New strategies for inner-city economic development by: Porter, Michael E



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NEW STRATEGIES FOR INNER-CITY ECONOMIC DEVELOPMENT
By: Porter, Michael E.., Economic Development Quarterly, Feb97, Vol. 11 Issue 1, p11, 17p, 1 graph

Revitalizing America's inner cities requires an economic strategy, to build viable businesses that can provide sorely needed, nearby employment opportunities. Economic development in inner cities will come only from recognizing the potential advantages of an inner-city location and building on the base of existing companies, while dealing frontally with the present disadvantages of inner cities as business locations. The economic potential in inner cities has been largely unrecognized and untapped. The private sector, which must play a central role in inner-city economic development, is just beginning to recognize this potential and has already begun investing. By improving perceptions and tackling long-neglected problems in the inner-city business environment, this trend can be accelerated Government and community-based organizations have continuing, vital roles, but their efforts must be refocused from direct intervention to preparing and training the inner-city workforce and creating a favorable environment for business.

The economic distress of America's inner cities is one of the most pressing issues facing the nation.(n1) The time has come to recognize that revitalizing these areas requires a radically different approach. Today, most efforts and public resources, including the Empowerment Zone program, are still targeted toward meeting residents' immediate needs rather than generating jobs and economic opportunity that will mitigate the need for social programs in the long run. Although efforts to provide education, housing, health care, and other needed services are essential and must continue, these must be balanced with a concerted and realistic economic strategy focused on for-profit business and job development. The necessity--and the real opportunity--is to create income and wealth, by harnessing the power of market forces, rather than trying to defy them. The private sector must play a leading role and, in many ways, is already beginning to do so.

An economic strategy for inner cities is needed as a complement to (not a substitute for) the many programs designed to increase human capital and meet the basic human needs of disadvantaged populations. A successful economic strategy will result in viable businesses that can provide the employment opportunities sorely needed in, or near, distressed inner-city neighborhoods--neighborhoods in which, in most cases, African Americans and other people of color represent the majority of the population. Employment opportunities are a linchpin for the success of virtually all other programs designed to improve human capabilities, values, and attitudes in distressed communities.

This research focuses on how to create jobs and sustainable business activity that benefit disadvantaged inner-city residents. It grows out of a stream of research on economic development in nations, states, and cities first described in The Competitive Advantage of Nations.(n2) The application to inner cities is based on studies of nine major inner cities;(n3) hundreds of interviews nationwide with inner-city-based companies, community-based organizations (CBOs), bankers, government officials, and others; an extensive survey of the literature; and close advisory relationships with more than a dozen inner-city companies in Boston.(n4) Unfortunately, reliable statistical data on business activities in inner cities are not yet available, though we have a growing body of survey evidence.

The approach to inner-city economic development my colleagues and I have developed is fundamentally different from most existing efforts. It reflects the new realities of inner-city America and the role that inner cities might occupy in the national and international economy. Although threads of this approach have appeared in previous literature and in the efforts of some organizations, the approach has not yet been implemented comprehensively in any one inner city. However, the core principles have been proven many times over throughout the world.

Part of the reason for the vigorous debate surrounding inner-city economic development is the definition of the term economic development itself. The American Economic Development Council (AEDC) defines economic development as "the process of creating wealth through the mobilization of human, financial, capital, physical and natural resources to generate marketable goods and services."(n5) But as John Blair notes, "economic development concerns reach into numerous aspects of community life.... In practice, distinctions between social, political, and economic development concerns are fuzzy."(n6) This has led to a tendency to widen the definition of economic development to include virtually everything and for different definitions to emerge. The result has been both confusion in communication and, we believe, unnecessary controversy. Individuals and organizations have also tended to focus on one or a few specific elements of economic development and assert their primacy.(n7)

Our research concentrates on inner-city economic development in the narrow sense--the creation of jobs and sustainable business activity that benefit disadvantaged inner-city residents. This does not deny the importance of improved housing, health care, and schools to the overall revitalization of inner cities. These topics are simply not where we have concentrated and not where the greatest uncertainty in theory and practice lies.



A STRATEGY FOR INNER-CITY ECONOMIC DEVELOPMENT

Our strategy begins with the premise that a sustainable economic base can be created in inner cities only as it has been elsewhere: through private, for-profit initiatives, and investments based on economic self-interest and genuine competitive advantage instead of artificial inducements, government mandates, or charity. A sound economic strategy must focus on the position of inner cities as part of regional economies, rather than treating inner cities as separate, independent economies; otherwise, economic activity there will not be sustainable. Although the changing economy, with its dual challenges of global competition and technological advances, has adversely affected inner cites, it has also created new opportunities.

There are many businesses present today in inner cities--a surprise to those who assume that little economic activity exists because of these communities' well-known problems. Our research has documented that inner-city businesses are concentrated in sectors such as food processing and distribution, printing and publishing, light manufacturing, recycling and remanufacturing, business support services for corporations, and entertainment and tourist attractions. These are all areas in which the genuine competitive advantages of inner-city locations are present.

Economic development in inner cities will come only from recognizing and enhancing the inherent advantages of an inner-city location and building on the base of existing companies, while dealing frontally with the present disadvantages of inner cities as business locations. There is genuine economic potential in inner cities that has been largely unrecognized and untapped.



THE COMPETITIVE ADVANTAGES OF INNER CITIES

Our analysis of major cities nationwide has found that often-discussed advantages, such as low-cost labor and cheap real estate, are largely illusory. Inner cities have available workers, but wages are not lower than in rural areas or in other countries. Real estate costs may be lower than in nearby high-rent downtown areas, but cheaper real estate is available in the suburbs and elsewhere. The changing nature of the world economy means that inner cities will not be able to compete if low-cost labor and cheap real estate are their only advantages. Similarly, it is futile to try to recreate the inner-city economies of the past, with their high-wage, blue-collar manufacturing jobs, as many urban planners still hope to do. Instead, the genuine competitive advantages of inner cities fall into four areas: strategic location, integration with regional clusters, unmet local demand, and human resources.



Strategic Location

Inner cities occupy what should be some of the most valuable locations in their regions, near high-rent business centers, entertainment complexes, and transportation and communications nodes. As a result, an inner-city location can offer a competitive edge to logistically sensitive businesses that benefit from proximity to downtown, transportation infrastructure, and concentrations of companies. The just-in-time service-intensive modern economy is only heightening the time and space advantages of these locations. Although some traditional location-sensitive businesses have been decentralized by modern technology, many others have been created (e.g., recycling, remanufacturing, value-added business services). This powerful locational advantage of inner cities, which has not been fully used or developed, explains the continued existence and growth of the many food processing, printing, business support, rapid-response warehousing and distribution, and light manufacturing companies in inner-city areas, despite the conspicuous problems.

In our surveys of cross sections of inner-city-based companies in Boston, Baltimore, Atlanta, and Oakland, strategic location was cited as the most important advantage for a significant majority of businesses. For example, in Boston, 90% of the 60 companies surveyed said proximity to customers was an important advantage, 55% cited proximity to nearby highways, and 35% cited proximity to suppliers.(n8) In Atlanta, 81% of the 37 companies surveyed said strategic location was an important advantage.(n9)

Integration with Regional Clusters

Longer-term development opportunities for inner cities lie in capitalizing on nearby regional clusters of firms and industries--unique concentrations of competitive companies in related fields. The notion that business development is strongly influenced by the external economies within clusters of interconnected industries has antecedents in the development literature. However, recent research has substantially developed and broadened this idea, demonstrating how it fits into a broader framework for understanding competitiveness.(n10) The composition of clusters includes not only firms and suppliers but also educational institutions, specialized financial providers, and specialized research centers. The dynamic external economies of clusters and their role in new business formation are perhaps their most fundamental attributes. Although some clusters fail to grow for a wide variety of reasons, the power of a cluster-based approach to development is far greater than company-based or even sectoral efforts.(n11)

An effective economic strategy for inner cities must focus on developing the clusters within inner cities, instead of isolated companies, and linking them better to those in the surrounding economy. The ability to access competitive clusters is more far-reaching in its economic implications than is the simple proximity of inner cities to the downtown or transportation infrastructure. Building on regional clusters involves tapping powerful external economies on information, skills, image, infrastructure, and markets. A cluster-based approach also leverages private and public investments in skills, technology, and infrastructure; for example, Boston is home to world-class clusters in health care, financial services, and tourism that surround the inner city. There are numerous opportunities to develop focused programs for training, purchasing, and business development leading to job , for inner-city residents.

Unmet Local Demand

The consumer market of inner-city residents represents the most immediate opportunity for inner-city-based entrepreneurs and businesses. Despite low average incomes, high population density translates into a large local market with substantial purchasing power. Making the market even more attractive is the fact that there tend to be few competitors serving it. At a time when suburban markets are saturated, inner-city markets remain poorly served--especially in many types of retailing, financial services, and personal services. For example, Figure 1 shows that although the median household income in inner-city Baltimore is 39% lower than that of the rest of the city, the aggregate spending power is nearly the same, and the estimated retail spending per establishment is two-thirds greater in the inner city than in the rest of the city,(n12) Inner-city-based businesses that serve this demand will have an advantage over more distantly located establishments because of their proximity to their customers. Inner-city-based retail and service businesses are also more likely to recognize and adapt to the fact that inner cities are distinct markets, which demand uniquely tailored product configurations, retail concepts, entertainment, and personal and business services. An opportunity is present for national retail and service chains focusing on inner cities, as well as large-scale manufacturing of tailored products to supply them.

The private sector is already waking up to the potential of inner cities. For example, supermarkets, facing market saturation in the suburbs, are launching successful stores in undeserved inner cities.(n13) Of the new Vons supermarkets opening in the 1990s, 25% will be urban, compared with none in the 1960s. The chief development officer of Vons said, "There are 1.7 million people within reach of our advertising, warehouses, and manufacturing who can't shop at a Vons, while the suburbs are over-stored."(n14) The CEO of Lucky concurs, saying, "This isn't a philanthropic exercise. There are good food customers who come out in large numbers to buy high-margin items like meat and produce that offset higher urban costs."(n15) In Harlem, Fairway has opened a large, thriving supermarket that employs 170 people, 120 of whom are neighborhood residents. Pathmark has committed to open another supermarket in Harlem, in conjunction with the Local Initiatives Support Corporation's Retail Initiative program. A Pathmark company spokesman said city stores are "disproportionately profitable. Last year, they accounted for only 22% of the chain's 147 stores, but contributed 25% of its profits. In the 1990s, 50% of the chain's new stores will be urban, compared to 25% in the 1980s."(n16) In Boston, seven new supermarkets have opened in the past three years, and the Stop & Shop in the South Bay Mall is one of the highest-selling stores in the 175-store chain.(n17)

Other retail, service, and franchise companies are also undertaking profitable ventures in inner cities.(n18) In Boston, Payless Shoes operates 7 stores that gross approximately $360 per square foot, which compares favorably with the world's best retailers.(n19) In the Bronx, Caldor opened 2 stores that are already 2 of the 5 top-grossing stores in the country, and Rite-Aid announced that it will expand from 11 to more than 50 stores in the Bronx in the next few years.(n20) Rite-Aid also reports that its Harlem store, opened in 1994, fills more prescriptions than does any other store in the city.(n21) In South Central Los Angeles, the Magic Johnson Movie Theaters, opened in the past year, consistently rank in the top five theaters among the 21,800 surveyed nationwide, and plans are under way to open similar complexes in Atlanta, Houston, and Harlem.(n22) In Boston, in addition to the hugely successful Stop & Shop mentioned above, the South Bay Mall includes the highest-volume Kmart in Massachusetts and the top-grossing Toys `R' Us in New England.(n23) A final example is Run `N' Shoot, which is the only full-scale fitness center in Atlanta's inner city. A total of 1,000 to 1,500 people per day use the facility, which hires all of its managers and 60 part-time employees locally. A second Run `N' Shoot will soon open nearby.

Many entrepreneurs are creating businesses that cater to the distinct needs of inner-city consumers. For example, Delray Farms, a chain of supermarkets in inner-city Chicago, specializes in meats and produce-food categories that inner-city consumers purchase in disproportionately high amounts(n24)--and provides cuts of meat and types of produce that reflect the distinct ethnic mix of each neighborhood in which it operates.(n25) Or consider The Lark, a chain of five men's apparel stores located in low-income neighborhoods of Gary, Indiana, and Chicago. Its product mix and marketing are uniquely tailored to local, primarily African American residents, who also comprise 90% of the workforce. Most important is first-class customer service, "because many Black shoppers say they feel slighted or even mistrusted by sales help in mainstream stores." The Lark's profits are "substantial," its theft and inventory losses are a minuscule 0.03% of sales, and employee turnover is less than 3%.(n26)

Banks, initially driven by the requirements of the Community Reinvestment Act but increasingly motivated by self-interest, are making major investments in inner cities in new branches and home mortgages. Bank of America, for example, now makes half its home mortgages in California through a program, launched in 1990, called Neighborhood Advantage. The program has generated $6 billion in home loans since its inception. This program evaluates creditworthiness using nontraditional methods and requires lower down payments, yet the delinquency and foreclosure rates are two-thirds lower than Bank of America's conventional portfolio.(n27)

Finally, a handful of companies have discovered lucrative niches in inner-city business lending. Medallion Funding, a private, for-profit lender and specialized small business investment corporation (SSBIC),(n28) has expanded beyond its traditional lending for taxi medallions and now lends to inner-city laundromats and dry cleaners in New York City. Medallion Funding has generated average annual returns of 18% and just became a publicly traded company.(n29)

Human Resources

Although inner-city populations present many workforce readiness challenges, inner-city residents can also be an attractive labor pool for businesses that rely on a loyal, modestly skilled workforce. There is the potential to build on this resource, with new approaches to education, job placement, and training. However, this requires debunking three deeply entrenched myths about the nature of inner-city residents.

The first is that inner-city residents do not want to work and opt for welfare over gainful employment. Although there is little doubt that inner cities as a whole have an undereducated, underskilled population, with a disproportionate number of people ill equipped for work for a variety of reasons, many employers report great satisfaction with their inner-city workforce. In our survey of inner-city companies in Boston, 65% of businesses cited an available workforce, 60% cited a low-cost workforce, and 50% cited a diverse workforce as critical or important advantages to their inner-city location.(n30) In Atlanta, just 4% of companies were dissatisfied with their employees' skill level and 15% with their work ethic.(n31) The following quotations are from our interviews:(n32)

I have no problem finding people. They come to me. I hand out 2-4 applications every day.... I have no problem getting them up to speed.... There are a lot of nice people here.... I've never had crime problems or seen drug problems.

We're very devoted to our workforce. At the present time, it is the single advantage to this location.

I have no problem finding willing and able workers.... I get two or three applications per day.

These perspectives are reinforced by a study in central Harlem, which concluded, "The ratio of job seekers to successful hires in the fast food restaurants studied . . . is approximately 14 to 1."(n33)

However, there is clear evidence that the work ethic and qualifications of some portion of inner-city residents are sorely lacking, supporting the view of those who argue that investment in human capital is a priority. The following three quotations reflect all-too-common comments we have heard from inner-city employers:(n34)

I am dying for qualified labor, but I can't afford to hire someone who can just show up for work.... There are a lot of unskilled people available, but they don't meet our needs. Of the inner-city residents we try to hire for semiskilled welding jobs, more than half flunk a drug test, and few make it through the internship period.

The vast majority [of the inner-city workers I hired] lacked basic attitudes rather than skills. It was very difficult to find individuals who consistently arrived at work on time, followed direction, worked as a team, or showed even a modest degree of enthusiasm or ambition. It was necessary to frequently test for drug use to control this problem as well as exercise careful supervision to prevent crime in the workplace. Despite the fact that our wages and promotion opportunities were the best in each area, it was often difficult even to find willing candidates.

Even when I hire through families or personal recommendations, I have found that 50% of the African Americans I hire don't work out. In contrast, 95% of Vietnamese I hire work out, as do 90-95% of Peruvians. Immigrants--at least certain groups of them--appreciate the job, are very reliable, and come to work every day. If you ask them to do something, they do it and don't give you any problems.

These quotations raise a number of important issues. First, they underscore the reality that the inner-city workforce has a disproportionate number of people who are problematic employees. Hence, to hire from the inner city, companies must have effective strategies for identifying good employees. Cultivating personal networks in the community and building relationships with CBOs (as discussed later) are essential.

Second, employers widely report much higher satisfaction with immigrant workers, many of whom are African American or Latino and live in inner cities. Thus perhaps a more relevant distinction than inner-city versus non-inner-city employees--or African Americans and Latinos versus other ethnic groups--is long-resident poor versus recent poor immigrants. The former tend to have greater problems entering the workforce, whether they are African Americans in the inner city or, for example, Whites in the Ozarks. Immigrants, on the other hand, tend to be a self-selecting group who find a low-income, entry-level job in the United States far better than the situation in their home country. They tend to work harder than everyone else.

Third, these quotations and our other interviews illustrate that some White inner-city business owners and managers are often quick to judge (unfairly) entire groups of people, based on only a few experiences. This is one of the most important areas in which faulty perceptions are working against economic progress in inner cities.

This discussion makes it clear that the inner-city workforce is diverse and complex and cannot easily be summarized. Although there are many problems with the workforce, however, our research reveals a meaningful proportion of unemployed or underemployed inner-city residents who are ready and able to be good employees. Rather than become paralyzed by the presence of residents unfit for work, our strategy focuses on job development for the substantial group that is ready to work. The challenge is to create more accessible jobs and better connect these people to them. Over time, more people being employed will be a virtuous cycle that will lead to others becoming more fit to be employed.

In addition to the nature of the workforce, a second myth about inner cities is that they lack entrepreneurs. In fact, there is a demonstrated capacity for entrepreneurship among inner-city residents, most of which has been channeled into microenterprises and the provision of social services. For instance, inner cities have a plethora of social service providers as well as social, fraternal, and religious organizations. Behind the creation and building of those organizations is a whole cadre of local entrepreneurs who have responded to intense local demand for social services and to funding opportunities provided by government, foundations, and private-sector sponsors. Now, the challenge is to create a climate whereby other inner-city residents, with similar talent and commitment, will build for-profit businesses that become meaningful employers and create wealth.

A third myth about inner cities is that skilled minorities--many of whom grew up in or near them--will inevitably work or create businesses in more affluent areas. Today's large and growing pool of talented minority managers represents a new generation of potential inner-city entrepreneurs. Many of these managers have developed the skills, networks, capital, and confidence to join or start entrepreneurial companies in the inner city. We know of some--including former students of mine--who are doing so. As the awareness of the economic opportunities in inner cities grows, more will follow.

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