696 3,118 53.8

313 $798,931 5,864

18.7

84 $117,159 2,354 28.0 Hispanic or Latino

5,789 $7,003,527 38,012 6.6
1,404 $3,268,807 24,399

17.4
17,954 $12,388,906 127,668 7.1
1,316 $1,265,109 12,947 9.8
1,045 $1,109,286 9,916

9.5

446 $1,115,615 5,644

12.7

323 $928,064 6,597 20.4
2,487 $4,068,316 29,358

11.8

270 $749,765 6,029 22.3 Native Hawaiian & Pacific Islander

109 $181,962 698 6.4

32 $234,701 904 28.3

NA NA NA NA

NA NA 59 NA

5 NA 10 2.0

4 $26,532 186 46.5



### o NA



## o NA

NA NA 60 NA

NA NA 175 NA


### CONTINUED

## Table 5 (CONTINUED) NumberofFirms, Employeesin FirmsandReceiptsofFirmsin IndustryRace andHispanicOrigin
American Black or Native Industry Name All Firms All Minority Indian & Asian African Hispanic or Hawaiian Alaska Latino & Pacific Native American Islander

WholesaleTrade In Durable

### I Non-durableGoods Numberoffirms with paid employees 317,846 38,171 765 23,460 1,877 11,991 78 Receipts forfirms with paid employees ($'000) $4,260,775,896 $40,657,519 $1,836,572 NA $4,846,244 $33,974,703 NA Total number ofemployees 5,748,199 252,141 5,575 150,000 11,232 84,209 1,125 Average employees perfirm 18.1 6.6 7.3 6.4 6.0 7.0 14.4 Publishing except internet Number offirms with paid employees 24,337 1,722 108 931 273 401 9 Receipts forfirms with paid employees ($'000) $245,876,005 $1,252,552 $92,283 NA $675,921 $484,348 NA Total number ofemployees 1,099,157 16,157 1,349 7,500 3,217 3,916 175 Average employees perfirm 45.2 9.4 12.5 8.1 11.8 9.8 19.4 Internet Publishing,Telecommunication and ISP Numberoffirmswith paid employees 25,406 2,734 44 1,531 394 745 20 Receipts forfirmswith paid employees ($'000) $511,537,853 $1,737,172 $129,427 $0 $612,938 $994,807 $0 Total number ofemployees 2,050,704 24,016 2,113 11,625 4,744 5,314 220 Average employees perfirm 80.7 8.8 48.0 7.6 12.0 7.1 11.0 Professional, Scientific and Technical Services Numberoffirmswith paid employees 727,893 63,966 3,271 30,000 11,014 19,360 321 Receiptsforfirms with paid employees ($'000) $911,568,291 $43,727,866 $1,569,868 $23,359,848 $7,096,863 $11,528,555 $172,732 Total numberofemployees 7,426,468 382,008 15,310 196,057 70,852 98,438 1,351 Average employees perfirm 10 6 5 7 6 5 4

Note: Some Minoritygrouptotal receipts are notgiven. This causes an understatement ofthetotal receipts by minorities.
Source: Survey of Business Owners, 2002.



### 17

## Table 6 Percentage ofTotalFirms, Receipts, EmployeesandDisparityIndexbyIndustry, Raceand Ethnicity

Industry Name

Construction ofbuildings Percent offirms with paid employees Percent of Receipts for firmswith paid employees Total Percent ofemployees Heavyand Civil Engineering Construction Percent offirms with paid employees Percent of Receipts forfirms with paid employees Total Percent ofemployees SpecialtyTrades Contractors Percent offirmswith paid employees Percent of Receipts forfirms with paid employees Total Percent ofemployees Textile and leather Manufacturing Percent offirmswith paid employees Percent of Receipts forfirmswith paid employees Total Percent ofemployees Paper, Printingand Related Manufacturing Percent offirms with paid employees Percent of Receipts for firmswith paid employees Total Percent ofemployees Chemical, Non-metallic minerals Manufacturing Percent offirms with paid employees Percent of Receipts for firmswith paid employees Total Percent ofemployees Plastics and Rubber Manufacturing Percent offirms with paid employees Percent of Receipts for firmswith paid employees Total Percent ofemployees Primary Metalsand Machinery Manufacturing Percent offirms with paid employees Percent of Receipts forfirmswith paid employees Total Percent ofemployees Computerand Electronic Manufacturing Percent offirms with paid employees Percent of Receipts forfirmswith paid employees Total Percent ofemployees WholesaleTrade In Durable

### I Non-durable Goods Percent offirms with paid employees Percent of Receipts forfirmswith paid employees Total Percent ofemployees Publishing except internet Percent offirms with paid employees Percent of Receipts forfirms with paid employees Total Percent ofemployees Internet Publishing, Telecommunication and ISP Percent offirmswith paid employees Percent of Receipts forfirms with paid employees Total Percent ofemployees Professional, Scientific and Technical Services Percent offirmswith paid employees Percent of Receipts forfirms with paid employees Total Minority

5.47% 2.97% 4.47%

5.36% 3.14% 3.70%

6.86% 4.49% 4.98%

20.48% 1.01% 3.57%

6.96% 0.60% 1.84%

5.71% 0.69% 1.37%

5.56% 2.18% 2.51%

5.24% 1.17% 1.69%

9.19% 0.25% 2.02%

12.01% 0.95% 4.39%

7.08% 0.51% 1.47%

10.76% 0.34% 1.17%

8.79% 4.80% American Indian& Alaska Native

0.54% 0.28% 0.34%

0.79% 0.60% 0.57%

0.71% 0.46% 0.46%

0.51% 0.05% 0.08%

0.01% 0.00% 0.00%

0.34% 0.02% 0.04%

NA NA NA

0.45% 0.11% 0.17%

0.31% 0.02% 0.03%

0.24% 0.04% 0.10%

0.44% 0.04% 0.12%

0.17% 0.03% 0.10%

0.45% 0.17% Asian

1.26% 0.72% 0.88%

0.71% 0.40% 0.39%

0.93% 0.73% 0.66%

14.18%

NA 1.86%

3.29%

NA 0.74%

2.57% 0.42% 0.77%

2.49% 1.38% 1.52%

1.67% 0.32% 0.45%

6.41%

NA 1.33%

7.38%

NA 2.61%

3.83%

NA 0.68%

6.03% 0.00% 0.57%

4.12% 2.56% Black

0.99% 0.59% 0.87%

1.06% 0.44% 0.55%

1.31% 0.73% 0.82%

0.52%

NA 0.11%

1.04% 0.16% 0.29%

0.72% 0.05% 0.13%

0.47% 0.28% 0.32%

0.35% 0.12% 0.18%

0.59% 0.03% 0.18%

0.59% 0.11% 0.20%

1.12% 0.27% 0.29%

1.55% 0.12% 0.23%

1.51% 0.78% Hispanic or latino

2.63% 1.34% 2.34%

2.75% 1.59% 2.11%

3.91% 2.57% 3.03%

5.27% 0.96% 1.51%

2.62% 0.44% 0.81%

2.07% 0.19% 0.41%

2.60% 0.53% 0.67%

2.78% 0.62% 0.89%

1.89% 0.20% 0.46%

3.77% 0.80% 1.46%

1.65% 0.20% 0.36%

2.93% 0.19% 0.26%

2.66% 1.26% Native Hawaiian & Pacific Islander

0.05% 0.03% 0.04%

0.06% 0.11% 0.08%

NA NA NA
NA NA 0.01%

0.01%

NA 0.00%

0.02% 0.00% 0.01%

0.00%

NA 0.00%

NA NA 0.00%

NA NA 0.01%

0.02%

NA 0.02%

0.04%

NA 0.02%

0.08% 0.00% 0.01%

0.04% 0.02% Total Percent ofemployees 5.14% 0.21% 2.64% 0.95% 1.33% 0.02% Note: Some minoritygrouptotal receipts are notgiven. This causes an understatementofthetotal percent of receipts by minorities.
Source: Survey of Business Owners, 2002. 

### 18

# MinorityBusinessDisparities

- CharacteristicsandCauses

Despite the rapid growth ofminorityownedfirms, the owners ofthesefirms continue to encounter significant disparities in the general marketplace. While racial and ethnic minorities comprise approximately 30% ofthe U.s. population, theyownjust 18% 

## ofall

# u.s. businesses.
DisparitiesbyIndustry,RaceandEthnicity

In 2002 Blacks comprised 12.8% of the total population and owned 5.2% of all businesses. Hispanics comprised 14.1% of the total population and owned 6.8% of all businesses; Subcontinent Asians comprised 4.2% of the total population and held 4.8% of all businesses; Pacific Islanders comprised 0.1% of the total population and owned 0.1% ofall businesses; and American Indians and Alaska Natives comprised 1% ofthe total population and owned 0.9% of all businesses. 19 In comparison, nonHispanic Whites comprised 67.4% of the total population, and owned 81% of all non-publicly traded businesses (See Table 7).



## Table7 Racial disparities in small business revenue are significant among all groups except Asians and American Indians. Furthermore, it is impossible to determine with precision the racial and ethnic ownership of publicly held companies. However, if we assume that the largest share of the receipts of these companies were held by non-Hispanic Whites, disparities in business revenue among minorities would be even greater. Specifically, while publicly held businesses comprised only 2.2% ofall businesses in 2002, they accounted for 60.7% of total business revenue. Among non-publicly held companies Whites received 36.4% of total revenue. Of all business revenues, minority percent of total revenue is much lower if we include revenue of public and non-public businesses. Hispanics received 0.1% of total business revenue, Blacks 0.4%, Native Americans 0.1%, Asians 1.4%, and Pacific Islanders 0.02%.20 Disparities in family income and poverty contributed to disparities in minority business performance, compared with businesses owned by non-minorities. For example, in 2005 the median income of non-Hispanic Whites was $50,784, for Blacks it was $30,858, for Asians $61,094, and for Hispanics it was $35,967. Blacks also had the highest percentage of households in poverty at 23.8%, followed by Hispanics 20.6%, Asians 8.9%, and nonHispanic Whites at 6.0% (See Table 8).



### DifferenceBetweenPopulationPercentandBusinessOwnersbipPercent

Race

White alone, not Hispanic Hispanic or Latino (any race) Black orAfrican American American Indian and Alaskan Native Asian Total orAverage Population, 2004
197,840,800 41,322,100 37,502,300 2,824,800 12,326,000 293,655,400 Source:

### u.s. Census Bureau 2005 (a), Lowery, 2007. Non-Publicly Held Businesses, 2002 18,609,599 1,573,464 1,197,567

201,387 1,103,587 22,974,655 Percent of Total Population 67.4% 14.1% 12.8% 1.0% 4.2% 100.0% Percent ofNonPublicly Held Businesses 81.0% 6.8% 5.2% 0.9% 4.8% 100.0% Percentage Point Difference (Business% - Pop %) +13.6% -7.3% -7.6% -0.1% 0.6%

19 Lowery, Ying. 2007 and Survey ofBusiness Owners, 2002. 20 Lowery, Ying. 2007. Minorities in Business: a Demographic Review of Minority Business Ownership, Small Business Research Summary, SBA Office of Advocacy, April 2007, No. 298, pp 1 - 50).

19

## Table 8 Racial DisparitiesinAttributesAssociatedwithBusinessViability
Median Poverty Rate, Percent Using Business Income, Race or Hispanic OriginCategory Three-year Three-year Bank loansto Median Net Ownership Rate Average Start Business, Worth,2000 (Businesses per Average 2003-2005 2003-2005 2002 1000persons)

White alone, not Hispanic $50,677 8.4% 23.1% $79,400 94 Hispanic or latino (any race) $35,467 22.2% 14.8% $9,750 38 Black $31,140 24.7% 17.6% $7,500 32 American Indian and Alaskan Native $33,627 12.2% 20.0% 71 Asian $59,877 10.9% 20.1% 90 Total orAvera!e $46,037 12.6% 22.2% $55,000 78 Source: U.s. Census Bureau, 200S(a); Census Bureau, 2005(b); lowery, 2007; Census Bureau, 2003.

In 2002, racial and ethnic disparities in business ownership and business receipts existed in all industries examined in this report. The simplest way of measuring disparities is with the disparity index (See Table 9); a numerical ratio of the percent oftotal business receipts gOing to a race orethnicgroup, divided bythe percent of all firms in the industry accounted for by that group. For example, Table 9 shows that every industry examined in this report had a disparity index for minority business



## Table9

DisparityIndexbyIndustryRace andEthnicity

Industry Name Total Minority

Construction ofBuildings 0.54 Heavy and Civil Engineering Construction 0.58 SpecialtyTrade Contractors 0.66 Textile and Leather Manufacturing 0.05 Paper, Printing and Related Manufacturing 0.09 Chemical, Non-metallic minerals Manufacturing 0.12 Plastics and Rubber Manufacturing 0.39 Primary Metals and Machinery Manufacturing 0.22 Computer and ElectroniC Manufacturing 0.03 Wholesale Trade In Durable/ Non-durable Goods 0.08 Publishing except/internet 0.07 Internet Publishing, Telecommunication and ISP 0.03 Professional, ScientifiC and Technical Services 0.55

Note: Simple Disparity Index: %of Receipts +%ofFirms owners that was less than 0.80

- the benchmark that court proceedings have established as indicating an inference ofdiscrimination.


## Disparities existed in all industriesfor all
race and ethnic groups. The only exceptions were Native Hawaiians and Pacific Islanders in the heavy construction andcivilengineering industry, andAsians in specialtytradecontracting.

American Native Hawaiian & Pacific Islander Indian & Alaska Native 0.51 0.76 0.64 0.10 0.00 0.05

0.24 0.05 0.18 0.08 0.15 0.38 Asian

0.57 0.56 0.79

0.16 0.55 0.19

0.00 0.62 Black

0.60 0.41 0.56

0.16 0.08 0.60 0.35 0.05 0.19 0.25 0.08 0.51 Hispanicor latino

0.51 0.58 0.66 0.18 0.17 0.09 0.20 0.22 0.10 0.21 0.12 0.07 0.48 0.70 1.82

0.25

0.00 0.43

Some disparityvalues may be biased downward in cases where industry revenue data were not available.

Source: Survey of Business Owners, 2002.

20

### The CausesofRacial and EthnicDisparities
Studies suggest that the factors contributing to the financial viability and growth of minority businesses are as follows:

1) Individual-specific factors, including owner's business acumen, relevant education and experience, choice of industry and business location. 2) Environment-consequent factors, such as access to capital, to supportive networks, presence of role models and absence of racial discrimination. 3) Group-specific factors include set-aside programs for minorities, equal employment opportunities and environments where there is significant minority political power (Ahiarah, 1993).
Insufficient access to start-up capital is the most widespread reason typically given for the lower level of self-employment among racial and ethnic minorities. Research has indicated that minority businesses experience a substantial disadvantage at the start-up phase (Fairlie, 1999). A frequently cited study by Cavaluzzo, Cavaluzzo and Wolken (2002) examines patterns of credit application for 4,570 small businesses, including 1,025 minority-owned businesses run by men and women in 1993. The size of owner's assets significantly influenced the probability of securing a credit line.



### After holding other factors constant, Black-owned businesses were denied credit 2.5 times more frequently than White-owned businesses. Hispanic males weredeniedtwo times asoftenas White males.

Moreover, interest rates paid by Black males who gained credit approval, were 11.1% higher than interest rates paid by White males.
Education has also been cited as afactor in determining the success of business owners. Bates (1990) used information on males who entered self-employment between 1976 and 1982, and found that the level of

21 education positively contributed to the probability of business longevity.
Bates also showed that groups with the highest education levels also had the most access to debt capital. Christopher (1998) developed a "Basic Survival Model" that analyzed small business performance and viability between 1987 and 1991 as a function of numerous exogenous variables. The author found that the probability of minority business survival increases with the number of years of formal education of the owner. Craig, Gent, Palumbo and Wall (2001) analyzed the factors that contributed toviability ofsmall businesses in Buffalo, NY. They identified how financial and nonfinancial assets of business owners influenced the success of businesses. They found that having a formal business plan increased sales by 55.8%, while availability of loans increased sales by 55.4%. Also formal education and non-minority status were positively correlated with sales. Dunn and Holtz-Eakin (2000) used samples from the National Longitudinal Surveys of Labor Market Experience and found that parental wealth and selfemployment were important in the inter-generational transmission of self-employment skills. Fairlie and Meyer (1996), using 1990 U.S. Census of Population, discovered significant differences in self-employment rates across six ethnic and racial groups in the U.S

.. They demonstrated that salary and personal income are positively correlated with self-employment rates. Finally, Audretsch (1991) investigated rates of firms survival varies across 295 industries, using the SBA data merge with Dun & Bradstreet data. He concluded that innovation substantially contributed to survival rates of these companies and that survival rates varied across industries.


### In summary, research has shown that
access to capitaland credit, personal net worth and income, educational attainment and a legacy of family entrepreneurship, allcontributepositively to business start-ups and viability. In each case, the historical legacy of discrimination has lowered the accumulation of these attributes for minorities.

# GovernmentContractingRemainstheMostViable Optionfor Minorities

National business statistics show that minority-owned firms engage in government contracting to 

## a larger extentthando non-minority firms. This is because minority business owners are muchmorelikelyto

## beadverselyaffected bydiscriminatorypractices in theprivate sectorthan in thepublicsector.

Laws governing discrimination in business practices pertain primarily to government contracting activity and notto private sector business to business transactions.
The greater representation of minority contractors as governmentvendors is readily apparent in Table 10. The table shows that in 2006 there were 47,254 small 

## Table 10 business concerns registered with the federal government's CCR database. Ofthis number, 19,237 (or 40.7%) were minority-owned businesses. In contrast, minorities owned 18% ofall U.S. businesses. Among the 19,237 minority-owned SBCs, 3,388 specialized in the construction of buildings, 1,935 concentrated primarily in special trades contracting, and 671 were in the heavy construction industry. But the largest concentration of minority-owned SBCs was in professional, scientific and technical services; 6,843. In total SBCs employed 821,315 workers in 2006; minority-owned SBCs employed 287,482 (or 35% of all workers employed by SBCs) while non-minority-owned SBCs employed 533,833 workers. Among minority SBCs, the industry creating the largest number ofjobs was construction of buildings, 66,136, followed by professional, scientific and technical services; 64,506. Internet publishing and telecommunications was third with 35,025 employees.



### Numberand Employment in Minorityand Non-minoritySBCs, 2006 Minority-ownedSBCs Non-Minority-owned AIISBCs SBCs Employment Percent of Non- Employment Total Industry Minority- in minority- all minority- in non- Number employees owned SBCs employees owned minority- ofSBCs owned SBCs in SBCs SBCs owned SBCs in SBCs
Construction ofBuildings 3,388 66,136 66% 2,147 33,543 5,535 99,679 Heavy Construction 671 13,781 37% 1,205 23,042 1,876 36,823 SpecialtyTrades Contracting 1,935 22,421 36% 2,957 39,977 4,892 62,398 Textile and Leather Manufacturing 381 6,467 18% 747 29,755 1,128 36,222 Paper, Printing and Related Manufacturing 572 5,175 23% 741 17,296 1,313 22,471 Chemical, Non-Metallic Minerals Manufacturing 318 3,515 13% 896 23,650 1,214 27,165 PlastiCS and Rubber Manufacturing 154 2,190 11% 625 16,969 779 19,159 Primary Metal and Machinery Manufacturing 1,287 23,648 15% 4,909 133,029 6,1% 156,677 Computer and ElectroniC Manufacturing 1,341 29,745 27% 2,722 80,873 4,063 110,618 Wholesale Trade (Durable and Non-Durable) 955 6,685 23% 1,639 21,987 2,594 28,672 Publishing, Except Internet 509 8,188 44% 824 10,592 1,333 18,780 Internet Publishing, Telecommunications and ISP 883 35,025 66% 650 18,400 1,533 53,425 Professional, Scientificand Technical Services 6,843 64,506 43% 7,955 84,720 14,798 149,226 Total 19,237 287,482 35% 28,017 533,833 47,254 821,315 Source: CCR, 2007 and FPDS, 2005-2007. 22Tables 11 through 15 describe various characteristics of minority SBCs by industry, race and ethnicity. Blacks comprised the largest number of minority SBCs (7,223), representing 15.3% of all SBCs. Blacks were followed in respective order by Hispanics (5,102 SBCs or 10.8%),



## Table 11 Asian and Pacific Americans (2,828 or 6% of all SBCs), Subcontinent Asian Americans (2,049 or 4.3% of SBCs), and Native Americans (2,035 SBCs or 4.7%). Nonminority SBCs comprised 59.3% of all firms (See Tables 11 and 12).



### NumberofMinorityandNon-MinoritySBCs byIndustry,RaceandEthnicity,2006

Native Subcontinent NonIndustry Asian Pacific Black Hispanic Americans Asian Minority SBCs Construction ofBuildings 354 1,192 1,037 638 167 2,147 Heavy Construction 62 203 238 144 24 1,205 SpecialtyTrades Contracting 195 776 682 231 51 2,957 Textile and Leather Manufacturing 66 143 109 37 26 747 Paper, Printingand Related Manufacturing 74 247 176 42 33 741 Chemical, Non-Metallic Minerals Manufacturing 66 106 82 21 43 896 Plastics and Rubber Manufacturing 19 30 65 22 18 625 Primary Metal and Machinery Manufacturing 245 228 488 203 123 4,909 Computer and Electronic Manufacturing 362 374 266 95 244 2,722 Wholesale Trade (Durable and Non-Durable) 141 387 251 91 85 1,639 Publishing, Except Internet 94 194 84 24 113 824 Internet Publishing, Telecommunicationsand ISP 124 382 144 65 168 650 Professional, Scientificand Technical Services 1,026 2,961 1,480 422 954 7,955 Total 2,828 7,223 5,102 2,035 2,049 28,017



## Table 12 PercentofMinorityandNon-MinoritySBCs byIndustry,Race andEthnicity,2006
Industry Asian Black Hispanic Native Subcontinent Non-Minority Total Pacific Americans Asian SBCs Construction of Buildings 6.4% 21.5% 18.7% 11.5% 3.0% 38.8% 100.0% Heavy Construction 3.3% 10.8% 12.7% 7.7% 1.3% 64.2% 100.0% SpecialtyTrades Contracting 4.0% 15.9% 13.9% 4.7% 1.0% 60.4% 100.0% Textile and Leather Manufacturing 5.9% 12.7% 9.7% 3.3% 2.3% 66.2% 100.0% Paper, Printingand Related Manufacturing 5.6% 18.8% 13.4% 3.2% 2.5% 56.4% 100.0% Chemical, Non-Metallic Minerals Manufacturing 5.4% 8.7% 6.8% 1.7% 3.5% 73.8% 100.0% Plastics and Rubber Manufacturing 2.4% 3.9% 8.3% 2.8% 2.3% 80.2% 100.0% Primary Metal and Machinery Manufacturing 4.0% 3.7% 7.9% 3.3% 2.0% 79.2% 100.0% Computer and Electronic Manufacturing 8.9% 9.2% 6.5% 2.3% 6.0% 67.0% 100.0% Wholesale Trade (Durable and Non-Durable) 5.4% 14.9% 9.7% 3.5% 3.3% 63.2% 100.0% Publishing, Except Internet 7.1% 14.6% 6.3% 1.8% 8.5% 61.8% 100.0% Internet Publishing, Telecommunications and ISP 8.1% 24.9% 9.4% 4.2% 11.0% 42.4% 100.0% Professional, Scientific and Technical Services 6.9% 20.0% 10.0% 2.9% 6.4% 53.8% 100.0% Total 6.0% 15.3% 10.8% 4.3% 4.3% 59.3% 100.0%

23

## Table 13 RevenueofMinorityandNon-MinoritySHes by

### Industry,RaceandEthnicity,2006
Industry Asian Pacific Construction of Buildings $ 1,213,297,452 Heavy Construction $ 164,025,683 SpecialtyTrades Contracting $ 285,955,872 Textile and leather Manufacturing $ 135,447,577 Paper, Printing and Related Manufacturing $ 61,090,819 Chemical, Non-Metallic Minerals Manufacturing $ 111,808,324 Plastics and Rubber Manufacturing $ 28,069,301 Primary Metal and Machinery Manufacturing $ 1,018,687,152 Computerand Electronic Manufacturing $ 2,414,157,208 Wholesale Trade (Durable and Non-Durable) $ 389,088,875 Publishing, Except Internet $ 142,695,417 Internet Publishing, Telecommunications and ISP $ 1,036,643,737 Professional, Scientificand Technical Services $ 1,006,520,699 Total $8,007,488,116

Industry Subcontinent Asian Construction of Buildings $ 843,642,226 Heavy Construction $ 64,980,777 SpecialtyTrades Contracting $ 46,844,721 Textile and leather Manufacturing $ 22,714,968 Paper, Printing and Related Manufacturing $ 44,993,000 Chemical, Non-Metallic Minerals Manufacturing $ 82,042,500 PlastiCS and Rubber Manufacturing $ 45,020,000 Primary Metal and Machinery Manufacturing $ 463,946,368 Computerand ElectroniC Manufacturing $ 882,732,259 WholesaleTrade (Durable and Non-Durable) $ 247,181,228 Publishing, Except Internet $ 243,034,626 Internet Publishing, Telecommunications and ISP $ 1,360,669,578 Professional, Scientific and Technical Services $ 1,224,103,491 Total $ 5,571,905,742
Table 13 provides the total revenue received by SBCs by race, ethnicity and industry. The largest revenue to a minority group ($11 billion) went to Blacks, followed in respective order by Hispanics, Asian and Pacific Islanders, Native Americans, and Subcontinent Asians. Overall, Blacks represented 15.3% ofall CCR-listed small business concerns (SBCs) and received 8.7% ofthe total revenue of those firms. The comparable figures for Hispanics were 10.8% and 7.7%; for Asian and Pacific Islanders the revenue percent was 6.3% and they comprised 6.0% of all SBCs. Native Americans and Subcontinent Asians received 4.7% and 4.4% of total revenue respectively (See Table 14). They each comprised 4.3% ofall available SBCs.



### 24 Black Hispanic Native Americans $ 2,003,544,462 $ 3,178,094,149 $ 2,638,624,991 $ 343,894,463 $ 728,909,201 $ 289,763,607 $ 433,337,335 $ 738,439,530 $ 263,021,894 $ 42,734,535 $ 204,147,514 $ 153,863,863 $ 186,274,889 $ 240,553,982 $ 325,905,825 $ 263,141,794 $ 146,319,445 $ 81,455,723 $ 120,265,763 $ 100,922,036 $ 52,146,250 $ 346,221,838 $ 1,013,767,528 $ 632,575,687 $ 2,283,408,017 $ 927,921,327 $ 447,803,475 $ 582,339,104 $ 687,361,118 $ 250,219,583 $ 172,865,553 $ 116,308,424 $ 10,283,002 $ 2,715,018,966 $ 408,086,569 $ 467,232,590 $ 1,506,124,929 $1,180,214,983 $ 351,922,844 $ 10,999,171,648 $ 9,671,045,806 $5,964,819,334

Non-MinoritySBCs $ 6,569,060,081 $ 3,471,796,962 $ 4,529,894,116 $ 3,732,809,657 $ 2,935,265,689 $ 3,891,460,954 $ 2,444,081,648 $ 22,675,953,901 $ 13,897,698,980 $ 8,756,154,774 $ 1,369,586,203 $ 2,176,230,922 $ 9,455,611,988 $85,905,605,875



## Blacks comprised21.5%

## of smallbusiness
concerns in construction ofbuildings and received 12.2%

## oftotalrevenue going to SBCs. Hispanics comprised 18.7% 

## ofall firms in this industry andreceived 19.3% of total revenue. In contrast, Native Americans and Subcontinent Asians comprised 11.5% 

## and 3% 

## of SBCs but accounted for 16% 

## and 5.1% respectively, oftotalrevenue receivedby thesefirms. Fifty-nine and three-tenths percent ofallfirms were ownedbynonminorities and they received 68.1% 

## of thetotalrevenue.

## Table 14 PercentofRevenueforMinorityandNon-MinoritySBCs by

### Industry.Race andEthnicity.2006
Asian Native Subcontinent NonIndustry Pacific Black Hispanic Americans Asian Minority Total SBCs Construction ofBuildings 7.4% 12.2% 19.3% 16.0% 5.1% 39.9% 100.0% Heavy Construction 3.2% 6.8% 14.4% 5.7% 1.3% 68.6% 100.0% SpecialtyTrades Contracting 4.5% 6.9% 11.7% 4.2% 0.7% 71.9% 100.0% Textile and Leather Manufacturing 3.2% 1.0% 4.8% 3.6% 0.5% 87.0% 100.0% Paper, Printing and Related Manufacturing 1.6% 4.9% 6.3% 8.6% 1.2% 77.4% 100.0% Chemical, Non-Metallic Minerals Manufacturing 2.4% 5.8% 3.2% 1.8% 1.8% 85.0% 100.0% Plastics and Rubber Manufacturing 1.0% 4.3% 3.6% 1.9% 1.6% 87.6% 100.0% Primary Metaland Machinery Manufacturing 3.9% 1.3% 3.9% 2.4% 1.8% 86.7% 100.0% Computerand Electronic Manufacturing 11.6% 10.% 4.4% 2.1% 4.2% 66.6% 100.0% Wholesale Trade (Durable and Non-Durable) 3.6% 5.3% 6.3% 2.3% 2.3% 80.2% 100.0% Publishing, Except Internet 6.9% 8.4% 5.7% 0.5% 11.8% 66.7% 100.0% Internet Publishing, Telecommunications and ISP 12.7% 33.3% 5.0% 5.7% 16.7% 26.7% 100.0% Professional, ScientifiC and Technical Services 6.8% 10.2% 8.0% 2.4% 8.3% 64.2% 100.0% Total 6.3% 8.7% 7.7% 4.7% 4.4% 68.1% 100.0%



## Table 15 MeanYearsofBusinessOperationforMinorityandNon-MinoritySBCs by

### Industry.Race and Ethnicity.2006
Industry Asian Pacific Construction of Buildings 12 Heavy Construction 12 SpecialtyTrades Contracting 12 Textile and leather Manufacturing 14 Paper, Printing and Related Manufacturing 16 Chemical, Non-Metallic Minerals Manufacturing 13 Plastics and Rubber Manufacturing 14 Primary Metal and Machinery Manufacturing 15 Computer and ElectroniC Manufacturing 13 Wholesale Trade (Durable and Non-Durable) 13 Publishing, Except Internet 8 Internet Publishing, Telecommunications and ISP 9 Professional, ScientifiC and Technical Services 10 Mean,All Industries 12



### In the heavy construction industry, the total number of Hispanic-owned firms was 238 and they accounted for 12.7% of all firms. There were a total of 203 Blackowned firms constituting 10.8% of the industry. However, the total revenue of Black-owned firms, $343.9 million, made up only 7% of total industry revenue. In the specialty trades contractor industry, Black and Hispanic-owned businesses comprised 15.9% and 13.9% ofthe total number offirms. Four-percent of the total number firms were Pacific Asian-owned, while 4.7% were owned by Native Americans (See Table 12). Although the minorities together owned 40% of all firms

25 Black Hispanic Native Subcontinent Non-Minority Americans Asian SBCs 9 10 10 11 16 10 12 11 12 17 8 11 9 10 17 8 13 12 13 28 17 14 17 12 24 30 14 10 15 24 11 16 13 13 24 13 17 15 15 27 10 12 11 13 18 8 13 11 10 24 8 9 6 8 12 7 7 7 9 10 8 9 9 10 11 9 11 11 11 18



### in this industry, their total revenue comprised 28% (See Table 14). Over 18.8% of the total 1,313 firms in the paper, printing and related manufacturing industry were Black-owned. Hispanic-owned firms formed the second largest minority group with a total of 176 firms. Asian, Native American and Subcontinent firms made up a relatively small portion ofthe number offirms. The 247 Black-owned firms shared 5% of the total revenue and had an average of nine years in business (See Table 15 also).The computer and electronic manufacturing industry had more Black (9.2%) and Asian (8.9%) owned firms than Hispanic firms (6.5%), followed by Subcontinent Asians who owned a relatively high 6% in this industry. Black-owned firms received 8% of the total industry revenue. In professional, scientific and technical services, Black-owned firms were the largest group with almost 3,000 firms or about 19.8%. They accounted for 10% ofthe total industry revenue. Hispanic-owned firms represented 10% of the industry and received 8% of total revenue.
A recurring pattern of disparity exists in virtually all industries between the share of revenue received by minorityfirms and theirshare ofall firms in the industry.



### 26 

### Minority-owned businesses are heavily representedamong Federal Government contractors. However, there is a significant gap between the share of firms that minorities comprise and the share oftotalrevenue theyreceive. The gap is even largerfor minority firms that have never participated in the SDB program.

# DisparitiesAmongMinorityCCRVendorsthatarenotSOB Certified 

# This section focuses on minority

-owned SBCs that are registered with CCR, but have never been SOB certified. We focus specifically on the experiences ofthese firms as away ofemphasizing the importance of the SOB program to the viability and growth of minorityowned firms. New federal regulations require that all firms seeking to engage in contracting with the federal government must register with the CCR database

. This requirement allowed us to determine the total revenue that each firm received

. This report tracked total firm revenue between 2004 and 2006

. In Section 6 ofthe reportwe demonstrated that minority contractors are more dependent upon government sector revenue than are non-minoritycontractors.



### In contrast to 

### SOBs, minorityfirms that do not participate in the government's SOB program experience significantly greaterdisparities in totalrevenue when comparedto

### non-minority-owned firms.

More specifically, we found that after holding constant the differences between minority and non-minority businesses in years of operation, number of employees, legal formal business organization, industry of operation

27 and success at government contracting, minority business owners who do not participate in the SOB program received significantly less revenue than nonminoritybusiness owners

.



### Other things being constant, minority business owners that were not SOB certifiedreceived $554,245 

### less in yearly
revenue in comparison to 

### OSBes between2004and2006.

Also, being a successful federal government contractor added about $2.4 million to small business revenue regardless ofthe race orethnicity ofthe business owner

. In 2006, there were 10,513 minority

-owned small business concerns thatwere not SOB certified (See Table 16). These businesses had combined annual revenues of $10.2 billion in 2006. We compared these firms to Other Small Business Concerns (OSBe)

. That is, firms primarily owned by White Males who are not socially or economically disadvantaged. In total, there were 27,087 OSBCs and their combined annual revenue was $82

.6 billion (See Table 16)

.

## Table 16 ComparisonBetweenPercentofTotalRevenueandPercentofFirmsforMinorityFirms-notSDBs andOSBCs, 2006

Construction of Buildings Heavy Construction SpecialtyTrades Contracting Textile and Leather Manufacturing Paper, Printingand Related Manufacturing Chemical, Non-Metallic Minerals Manufacturing Plastics and Rubber Manufacturing Primary Metal and Machinery Manufacturing Computer and Electronic Manufacturing Wholesale Trade (Durable and Non-Durable) Publishing, Except Internet Internet Publishing, Telecommunications and ISP Professional, Scientific and Technical Services Total

Construction of Buildings Heavy Construction SpecialtyTrades Contracting Textile and Leather Manufacturing Paper, Printing and Related Manufacturing Chemical, Non-Metallic Minerals Manufacturing Plastics and Rubber Manufacturing Primary Metal and Machinery Manufacturing Computer and Electronic Manufacturing Wholesale Trade (Durable and Non-Durable) Publishing, Except Internet Internet Publishing, Telecommunications and ISP Professional, Scientific and Technical Services Total Total Revenue
$1,156,946,726

$478,866,084 $738,283,137 $264,634,769 $570,747,649 $262,319,508 $192,920,052 $1,243,665,766 $1,520,366,799

$973,739,009 $178,878,197 $1,001,971,072 $1,615,087,973 $10,198,426,741

Total Revenue
$5,755,347,491 $3,268,926,920 $4,426,006,261 $3,696,693,394 $2,902,050,368 $3,878,600,954 $2,434,651,648 $22,489,161,877 $13,326,421,928 $8,653,258,471 $1,265,043,857 $1,824,964,602 $8,649,633,543 $82,570,761,314 MinorityFirm Not-SOB
%ofTotal SBC No. ofFirms %ofall SBC

Revenue Firms

16.7 1398 41.7 12.8 344 23.0 14.3 1281 30.8 6.7 264 26.6 16.4 362 33.5 6.3 214 19.5 7.3 86 12.2 5.2 663 12.1 10.2 672 20.3 10.1 656 29.0 12.4 276 25.7 35.4 474 43.8 15.7 3823 33.3 11.0 10513 28.0

OtherSmall Business Concerns
%ofTotal SBC No. ofFirms %ofallSBC

Revenue Firms

83.3 1956 58.3 87.2 1152 77.0 85.7 2884 69.2 93.3 730 73.4 83.6 720 66.5 93.7 886 80.5 92.7 618 87.8 94.8 4835 87.9 89.8 2645 79.7 89.9 1607 71.0 87.6 799 74.3 64.6 607 56.2 84.3 7648 66.7 89.0 27087 72.0

In Table 17, we record the total revenue percentage (utilization) and availability percentage of minority firms that are not SDBs. This Table indicates that the revenue received by all minorities (that were not SDBs) was 11% of total revenue and these firms comprised 28% of all vendors. The disparity index is therefore 0.39 (See last line ofTable 17). Similarly, a disparity index is calculated for minorities in each industry and Internet publishing is the only industry whose disparity index is not below the 0.80 threshold that indicates an inference of discrimination by legal standards.

28

## Table 17 Utilization,AvailabilityandDisparityIndexfor Non-SDBs byIndustry, 2006

Utilization Availability Simple Disparity Percentage Percentage Index Construction of Buildings 16.7 41.7 0.40 Heavy Construction 12.8 23.0 0.56 SpecialtyTrades Contracting 14.3 30.8 0.46 Textile and Leather Manufacturing 6.7 26.6 0.25 Paper, Printing and Related Manufacturing 16.4 33.5 0.49 Chemical, Non-Metallic Minerals Manufacturing 6.3 19.5 0.33 Plastics and Rubber Manufacturing 7.3 12.2 0.60 Primary Metal and Machinery Manufacturing 5.2 12.1 0.43 Computer and Electronic Manufacturing 10.2 20.3 0.51 Wholesale Trade (Durable and Non-Durable) 10.1 29.0 0.35 Publishing, Except Internet 12.4 25.7 0.48 Internet Publishing, Telecommunications and ISP 35.4 43.8 0.81 Professional, Scientific and Technical Services 15.7 33.3 0.47 Total 11.0 28.0 0.39 Note: Simple Disparity Index: Utilization % .;. Availability %. Some disparityvalues may be biased downward in cases where industry revenue data were not available.

To eliminate the possibility that other factors might account for the disparity that exists between minority firms that are not SDBs and aSBCs, we used a regression analysis. The dependent variable was average income over a three-year period, 2004 through 2006. The explanatory variables included the age of the business, the number of employees, the legal form of business organization, the industry that the business operated in, and a dummy variable indicating whether the firm received government contracting revenue. Also included among the explanatoryvariables was avariable that indicated whether the firm being observed was a minority-owned firm (not a SDB) or whether it was an aSBC (i.e., other small business concerns). The results revealed that firms' average revenue increased by

29 $43,732 for each additional year of operation; it increased by $92,666 for each additional employee; and average revenue was much greater for a corporation ($1,074,656) as opposed to a regular proprietorship (See Table 18). The most important variable observed was whether average revenue increased or decreased for minority-owned firms that were not SDBs. The results indicated that these firms experienced a $544,245 decrease in average revenue. This result provides an even more compelling inference of discrimination since it is statistically significant (See regression results in Table 18). The regression results also show that firms that successfully received government contracts had average revenues of$2.4 million greaterthan those who were unsuccessful.

## Table 18 Regression Equation:Three-YearRevenueisEstimatedforMinorityFirms Not-SDB andOSBCsafter Controllingfor BusinessAttrihutes Dependent Variable =Three YearAverage Revenue ExplanatoryVariables Unstandardized Standardized t- Significance Coefficients Coefficients Statistic Level B Std. Error Beta Constant -37987 427195 -0.089 0.929 Age of Business 43732 5712 0.050 7.657 0.000 Numberof Employees 92666 1577 0.356 58.775 0.000 Legal Form ofBusiness Organization

Proprietorship: Reference Category Regular Corporation 1074656 325004 0.034 3.307 0.001 SCorporation or LLC 836545 314404 0.026 2.661 0.008 Partnership 958701 745459 0.008 1.286 0.198 Industry

Construction ofBuildings = Reference Category Construction: Heavy -613493 541502 -0.008 -1.133 0.257 Construction: SpecialtyTrades -1282749 419434 -0.025 -3.058 0.002 Manufacturing:Textiles -671051 657450 -{).007 -1.021 0.307 Manufacturing: Paper 968851 666050 0.009 1.455 0.146 Manufacturing: Chemical 278721 614459 0.003 0.454 0.650 Manufacturing: Plastic -38795 740819 0.000 -0.052 0.958 Manufacturing: Metals 705802 400968 0.016 1.760 0.078 Manufacturing: Computer Electronics 954588 434219 0.018 2.198 0.028 WholesaleTrade 2656977 478711 0.041 5.550 0.000 Publishing Except Internet -999751 635723 -0.010 -1.573 0.116 Internet/ISP /Telecom 60780 618582 0.001 0.098 0.922 Professional, Scientific &Technical -1033015 356988 -0.030 -2.894 0.004 Minority Not SDB (versus OSBCs) -544245 223807 -0.015 -2.432 0.015 Received Government Contract (Versus Did Not) 2390033 319713 0.044 7.476 0.000 Degrees of Freedom 25037 Adjusted RSquare 0.159 Mean Value of DependentVariable 3,705,283 Standard Error of Estimate 14,506,960



### 30

# The Small DisadvantagedBusiness (SOB) Program

Eligibility Requirementsand Operation ofthe SDB Program 

# There are two business assistance programs administered by the SBA for Small Disadvantaged Businesses. The 8(a) Business Development Program offers a broad range of assistance to socially and economically disadvantaged firms

.



### The Small Disadvantaged Business Certification Program (SDB Program) offers benefits to SDBs in federal procurement andprovides incentives to corporate priine contractors to the government to encourage their use of SDBs assubcontractors.

The SDB program is currently structured so as to: 1) Use federal procurement to overcome the effects of discrimination. 2) Ensure that the benefits of federal procurement are used in afair and effective manner. 3) Ensure that the operation of the program conforms tothe U.S. Supreme Court's 1995Adarand Decision

. The SBA (or an independent organization designated by SBA) certifies small firms to make sure that they meet specific social, economic and ownership criteria, in addition to other eligibility criteria. SDB certification remains effective for three years. Large business concerns that pursue government prime contracting opportunities use the CCR on-line to identify potential SDB suppliers and subcontractors. The benefits of the SDB program are as follows:

• When bidding as prime contractors, SDBs are eligible for price evaluation adjustments of up to 10%

. This is accomplished by adding up to 10% to



### 31 the price of bids received from non-SDBs. 21 The U

.S

. Department of Commerce uses a benchmarking procedure to determine the under-representation ofSDBs in particular industries. Identified industries are eligible for price evaluation ofadjustments:

Price credits are not applied to industries that do not reflect under-representation. 22 Price credits are not applied to acquisitions below $100,000. Price credits are not applied to procurements set aside forsmall businesses. Price credits do not apply to procurement underthe SBA 8(a) Program.

• Large prime contractors are eligible for evaluation

credits for reaching SDB's subcontracting targets. This is accomplished by awarding the highest points to the bid proposal with the most targeted dollars, to SDB subcontractors in authorized industries. This credit is available only on negotiated acquisitions greater than $500,000 or construction projects greater than $1 million. Credits are not applied to contracts performed outside ofthe United States, or to contracts in industries outside of those that are benchmarked. The government-wide goal for SDB participation in prime contracts is 5%.
• Monetary incentives can be provided to prime

contractors for exceeding SDB subcontracting targets on negotiated contracts. This can be up to 10% ofthe difference between the actual and target amount.
• The HUBZone program allows small businesses to

engage in sole-source contracting in HUBZones (Historically Under-utilized Business Zones). SDBs

21 The co-author, T. D. Boston assisted the U.S. Department of Commerce in developingthe current benchmarking procedure.

22 This provision of the SOB Program expired in 2004 and has not been reauthorized

. However, 000 and NASA still use price incentives

.located in these zones are eligible for benefits under both programs. Eligibility for the SDB program and the 8(a) Business Development Program are the same, with the exception that 8(a) participants cannot have personal adjusted net worth of greater than $250,000 when entering the program. All 8(a) certified firms are automatically SDB certified. To become certified businesses:

• Must meet size standards for small businesses in

their industry. The SBA office of size standards develops and recommends small-business size standards thatvary by industry group. For example, in manufacturing, the standard generally varies between 500 to 1,000 employees. In general construction the size standard is $31 million revenue and in architectural, engineering and professional industries it is $6.5 million.
• Must be at least 51% owned and controlled by a

socially and economically disadvantaged individual/s. Blacks, Hispanic Americans, Asian Pacific Americans, Subcontinent Asian Americans and Native Americans are presumed to qualify within this category. Other individuals can qualify



## Table 19 by showing a preponderance of evidence that they are disadvantaged.
• Owners must have a personal net worth of less than

$750,000 excluding the equity in their business and primary residence.
SDB Certification is conducted electronically by SBA or a designated independent contracting organization. Applicants must complete SBA form 10lD-personal information and business profile, SBA form 413-personal financial statement, provide two years' personal tax returns, provide three years' business tax returns and provide updated business financial statements. Table 19 gives the number of SDBs and OSBCs with their associated total revenue by industry. The table shows that SDBs comprised 20% of small business concerns' (their availability) and received 18.9% of total revenue received by these firms (utilization). A simple Disparity Index for the SDBs yields 0.95 (18.9%/20%). This indicates thatfirms that participated in the SDB program did not experience significant disparities. In contrast, the Disparity Index was 0.39 for minority firms that did not participate in the SDB program. We can therefore conclude that the program is achieving its intended purpose, to remedy the effects ofdiscrimination.



### Number,Revenue,AvailabilityandUtilizationofSDBsandOSBCs, 2006

Industrycategory

Construction ofBuildings Heavy Construction SpecialtyTrades Contracting Textile and Leather Manufacturing Paper, Printing and Related Manufacturing Chemical, Non-Metallic Minerals Manufacturing Plastics and Rubber Manufacturing Primary Metal and Machinery Manufacturing Computer and Electronic Manufacturing Wholesale Trade (Durable and Non-Durable) Publishing, Except Internet Internet Publishing, Telecommunications and ISP ProfeSSional, Scientific and Technical Services Total Number of SDBs

1,841 304 581 74 131 53 49 336 444 259 189 357 2,140 6,75B

32 Small Disadvantage Businesses (SOBs) Availability: Utilization: SDB SDB percent of Revenue ofSDBs percent ofSBC SBCs total revenue

48.5 $7,592,748,388 56.9 20.9 $902,419,353 21.6 16.8 $915,455,451 17.1 9.2 $149,284,536 3.9 15.4 $182,985,539 6 5.6 $332,921,440 7.9 7.4 $111,183,298 4.4 6.5 $1,280,108,097 5.4 14.4 $2,606,881,317 16.4 13.9 $885,483,366 9.3 19.1 $464,216,277 26.8 37 $1,172,286,467 39.1 21.9 $2,696,568,004 23.8 20 $19,292,541,533 18.9



### CONTINUED

_ ...._-_ ..................._-_.__.__. __._-.....__..

## Table 19 Continued OtherSmall Business Concerns (OSBCs)

Numberof Availability: Utilization: aSBC IndustryCategory aSBCs percent Revenue ofaSBCs percent ofSBC Non-SBCs ofSBCs total revenue
Construction of Buildings 1,956 Heavy Construction 1,152 SpecialtyTrades Contracting 2,884 Textile and Leather Manufacturing 730 Paper, Printing and Related Manufacturing 719 Chemical, Non-Metallic Minerals Manufacturing 886 Plastics and Rubber Manufacturing 617 Primary Metal and Machinery Manufacturing 4,833 Computer and Electronic Manufacturing 2,644 Wholesale Trade (Durable and Non-Durable) 1,607 Publishing, Except Internet 799 Internet Publishing, Telecommunications and ISP 607 Professional, Scientific and Technical Services 7,647 Total 27,081



### How Goals and Objectives ofthe SDB Programare Achieved

The SBA works with each agency's procurement authority to establish its goals for SBCs, and it is responsible for tracking and reporting on these agencies attainment. Goals are set for all categories of small business concerns separately (See Table 20 below). A procurement award can be counted in more than one sub-category, except the 8(a) and the SOB categories as they are reported separately. Together, they form the achievement ofthe government's SOB goals.

33 51.5 $5,755,347,491 43.1 79.1 $3,268,926,920 78.4 83.2 $4,426,006,261 82.9 90.8 $3,696,693,394 96.1 84.6 $2,885,050,368 94 94.4 $3,878,600,954 92.1 92.6 $2,434,651,648 95.6 93.5 $22,453,063,761 94.6 85.6 $13,326,421,928 83.6 86.1 $8,653,258,471 90.7 80.9 $1,265,043,857 73.2 63 $1,824,964,602 60.9 78.1 $8,649,633,543 76.2 80 $82,517,663,198 81.1

Large business concerns that operate as prime contractors to the government must submit form SF294, the Subcontracting Report for Individual Contracts, on a semi-annual basis. Subcontracts are reported on SF-295 SOB the "Breakout of Subcontracting Awards to SOBs.,,23 This is required at the end of the fiscal or calendar year. Optional Form 312 may be submitted at the end ofa contract. It allows the contracting officerto determine the extent to which the subcontracting target was met in a particular industry. This form includes only contract activity involving SOBs in benchmarked industry.

23 Effective January 1, 1999 the SF-295 50S breakout report was required for all government contracts, not just those associated with evaluation factors.

## Table20 Matrix oftheSmall BusinessAdministration'sPrograms Program Name Small Business Concerns Small Disadvantaged Business [Non-S(a)) Prime Contract Utilization 23% 5% combined goal (splitevenly with S(a) contractors) Goal

Sub-contract Utilization None 5% combined goal (split evenlywith S(a) contractors) Goal**~** Certification strictly pertainsto benefits in Federal**~** Small Business Development Centers (SBDCs) procurement.**~** SBA certifies SDBs to makethem eligible for Description of Program**~** SCORE Association (Service Corps ofRetired special bidding benefits. Executives) provide management and technical**~** Evaluation credits and monetary incentives assistance. availableto prime contractors who boost subcontracting opportunitiesforSDBs.**~** Must be at least51% owned and controlled bya socially and economicallydisadvantaged individual or individuals.**~** Other individuals can qualify iftheyshow by a "preponderance ofthe evidence" thatthey are**~** Independently owned and operated. disadvantaged. Eligibility Criteria**~** Notdominant in its field ofoperation.**~** Must have a networth ofless than $750,000,**~** Meets employment and industry size standards. excludingthe equity ofthe business and primary residence.**~** Successful applicants mustalso meet applicable size standardsfor small businesses in their industry.**~** S(a) concerns automaticallyqualifyfor SDB certification.

NetWorth limitation None Networth must be less than $750,000 aftertaking into account certain exclusions applicable by law.

SelfCertifyor Independent Self SBA or approved IndependentOrganization must Organization certify

Overall Objective Help small businesses gain access to Federal Expand economic opportunityfor disadvantaged Procurement businesses.



### CONTINUED

34

## Table20 Continued MatrixoftheSmallBusinessAdministration'sPrograms Program Name SOB 8(a) Contractors HUBZone Contractors Prime Contract Utilization 5% combined goal (split evenlywith SDB-non-S(a) 3% Goal contractors)

Sub-contract UtilizationGoal 5% combined goal (splitevenlywith SDB-non-S(a) 3% contractors)

-7 SBA program forsmall business concerns owned by socially and economicallydisadvantaged persons_ -7 Admitted firms can receive Federal contracts -7Program encourages economic development in Description designated for S(a) Business Development Program historically underutilized business zones, participants, as well as management and technical 'HUBZones', through the establishment of assistance. preferences. -7 Participation is divided intotwo phases over nine years: a4-year developmental stage and a5-year transition stage. -7 Must be located in a "historically underutilized business zone" or HUBZone.
-7 All SDB criteria are applicable -7 Must be owned and controlled at least51% by U.S. Citizens, aCommunity Development -7 Small businesses owned and controlled by a Corporation, an agricultural cooperative oran socially and economically disadvantaged individual. Indian tribe; EligibilityCriteria -7 To enter program, owners must have a networth -7 Its principal office must be located within a of less than $250,000, excludingthevalue ofthe "Historically Underutilized Business Zone," which business and personal residence and networth includes lands considered 'Indian Country' and cannot exceed $750,000 during program militaryfacilities closed by Base Realignment and matriculation. Closure Act; and -7 At least 35% ofits employees must reside in a HUBZone. Entering networth less than $250,000 aftertaking NetWorth Limitation into account certain exclusions applicable by law. None For continued S(a) eligibilityafteradmission tothe program, networth must be less than $750,000.

SelfCertifyor Independent Online application submitted and subjecttofour Same as forSDB rounds of review, three ofwhich are by HUBZone Organization Analysts.
To teach S(a) and othersmall companies howto compete in the Federal contracting arena and how Expand economic opportunityfordisadvantaged Overall Objective totake advantage ofgreater subcontracting businesses in economicallydistressed areas. opportunities available from large firms as the result ofpublic-private partnerships.



### CONTINUED

35

## Table 20. Continued Matrix oftheSmall BusinessAdministration'sPrograms Program Name Women-owned Small Business Service Disabled Veterans/Veterans

Prime Contract 5% 3% Utilization Goal

Sub-contract Utilization 5% 3% Goal**~** Offers unique opportunities and guidance forwomen entrepreneursthrough special programsand services.**~** Provides entrepreneurial development services**~** Provides business development, management and technical assistance to emerging, intermediate and such as business training, counseling and mentoring Description advance-stage women entrepreneurs for running to eligible veterans owning or considering starting a small business. successful businesses.**~Also** provides assistance with financing a**~** The Office ofWomen's Business ownership also provides access to credit and capital, federal contracts, business and business development. and internationaltrade opportunities.**~** At least 51 percent owned byone or more**~** A small business concern that is at least 51 percent service-disabled veterans (a veteran with a owned by one or more women; or, in the case ofany disabilitythat is service-connected, I.e., the publicly owned business, at least51 percent ofthe stock disabilitywas incurred in the line ofdutywhile Eligibility Criteria ofwhich is owned byone or more women; serving in the

### u.s. active military, naval orair**~** Whose management and daily bUSiness operations are service); or in the case ofa publiclyowned small business, at least51 percent ofthe stock is owned controlled by one or morewomen. by one or more service-disabled veterans. Does not require a minimum disability rating.

NetWorth Limitation None None

Self Certify or Independent Self Self, Veterans' Administration Organization
Designed to assist women start and growsmall businesses. Women's Business Centers operate withthe Expand economicopportunitiesfor service disabled Overall Objective mission to level the playingfield for women entrepreneurs, who still face unique obstacles in the veterans and otherveterans. world ofbusiness.

Note: See Office of Government Contracting 2003 "Goaling Guidelines for the Small Business Preference Programs: For Prime and Subcontract Federai Procurement Goals and Achievements"July 3, 2003 [29).



### 36

# The ImpactoftheAdarandDecisionontheSmall Disadvantaged Business (SOB) Program 

# As a result of the U.S. Supreme Court's Adarand Decision, in 1995 President Clinton ordered the Justice Department to review all federal racebased affirmative action programs. 24 A race conscious program is one that "confers a benefit or imposes a burden on individuals."



### Major changes to 

### the SOB Program following Adarand included the use of industry benchmarks to 

### establish SOB utilization goals, to

### determine industries where the benchmarks should be applied, and the establishment of a $750,000personal net worth ceilingfor individuals participating in the SOB Program.

The revIsions also require SBA certification or independent certification of all SDBs, implementation of price evaluation adjustments, subcontractor evaluation factors and monetary incentives, to encourage the use of SDBs in specified industries. In September 2000, the 10th Circuit Court of Appeals found that the Federal Transportation Program that was previously challenged had been revised and amended in 1997. Also, it was narrowly tailored to meet a compelling government interest and it passed constitutional muster. In 2001, the U.S. Supreme Court agreed with this decision. The new SDB regulations complied with Adarand, by applying

*The legal analysis in this section was prepared by Attorney Keith Wiener of the law firm of Holland and Knight, llP. However, the authors takes full responsibility for any errors or omissions in summarizing his analysis.

24 United States Supreme Court decision in Adarand Construction, Inc. v. Pena, 515 U.S. 200 (1995).

37 preferences to specific industries only instead of to all federal procurement and by requiring all companies to be certified, limiting preferences to onlythose who were trulydisadvantaged.



### InAdarand, the u.S. Supreme Courtruled that all federal government programs that use racial or ethnic criteria as factors in procurement decisions must pass a test ofstrict scrutiny in order to 

### surviveconstitutionalmuster.

Legal Background
Adarand involved a Federal highway construction project awarded by the U.S. DOT, Federal Highway Administration, and Central Federal Lands Highway Division (CFLHD). This Federal contract contained a provIsion referred to as the "Subcontracting Compensation Clause" (Scq. The SCC authorized an additional payment to the prime contractor as an incentive to award subcontracts to minorities and females. The SCC clause implemented a DOT requirement under the Surface Transportation and Uniform Assistance Act (STURAA) that established a SDB goal of 10 percent for federally-funded transportation programs. The prime contractor solicited bids for the guardrail portion of the project from Adarand Constructors, Inc. ("Adarand"), a non-minority subcontractor, and a DBE subcontractor. Despite the fact that Adarand submitted the lowest bid, the prime contractor awarded the subcontract to the DBE. 25 The prime contractor testified that it would have awarded the guardrail subcontract to Adarand were it notfor the monetary bonus that it received by hiring a DBE. 

### &

25

### llh at2102.Adarand filed suit in the U.S. District Court for the District of Colorado arguing that the SCC violated Adarand's constitutional right to Equal Protection under the law. The District Court granted summary judgment in favor of DOT and Adarand appealed to the U.S. Court of Appeals for the Tenth Circuit. The Tenth Circuit determined that Federal Government affirmative action programs need only satisfy a standard of "intermediate scrutiny" and held that the CFlHD disadvantaged business preference program withstood Constitutional review underthe lesser intermediate scrutiny standard.
The Supreme Court, in a 5-4 decision, ruled that all racebased classifications must now withstand "strict scrutiny." The Court stopped short of declaring the CFlHD program unconstitutional and, instead, returned the case to the lowerCourt forfurther proceedings. The 

### 10th Circuit, found the Subcontractor Compensation Clause to be constitutionally satisfactory and found this aspect of the DOT's program to have a compelling interest and to meet the narrowly tailored test. Thus, the program withstood the strict scrutinystandard.26
The Adarand Decision evolved out of issues regarding disadvantaged, minority and female business enterprise participation programs as considered, developed and adopted by local, state and federal governmental entities in connection with their contracting and procurement activities. These decisions date to the landmark United States Supreme Court decision in 

### Qrl of Richmond v. J.A. Croson, 488 U.S. 469 (1989). They apply the strict scrutiny analysis set forth in Croson to Federal Programs.

In Croson, the U.S. Supreme Court struck down a City affirmative action set-aside program as unconstitutional because it did not satisfy the strict scrutiny analysis applied to "race based" governmental programs. J.A. Croson Co. ("Croson") challenged the City of Richmond's minority contracting preference plan, which required prime contractors to subcontract at least 

### 30 percent of the dollar amount of contracts to one or more Minority Owned Business Enterprises (MBEs). The City defined MBEs as "business[es] at least 

### 51 percent of which [are] owned and controlled

. . . by minority group members.,,2? Minority group members were defined as

26 ADARAND CONSTRUCTION, INC. V. PENA, 515 U.S. 200 (1995) and 2000

## u.s. APP. Lexis, pp 23725, 10th Circuit, Sep. 25, 2000.

27 488 U.S. at 478.



### 38 "[c]itizens of the United States who are Blacks, Spanishspeaking, Oriental, Indians, Eskimos, or Aleuts.,,2s In enacting the plan, the City cited past discrimination and intent to increase minority business participation in construction projects as motivatingfactors.
The Supreme Court held the City of Richmond's affirmative action plan violated the Equal Protection Clause of the Fourteenth Amendment. The Court applied the "strict scrutiny" standard, generally applicable to any race-based classification, which requires a governmental entity to have a "compelling governmental interest" in remedying past identified discrimination, and that any program adopted by a local or state government must be "narrowly tailored" to achieve the goal of remedying the identified discrimination.
The Court determined that the plan neither served a "compelling governmental interest" nor offered a "narrowly tailored" remedy to prior discrimination. The Court found no "compelling governmental interest" because the City had not provided "a strong basis in evidence for its conclusion that [race-based] remedial action was necessary.,,29 The Court held the City presented no direct evidence of any race discrimination on its part in awarding construction contracts or any evidence that the City's prime contractors had discriminated against minority-owned subcontractors. The Court concluded that this was insufficient evidence to demonstrate a compelling interest in awarding public contracts on the basis of race. Similarly, the Court held the City failed to demonstrate that the statute was "narrowly tailored" for several reasons, including the fact that there did not appear to have been any consideration of race-neutral means to increase minority business participation in city contracting. The Courtfound the City's 

### 30 percent quota could not be said to be narrowly tailored to any goal, except perhaps outright "racial balancing.,,30 In particular, the Court found it rested upon the "completely unrealistic" assumption that minorities will choose a particular trade in lockstep proportion to their representation in the local population. 

## !!!:. The Court also noted that the City of Richmond's minority population was predominately Black. The Court held it

28 488 U.S. at 469.

29 488 U.S. at 499.

30488 U.S. at 507.could notfind the "set-aside" program narrowly tailored because of the over inclusiveness of other minorities in the preference programs (for example, Aleuts) without any evidence they suffered discrimination in Richmond. Despite its analysis ofthe City of Richmond's affirmative action plan, the Supreme Court noted that it did not intend its decision to preclude a State or local government from "taking action to rectify the effects of identified discrimination within itsjurisdiction.,,31


### The Meaningofthe COMPELLING GOVERNMENTAL INTEREST REQUIREMENT
Statistical evidence of discrimination is the primary method used to determine whether there is or is not a strong basis for a remedial program, i.e. that there is a compelling governmental interest. Statistical evidence is used to compare the government's 

### utilization of



### An important component 

## 0/ statistical evidence 

## 0/ discrimination is the disparity index.:t The disparity index consists 

## 0/ the percentage 

## 0/ minority contractor participation in government contracts divided by the percentage 

# 0/ availableminorities. Id.

Minority-and Women-owned Business Enterprises (MFBE) to the 

### availability of qualified, willing and able MFBEs.32

This equation yields a percentage figure which is then multiplied by 100 to generate a number between 0 and 

### 100, with 

### 100 consisting offull participation by minority contractors.33 Disparity indices are considered by the Courts as highly probative evidence of discrimination because they ensure that the "relevant statistical pool" of minority contractors is being considered. A disparity greater than two or three standard deviations has been held to be statistically significant and may create a presumption ofdiscriminatory conduct.34

31 488 U.S. at509. 32 Croson, 448 U.s. at 509; see Drabik. 214 F.3d 730, 2000 Wl 703031 at *5.
33 6 F.3d at 1005.

34 Peightal v. Metropolitan Dade Countv. 26 F. 3d 1545, 1556 (11th Cir. 1994); see Dade Countv. 122 F.3d at917.



### 39 The Meaning of the NARROWLY TAILORED LEGISLATION REQUIREMENT
The Courts require that race or ethnic based legislation to remedy past identified discrimination must be "narrowly tailored." The Courts analyze several criteria or factors in determining whether a program or legislation satisfies the narrowlytailored requirement.
The Sixth Circuit Court of Appeals in Drabik stated the following:

Adarand teaches that a court called upon to address the question of narrow tailoring must ask, "for example, whether there was 'any consideration of the use ofrace-neutral means to increase minority business participation' in government contracting, Croson, 

### [488 U.S.] at 

### 507, 109 S. Ct. 

### 706

... or whether the program was appropriately limited such that it 'will not last longer than the discriminatory effects it is designed to eliminate,' Fullilove, 

### [448 U.S.] at 

### 513, 100 S. Ct. 

### 2758

...." Adarand, 

### 515 U.S. at 

### 237-38, 115 S. Ct. 

### 2097. A narrowly-tailored set-aside program must be "linked to identified discrimination." Croson, 

### 488 U.S. at 

### 507, 109 S. Ct. 

### 706. Its criteria and measures of success must be particularized, not reduced to rigid quotas driven by "simple administrative convenience." Id. at 

### 508, 109 S. Ct. 

### 706. It must also not suffer from "overinclusiveness.,,35



### FederalGovernment's Response toAdarand
In 

### 1998the Government revised the eligibility criteria for participating in the SDB Program in response to the 

## u.s. Supreme Court's 

### 1995 Adarand Decision. Majorchanges to the SDB Program involved the use of industry benchmarks to establish SDB utilization goals, to determine the industries where the goals should be applied, and the establishment of a 

### $750,000 personal net worth (PNW) ceiling for individuals participating in the SDB Program.
The benefits of SDB status were expanded to include a Price Evaluation Adjustment (PEA) for SDBs bidding as prime contractors, Subcontracting Evaluation Factors, and Monetary Subcontracting Incentives to improve SDB subcontracting opportunities. The new regulation**~** Id. at 506, 109 S. Ct. 706.Dade Countv. 122 F.3d at 926. 214 F.3d 730, 2000Wl703031 at *6.modified the Federal Acquisition Streamlining Act of 1994 (Pub. l. 103-355, Sec. 7102) underwhich incentives were originally implemented. New benchmarking criteria were developed to determine the specific industries where incentives would apply.
SOBs are eligible to receive a price benefit of up to 10% in industries where benchmarks applied. This policy was accomplished by adding up to 10% tothe price of bids or offers received from non-SOBs. To apply Subcontracting Evaluation Factors, the contracting officer awards the highest points to the bidder with the most dollars targeted to SOB subcontractors in authorized industries. Monetary Subcontracting Incentives allow contracting officers to provide a monetary incentive to the prime contractor of up to 10% of the value by which SOB utilization exceeds the authorized industry target {See also, U.S. SBA America's Small Business Resource, Federal Acquisition Regulation (FAR) Council Rules, final rule published on July 2, 1999).36 The benefits of the SOB program accrue to firms that have met the certification criteria.

36 See, Office of Management and Budget, Office of Federal Procurement Policy, SOB Procurement: Reform of Affirmative action in Federal Procurement. Accessed electronically on June 15,2007at: http://www.whitehouse.qov/omb/tedreq/sdb-re(html. tCode of Federal Regulations, TItle 13, Volume 1, Revised as of January 1, 2005. From the U.S. Government printing office via GPO access [CITE: 13CFR124j. Available electronically at: http://SBAs.qov/library/c(rs/13c(r124.html. Available electronicallyat: www.sba.qov.

40 

### On 

### December 9, 

### 2004 the SBA's authority to use PEAs for civilian agencies expired and was not renewed aspartofthe SBA ReauthorizationActof 2004 (Pub.L.I08447, Division K). The expiration covers all non-Department of Defense agencies with the exception of the National Aeronautics and Space Administration (NASA) and the Coast Guard.t

# Determiningthe CapacityofFirmsbutforDiscrimination

MajorFindings 

# F or almost a decade, the personal net worth ceiling has been capped at $750,000. By failing to adjust the net worth ceiling for inflation, the 2007 real value of $750,000 (1998 dollars) is $558,070. The unadjusted ceiling has made it more difficult for SOBs to win awards in corporate supply chains because global competitive pressures have forced corporations to greatly reduce the number of suppliers they use. This means that suppliers must have larger capacities today. At the same time, government agencies have increasingly "bundled" procurement solicitations as a way ofcutting administrative expenses and performance costS. 37 These changes mean that SOBs must have significantly greater capacity to enter core areas of supply chains or compete as government prime contractors.
This section determines whatthe capacity ofSOBs would be in a market free of discrimination. In the next section, we explain our findings that the elasticity or responsiveness of personal net worth to changes in firm capacity is 40%. This means that when the capacity ofa firm increases by 100%, personal networth ofthe owner increases by 40%. Therefore, when a ceiling is placed on the personal net worth of individuals in the SOB Program, that ceiling also limitsthe capacity offirms that are eligible forthe program (See Figure 2).

We find that the PNW ceiling is set too low. Therefore firms that should be eligible to participate in the SOB program are barred by the ceiling cap. This report finds

37 House of Representative bill H.R 1813, "Small Business Fairness in Contracting Act" calls for a scale back of "contract bundling"

- the practice of grouping small government contracts together and awarding them as one large contract. House Small Business Committee Chairwoman Nydia Velazquez, D-N.Y., said the bill was needed to help small businesses gain more opportunities, because the federal government has been "bundling" individual contracts into mega-contracts out ofthe price range for small businesses to place bids. This bill is currently in committee.

41 that the ceiling is low because, it has not been adjusted for inflation in nine years. Second, it is not consistent with the level of capacity that SOBs would be expected to achieve in the absence ofdiscrimination.38 This report argues that any net worth ceiling must at a minimum, allow SOBs to achieve the capacity that they would in the absence ofdiscrimination. Any ceiling set below this level is a burden on small disadvantaged business owners. Third, the PNW ceiling does not consider that different industries require greater capacities. 

### SummaryofhowtheNew PNW

### Ceilingwas Determined

Had the appropriate inflationary adjustment been made to PNW, the 2006 real value of $750,000 (1998) would have been $916,294. 39 In addition, the study used regression analysis and adecomposition methodologyto estimate the average capacity of non-SOBs on an industry by industry basis. The estimated coefficients were then applied to SOBs to determine their average capacity assuming they were treated the same as nonSOBs. This yielded an estimate of what their capacity would be in a nondiscriminatory environment. Actual SOB capacity across all industries between 2004 and 2006 was $3.4 million. SOB capacity in the absence of discrimination was estimated at $4.3 million, or 27% higher. We shall see that personal net worth increases by 40% for every 100% increase in business capacity. Therefore the personal net worth ceiling must be increased overall by 11% (or40% x27%) to allow SOBs to achieve a non-discriminatory level ofcapacity.

38The Department ofCommerce's benchmarks for setting SDB goals are based on evaluating seventy major industry groups to determine how the share of federal contracts SDBs actually receive compares to the share they would be expected to receive in the absence ofdiscrimination.

39 We used the S. Morgan Friedman Inflation Calculator, between 1998and 2006, see electronically at: 

### http://www.westeqq.comlinf/atian/This report calculates the capacity but for discrimination on an industry basis for all Construction industries, all



## Figure2 EffectofFirmCapacityonPersonalNetWorth



## A 100% Change 

# in Firm Capacity (i.e

.Average Revenueover 

### 3years)



### DetailedExplanationofResults

This section explains in detail the methodology and results used in determining a new PNW for participating in the SOB Program. To estimate what the capacity of SOB firms would be without discrimination, we used the technique of decomposition pioneered by economists Blinder and Oaxaca. For each industry we defined one regression equation describing the relationship between average total revenue (2004-2006) and the following set of explanatory variables: age of firm, number of employees, legal form of organization and government award indicator variable. This equation was then applied to two separate groups; OSBCs, agroup which is presumed to operate without the presence of discrimination, and active-SOB firms, a group presumed to be adversely affected by discrimination. In the next step, we assigned SOB firms the coefficient estimates from the OSBC regression equation. This equation predicted the average revenue (or capacity) of active SOB firms, ifthey received the same return on attributes as their non-SOB counterparts. A regression equation was estimated for each industry. The overall average SOB capacity was determined by weighting each industry average bythe numberoffirms in the industry.

42 Manufacturing industries and all Professional, Scientific services and IT services.



## . 40% Change 

# in Owner's Personal Net Worth

Average Revenue In the first step of this analysis we limited the set of firms to those that reported positive revenue over the years 2004 to2006. This reduced the original list ofover 47,000 firms to 32,072. The dependent variable used was the average revenue of firms between 2004 and 2006. 40 

### ExplanatoryVariables

NumberofEmployees There is a positive linear relationship between the numberof employees and the average revenue offirms; this value is 0.343. The correlation between the number of employees and average revenue depends heavily on the industry being analyzed. Table 21 details the industry specific correlations and is organized from weakest to strongest relationship. Manufacturing industries had the strongest relationship between revenue and employment; professional, scientific and technical industries had the weakest relationship. Clearly, an industry variable should be included in the regression equation predicting average revenue.

40 Although the structure ofthe dependentvariable suggested the use ofa log transformation, in the final results we did not transform the variable, this made the results easier to interpret.

## Table21 CorrelationbetweenNumber

### ofEmployeesandAverage Revenue, byIndustry Industry Professional, Scientific and Technical Services Wholesale Trade In Durable/ Non-durable Goods Computer and Electronic Manufacturing Primary Metals and Machinery Manufacturing Internet Publishing, Telecommunication and ISP SpecialtyTrades Contractors Construction ofbuildings Textile and Leather Manufacturing Chemical, Non-metallic minerals Manufacturing Heavy and Civil Engineering Construction Publishing except internet Plastic Manufacturing Paper, Printing and Related Manufacturing 

### Legal Form of Organization The overall set ofdata exhibits the expected relationship between the average revenue of a firm and their legal form of organization; C-corporations have the highest mean average revenue, followed by the category which includes both S-corporations and Limited Liability Companies. General partnerships have the third highest mean average revenue and Sole proprietorships have the lowest mean average revenue. 

### Age of Business The overall correlation between log of average revenue and age is about0.1.


### Government ContractAward The final explanatoryvariable is a binary indicator. It has a value of one for firms that received a government contract over the years 2004 to 2006 and avalue ofzero otherwise. Its inclusion in the regression model predicting revenue indicated that it has a large impact

43 Correlation 0.1428 0.3172 0.3323 0.4248 0.4499 0.5513 0.5537 0.6229 0.6716 0.7421 0.7445 0.7540 0.7795

on the average revenue of afirm. For the entire 32,072 firms, the average revenue of firms that received a government contract was $8.1 million dollars; the average revenue of firms that did not receive a government contract was $3.2 million dollars. For active-SDB companies these averages were $4.9 million for those receiving government contracts, and $2.6 million for firms that did not receive government contracts.
The results indicate the importance of government contracts on small business performance. 

### Regression Analysis 

### All ofthe explanatory variables described were included in the regression equations. For each industry we have the following set ofvariables in Figure 3.

## Figure3 StructureofRegressionAnalysis DependentVariable Average Revenue (2004-2006)

This leads totwo versions ofthe same equation:

Legal Form 

### = [ Corporation

# J

S-Corp or LLC Partnership Proprietorship

G C t t ( No Governmentcontract)

ov on rac 

### = GovernmentContract
Equation 1: (For Other Small Business Concerns, i.e. Non-Minority/Non-SOBfirms)


## • Avg Rev Non-SOB 

### =

## 130+

## 131 (Number of Employees Non-SoB) 

# • • ExplanatoryVariables Numberof Employees Legal Form ofOrganization (4 categories) Age ofBusiness Government Contract (Binary indicator)

Table 22a gives the overall average revenue predicted for each industry The Table shows that SDS weighted average revenue before removing the effects of discrimination was $3.39 million. Adjusting for the effects of discrimination yields a SOS revenue of $4.31 million, which is a 27% increase over the unadjusted average_ In summary, the average revenue we would expect SOB to have in a non-discriminatory market place is $4.31 million.



### +

## 132 (Legal Form Non-SOB) 

### +

## 133 (Age of Table 22b provides the same information showing the weighted averages for each ofthe three industry groups. The current average capacity of Construction industry firms is $3,373,283. Estimated capacity but for discrimination is $4,096,613. Current average capacity of Manufacturing industry firms is $4,829,245

. Estimated capacity but for discrimination is $6,075,465. Finally current estimated capacity for firms in the IT industry and Professional and Scientific services is $1,868,793. Capacity but for discrimination is $2,588,477. 

# • Biz Non-SoB) 

### +

## 134 (Gov ContractNon-SOB) Equation 

### 2: (ForActive-SOB firms) Avg Rev Act-SOB 

### =

## 130 +

## 131 (Number of Employees Act-SOB) 

### + 

## 132 (Legal Form Act-SOB) 

### + 

## 133 (Age of Biz Act-SOB) 

### +

## 134 (Gov ContractAct-SOB) A final equation predicting SOS revenue, using coefficients ofOSBe: Equation 

### 3: (ForActive-SOB firms)


## • Avg Rev Act-SOB 

### =

## 130+

## 131 (Number of Employees Act-SOB) 

### +



## • • • 132 (Legal Form Act-SOB) 

### +

## 133 (Age of Biz Act-SOB) 

### +

## 134 (Gov ContractAct-sos)

44

## Table22a RegressionEguationforAdjustingtheNetWorth Limitation Equation 1 Equation 2 Equation3 Estimated Estimated Revenue for Revenuefor Industry Estimated SDB SDB ifequally Revenue (unadjusted compensated for OSBC reg. (adjusted reg. coefficient) coefficient) Construction ofBuildings $4,386,229 $4,527,025 $5,418,646 Heavy Construction $3,723,151 $3,511,359 $4,442,770 SpecialtyTrades Contracting $2,259,319 $1,877,789 $2,303,133 Textile and Leather Manufacturing $7,349,291 $2,816,689 $6,221,612 Paper, Printing and Related Manufacturing $6,625,686 $2,010,830 $2,194,476 Primary Metal and Machinery Manufacturing $6,706,953 $4,655,826 $6,272,618 Computer and Electronic Manufacturing $6,651,858 $7,365,581 $7,947,379 WholesaleTrade (Durable and Non-Durable) $7,222,252 $4,061,850 $5,049,229 Publishing, Except Internet $2,391,387 $2,994,944 $4,326,501 Internet Publishing, Telecommunications and ISP $4,273,641 $3,781,569 $4,934,376 Professional, Scientific and Technical Services $1,683,093 $1,640,279 $2,308,218 SOB Average

Total increase in SDB average revenue without discrimination

### = $4,305,919

- $3,391,047

### = $914,873 Percentage change in SDB average revenue =27%



## Table22b Observations

4,101 1,399 3,293

722 737 4,207 2,887 1,897

876 1,131 9,467 30,717



### Estimated SOB**Ca~acity** 

### (i.e. 3yearAverageRevenue) ButforDiscrimination Mean Mean Reven'Je of Revenue of Estimated Non-SDBs SDBs after Mean Revenue Numberof Industry after controlling ofSDBs butfor Observations controlling for business discrimination for business attributes Attributes Construction ofBuildings $4,386,229 $4,527,025 $5,418,646 4,101 Heavy Construction $3,723,151 $3,511,359 $4,442,770 1,399 SpecialtyTrades Contracting $2,259,319 $1,877,789 $2,303,133 3,293 Total Construction Industries 8,793

Textile and Leather Manufacturing $7,349,291 $2,816,689 $6,221,612 722 Paper, Printing and Related Manufacturing $6,625,686 $2,010,830 $2,194,476 737 Primary Metaland Machinery Manufacturing $6,706,953 $4,655,826 $6,272,618 4,207 Computer and Electronic Manufacturing $6,651,858 $7,365,581 $7,947,379 2,887 Wholesale Trade (Durable and Non-Durable) $7,222,252 $4,061,850 $5,049,229 1,897 Publishing, Except Internet $2,391,387 $2,994,944 $4,326,501 876 Total Manufacturing Industries 11,326
Internet Publishing, Telecommunications and iSP $4,273,641 $3,781,569 $4,934,376 1,131 Professional, Scientificand Technical Services $1,683,093 $1,640,279 $2,308,218 9,467 Total ProfeSSional, Scientific &IT Services 10,598



### 45 Unadjusted Adjusted SDB SDB Weights Weighted Weighted Average Average Revenue Revenue

0.134 $604,339 $723,439 0.046 $159,924 $202,345 0.107 $201,307 $246,906 0.024 $66,206 $146,238 0.024 $48,246 $52,653 0.137 $637,662 $859,098 0.094 $692,269 $746,951 0.062 $250,849 $311,827 0.029 $85,411 $123,385 0.037 $139,237 $181,684 0.308 $505,535 $711,394 1.000 $3,391,047 $4,305,919

Estimated Observation Current Revenue of

Weights Revenue of SDBs butfor SDBs Discrimination

0.466 $2,111,376 $2,527,222 0.159 $558,670 $706,861 0.375 $703,236 $862,528 100% $3,373,283 $4,096,613

0.064 $179,555 $396,609 0.065 $130,847 $142,797 0.371 $1,729,389 $2,329,940 0.255 $1,877,488 $2,025,788 0.167 $680,322 $845,699 0.077 $231,641 $334,629 100% $4,829,244 $6,075,465

0.107 $403,562 $526,587 0.893 $1,465,231 $2,061,889 100% $1,868,793 $2,588,476

# DeterminingtheRelationshipbetweenSDB CapacityandtheNew PersonalNetWorth 

# This section of the report examines the relationship between firm capacity and personal net worth (PNW). More specifically, a regression equation is used to predict the influence of firm capacity on PNW. We found that the elasticity or responsiveness of personal net worth to changes in firm capacity is 40%. This means that when the capacity (oraverage revenue) of a firm increases by 10%, personal net worth of the owner increases by 4%. We determined in the last section that average SDB capacity but for discrimination is 27% higher than the unadjusted capacity. Capacity in Construction Industries would be 21% higher but for discrimination, 26% higher in Manufacturing Industries and 39% higher in Professional, Scientific and IT services. Therefore, we need to determine the level of PNW that is consistentwith the higher levels ofcapacity.


### Data
The purpose of this section is to investigate the relationship between the adjusted net worth of a



## Figure4 PlotofNetWorth

1:) 

## • 

# .. : 15.00



# - • z 

## 1



# .. "**=010L~** -< 1:**~** 

## " (.) .,,5.00 o oJ X'{ Plot ofAssets

o

o

o

o firm's owner/s and the firm's average revenue over a three-year period, a proxy for firm capacity. These data come from firms that were certified in the 8(a) program from 1995 to 1997. This period is convenient because the $750,000 PNW was notyet implemented. 

### Methodology

A Weighted linear least Squares Regression was used to adjust personal net worth for the fact that the variation between unadjusted net worth and adjusted net worth increases at higher levels offirm revenue. The following chart gives the logarithm ofadjusted networth on the Yaxis and unadjusted net worth on the X-axis. It demonstratesthatas unadjusted networth increases, so does the variation in the log of adjusted net worth. Weighted least Squares Regression adjusts for this variation, by decreasing the importance of observations with high netassets and implicitly, high variation.

o**ooo~~------------------,---------,----------,-"** 10,(0),000 20,000,(00**~,OOJ,(OJ** '0.000,(0) Unadjusted NetA$$ets



### 46

## ExploratoryDataAnalysis
Adjusted NetWorth Adjusted net worth is the value of net worth after removing the value of the owner's primary residence and the value ofthe business.

To account for the heavily right-skewed nature of adjusted net worth, the natural logarithmic transformation was applied to this variable. After applying the natural log, the distribution becomes more normal. Any observations that had untransformed



## Figure 5 values equal to or below zero were dropped from this analysis, a total of 65 observations. Figure 5 illustrates that partnerships had the highest adjusted net worth, followed by corporations, and proprietorships.
Average Revenue This report uses the average annual revenue of firms over a three-year period from 1995 to 1997

. Again, the heavily right-skewed distribution of this variable suggests the use ofa natural logarithmictransformation

.



### Boxplot

### ofOrganizationType on

### LogAverageTotal Revenue

20

.

00**~** 0 0

15

.

00

# ~ ..**~** .., IX 

# I -= :;? 10

. 00 

### go c( 

### "" 8 co -' 0 0 5.00 

## .,**oo ..l-.----r-------** **-r- ----** **--~-- --1**  Corporll:ion**Pr prieto** **~p** Organl2.ltlon Type

### 47

## Table23 FirmCountandAverageRevenuebyIndustry, 1995·97(IndustryVariablesusedintheRegression) Industry Computer and Electronic Equipment Manufacturing Construction ofBuildings and Heavy Engineering Construction Internet Publishing Light Manufacturing Primary Metal and Machinery Manufacturing Professional, Scientific and Technical Services Publishing (non internet) Specialty Trade Contractors WholesaleTrade



### OtherExplanatoryVariables IndustryCategories Table 23 gives counts of businesses in a particular industry as well as gives the mean value of average revenue for that industry. The Table also shows that businesses in the Computer and Electronic Manufacturing industry have the highest average revenue over the years 1995 to 1997. Conversely, the category with the smallest average revenue is the Professional, Scientific and Technical services industry. This industry also contains the greatest number of 8(a) firms. 41
Age ofBusiness Proprietorships, with a value of 10.02 years, had the highest average age of business. Corporations had the second highest average age followed by partnerships, at 9.4 and 8.3 years respectively.

41 Note that we considered using an employment variable in the regression. However, it was dropped as an explanatory variable in the final equation because it introduced multicollinearity.

48 Count Average Revenue 38 $2,617,180 69 $7,187,009 52 $2,421,519 39 $4,552,931 70 $2,556,568 1,454 $1,736,343

599 $2,463,513 430 $1,738,203 79 $1,994,897


### RegressionResults
Table 24 presents the results of the weighted least squares regression which includes all of the variables discussed above. The coefficient for log average revenue (0.395) represents the impact of a 100% increase in average revenue on the adjusted net worth of a firms owner. Specifically, a 100% increase in average revenue implies an estimated 39.5% increase in adjusted personal net worth). Since the log of adjusted PNW is evaluated against the log of revenue, the resulting coefficient expresses the elasticity of responsiveness.

## Table24 RegressionEquation:TheInfluenceofThree-YearAverageRevenue onNetWorthisEstimated ControllingforAttributesofSDBsofFirmsin8(a)Program, 1995to 199742 Dependent Variable

### =logarithm ofadjusted SDB NetWorth, 1998 ExplanatoryVariables

Constant Age ofBusiness in 1998 Legal Form ofBusiness Organization

Corporation: Reference Category Proprietorship Partnership Industry

SpecialtyTrades Contracting= Reference Category Construction: Heavy, Buildings, Civil Engineering Manufacturing: Computer and Electronics Manufacturing: Primary Metals and Machinery Manufacturing: Light WholesaleTrade Publishing Internet Publishing ProfeSSional, Scientific &Technical Log ofAverage Revenue 1995

- 1997 Degrees of Freedom Adjusted R-Square

42 We have the following linear regression equation: In (Adj NetWorth)

## =**~O+~l*** In(AvgTot Revenue) +**~2**

## * (Industry)+**~3*(Age** ofBiz) +**~4*(Legal** Organization)+**~s*** (Employment)

With this categorical variable: Industry

## = SpecialtyTrade Contracting Computerand Electronic Manufacturing Unstandardized Coeffidents B 1.235396 -0.038682

-3.624141 4.073837

-6.030172 -1.042354 4.040937 4.410867 2.859084 1.886179 3.191651 -1.666426 0.394871

2484 0.9296

Where the coefficient estimates minimize the sum ofresiduals in this equation: S

## =i:;w,(y,

-

### xjJ) x+=J WI

## =1/(Net Worthl)2 YI

## =In(Adj NetWorth)

Xi

## =[1 Xil Xi2 XI 3 xi4 XiS] 

### 49 Std. Error t-Statistic Significance Level

0.300830 4.106000 0.001000 0.006352 2.643000 0.001000

0.073175 -49.527000 0.001000 1.374708 2.963000 0.003070

0.122738 -49.131000 0.001000 2.016023 -0.696000 0.486740 4.268144 0.947000 0.343850 6.668735 0.661000 0.508400 1.081763 2.704000 0.006904 2.907062 0.649000 0.516510 3.713439 0.859000 0.390160 0.124722 -13.361000 0.001000 0.022593 17.478000 0.001000Using this information, the report derives the new recommended level of PNW forthree industry groups. If an inflationary adjustment is made to the PNW, the value would have been $916,294 in 2006. Our empirical results have shown that in a non-discriminatory environment, SOB capacity would be 21%, 26%, and 39%



## Table25 RecommendedIndustrySpecificPNW Ceiling

Estimated Revenue ofSDBs butfor Discrimination Current Revenue ofSDBs Disparity in SDB Revenue (Estimated

- Current) Percent by which Current Revenue ofSDBs must increase to eliminate Disparity Estimated Percentage Relationship between PNW and SDB Revenue (i.e. Elasticity) Current PNW ceiling (Established by Regulation in 1998) PNW ceiling ifadjusted for inflation between 1998and 2006 Method for calculatingthe increase in PNE ceiling required to eliminate Disparity Amount by which PNW ceiling must increase so that Disparity may be Eliminated PNW ceilingwith InflationAdjustment and DisparityAdjustment Recommended IndustrySpecific PNW ceiling



## so higher in Construction, Manufacturing and Professional, Scientific and IT services respectively.
Table 25 outlines the method used to derive the new PNW ceiling for each industry group. This ceiling is $979,000 in Construction, $1,043,000 in Manufacturing, and $1,026,000 in Professional, Scientific and IT services.

Construction Manufacturing Professional Svc. $4,096,613 $6,075,465 $2,588,477 $3,373,283 $4,829,245 $1,868,794

$723,330 $1,246,220 $719,683 21% 26% 39%

40% 40% 40% $750,000 $750,000 $750,000 $916,294 $916,294 $916,294 (0.4*0.21*723,330) (0.4*0.26*1,246,220) (0.4*0.26*1,246,220)
61,266 127,030 109,476 977,560 1,043,324 1,026,000 $979,000 $1,043,000 $1,026,000

# The EconomicImpactoftheSmall Disadvantaged Business (SDB) Program 

# A casual observation reveals that the capacity of minority-owned and disadvantaged businesses is increased significantly by participating in the SOB program. For example, records show that the average revenue of SOBs is twice that of minority-owned firms thatare registered with CCR, but have never participated in the SOB Program

. Similarly, the average revenue of graduates of the SOB program (that are still registered with CCR) is more than twice that of SOBs

. But, how much of the difference in revenue is due to the SOB Program itself and how does this difference affect national output and employment? Answering these questions is the primary objective ofthis section.
While the objective of the SOB program is to use federal procurement to overcome the effects of discrimination, it is importantfrom a policy standpointto know howthis program affects national well-being. For example, in 

### 2006 minority-owned small business concerns that were not SOBs had total receipts of 

### $10.2 billion. In comparison, total receipts of active SOB were 

### $19.3 billion while receipts of graduated SOBs were 

### $14.0 billion. The challenge however is to determine how much ofthe net difference in receipts is caused by their participation in the SOB program

. Several steps are required to measure the total impact of the SOB program on national output and employment. First, we measured the difference in average revenue between minorityfirms that have never participated in the SOB Program and those that have participated. Second, we measured the average difference in firm revenue between SOBs and firms that have graduated from the SOB program. Finally, we applied industry-specific multipliers to the differences in average revenue to determine the impact ofthe average gained in revenue on final demand and final employment in the 

## U.s. economy

. The multipliers were obtained from the Bureau of Economic Analysis (BEA) Regional Input-Output Modeling System (RIMS II).



### 51 The logic behind the multiplier approach is well-known

. The model replicates how spending in one industry sector of the economy is linked to spending in all other sectors. The model replicates how additional revenue that a company receives and then pays to workers, households and other bUSinesses, ripples through the economy in subsequent rounds of spending creating even more income, jobs and economic activity

. The multiplier expresses the cumulative impact of all rounds of spending on final demand and final employment in the economy.43 For example, a final demand output multiplier of 

### 3.1 indicates that for every one dollar of additional revenue spent by a company, 

### $3.10 of final demand is generated in the economy. likewise, a final demand employment multiplier of 

### 26.7 indicates that approximately 27 jobs are created for every 

### $1.0 million in new final demand

. But to apply the multipliers, we first had to isolate the amount ofthe change in revenue that was attributable to the SOB Program. To do so we used the following steps. First, we determined the difference in revenue between firms in the SOB Program and minority firms that were not SOBs. To do this we used a multivariate propensity score matching procedure. This procedure allowed us to match minority firms and SOBs that were identical on a variety of firm attributes. 44 We then measured the difference in revenue between identically matched firms that participated in the SOB program and those that did not participate in the program. The matching procedure paired firms that had identical characteristics, thereby controlling for difference in management characteristics

. We generated pairs by matching firms on the following business attributes: age of business, employment size,

43 See U.S. Department of Commerce, 1997. Regional Multipliers: A User's Handbook for Regional Input

- Output Modeling Systems (RIMS II).

44 Rversion 2.5 software with the additional matching program was used

. The matching algorithm was developed by Jasjeet Sekhon

.

### industry of operation, legal form of business organization and whether or notthey had been awarded agovernmentcontract. 45



### After matching firms, we measured the difference in average revenue between minority firms that were not SOBs and those thatwere active SOBs. Likewise; we also generated pairs to measure the difference in revenue between active SOBs and firms that have graduated from the SOB Program. This procedure isolated the impact on revenue of a minorityfirm participating in the SOB Program and graduating from the SOB program in comparison tofirms thatdid not.
To determine the total impact of the SOB Program on the revenue of firms in each industry, we multiplied average estimated revenue (derived in the procedure above) bythe number offirms in the industry. A similar procedure was followed to derive the impact on total industry revenue associated with firms that graduated from the SOB program.



## Table26 Finally, to determine the total effect on final demand and employment in the economy, we used the finaldemand multipliers for industry output and finaldemand multipliersfor industry employment. 46



### Tables 26 to 29 show that the SOB program has a significant impact on national output and employment. In 2006, the SOB program caused $5.5 billion to be added to final demand; $3.7 billion was added by active SOBs (See Table 26) and $1.8 billion was added by SOB graduates (See Table 27). Additionally, the SOB program added over 124,000jobs that would not have existed in its absence (see Tables 28 and 29).



### ImpactonIndustryFinalDemandofMinorityFirmsParticipatingintheSDB Program Industry Numberof Estimated Revenue Final Demand Total Output ActiveSDBs Increaseperfirm Output Multiplier Construction ofbuildings 1,678 460,404 3.1748 $2,452,716,859 SpecialtyTrades Contractors 487 53,506 3.1748 $82,727,103 Textile and Leather Manufacturing 53 671,594 3.2719 $116,461,586 Paper, Printingand Related Manufacturing 487 170,043 3.1422 $260,208,539 Chemical, Non-metallicminerals Manufacturing 43 587,242* 2.9216 $73,774,508 Primary Metalsand Machinery Manufacturing 278 915,962 2.7375 $697,069,981 Computerand Electronic Manufacturing 355 147,431 3.1725 $166,042,321 WholesaleTrade In Durable/ Non-durableGoods 218 -97,838 2.57% ($55,019,473) InternetPublishing,Telecommunication and ISP 310 -156,335 2.924 ($141,708,297) TotallmeactonFinal Demand $3,652,273,126

• The Average Treatment Effectwas used tocalculatethe revenue increase.

45 

### Statistical output from the matching procedure is available upon request.

52 46 

### These multipliers released by the U.S. Department of Commerce's Bureau of Economic Analysis account for inter industry relationships in the whole economy. Regional Multipliers derived using the Regional Input-Output Modeling System (RIMS It) 

### are based on 2004 national annual inputoutputdata.

## Table27 ImpactonIndustryFinalOemandofFirmsGraduatingfromtheSOB Program Numberof Estimated Revenue Final Demand Industry Graduated Increase perfirm Output Multiplier SOBs Construction ofbuildings 253 $2,458,057 3.1748 Heavy and Civil Engineering Construction 56 $1,425,492 3.1748 SpecialtyTrades Contractors 97 $170,284' 3.1748 Paper, Printing and Related Manufacturing 97 $191,173 3.1422 Primary Metals and Machinery Manufacturing 162 $-1,018,280- 2.7375 Computer and Electronic Manufacturing 127 $-402,377" 3.1725 Publishing except internet 30 $1,207,835- 2.9777 Professional, Scientificand Technical Services 460 -$180,325 3.0383 Totallmeact on Final Demand

, The Average Treatment Effect was used to calculate the revenue increase.



## Table 28 ImpactonIndustryJobsofMinorityFirmsParticipatingintheSOB Program

Industry

Construction of buildings SpecialtyTrades Contractors Textile and Leather Manufacturing Paper, Printingand Related Manufacturing Chemical, Non-metallic minerals Manufacturing Primary Metals and Machinery Manufacturing Computer and Electronic Manufacturing Wholesale Trade In Durable/ Non-durable Goods Internet Publishing, Telecommunication and ISP TotalJobs



## Table29 Total Revenue Effectof Partldpatlon $2,452,716,859

$82,727,103 $116,461,586 $260,208,539 $73,774,508 $697,069,981 $166,042,321 -$55,019,473 -$141,708,297 Final Demand Employment Multiplier(=no.jobs per$1.0million Infinal demand) 26.7564 26.7564 21.6294 18.4304 14.7532 14.9916 19.4322 18.6324 20.1571



### ImpactonIndustryJobsofFirmsGraduatingfromtheSOB Program
Total Revenue Final Demand Employment Industry Effectof Multiplier(=no.jobs per$1.0 Graduation millioninfinal demand) Construction ofbuildings $1,974,371,359 26.7564 Heavy and Civil Engineering Construction $253,436,512 26.7564 SpecialtyTrades Contractors $52,439,911 26.7564 Paper, Printing and Related Manufacturing $58,268,269 18.4304 Primary Metalsand Machinery Manufacturing -$451,581,723 14.9916 Computer and Electronic Manufacturing -$162,120,711 19.4322 Publishing except internet $107,897,108 19.7584 Professional, Scientific and Technical Services -$252,025,466 24.643 TotalJobs



### 53 Total Output
$1,974,371,359

$253,436,512

$52,439,911 $58,268,269 ($451,581,723) ($162,120,711)

$107,897,108 ($252,025,466) $1,832,710,725

Total employment Uobs)

65,626

2,213 2,519 4,796 1,088 10,450 3,227 (1,025) (2,856) 86,038

Total employment Uobs) 52,827 6,781 1,403 1,074 (6,770) (3150) 2,132 (6,211) 48,086

# 13

SpatialImpactofMinority-OwnedFirms 

# I n major central cities, minorities are more likely than

non-minorities to locate their businesses in high poverty areas. This creates the potential for enhancing economic opportunity and revitalization of some of the nation's most distressed urban communities.
Paul Ong and Anastasia loukaitou-Sideris observed that globalization and economic restructuring have placed minority communities in a vicious circle of concentrated poverty and inequality

. They note that spatial restructuring has been accompanied by an increasing



## Figure6 PercentofBusinessesinHigh PovertyAreas
35% 31%

25% VI QJ VI VI QJ 20'% c 'iii :J 

### co 

# - 15% 0 

# '*
10'%

Mi nority**Bu in~s** Owners Numberof Minority Businesses examined =3,832 NumberofNon-Minority Businesses examined =3,011

In the final section of the report, we selected fourteen central city locations and examined the location pattern of CCR firms in these cities. Our results document the validity of Ong's observation

. Figure 6 indicates that 31% of minority businesses listed in CCR are located in



### 54 geographic separation of people from jobs. "Caught in a vicious circle, disadvantaged communities concentrate poverty and accentuate inequality as they segregate and isolate poor people of color

. Their location often denies residents access to employment and busines s opportunities and may hinder civic and political participation

." (Jobs and Economic Development in Minority Communities (Philadelphia: Temple Univ: 1). However, the authors also note that minority

-owned businesses are counterweights to this tendency

.

24%

Non-Minority**Busi~s** Owners

high poverty areas of large central cities. High poverty areas are defined as census tracts where 20% or greater ofthe 2000 population lived in poverty

. In contrast, only 24% of the businesses owned by non-minority persons were located in high poverty areas

.Table 30 shows that the percent of minority-owned businesses in high poverty areas of central cities varies significantly. The concentration is highest in Baltimore (69%) and Philadelphia (60%) and lowest in Chicago (17%) and Atlanta (18%).



## Table 30 NumberandPercentofMinority-OwnedBusinessesin High andLowPovertyAreast 

### ofCentralCities High PovertyArea Low PovertyArea City Total Number Number Percent Number Percent Atlanta 65 17.6% 304 82.4% 369 Baltimore 78 69.0% 35 31.0% 113 Boston 15 48.4% 16 51.6% 31 Chicago 71 17.4% 338 82.6% 409 Cleveland 47 40.9% 68 59.1% 115 Dallas + Houston 190 23.3% 624 76.7% 814 Detroit 77 50.3% 76 49.7% 153 District ofColumbia 174 41.7% 243 58.3% 417 Miami 66 25.1% 197 74.9% 263 NewYork City 109 38.0% 178 62.0% 287 Philadelphia 49 59.8% 33 40.2% 82 San Francisco+ Los Angeles 242 31.1% 537 68.9% 779 GroupTotal 1,183 30.9% 2,649 69.1% 3,832

t High PovertyArea = Poverty Rate of20% or Higher, Low PovertyArea = Poverty Rate less than 20%.


## Figure7 MedianIncomeofNeighborhoodsbyRaceandEthnicity, 1999 $80,000 $70,033 $70.000 $62,847 .", 0 0 $60.000

### ~ ..::. -f2, $50.000**~** z:



# ... 0 $10,000 

## '" E 0 u 

### .: $30.000 .:: 

## '" '§ $20.000 ::E $10,000
$0 AsianPacific Blad< Hispanic Native SubcontinentNon-Minority Total American Asian Rile. orEthnitltyof BusinessOwner

Among all racial and ethnic groups, Black-owned businesses are located in central city neighborhoods with the lowest median family income. Subcontinent Asians locate their businesses in the highest income neighborhoods.



### 5S While minorities are more likely than non-minorities to locate low skilled businesses in high poverty areas, they are even more likely to locate high skilled businesses (such as Information Technology, Professional, Scientific and Technical Businesses) in High Poverty areas. Both types of businesses are critical for stimulating economicdevelopment in distressed areas. Numerous studies have documented a spatial mismatch (or significant geographic imbalance) between where minorities lives



## Figure 8 and where jobs are located; both low skilled and high skilledjobs.



### Percentof

### High

### SkilledBusinessesin High PovertyNeighborhoods

40% 

### 35%

21%

MinorityBusinessOwners Non-MinorityBusinessOwners

This report found that in central cities, minorities are more likely than non-minorities to locate low skilled businesses (such as construction and wholesale) in high poverty areas

. This has the potential for creating jobs for local residents. Figures 8 and 9 show that 3S% and 37%, of high and low skilled businesses, owned by minorities, are located in high poverty areas

. In contrast, 21% and 27% of high skilled and low skilled businesses owned by non-minorities are located in these areas respectively.



### S6 On an average, Black-owned businesses are located in Central City areas where the population is 44% Black. Hispanic-owned businesses locate in neighborhoods that are 37% Hispanic (See Figure 10).

## Figure9 PercentofLow SkilledBusinessesinHigh PovertyNeighhorhoods

40% 37% 35% 30% 27%**2~%** 20% 15%
10% 5% 0% Minority**Busin~s**Owners Non-MinorityBusillessOwners



## Figure 10 Race/EthnicComposition ofCentralCityAreaswhereBusinessesareLocated

70%

60%

50%

40%



### 30%

20%

10%

0% AsianPaellic Blade Hispanic

Overall, the spatial analysis indicates that minorityowned businesses registered with CCR have the potential to make a significant economic impact in distressed central city areas. Not only are minority business owners more likely to locate both high skilled and low skill businesses in high poverty areas, Blacks



### 57 Sub('ontinent Asian 65%

Non-Minority

and Hispanic business owners tend to locate their business in neighborhoods where there are higher concentrations of their own ethnic group. Given the disproportionate unemployment and poverty among Blacks and Hispanics, these businesses represent a valuable resource to the nation's well-being

.