The Competitive Advantage of the Inner City...the New York City Office of Economic Develop-ment set...

The CompetitiveAdvantage of the InnerCity

Harvard Business Review

by Michael E. Porter

Reprint 95310

MAY-JUNE 1995

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HarvardBusinessReviewMICHAEL E. PORTER THE COMPETITIVE ADVANTAGE OF THE INNER CITY 95310

LOUISE O’BRIEN DO REWARDS REALLY CREATE LOYALTY? 95307AND CHARLES JONES

IT OUTSOURCINGM.C. LACITY, L.P. WILLCOCKS, AND D.F. FEENY MAXIMIZE FLEXIBILITY AND CONTROL 95306

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The Competitive Advantage

el E. Porter

of the Inner City
The economic distress of America’s inner cities
may be the most pressing issue facing the nation.The lack of businesses and jobs in disadvantaged ur-ban areas fuels not only a crushing cycle of povertybut also crippling social problems, such as drugabuse and crime. And, as the inner cities continueto deteriorate, the debate on how to aid them growsincreasingly divisive.

The sad reality is that the efforts of the past fewdecades to revitalize the inner cities have failed.The establishment of a sustainable economic base–and with it employment opportunities, wealth cre-ation, role models, and improved local infrastruc-ture – still eludes us despite the investment ofsubstantial resources.

Past efforts have been guided by a social modelbuilt around meeting the needs of individuals. Aidto inner cities, then, has largely taken the form ofrelief programs such as income assistance, housingsubsidies, and food stamps, all of which addresshighly visible–and real–social needs.

Programs aimed more directly at economic de-velopment have been fragmented and ineffective.These piecemeal approaches have usually taken theform of subsidies, preference programs, or expen-sive efforts to stimulate economic activity in tan-

by Micha

DRAWING BY PETER SIMPSON COOK Copyright © 1

gential fields such as housing, real estate, andneighborhood development. Lacking an overallstrategy, such programs have treated the inner cityas an island isolated from the surrounding economyand subject to its own unique laws of competition.They have encouraged and supported small, sub-scale businesses designed to serve the local com-munity but ill equipped to attract the community’sown spending power, much less export outside it.In short, the social model has inadvertently under-mined the creation of economically viable compa-nies. Without such companies and the jobs theycreate, the social problems will only worsen.

The time has come to recognize that revitalizingthe inner city will require a radically different ap-proach. While social programs will continue to playa critical role in meeting human needs and improv-ing education, they must support – and not under-mine – a coherent economic strategy. The questionwe should be asking is how inner-city-based busi-nesses and nearby employment opportunities forinner city residents can proliferate and grow. A sus-tainable economic base can be created in the inner

Michael E. Porter is the C. Roland Christensen Professorof Business Administration at the Harvard BusinessSchool in Boston, Massachusetts.

995 by the President and Fellows of Harvard College. All rights reserved.

INNER CITY

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city, but only as it has been created elsewhere:through private, for-profit initiatives and invest-ment based on economic self-interest and genuinecompetitive advantage – not through artificial in-ducements, charity, or government mandates.

We must stop trying to cure the inner city’s prob-lems by perpetually increasing social investmentand hoping for economic activity to follow. Instead,an economic model must begin with the premisethat inner city businesses should be profitable andpositioned to compete on a regional, national, andeven international scale. These businesses should

be capable not only of serving the local communitybut also of exporting goods and services to the sur-rounding economy. The cornerstone of such a mod-el is to identify and exploit the competitive advan-tages of inner cities that will translate into trulyprofitable businesses.

Our policies and programs have fallen into thetrap of redistributing wealth. The real need – andthe real opportunity–is to create wealth.

Toward a New Model: Location andBusiness Development

Economic activity in and around inner cities willtake root if it enjoys a competitive advantage andoccupies a niche that is hard to replicate elsewhere.If companies are to prosper, they must find a com-pelling competitive reason for locating in the innercity. A coherent strategy for development startswith that fundamental economic principle, as thecontrasting experiences of the following companiesillustrate.

Alpha Electronics (the company’s name has beendisguised), a 28-person company that designed andmanufactured multimedia computer peripherals,was initially based in lower Manhattan. In 1987,the New York City Office of Economic Develop-ment set out to orchestrate an economic “renais-sance” in the South Bronx by inducing companiesto relocate there. Alpha, a small but growing com-pany, was sincerely interested in contributing tothe community and eager to take advantage of thecity’s willingness to subsidize its operations. Thecity, in turn, was happy that a high-tech company

Inner city businesses spositioned not only to serv

also to export to the s

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would begin to stabilize a distressed neighborhoodand create jobs. In exchange for relocating, the cityprovided Alpha with numerous incentives thatwould lower costs and boost profits. It appeared tobe an ideal strategy.

By 1994, however, the relocation effort hadproved a failure for all concerned. Despite the rapidgrowth of its industry, Alpha was left with only 8 ofits original 28 employees. Unable to attract high-quality employees to the South Bronx or to train lo-cal residents, the company was forced to outsourceits manufacturing and some of its design work.

Potential suppliers and customers refused to visitAlpha’s offices. Without the city’s attention to secu-rity, the company was plagued by theft.

What went wrong? Good intentions notwith-standing, the arrangement failed the test of busi-ness logic. Before undertaking the move, Alpha andthe city would have been wise to ask themselveswhy none of the South Bronx’s thriving businesseswas in electronics. The South Bronx as a locationoffered no specific advantages to support Alpha’sbusiness, and it had several disadvantages thatwould prove fatal. Isolated from the lower Manhat-tan hub of computer-design and software compa-nies, Alpha was cut off from vital connections withcustomers, suppliers, and electronic designers.

In contrast, Matrix Exhibits, a $2.2 million sup-plier of trade-show exhibits that has 30 employees,is thriving in Atlanta’s inner city. When Tennessee-based Matrix decided to enter the Atlanta market in1985, it could have chosen a variety of locations.All the other companies that create and rent trade-show exhibits are based in Atlanta’s suburbs. Butthe Atlanta World Congress Center, the city’s ma-jor exhibition space, is just a six-minute drive fromthe inner city, and Matrix chose the location be-cause it provided a real competitive advantage. To-day Matrix offers customers superior responsetime, delivering trade-show exhibits faster than itssuburban competitors. Matrix benefits from lowrental rates for warehouse space–about half the rateits competitors pay for similar space in the sub-urbs – and draws half its employees from the localcommunity. The commitment of local police hashelped the company avoid any serious security prob-

ould be profitable and the local community butrrounding economy.

HARVARD BUSINESS REVIEW May-June 1995

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lems. Today Matrix is one of the top five exhibi-tion houses in Georgia.

Alpha and Matrix demonstrate how location canbe critical to the success or failure of a business. Every location – whether it be a nation, a region, or a city – has a set of unique local conditions thatunderpin the ability of companies based there to com-pete in a particular field. The competitive advan-tage of a location does not usually arise in isolatedcompanies but in clusters of companies – in otherwords, in companies that are in the same industryor otherwise linked together through customer,supplier, or similar relationships. Clusters repre-sent critical masses of skill, information, relation-ships, and infrastructure in a given field. Unusualor sophisticated local demand gives companies in-sight into customers’ needs. Take Massachusetts’shighly competitive cluster of information-technol-ogy industries: it includes companies specializingin semiconductors, workstations, supercomputers,software, networking equipment, databases, mar-ket research, and computer magazines.

Clusters arise in a particular location for specifichistorical or geographic reasons – reasons that maycease to matter over time as the cluster itself be-comes powerful and competitively self-sustaining.In successful clusters such as Hollywood, SiliconValley, Wall Street, and Detroit, several competi-tors often push one another to improve productsand processes. The presence of a group of compet-ing companies contributes to the formation of newsuppliers, the growth of companies in related fields,the formation of specialized training programs, and

the emergence of technological centers of excel-lence in colleges and universities. The clusters alsoprovide newcomers with access to expertise, con-nections, and infrastructure that they in turn canlearn and exploit to their own economic advantage.

If locations (and the events of history) give rise toclusters, it is clusters that drive economic develop-ment. They create new capabilities, new compa-nies, and new industries. I initially described thistheory of location in The Competitive Advantageof Nations (Free Press, 1990), applying it to the rela-

We must stopthe problems of the innincreasing social inve

economic act


tively large geographic areas of nations and states.But it is just as relevant to smaller areas such as theinner city. To bring the theory to bear on the innercity, we must first identify the inner city’s competi-tive advantages and the ways inner city businessescan forge connections with the surrounding urbanand regional economies.

The True Advantages of the Inner CityThe first step toward developing an economic

model is identifying the inner city’s true competi-tive advantages. There is a common misperceptionthat the inner city enjoys two main advantages:low-cost real estate and labor. These so-called ad-vantages are more illusory than real. Real estateand labor costs are often higher in the inner citythan in suburban and rural areas. And even if innercities were able to offer lower-cost labor and real es-tate compared with other locations in the UnitedStates, basic input costs can no longer give compa-nies from relatively prosperous nations a competi-tive edge in the global economy. Inner cities wouldinevitably lose jobs to countries like Mexico orChina, where labor and real estate are far cheaper.

Only attributes that are unique to inner citieswill support viable businesses. My ongoing re-search of urban areas across the United States iden-tifies four main advantages of the inner city: strate-gic location, local market demand, integration withregional clusters, and human resources. Variouscompanies and programs have identified and ex-ploited each of those advantages from time to time.

To date, however, no systematic effort has beenmounted to harness them.

Strategic Location. Inner cities are located inwhat should be economically valuable areas. Theysit near congested high-rent areas, major businesscenters, and transportation and communicationsnodes. As a result, inner cities can offer a competi-tive edge to companies that benefit from proximityto downtown business districts, logistical infra-structure, entertainment or tourist centers, andconcentrations of companies.

rying to cure er city by perpetuallytment and hoping for

vity to follow.

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INNER CITY

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Newmarket Square has excellent access to trucking as well as sea

For example, Boston’s food processing and distri-bution industry gains a competitive edge from itsinner city location in Newmarket Square. The in-dustry consists of such businesses as seafood im-porters, meat processors, bakeries, and food distrib-utors. Because they are near downtown Boston,these businesses can make rapid deliveries, anddowntown buyers have a convenient location atwhich to purchase goods. Land, although morecostly than in the suburbs, is cheaper in the innercity than it is downtown, and zoning regulationspermit food processing operations. NewmarketSquare has excellent access to trucking as well assea and air transport, which provides it with a par-ticular competitive advantage in the export ofseafood. The combination of those factors has pro-duced a dense concentration of processors, caterers,truckers, wholesalers, distributors, and other sup-pliers in the inner city.

Although the location of Boston’s food processingcluster has historic roots that predate the moderninner city, examples of newly formed companiesunderscore how critical an advantage proximitycan be. Consider the catering supplier Be OurGuest. Founded in 1984, the company rents linens,party equipment, and other hard goods associatedwith the catering business. Located in Boston’sinner city neighborhood of Roxbury, the companyenjoys immediate and easy access to downtownBoston. As a result, it is able to offer a higher levelof service to customers than its competitors can. Toreinforce its service strategy, Be Our Guest main-tains sufficient inventory levels to meet peaks indemand. Today the company has 36 full-time em-ployees and annual sales of $1.2 million.

In Boston and Los Angeles, it is striking howmany of the businesses that have remained in theinner city in the face of numerous difficulties areones for which location matters. For example, bothcities have a concentration of logistics and storagebusinesses. Advances in transportation and com-munications may have reduced the importance oflocation for some kinds of businesses. However, theincreasing importance of regional clusters and ofsuch concepts as just-in-time delivery, superiorcustomer service, and close partnerships betweencustomers and suppliers are making location morecritical than ever before.

There is significant potential, then, for expandingthe inner-city business base by building on the ad-vantage of strategic location. Among the initialprospects are location-sensitive industries now sit-uated elsewhere, nearby companies and industriesthat face space constraints, and back-office or sup-port functions amenable to relocation or outsourc-

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ing. Consider Boston’s Longwood medical area, ahuge concentration of world-class health care facil-ities. Longwood is located near the inner city neigh-borhoods of Roxbury and Jamaica Plain. Today suchactivities as laundry services, building mainte-nance, and just-in-time delivery of supplies are per-formed in-house or by suburban vendors. But, be-cause of Longwood’s proximity to the inner city,activities like these could be shifted to businessesbased in Roxbury or Jamaica Plain–especially if ba-sic infrastructure such as roads could be improved.

Local Market Demand. The inner city market it-self represents the most immediate opportunity forinner-city-based entrepreneurs and businesses. At atime when most other markets are saturated, innercity markets remain poorly served–especially in re-tailing, financial services, and personal services. InLos Angeles, for example, retail penetration per res-ident in the inner city compared with the rest of thecity is 35% in supermarkets, 40% in departmentstores, and 50% in hobby, toy, and game stores.

The first notable quality of the inner city marketis its size. Even though average inner city incomesare relatively low, high population density trans-lates into an immense market with substantial pur-chasing power. Boston’s inner city, for example, hasan estimated total family income of $3.4 billion.


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and air transport, which provides it with a particular competitive advantage in the export of seafood.

Spending power per acre is comparable with therest of the city despite a 21% lower average house-hold income level than in the rest of Boston, and,more significantly, higher than in the surroundingsuburbs. In addition, the market is young and grow-ing rapidly, owing in part to immigration and rela-tively high birth rates.

A handful of forward-looking entrepreneurs haverecognized the opportunities for profit and growthin this large, underdeveloped market and haveopened retail outlets in the inner city. Chicago’shistoric retailer Goldblatt Brothers found new lifeafter bankruptcy with a strategy built on inner citystores. In 1981, the company closed all its storesbut six profitable ones located in the inner city. Focusing on cash-and-carry items and offeringgoods at closeout prices, Goldblatt Brothers has re-emerged as a competitive retailer. Today the com-pany has 14 stores, most of which are located inChicago’s inner city. Similarly, Stop & Shop and Purity Supreme are opening new stores in the innercity of Boston.

Another important quality of the inner city mar-ket is its character. Most products and serviceshave been designed for white consumers and busi-nesses. As a result, product configurations, retailconcepts, entertainment, and personal and busi-


ness services have not been adapted to the needs ofinner city customers. Although microsegmenta-tion has been slow to come to the inner city, itholds promise for creating thriving businesses.

Inner city consumers, in fact, represent a ma-jor growth market of the future, and companiesbased in the inner city have a unique ability tounderstand and address their needs. For example,Miami-based, Latino-owned CareFlorida has rap-idly expanded its HMO business by tailoring itsmarketing to Latino customers. And Detroit’s Uni-versal Casket has grown to $3 million in sales by fo-cusing on African-American-owned funeral homes.Many of the largest and most enduringly successfulminority-owned (although not necessarily inner-city-based) businesses have drawn their advantagesfrom serving inner city residents’ cultural and eth-nic needs in fields such as food products (ParksSausage and Brooks Sausages); beauty care (SoftSheen, Proline, Dudley, Luster Products, and John-son Products); and media (Essence, Earl Graves,Johnson Publishing, and Black Entertainment Tele-vision). Although inner city businesses need not belimited to serving local needs, this kind of focusedstrategy is one way to gain a clear competitive ad-vantage over established businesses such as Procter& Gamble, Safeway, and Levi Strauss.

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INNER CITY

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More important, businesses catering to local de-mand have the potential to expand beyond the in-ner city and become major players. Companies cantarget and sell not only to their own local commu-nities but also to similar communities nationallyand even internationally. Consider Americas’ FoodBasket, a Cuban-owned supermarket based in Bos-ton’s inner city. In its second year of operation, the company has reached sales of $8 million annu-ally and is profitable. It has developed a productmix that satisfies local demand better than main-stream supermarkets do. Its management’s strongrelationship with the community has reduced secu-rity problems and employee turnover. Unlike othernearby mom-and-pop stores, Americas’ Food Bas-ket has developed a partnership with a leading na-tional wholesaler that provides goods and financ-ing at competitive rates. As a result, its selection,prices, and service are far superior to those of small-er competitors. More important, Americas’ FoodBasket shows signs of becoming a major regional business by seeking ways to export its goods to thesurrounding region. It is currently expanding intowholesaling with a start-up called Selmac Corpo-ration. Selmac will supply mainly Latino productsto Americas’ Food Basket and to small bodegasthroughout the inner city and the surrounding re-gion. It also plans to bid on contracts to supplywholesale food services to schools, prisons, andother institutions throughout Massachusetts.

Tailored retailing concepts in a broad range ofareas such as food, clothing, pharmaceuticals, toys,books, and restaurants could also set off a chain re-action of opportunities: Companies create demandfor new types of products, which in turn createsnew opportunities for manufacturers of specialized

products. For example, tailored supermarkets areincreasing the demand for established ethnic foodproducers and distributors such as Goya Foods, asupplier of Latino foods with annual sales of ap-proximately $500 million. Such stores also repre-sent a critical distribution channel for recent start-ups such as Glory Foods, which sells canned foodstargeted at African-American consumers.

The most intriguing attribute of the inner citymarket is its potential to be a leading indicator of

A new breed of professbusinesses will attract sp

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major nationwide trends. The tastes and sensibili-ties of inner city communities are cutting-edge in anumber of respects and often become mainstream.Popular music is one example. Or consider ParksSausage, based in Baltimore, Maryland, which de-veloped its food products for African-Americanconsumers but has found a receptive market na-tionally. Today it is competing head-to-head withJimmy Dean Sausage, the industry leader.

Ultimately, what will attract the inner city con-sumer more than anything else is a new breed ofcompany that is not small and high-cost but a pro-fessionally managed major business employing thelatest in technology, marketing, and managementtechniques. This kind of company, much morethan exhortation, will attract spending power andrecycle capital within the inner city community.

Integration with Regional Clusters. The mostexciting prospects for the future of inner city eco-nomic development lie in capitalizing on nearby re-gional clusters: those unique-to-a-region collectionsof related companies that are competitive nationallyand even globally. For example, Boston’s inner cityis next door to world-class financial-services andhealth-care clusters. South Central Los Angeles isclose to an enormous entertainment cluster and alarge logistical-services and wholesaling complex.

The ability to access competitive clusters is avery different attribute – and one much more farreaching in economic implication – than the moregeneric advantage of proximity to a large down-town area with concentrated activity. Competitiveclusters create two types of potential advantages.The first is for business formation. Companies pro-viding supplies, components, and support servicescould be created to take advantage of the inner

city’s proximity to multiple nearby customers inthe cluster. For example, Detroit-based Mexican In-dustries has emerged as one of the most respectedsuppliers of head rests, arm rests, air bags, and other auto parts by forging close relationships withGeneral Motors, Ford, Chrysler, and Volkswagen ofAmerica. Last year, the company had more than1,000 employees, most of whom live in the innercity, and revenues of more than $100 million. BingSteel, a 54-person company with $57 million in

onally managed majornding power and recycleer city community.


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sales, has made similar connections, supplying flatroll steel and coils to the auto industry.

The second advantage of these clusters is the po-tential they offer inner city companies to competein downstream products and services. For example,an inner city company could draw on Boston’sstrength in financial services to provide servicestailored to inner city needs – such as secured creditcards, factoring, and mutual funds–both within andoutside the inner city in Boston and elsewhere inthe country. Boston Bank of Commerce (BBOC)

is a trusted local institution in the inner city withstrong ties to the community. It has many smallnonprofit customers, such as the Dimock Commu-nity Health Center in Roxbury, which has a $1 mil-lion endowment. There are many nonprofit organi-zations like Dimock whose funds are sitting idle inlow-interest savings accounts because they lack theinvestment savvy and size to attract sophisticatedmoney managers. In toto, however, such organiza-tions represent a significant pool of capital. BBOCsees an opportunity here to take advantage of thetrust it enjoys within the community and the prox-imity of world-class asset managers in the city’snearby financial services cluster. The company isdeveloping a product to do asset management fornonprofits in its service area; it will pool funds fromits clients and then subcontract their managementto companies in the nearby cluster.

Few of these opportunities are currently beingpursued. Most of today’s inner city businesses ei-ther have not been export oriented, selling onlywithin the local community rather than outside it,or have seen their opportunities principally interms defined by government preference programs.Consequently, networks and relationships withsurrounding companies are woefully underdevel-oped. New private sector initiatives will be neededto make these connections and to increase innercity entrepreneurs’ awareness of their value. Inte-gration with regional clusters is potentially the in-ner city’s most powerful and sustainable competi-tive advantage over the long term. It also providestremendous leverage for development efforts: By

Because most of today’s innot been export oriented, n

with surrounding comunderde


focusing on upgrading existing and nascent clus-ters, rather than on supporting isolated companiesor industries, public and private investments intraining, infrastructure, and technology can benefitmultiple companies simultaneously.

Human Resources. The inner city’s fourth advan-tage takes on a number of deeply entrenched mythsabout the nature of its residents. The first myth isthat inner city residents do not want to work andopt for welfare over gainful employment. Althoughthere is a pressing need to deal with inner city resi-

dents who are unprepared for work, most inner cityresidents are industrious and eager to work. Formoderate-wage jobs ($6 to $10 per hour) that re-quire little formal education (for instance, ware-house workers, production-line workers, and truckdrivers), employers report that they find hardwork-ing, dedicated employees in the inner city. For ex-ample, a company in Boston’s inner city neighbor-hood of Dorchester bakes and decorates cakes soldto supermarkets throughout the region. It attractsand retains area residents at $7 to $8 per hour (pluscontributions to pensions and health insurance)and has almost 100 local employees. The loyalty ofits labor pool is one of the factors that has allowedthe bakery to thrive.

Admittedly, many of the jobs currently availableto inner city residents provide limited opportuni-ties for advancement. But the fact is that they arejobs; and the inner city and its residents need manymore of them close to home. Proposals that work-ers commute to jobs in distant suburbs–or move tobe near those jobs – underestimate the barriers thattravel time and relative skill level represent for in-ner city residents. Moreover, in deciding what typesof businesses are appropriate to locate in the innercity, it is critical to be realistic about the pool of po-tential employees. Attracting high-tech companiesmight make for better press, but it is of little benefitto inner city residents. Recall the contrasting expe-riences of Alpha Electronics and Matrix Exhibits. Inthe case of Alpha, there was a complete mismatchbetween the company’s need for highly skilled pro-fessionals and the available labor pool in the local

ner city businesses haveetworks and relationshipspanies are woefullyeloped.

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Inner City Economic Development

New Model M Economic: create wealth M Private sector M Profitable businesses M Integration with the regional economy M Companies that are export oriented M Skilled and experienced minorities engaged in building businesses M Mainstream, private sector institutions enlisted M Inner city disadvantages addressed directly M Government focused on improving the environment for business

Old Model M Social: redistribute M Government and so organizations M Subsidized busines M Isolation from the la M Companies that ser local community M Skilled and experie engaged in the soc M Special institutions

M Inner city disadvan counterbalanced w M Government involve providing services

community. In contrast, Matrix carefully consid-ered the available workforce when it established itsAtlanta office. Unlike the Tennessee headquarters,which custom-designs and creates exhibits for eachclient, the Atlanta office specializes in rentalsmade from prefabricated components–work requir-ing less-skilled labor, which can be drawn from theinner city. Given the workforce, low-skill jobs arerealistic and economically viable: they representthe first rung on the economic ladder for many indi-viduals who otherwise would be unemployed. Overtime, successful job creation will trigger a self-rein-forcing process that raises skill and wage levels.

The second myth is that the inner city’s only en-trepreneurs are drug dealers. In fact, there is a realcapacity for legitimate entrepreneurship among inner city residents, most of which has been chan-neled into the provision of social services. For in-stance, Boston’s inner city has numerous socialservice providers as well as social, fraternal, andreligious organizations. Behind the creation andbuilding of those organizations is a whole cadre oflocal entrepreneurs who have responded to intenselocal demand for social services and to funding op-portunities provided by government, foundations,and private sector sponsors. The challenge is toredirect some of that talent and energy towardbuilding for-profit businesses and creating wealth.

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The third myth is that skilledminorities, many of whom grewup in or near inner cities, haveabandoned their roots. Today’slarge and growing pool of talentedminority managers represents anew generation of potential innercity entrepreneurs. Many havebeen trained at the nation’s lead-ing business schools and havegained experience in the nation’sleading companies. Approximate-ly 2,800 African Americans and1,400 Hispanics graduate fromM.B.A. programs every year com-pared with only a handful 20 yearsago. Thousands of highly trainedminorities are working at lead-ing companies such as MorganStanley, Citibank, Ford, Hewlett-Packard, and McKinsey & Com-pany. Many of these managershave developed the skills, net-work, capital base, and confidenceto begin thinking about joining orstarting entrepreneurial compa-nies in the inner city. Two Har-

vard Business School graduates, for example, havelaunched Delray Farms with the aim of creating anational chain of small inner city supermarketsthat focus on produce and other perishables. Backedby significant private-equity capital, Delray Farmsis operating its first store in Chicago and is plan-ning to open six new stores within a year.

The Real Disadvantages of the Inner City

The second step toward creating a coherent eco-nomic strategy is addressing the very real disadvan-tages of locating businesses in the inner city. Theinescapable fact is that businesses operating in theinner city face greater obstacles than those basedelsewhere. Many of those obstacles are needlesslyinflicted by government. Unless the disadvantagesare addressed directly, instead of indirectly throughsubsidies or mandates, the inner city’s competitiveadvantages will continue to erode.

Land. Although vacant property is abundant ininner cities, much of it is not economically usable.Assembling small parcels into meaningful sites canbe prohibitively expensive and is further complicat-ed by the fact that a number of city, state, and feder-al agencies each control land and fight over turf. Forexample, development of the Jeffrey Plaza shopping

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center in Chicago’s South Side required govern-ment efforts over eight years to assemble 21 con-tiguous parcels. Similarly, attempts to rebuildSouth Central Los Angeles after the 1992 riots havebeen hampered because only 9 of 200 vacant orunderutilized properties are larger than one acre.(By comparison, Wal-Mart requires four to six acresfor a single store). Once assembled, an inner citysite often requires expensive demolition, environ-mental cleanup, and extensive litigation. Privatedevelopers and banks tend to avoid sites with evena hint of environmental problems because of puni-tive liability laws.

Building Costs. The cost of building in the innercity is significantly higher than in the suburbs be-cause of the costs and delays associated with logis-tics, negotiations with community groups, andstrict urban regulations: restrictive zoning, archi-tectural codes, permits, inspections, and govern-ment-required union contracts and minority set-asides. Ironically, despite the desperate need fornew projects, construction in inner cities is farmore regulated than it is in the suburbs–a legacy ofbig city politics and entrenched bureaucracies.

More damaging than regulatory costs is the un-certainty that the regulatory process creates for po-

tential investors. Managers interviewed in Boston,Los Angeles, and Chicago expressed frustrationwith the three-year to five-year waiting periodsnecessary to obtain the numerous permit and siteapprovals required to build, expand, or improve fa-cilities. Undeniably, the wait is expensive; but theuncertainty about whether an application will beapproved or when a ruling will be made makesforming a financial strategy nearly impossible.

Other Costs. Compared with the suburbs, innercities have high costs for water, other utilities,workers’ compensation, health care, insurance,permitting and other fees, real estate and other taxes, OSHA compliance, and neighborhood hiringrequirements. For example, Russer Foods, a manu-facturing company located in Boston’s inner city,operates a comparable plant in upstate New York.The Boston plant’s expenses are 55% higher forworkers’ compensation, 50% higher for familymedical insurance, 166% higher for unemploy-

Inner city residents hentrepreneurship. The ch

of that talent from the so


ment insurance, 340% higher for water, and 67%higher for electricity. High costs like these driveaway companies and hold down wages. Some costs,such as those for workers’ compensation, apply tothe state or region as a whole. Others, such as realestate taxes, apply citywide. Still others, such asproperty insurance, are specific to the inner city.All are devastating to maintaining fragile inner citycompanies and to attracting new businesses.

It is an unfortunate reality that many cities – be-cause they have a greater proportion of residents de-pendent on welfare, Medicaid, and other social pro-grams–require higher government spending and, asa result, higher corporate taxes. The resulting taxburden feeds a vicious cycle–driving out more com-panies while requiring even higher taxes from thosethat remain. Cities have been reluctant to chal-lenge entrenched bureaucracies and unions, as wellas inefficient and outdated government depart-ments, all of which unduly raise city costs.

Finally, excessive regulation not only drives upbuilding and other costs but also hampers almostall facets of business life in the inner city, fromputting up an awning over a shop window to operat-ing a pushcart to making site improvements. Regu-lation also stunts inner city entrepreneurship, serv-

ing as a formidable barrier to small and start-upcompanies. Restrictive licensing and permitting,high licensing fees, and archaic safety and healthregulations create barriers to entry into the verytypes of businesses that are logical and appropriatefor creating jobs and wealth in the inner city.

Security. Both the reality and the perception ofcrime represent profound impediments to urbaneconomic development. First, crime against proper-ty raises costs. For example, the Shops at ChurchSquare, an inner city strip shopping center in Cleve-land, Ohio, spends $2 per square foot more than acomparable suburban center for a full-time securityguard, increased lighting, and continuous cleaning–raising overall costs by more than 20%. Second,crime against employees and customers creates an unwillingness to work in and patronize innercity establishments and restricts companies’ hoursof operation. Fear of crime ranks among the mostimportant reasons why companies opening new fa-

ve a real capacity forllenge is to redirect someial to the private sector.

63

INNER CITY

r

i

cilities failed to consider inner city locations andwhy companies already located in the inner city left.Currently, police devote most of their resources to the security of residential areas, largely overlook-ing commercial and industrial sites.

Infrastructure. Transportation infrastructureplanning, which today focuses primarily on the mo-bility of residents for shopping and commuting,should consider equally the mobility of goods andthe ease of commercial transactions. The most crit-ical aspects of the new economic model–the impor-tance of the location of the inner city, the connec-tions between inner city businesses and regionalclusters, and the development of export-orientedbusinesses–require the presence of strong logisticallinks between inner city business sites and the sur-rounding economy. Unfortunately, the business infrastructure of the inner city has fallen into dis-repair. The capacity of roads, the frequency and loca-tion of highway on-ramps and off-ramps, the linksto downtown, and the access to railways, airports,and regional logistical networks are inadequate.

Employee Skills. Because their average educationlevels are low, many inner city residents lack the

skills to work in any but the most unskilled occu-pations. To make matters worse, employment op-portunities for less-educated workers have fallenmarkedly. In Boston between 1970 and 1990, forexample, the percentage of jobs held by peoplewithout high school diplomas dropped from 29% to7%, while those held by college graduates climbedfrom 18% to 44%. And the unemployment rate forAfrican-American men aged 16 to 64 with less thana high school education in major northeasterncities rose from 19% in 1970 to 57% in 1990.

Management Skills. The managers of most innercity companies lack formal business training. Thatproblem, however, is not unique to the inner city; itis a characteristic of small businesses in general.Many individuals with extensive work historiesbut little or no formal managerial training startbusinesses. Inner city companies without well-trained managers experience a series of predictableproblems that are similar to those that affect many

Excessive regulation hambusiness life in the inne

awning over a shop windoto making site

64

small businesses: weaknesses in strategy develop-ment, market segmentation, customer-needs eval-uation, introduction of information technology,process design, cost control, securing or restructur-ing financing, interaction with lenders and govern-ment regulatory agencies, crafting business plans,and employee training. Local community collegesoften offer management courses, but their qualityis uneven, and entrepreneurs are hard-pressed fortime to attend them.

Capital. Access to debt and equity capital repre-sents a formidable barrier to entrepreneurship andcompany growth in inner city areas.

First, most inner city businesses still suffer frompoor access to debt funding because of the limitedattention that mainstream banks paid them histori-cally. Even in the best of circumstances, small-business lending is only marginally profitable tobanks because transaction costs are high relative to loan amounts. Many banks remain in small-busi-ness lending only to attract deposits and to help sellother more profitable products.

The federal government has made several effortsto address the inner city’s problem of debt capital.

As a result of legislation like the Community Re-investment Act, passed in order to overcome bias in lending, banks have begun to pay much more at-tention to inner city areas. In Boston, for example,leading banks are competing fiercely to lend in theinner city – and some claim to be doing so prof-itably. Direct financing efforts by government,however, have proved ineffective. The proliferationof government loan pools and quasi-public lendingorganizations has produced fragmentation, marketconfusion, and duplication of overhead. Businessloans that would provide scale to private sectorlenders are siphoned off by these organizations,many of which are high-cost, bureaucratic, andrisk-averse. In the end, the development of high-quality private sector expertise in inner city busi-ness financing has been undermined.

Second, equity capital has been all but absent. In-ner city entrepreneurs often lack personal or familysavings and networks of individuals to draw on for

pers almost all facets of city, from putting up anw to operating a pushcartmprovements.


fg o

capital. Institutional sources of equity capital arescarce for minority-owned companies and have vir-tually ignored inner city business opportunities.

Attitudes. A final obstacle to companies in theinner city is antibusiness attitudes. Some workersperceive businesses as exploitative, a view thatguarantees poor relations between labor and man-agement. Equally debilitating are the antibusinessattitudes held by community leaders and social activists. These attitudes are the legacy of a regret-table history of poor treatment of workers, depar-tures of companies, and damage to the environ-ment. But holding on to these views today iscounterproductive. Too often, community leadersmistakenly view businesses as a means of directlymeeting social needs; as a result, they have unreal-istic expectations for corporate involvement in thecommunity. For example, some businesses inter-ested in locating in Boston’s inner city decided

against it because of demands to build playgrounds,fund scholarships, and cede control of hiring andtraining to community-based organizations. Suchdemands on existing and potential businessesrarely help the community; instead, they drivebusinesses–and jobs–to other locations.

Demanding linkage payments and contributionsand stirring up antibusiness sentiment are politicaltools that brought questionable results in the pastwhen owners had less discretion about where theychose to locate their companies. In today’s increas-ingly competitive business environment, such tac-tics will serve only to stunt economic growth.

Changing Roles and Responsibilitiesfor Inner City Development

Overcoming the business disadvantages of the in-ner city as well as building on its inherent advan-tages will require the commitment and involve-ment of business, government, and the nonprofitsector. Each will have to abandon deeply held be-liefs and past approaches. Each must be willing toaccept a new model for the inner city based on aneconomic rather than a social perspective. The pri-vate sector, not government or social service orga-nizations, must be the focus of the new model.

Community leaders too omeans of directly meetin

companies and jobs


The New Role of the Private Sector. The eco-nomic model challenges the private sector to assumethe leading role. First, however, it must adopt newattitudes toward the inner city. Most private sec-tor initiatives today are driven by preference pro-grams or charity. Such activities would never standon their own merits in the marketplace. It is in-evitable, then, that they contribute to growing cyn-icism. The private sector will be most effective if itfocuses on what it does best: creating and support-ing economically viable businesses built on truecompetitive advantage. It should pursue four im-mediate opportunities as it assumes its new role.

1. Create and expand business activity in the in-ner city. The most important contribution compa-nies can make to inner cities is simply to do busi-ness there. Inner cities hold untapped potential forprofitable businesses. Companies and entrepre-neurs must seek out and seize those opportunities

that build on the true advantages of the inner city.In particular, retailers, franchisers, and financialservices companies have immediate opportunities.Franchises represent an especially attractive modelfor inner city entrepreneurship because they pro-vide not only a business concept but also trainingand support.

Businesses can learn from the mistakes thatmany outside companies have made in the innercity. One error is the failure of retail and servicebusinesses to tailor their goods and services to thelocal market. The needs and preferences of the in-ner city market can vary greatly – something thatcompanies like Goldblatt Brothers have recog-nized. The Chicago retailer understands that its in-ner city customers buy to meet immediate needs,and it has tailored its retail merchandise and pur-chasing planning to its customers’ buying habits.For example, unlike most stores, which stock win-ter coats in the fall, Goldblatt Brothers stocks itscoats in the winter.

Another common mistake is the failure to buildrelationships within the community and to hire lo-cally. Hiring local residents builds loyalty fromneighborhood customers, and local employees ofretail and service businesses can help stores cus-tomize their products. Evidence suggests that com-

ten view businesses as a social needs – and driveut of the inner city.

65

INNER CITY

htt

panies that were perceived to be in touch with thecommunity had far fewer security problems,whether or not the owners lived in the community.For example, Americas’ Food Basket hires locallyand is widely viewed as a good citizen of the com-munity. As a result, management reports that it hasnot had to hire a security guard and that neighborsoften call if they witness anything amiss.

Companies have discovered a number of othereffective tactics for dealing with security. For in-stance, large concentrations of businesses spread

security costs and reinforce perceptions of safety.MetroTech, a back-office operations complex serv-ing nearby Wall Street, is located in a high-povertyand high-crime area near the federal buildings indowntown Brooklyn. The developers created an 18-acre campus that could support 4 million to 8 mil-lion square feet of office space. The complex is solarge that tenants pay only 33 cents per square footfor 24-hour private security. Because transporta-tion infrastructure adds to perceptions of safety intraveling to and from business locations, Metro-Tech enlisted the city government to renovate thelocal subway stations and to locate a police branchnear the site. Crime has been insignificant, andMetroTech is fully occupied by leading financialinstitutions.

In other cases, companies have organized them-selves into associations to increase the effective-ness of security and to spread costs. The associa-tions work closely with the police department andwith members of the community to identify andaddress security problems. In some cities, specialneighborhood-managed tax-assessment districts –such as New York City’s many Business Improve-ment Districts – have been established to providefunds for supplemental security protection andother services.

2. Establish business relationships with innercity companies. By entering into joint ventures orcustomer-supplier relationships, outside compa-nies will help inner city companies by encouragingthem to export and by forcing them to be competi-tive. In the long run, both sides will benefit. For ex-ample, AB&W Engineering, a Dorchester-basedmetal fabricator, has built a close working relation-

Every major company srelationships with inner ci

charity but on mu

66

ship with General Motors. GM has given AB&Wmanagement assistance and a computerized order-ing system and has referred a lot of new business to AB&W. In turn, AB&W has become a high-performing and reliable supplier. Such relation-ships, based not on charity but on mutual self-inter-est, are sustainable ones; every major companyshould develop them.

3. Redirect corporate philanthropy from socialservices to business-to-business efforts. Countlesscompanies give many millions of dollars each year

to worthy inner-city social-service agencies. Butphilanthropic efforts will be more effective if theyalso focus on building business-to-business rela-tionships that, in the long run, will reduce the needfor social services.

First, corporations could have a tremendous im-pact on training. The existing system for job train-ing in the United States is ineffective. Training pro-grams are fragmented, overhead intensive, anddisconnected from the needs of industry. Many pro-grams train people for nonexistent jobs in indus-tries with no projected growth. Although reformingtraining will require the help of government, theprivate sector must determine how and where re-sources should be allocated to ensure that the specific employment needs of local and regionalbusinesses are met. Ultimately, employers, notgovernment, should certify all training programsbased on relevant criteria and likely job availability.

Training programs led by the private sector couldbe built around industry clusters located in boththe inner city (for example, restaurants, food ser-vice, and food processing in Boston) and the nearbyregional economy (for example, financial servicesand health care in Boston). Industry associationsand trade groups, supported by government incen-tives, could sponsor their own training programs incollaboration with local training institutions.

Programs that help inner city residents with theschool-to-work transition could also take advan-tage of regional clusters. Project ProTech in Bostonlets high school students compete for apprentice-like positions in the health care cluster. The pro-gram mixes classroom work and internship train-ing during the school year and over the summer,

ould develop businessy companies based not onual self-interest.


mru

beginning in the junior year of high school. ProjectProTech is currently expanding to include otherclusters, such as utilities and financial services.

Second, the private sector could make an equallysubstantial impact by providing management assis-tance to inner city companies. As with training,current programs financed or operated by the gov-ernment are inadequate. Outside companies havemuch to offer companies in the inner city: talent,know-how, and contacts. One approach to upgrad-ing management skills is to emphasize networkingwith companies in the regional economy that ei-ther are part of the same cluster (customers, suppli-ers, and related businesses) or have expertise inneeded areas. An inner city company could team upwith a partner in the region who provides manage-ment assistance; or a consortium of companieswith a required expertise, such as information tech-nology, could provide assistance to inner city busi-nesses in need of upgrading their systems.

Professional associations could develop advisoryprograms for inner city managers. Business schoolscould develop and teach custom-designed short andpractical executive programs or assist inner citycompanies through field studies programs. The

Harvard Business School, for example, offers a for-credit course that matches teams of M.B.A. stu-dents with inner city companies. We are encourag-ing the development of such programs elsewhere.

4. Adopt the right model for equity capital in-vestments. The investment community – especial-ly venture capitalists – must be convinced of theviability of investing in the inner city. There is a small but growing number of minority-orientedequity providers (although none specifically focuson inner cities). A successful model for inner cityinvesting will probably not look like the familiarventure-capital model created primarily for technol-ogy companies. Instead, it may resemble the equityfunds operating in the emerging economies of Rus-sia or Hungary– investing in such mundane but po-tentially profitable projects as supermarkets andlaundries. Ultimately, inner-city-based businessesthat follow the principles of competitive advantage

The private sector will beon what it does best: ceconomically viable b

competitive


will generate appropriate returns to investors – par-ticularly if aided by appropriate incentives, such astax exclusions for capital gains and dividends forqualifying inner city businesses.

The New Role of Government. To date, govern-ment has assumed primary responsibility for bring-ing about the economic revitalization of the innercity. Existing programs at the federal, state, and lo-cal levels designed to create jobs and attract busi-nesses have been piecemeal and fragmented at best.Still worse, these programs have been based on sub-sidies and mandates rather than on marketplacerealities. Unless we find new approaches, the innercity will continue to drain our rapidly shrinkingpublic coffers.

Undeniably, inner cities suffer from a long histo-ry of discrimination. However, the way for govern-ment to move forward is not by looking behind.Government can assume a more effective role bysupporting the private sector in new economic ini-tiatives. It must shift its focus from direct involve-ment and intervention to creating a favorable envi-ronment for business. This is not to say that publicfunds will not be necessary. But subsidies must bespent in ways that do not distort business incen-

tives, focusing instead on providing the infrastruc-ture to support genuinely profitable businesses.Government at all levels should focus on four goalsas it takes on its new role.

1. Direct resources to the areas of greatest eco-nomic need. The crisis in our inner cities demandsthat they be first in line for government assistance.This may seem an obvious assertion. But the fact isthat many programs in areas such as infrastructure,crime prevention, environmental cleanup, land de-velopment, and purchasing preference spread fundsacross constituencies for political reasons. For ex-ample, most transportation infrastructure spendinggoes to creating still more attractive suburban ar-eas. In addition, a majority of preference-programassistance does not go to companies located in low-income neighborhoods.

Investments that boost the economic potential of inner cities must receive priority. For example,

ost effective if it focuseseating and supportingsinesses built on trueadvantage.

67

INNER CITY

f

Superfund cleanup dollars should go to sites inhigh-unemployment inner city areas before they goto low-unemployment suburban sites. Infrastruc-ture improvements should go to making inner cityareas more attractive business locations. And crimeprevention resources should go to high-crime innercity areas. Spending federal, state, and local moneyin that way will have the added benefit of easingcritical social problems, thus reducing social ser-vice spending.

Unfortunately, the qualifying criteria for currentgovernment assistance programs are not properlydesigned to channel resources where they are mostneeded. Preference programs support businessbased on the race, ethnicity, or gender of their own-ers rather than on economic need. In addition to di-recting resources away from the inner city, suchrace-based or gender-based distinctions reinforceinappropriate stereotypes and attitudes, breed re-sentment, and increase the risk that programs will

be manipulated to serve unintended populations.Location in an economically distressed area andemployment of a significant percentage of its resi-dents should be the qualification for governmentassistance and preference programs. Shifting the fo-cus to economic distress in this way will help enlistall segments of the private sector in the solutions tothe inner city’s problems.

2. Increase the economic value of the inner cityas a business location. In order to stimulate eco-nomic development, government must recognizethat it is a part of the problem. Today its priori-ties often run counter to business needs. Artificialand outdated government-induced costs must bestripped away in the effort to make the inner city a profitable location for business. Doing so willrequire rethinking policies and programs in a widerange of areas. There is early evidence that self-in-flicted regulatory costs can be overcome. Considerthe success of the Indianapolis Regulatory StudyCommission in Indiana. In two short years, Indi-anapolis ended its taxi monopoly, streamlined itsbuilding permitting process, and eliminated a widerange of needless regulations.

Indeed, there are numerous possibilities for re-form. Imagine, for example, policy aimed at elimi-

Government must shiinvolvement and intervent

environment

68

nating the substantial land and building cost penal-ties that businesses face in the inner city. Ongoingrent subsidies run the risk of attracting companiesfor which an inner city location offers no other eco-nomic value. Instead, the goal should be to providebuilding-ready sites at market prices. A single gov-ernment entity could be charged with assemblingparcels of land and with subsidizing demolition,environmental cleanup, and other costs. The sameentity could also streamline all aspects of build-ing– including zoning, permitting, inspections, andother approvals.

That kind of policy would require further prog-ress on the environmental front. A growing numberof cities – including Detroit, Chicago, Indianapolis,Minneapolis, and Wichita, Kansas – have success-fully developed so-called brownfield urban areas bymaking environmental cleanup standards more flex-ible depending on land use, indemnifying land own-ers against additional costs if contamination is

found on a site after a cleanup, and using tax-incre-ment financing to help fund cleanup and redevelop-ment costs.

Government entities could also develop a morestrategic approach to developing transportation andcommunications infrastructures, which would fa-cilitate the fluid movement of goods, employees,customers, and suppliers within and beyond the in-ner city. Two projects in Boston are prime exam-ples: first, a new exit ramp connecting the innercity to the nearby Massachusetts Turnpike, whichin turn connects to the surrounding region and be-yond; and a direct access road to the harbor tunnel,which connects to Logan International Airport.Though inexpensive, both projects are stalled be-cause the city does not have a clear vision of theireconomic importance.

3. Deliver economic development programs andservices through mainstream, private sector insti-tutions. There has been a tendency to rely on smallcommunity-based nonprofits, quasi-governmentalorganizations, and special-purpose entities, such ascommunity development banks and specializedsmall-business investment corporations, to providecapital and business-related services. Social serviceinstitutions have a role, but it is not this. With few

t its focus from direction to creating a favorablefor business.


exceptions, nonprofit and government organiza-tions cannot provide the quality of training, advice,and support to substantial companies that main-stream, private sector organizations can. Comparedwith private sector entities such as commercialbanks and venture capital companies, special-pur-pose institutions and nonprofits are plagued byhigh overhead costs; they have difficulty attractingand retaining high-quality personnel, providingcompetitive compensation, or offering a breadth ofexperience in dealing with companies of scale.

Consider access to capital. Government musthelp create the conditions necessary for private,mainstream financial institutions to lend and in-vest profitably in inner city businesses. Efforts toeliminate discrimination are vital but are not suffi-cient. Financing in the inner city must be prof-itable, or private sector institutions will never havethe enthusiasm to develop it aggressively. Someconventional lenders claim that the reason theyhave not found inner city loans profitable is nothigher default rates, as is commonly assumed, butthe high transaction costs of finding and actuallymaking inner city loans. Government should ad-dress those costs head on through better infor-mation and relaxed paperwork requirements andregulations. In addition, it could provide directincentives, giving banks a transaction fee ratherthan a loan guarantee for closing a qualifying inner-city-based business loan. Such an approach wouldencourage banks to make and maintain good loans,instead of forcing capital into bad loans to fill lend-ing quotas based on race, ethnicity, or gender.

The most important way to bring debt and equityinvestment to the inner city is by engaging the pri-vate sector. Resources currently going to govern-ment or quasi-public financing would be betterchanneled through other private financial institu-tions or directed at recapitalizing minority-ownedbanks focusing on the inner city, provided thatthere were matching private sector investors. Mi-nority-owned banks that have superior knowledgeof the inner city market could gain a competitiveadvantage by developing business-lending expertisein inner city areas.

As in lending, the best approach to increase thesupply of equity capital to the inner cities is to pro-vide private sector incentives consistent withbuilding economically sustainable businesses. Oneapproach would be for both federal and state gov-ernments to eliminate the tax on capital gains anddividends from long-term equity investments in inner-city-based businesses or subsidiaries that em-ploy a minimum percentage of inner city residents.Such tax incentives, which are based on the prem-


ise of profit, can play a vital role in speeding upprivate sector investment. Private sector sources ofequity will be attracted to inner city investmentonly when the creation of genuinely profitablebusinesses is encouraged.

4. Align incentives built into government pro-grams with true economic performance. Aligningincentives with business principles should be thegoal of every government program. Most programstoday would fail such a test. For example, prefer-ence programs in effect guarantee companies a mar-ket. Like other forms of protectionism, they dullmotivation and retard cost and quality improve-ment. A 1988 General Accounting Office reportfound that within six months of graduating fromthe Small Business Association’s purchasing pref-erence program, 30% of the companies had goneout of business. An additional 58% of the remain-ing companies claimed that the withdrawal of theSBA’s support had had a devastating impact on busi-ness. To align incentives with economic perfor-mance, preference programs should be rewritten torequire an increasing amount of non-set-aside busi-ness over time.

Direct subsidies to businesses do not work. In-stead, government funds should be used for site as-sembly, extra security, environmental cleanup, andother investments designed to improve the busi-ness environment. Companies then will be left tomake decisions based on true profit.

The New Role of Community-Based Organiza-tions. Recently, there has been renewed activityamong community-based organizations (CBOs) tobecome directly involved in business development.CBOs can, and must, play an important supportingrole in the process. But choosing the proper strategyis critical, and many CBOs will have to change fun-damentally the way they operate. While it is diffi-cult to make a general set of recommendations tosuch a diverse group of organizations, four princi-ples should guide community-based organizationsin developing their new role.

1. Identify and build on strengths. Like everyother player, CBOs must identify their unique com-petitive advantages and participate in economic de-velopment based on a realistic assessment of theircapabilities, resources, and limitations. Communi-ty-based organizations have played a much-neededrole in developing low-income housing, social pro-grams, and civic infrastructure. However, whilethere have been a few notable successes, the vastmajority of businesses owned or managed by CBOshave been failures. Most CBOs lack the skills, atti-tudes, and incentives to advise, lend to, or operatesubstantial businesses. They were able to master

69

INNER CITY

n;es

low-income housing development, in which therewere major public subsidies and a vacuum of insti-tutional capabilities. But, when it comes to financ-ing and assisting for-profit business development,CBOs simply can’t compete with existing privatesector institutions.

Moreover, CBOs naturally tend to focus on com-munity entrepreneurship: small retail and servicebusinesses that are often owned by neighborhoodresidents. The relatively limited resources of CBOs,as well as their focus on relatively small neighbor-hoods, is not well-suited to developing the more

substantial companies that are necessary for eco-nomic vitality.

Finally, the competitive imperatives of for-profitbusiness activity will raise inevitable conflicts forCBOs whose mission rests with the community.Turning down local residents in favor of better-qualified outside entrepreneurs, supporting neces-sary layoffs or the dismissal of poorly performingworkers, assigning prime sites for business insteadof social uses, and approving large salaries to suc-cessful entrepreneurs and managers are only ahandful of the necessary choices. Given these orga-nizations’ roots in meeting the social needs ofneighborhoods, it will be difficult for them to putprofit ahead of their traditional mission.

2. Work to change workforce and community at-titudes. Community-based organizations have aunique advantage in their intimate knowledge ofand influence within inner city communities, andthey can use that advantage to help promote busi-ness development. CBOs can help create a hos-pitable environment for business by working tochange community and workforce attitudes andacting as a liaison with residents to quell unfound-ed opposition to new businesses. When BayBankwanted to open a new branch in Dorchester, for ex-ample, a local community development corpora-tion was instrumental in smoothing relations witha few vocal critics who could have delayed the pro-ject or even driven the bank away.

3. Create work-readiness and job-referral sys-tems. Community-based organizations can play an

Businesspeople, entreprelead the economic revival

social service providbureaucrats mu

70

active role in preparing, screening, and referringemployees to local businesses. A pressing needamong many inner city residents is work-readinesstraining, which includes communication, self-de-velopment, and workplace practices. CBOs, withtheir intimate knowledge of the local community,are well equipped to provide this service in closecollaboration with industry. The Urban League ofEastern Massachusetts, for example, has taken upthe challenge in its new Employment ResourceCenter. The center provides workers with basictraining as well as instruction on specific topics,

such as customer-service and interviewing skillsand written and oral communication.

CBOs can also help inner city residents by active-ly developing screening and referral systems. Ad-mittedly, some inner-city-based businesses do nothire many local residents. The reasons are variedand complex but seem to revolve around a few badexperiences that owners have had with individualemployees and their work attitudes, absenteeism,false injury claims, or drug use. A study of the im-poverished Red Hook neighborhood in Brooklynpoints to the importance of social networks – net-works that are often lacking in inner cities – as in-formal job referral systems.1 The study found that a local development corporation, the South Brook-lyn LDC, played an important role in helping localresidents get jobs by developing relationships withnearby businesses and screening and referring em-ployees to them.

4. Facilitate commercial site improvement anddevelopment. Community-based organizations (es-pecially community development corporations)can also leverage their expertise in real estate andact as a catalyst to facilitate environmental cleanupand the development of commercial and industrialproperty. For example, the Codman Square Neigh-borhood Development Corporation in Boston waspart of a group including the Boston Public Facili-ties Department, local merchants, and the local

eurs, and investors must and community activists,rs, and governmentt support them.

1. See Philip Kasinitz and Jan Rosenberg, “Why Enterprise Zones Will NotWork: Lessons from a Brooklyn Neighborhood,” City Journal, Autumn1993, pp.63-9.


health center that encouraged 36 businesses tomove into a depressed neighborhood. The groupused its considerable community organizing talentto help merchants form an association to identifythe neighborhood’s needs as well as barriers tomeeting them. It negotiated with the police to in-crease patrols in the area and pushed the mayor’s of-fice to board up abandoned buildings and to rid thearea of trash and abandoned cars. After bringing to-gether many different constituencies, it led a cam-paign to encourage businesses to locate in theneighborhood.

Overcoming Impediments to ProgressThis economic model provides a new and com-

prehensive approach to reviving our nation’s dis-tressed urban communities. However, agreeing onand implementing it will not be without its chal-lenges. The private sector, government, inner cityresidents, and the public at large all hold en-trenched attitudes and prejudices about the innercity and its problems. These will be slow to change.Rethinking the inner city in economic rather thansocial terms will be uncomfortable for many whohave devoted years to social causes and who viewprofit and business in general with suspicion. Ac-tivists accustomed to lobbying for more govern-ment resources will find it difficult to embrace astrategy for fostering wealth creation. Elected offi-cials used to framing urban problems in social


terms will be resistant to changing legislation, redi-recting resources, and taking on recalcitrant bu-reaucracies. Government entities may find it hardto cede power and control accumulated throughpast programs. Local leaders who have built socialservice organizations and merchants who have runmom-and-pop stores could feel threatened by thecreation of new initiatives and centers of power. Lo-cal politicians schooled in old-style community or-ganizing and confrontational politics will have totread unfamiliar ground in facilitating cooperationbetween business and residents.

These changes will be difficult ones for both indi-viduals and institutions. Nonetheless, they mustbe made. The private sector, government, and com-munity-based organizations all have vital new partsto play in revitalizing the economy of the innercity. Businesspeople, entrepreneurs, and investorsmust assume a lead role; and community activists,social service providers, and government bureau-crats must support them. The time has come to em-brace a rational economic strategy and to stem theintolerable costs of outdated approaches.

The research that this article is based on would not have beenpossible without the generous support of the Harvard BusinessSchool and the assistance of many individuals. Whitney Tilson,Michael Marubio, and Barbara Paige were integrally involvedin preparing this article. I would also like to thank the manyM.B.A. students from both the Harvard Business School andother schools who have been involved in the research effort thatmade this article possible.

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