Richard Marcus is an associate professor in the School of Business Administration at the University of Wisconsin-Milwaukee.
As a business teacher I occasionally receive questions from students that I can’t immediately answer. A student recently asked, “Why are so many inner-city stores owned by foreigners?” This problem calls for economic analysis. The answer involves the nature of incentives and opportunity costs in competitive industries.
Perhaps the student’s casual observation requires some empirical confirmation. Such a study would likely show that proportionally more convenience stores in the inner city have first-generation immigrant owners than in the suburbs. To move the question along, I will presume that the student’s observation is correct.
Leaving one’s native country is a big decision. Those who set out for the New World are highly motivated to achieve success.
Consequently, first-generation immigrants are self-selected to be risk-takers with above-average ambition. Their manifest acceptance of the risks, hardships, and long-hours of entrepreneurial commerce set them apart from other domestic residents. What’s more, the ability to be perfectly fluent in English is less important in retail operations than in other fields.
Hence, it is really rather expected that immigrants would work in the openly competitive industry of retail. But where? The rental cost of space is, to a large extent, a function of safety, location, and affluence of the neighborhood. It takes no stretch of the imagination to suppose that retail space in older inner-city locations is cheaper than in the suburbs. The risks that stores will fail make most national chains and franchises avoid these locations: Seven-Elevens and Open Pantries move to higher-priced locations. But the relatively low costs of starting a business and the lack of competition from national chains in these locations are attractive to immigrants starting businesses.
But why don’t native-born residents invest there? To an economist, the natural answer is that the opportunity cost of time, money, and effort must be too great. They prefer employment with firms that offer health insurance, paid vacations, and moderate hours of work. Why work in your own retail outlets 90 hours a week for the same money you can earn working at a 9-to-5 job?
The economic way of thinking starts with a presumption that what we observe is happening for a reason. The reasons tend to involve economic incentives and opportunity costs.