Eastern Economic Journal, 2015, 41, (387–410) © 2015 EEA 0094-5056/15 www.palgrave-journals.com/eej/ External Financing and the Survival of Black-Owned Start-Ups in the US Yunwei Gai a and Maria Minniti b a Babson College, Babson Park, MA 02457, USA. b Syracuse University, 900 South Crouse Ave, Syracuse, NY 13244. Since black-owned businesses tend to have access to lower informal financing, we hypothesize that, obtaining commercial financing should play a compensating role and have a stronger marginal effect on black-owned businesses than on businesses owned by other racial groups. Unexpectedly, we find that, while the use of commercial financing reduces the exit rates of new firms in general, the reduction is not significantly different across racial groups. We attribute this result to unobserved heterogeneity linked, at least in part, to the owner’s start-up capital and to other beneficial externalities that access to informal investors produces. Eastern Economic Journal (2015) 41, 387–410. doi:10.1057/eej.2014.23; published online 5 May 2014 Keywords: minorities; start-ups; entrepreneurship; financing; survival model JEL: J15; M13; L26 INTRODUCTION In the United States, the last 30 years have seen a significant increase in the number of self-employed blacks [Fairlie 2004]. Yet, the percentage of self-employed white workers in the United States continues being about three times that of black workers [Robb and Fairlie 2007], and that ratio has remained relatively stable for the last 100 years [Fairlie and Meyer 2000]. In addition, studies have shown that self-employed blacks earn less than whites [Borjas and Bronars 1989], that black-owned businesses tend to be less profitable than white-owned businesses [Robb and Fairlie 2007], and that the rate of exit from self-employment for blacks is about twice that of their white counterparts [Fairlie 1999]. 1 What explains this difference? Köllinger and Minniti [2006] have shown that the under- representation of blacks is not due to a lack of entrepreneurial propensity. In fact, they find that African Americans are more likely to try starting a business than whites, but that they are significantly less likely than white Americans to actually start a business or own an established one that survives in the market beyond the initial start-up process. Their study suggests that the lack of participation in self-employment among African Americans is not the result of a lack of tradition as hypothesized in early writings on race [Myrdal 1944], but it is likely due, instead, to higher failure rates and/or to the existence of barriers in access to resources. Studies on the differences in entrepreneurship rates between racial groups have stressed geographical concentration, reliance on co-racial markets, replacement in markets abandoned by indigenous businesses or large firms, and discrimination [Fairlie and Robb 2008]. In addition, when focusing specifically on differences between black Americans and other racial groups, particular attention has been paid to the lower average personal wealth held by black entrepreneurs [Fairlie 1999], and to the possible existence of discrimination in the credit market. Bradford [2003], for example, estimated that in the mid-1990s, black