Some of America's fastest growth occurs within our slowest-growing cities

Sometimes -- so it seems -- INC.'s annual ranking of metropolitan hot spots can get pretty boring. Aren't the same areas always near the top of the list? Such cities as Orlando, Atlanta, and Anaheim ranked high last year, rank high this year, and will probably rank high again next year. Chicago, Cleveland, and New York City, similarly, are always lost in the list's bottom half. Ho hum.

But before you fall asleep, ponder a couple of questions: why does Pittsburgh have more rapidly growing companies than Tampa? Why does Detroit have more than Dallas, and St. Louis as many as San Diego?

A moment's reflection will persuade you of a simple but often-ignored truth. The perennially top-ranked cities are up there not because they are better but because they are newer.

Different metro areas have matured at different points in our history. Cities in the Northeast began taking shape before the Industrial Revolution. Rustbelt regions boomed in the nineteenth and early twentieth centuries. Walk around some of the decaying industrial sections of Baltimore or Buffalo. These areas still house a lot of industrial and commercial baggage -- older companies, many of them stagnant or declining. That hurts their averages.

The newer areas have come to maturity just since the end of World War II. (Only 167,000 people lived in Phoenix in 1946, for example, as compared with 2.2 million today.) As a result, they inherited little of this baggage. They house relatively few older Fortune 500 factories; they've scarcely been touched by the 3.5 million jobs eliminated by the 500 since 1980. When it comes to averages, the new cities have lots of ups and very few downs. No wonder they score high.

But the mixed-bag economy in the older cities has already produced a strong counterforce: a legion of talented, energetic men and women who have benefited, so to speak, from the experience of the past 100 years. No longer enamored with life in the large corporation, they are seeing niches the giants can't touch. They're developing technologies that are economical on a small, entrepreneurial scale. And as INC. readers well know, they're creating a host of fast-growing companies. Maybe the Fortune 500 eliminated millions of jobs in the past decade -- but more than two-thirds of those losses have been replaced by smaller companies within the manufacturing sector.

Geographically, this new breed is settling in neighborhoods somewhat different from the haunts of their old-economy ancestors. Some are building their businesses out on the far fringes of the metropolitan area, often near an airport or a new highway. Look up Chesterfield, Mo., on a map and you'll find that it's quite some distance from St. Louis. Others are recapturing run-down industrial districts, such as East Cambridge, Mass. (see "The Most Entrepreneurial Place on Earth," [Article link]). A third group -- like the new service businesses sprouting up in midtown Manhattan, Chicago's East Loop, or Pittsburgh's central business district -- are squeezing themselves in amidst the high-rise headquarters of much larger companies.

What these entrepreneurs have created is a new set of boom areas in older cities. You won't find them in the rankings [ [Article link]], because INC.'s annual listing focuses only on metropolitan areas as a whole. But they're every bit as vital as Las Vegas or San Jose.

To get a better handle on this phenomenon, my colleagues at Cognetics and I created a new business geography, breaking the United States up into nearly 1,300 "metropolitan neighborhoods." New York or Los Angeles contains 50 or 60 of these subareas. Smaller cities might contain 15 or 20. The areas are designed to isolate different kinds of economic activity, and to distinguish between growth and decline.

"Boom Neighborhoods" (below) lists several of the fastest-growing neighborhoods in older cities, chosen from the top 25 (ranked by number of high-growth companies). Just below the top 25 -- but still in the top 10% of all metro neighborhoods -- are sections of Kansas City, Cleveland, Milwaukee, and Cincinnati. In fact, when you print out a list of that overall top 10%, you find that exactly half are in older cities.

What kind of businesses are found in places like Melville, N.Y., Northbrook, Ill., and Livonia, Mich.? They are companies such as The Softa Group, 25 miles north of Chicago in Northbrook. Softa -- #497 on last year's INC. 500 and still growing at 40% a year -- makes and distributes software for real-estate developers, managers, and investors. "Northbrook is a neighborhood where there's still room to grow," says Larry Zinox, a principal with the company.

In general, fast-growing businesses in these new boom neighborhoods are small. According to Cognetics's data, 70% have fewer than 20 employees and 93% fewer than 100. The majority are locally owned. And they're highly diverse. About 20% are in business and professional services, with another 16% in general manufacturing. High-tech manufacturing accounts for only 2% of the companies.

Most important from an international point of view, companies in these high-growth neighborhoods are competing successfully abroad. Nearly 5,500 are exporters. And surprisingly, most of the companies that ship their goods or services overseas are themselves quite small: about 85% have fewer than 100 employees. Examples? Galison Books, an INC. 500 company in midtown Manhattan with four full-time and six part-time employees, sells its address books and other products in France, Italy, England, Japan, Canada, Australia, and New Zealand. Qosina Corp., a Melville, N.Y., manufacturer of medical and cosmetics disposables, also has only four full-time employees -- but sells to England, Germany, and the Netherlands.

You can, if you want to, compare Orlando with Pittsburgh, or Anaheim with Chicago. And you'll find, year after year, that the newer Sunbelt cities score higher on the entrepreneurial averages than the older cities. But when you put the economic microscope on the older cities -- looking at neighborhoods and regions within the metro area -- you find at least as much growth and vitality there as in the high-ranking regions.

As with so many things in life, it pays to look below the surface.

David L. Birch is president of Cognetics Inc., in Cambridge, Mass.

Research assistance was provided by Lisa D. Royal.


BOOM NEIGHBORHOODS

High-growth regions in and around older cities (selected)

1. Melville-Smithtown, N.Y.

2. Elk Grove Village-Arlington Heights, Ill.

3. Bethpage-Farmingdale, N.Y.

4. West Chester-Wayne, Pa.

5. Des Plaines-Northbrook, Ill.

6. Livonia-Plymouth, Mich.

7. Edison-Woodbridge, N.J.

8. Pittsburgh central business district

9. St. Louis-Chesterfield, Mo.

Source: Cognetics Inc.


HERE COMES THE NEIGHBORHOOD:

The Woodlands, Tex.

During the gluttonous, heady years of the oil frenzy, Houston didn't give much thought to anything as academic as economic development. Energy-related business poured into the city; entrepreneurship didn't have to be enticed. "In those days," says John Brock, head of the five-year-old Houston Economic Development Council, " 'economic development' consisted of sending out a city map."

No more. As oil prices plummeted in the 1980s, Houston went through a massive depression, losing 220,000 jobs. Yet in spite of the drop -- many would argue because of it -- the city is rebounding with astounding vigor. More than 125,000 jobs have been added back in the past three years. Some 300 new companies open each month. "The success you're seeing," says Brock, "comes simply because people were desperate."

Ringing Houston, in fact, is a 20- to 30-mile radius of communities bursting with new activity. Consider The Woodlands, 30 miles north of Houston center, developed in the 1970s as a place where people would live, work, and play. The Woodlands is capitalizing on a growing regional infrastructure to encourage high-tech companies -- an infrastructure that's emerged from what one Houston official calls a "united recognition of our deficiencies." Among its components:

* BCM Technologies, a wholly owned but separately managed subsidiary of Baylor College of Medicine. BCM identifies research that has commercial possibilities and offers management help to start-ups;

* Free or almost free help from the public Small Business Development Center -- tracking down technical assistance, arranging advisory boards, finding government contracts through a matchmaking program;

* Tax-incentive programs (notably to keep $2-billion Compaq Computer Corp.'s expansion in the region) and a capital-raising service spurred by the one-year-old private Greater Houston Partnership;

* Homegrown venture capital from Woodlands Venture Partners, which works with BCM and the partnership in funding biomedical start-ups.

Some 12 companies and six research institutions now inhabit what's called Research Forest in The Woodlands, an area that officials hope will turn into the next Silicon Valley or Route 128. And while Martin Sutter, managing partner of Woodlands Venture, concedes that the economic impact of the biotech industry isn't yet colossal -- indeed, about 60% of Greater Houston's jobs are still oil-related -- he says the groundwork is being laid. "If a new pharmaceutical company becomes successful, it will be big. If we have one, much less two companies like that, you'll be seeing manufacturing facilities and new employees not unlike the petrochemical companies that now line the channel."

Everything that's coming together, he says, is a natural. "Most communities talk about creating something out of nothing. But here we had the structure with the universities. It's just that, for years, nobody took a role in capitalizing on that." Adds Phil Ralston, CEO of Optex Biomedical Inc., a company spun out from Texas A&M and now operating in the heart of The Woodlands: "This is a community that really does work. A little bit of paradise in this part of Texas."

-- Leslie Brokaw


HERE COMES THE NEIGHBORHOOD:

Monmouth County, N.J.

My hometown? In the metro rankings? As the horse thief said when they were about to run him out of town: if it weren't for the honor of the thing, I'd just as soon not be involved.

OK, so the Holmdel-Red Bank-Eatontown region of central New Jersey is booming, even though the rest of metropolitan New York City is sluggish. But do we really have to tell everybody? Periodically, it seems, we get discovered, and when we do people come to look, and some of those visitors then have the bad grace to move in. "You get all these New Yorkers who go out for a Sunday drive and think they've discovered heaven," says Bob McIntosh, owner of Empress Travel in Middletown, the municipality separating Holmdel from Red Bank. "They're close to New York yet still in the country."

Close? My daily commute to Manhattan runs an hour and 45 minutes each way. Maybe that's why so many people have chosen to work where they live. Bell Labs started it all: the research arm of AT&T has been here since the 1960s. Prudential has a sprawling campus-like office complex in town (don't tell them we use their softball field on Sundays), and Chase Manhattan has taken an option on another huge chunk of land.

And it's not just the big boys who like the area. Leonard P. Cuozzo, who grew up in Keyport, just east of Holmdel, has decided to stay. Cuozzo runs fragrance manufacturer Paul Sebastian, number #228 on the 1989 INC. 500, down in Ocean Township, which is adjacent to Eatontown. Says Cuozzo: "We just don't have to be in the city. We don't even have an office there. We can do a lot of our business by phone, fax, and overnight mail." Customers? Cuozzo sends sales reps out to department stores, and sees buyers from men's specialty stores at trade shows. No downtown location necessary.

Where businesses go, support services follow. So it's not surprising that East Coast Computer Systems, a business-to-business marketer ranking #110 on the 500, is here as well. "While we have sales up and down the East Coast, most of our business is here," says company president Marbeth J. Shay, who, like me, happens to live in Holmdel. "There's absolutely no reason to go anywhere else." With all this activity, retailers are tripping over one another to set up shop here -- and that's another reason I hope we'll keep the whole thing quiet. Consider our newest shopping area: The Grove at Shrewsbury, about halfway between Holmdel and Eatontown. It's like a caricature of yuppie shopping habits. Among the 30 stores: The Gap, Gap Kids, Williams-Sonoma, Eddie Bauer, and Workbench. Banana Republic is opening soon.

Prosperity isn't all bad, of course. Those of us who were able to buy in the early or mid-1980s have seen the price of our homes -- which we thought were overpriced then -- more than double. Still, I wish we could go back to the way things were a few years ago. We now have $750,000 homes going up on lots where you can look into your neighbor's yard. There's a 2,174-name waiting list at the train station for a parking space. And believe it or not, we are beginning to have traffic jams -- especially on Sundays when New Yorkers are out for a drive.

Is it too late to take us off the list? -- Paul B. Brown