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Why Do Immigrants Own Inner-City Stores?

by Richard D. Marcus for the Foundation For Economic Education

As a business teacher I occasionally receive questions from students that I cant 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 students 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 students observation is correct.

Leaving ones 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. Whats 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 dont 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.

This article was originally published by the Foundation for Economic Education (FEE) in The Freeman on August 2001.

About The Author

Richard D. Marcus is an associate professor in the School of Business Administration at the University of Wisconsin-Milwaukee. The Foundation for Economic Education (FEE), one of the oldest free-market organizations in the United States, was founded in 1946 by Leonard E. Read to study and advance the freedom philosophy. FEE's mission is to offer the most consistent case for the "first principles" of freedom: the sanctity of private property, individual liberty, the rule of law, the free market, and the moral superiority of individual choice and responsibility over coercion.

The opinions expressed in this article do not necessarily reflect the opinion of ILW.COM.