A Harvard Business School professor explains that small urban businesses can thrive and how the government can help.
The time for revitalizing the inner city is now. The solutions won't come from social programs but from the private sector -- from entrepreneurs who are prepared to tap the economic and entrepreneurial potential of our nation's inner cities
Jobs, investment, and businesses in our inner cities will materialize only as they have elsewhere -- as the result of private, for-profit initiatives and investment based on economic self-interest and true competitive advantage. If our aim is to create a healthy, sustainable economic base in the inner city with the employment, role models, and wealth that come with such a base, then our task is clear. It is to identify the unique existing and potential competitive advantages of inner cities that will sustain profitable companies, capable not only of serving the local community but also of "exporting" beyond it. Unless we start with the premise that inner-city businesses must be genuinely profitable and capable of competing on a regional, national, and even international scale, inner-city economies will forever be out of the economic mainstream.
Past attempts at inner-city revitalization have failed because they ignored those basic economic principles. They sought to meet highly visible social needs -- poverty, homelessness, and hunger -- with programs such as income assistance, housing subsidies, and food stamps, while they ignored the need to build viable inner-city businesses. The revitalization didn't take root because without economically viable companies the only growth social programs promote is their own.
Today is the right time for a dramatic reversal of inner-city decline. Inner cities harbor untapped economic and entrepreneurial potential. Inner-city residents and other citizens are tired of failed government programs and are ready to try a different tack. Government officials at all levels say they are ready to innovate. The private sector, if allowed to focus on enterprise building, is poised to help.
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Toward a New Model
We need a new model to guide inner-city economic development. Its dimensions must be economic and social. It must draw its energy from the private sector, not from government or social-services agencies. It must address companies directly instead of trying to stimulate economic development through expensive investments in housing and community infrastructure. The model must incorporate the idea of creating profitable inner-city businesses instead of presuming the need for continuing public subsidies or incentives. It must attempt to integrate inner cities with regional and national economies and not view them as islands apart. The goal should be to create regional, national, and international companies, not just local small businesses.
The model I propose rests on the proposition that inner cities provide unique potential competitive advantages that companies can leverage in order to turn a profit. We need to focus on identifying those competitive advantages and on encouraging the formation and growth of companies that can exploit them. If companies are to put down roots in the inner city, they must be motivated by profits.
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The Advantages of Inner Cities
Location plays an important part in determining the ultimate success or failure of a business. Many people assume that the chief advantages of inner-city locations are low-cost real estate and available labor. But those two attributes are illusory. Real estate and labor costs are often higher in the inner city than they are in surrounding suburbs and certainly higher than in low-cost countries such as Mexico and Korea.
To understand the competitive advantages of inner-city locations, we need to see the inner city within the context of a broader regional economy. Every location -- whether it be a nation, state, or region -- has a set of unique local conditions that underpin the ability of companies based there to compete in a particular field. The competitive advantage of a location does not normally arise in isolated companies but in clusters of companies -- companies in the same industry or companies that are otherwise linked together through customer, supplier, or other relationships. Unusual or sophisticated local demand is one important reason why clusters form as companies gain insight into customers' needs. The clusters represent critical masses of skill, information, relationships, and infrastructure in a particular field.
I initially described the theory of location and regional clusters in my book The Competitive Advantage of Nations. I applied that theory to relatively large geographic areas of nations and states. But the theory is just as relevant to smaller areas such as the inner city.
The potential competitive advantages of inner cities lie in four areas: strategic location, local market demand, integration with regional clusters, and human resources. Those potential advantages have been recognized before, but no one in the private or public sectors has ever made a systematic effort to develop and harness them.
Strategic location. Inner cities occupy what should be economically valuable locations. They sit near congested high-rent business centers and astride transportation and communications nodes. Inner-city locations thus offer potential advantages for businesses that benefit from proximity to downtown business districts, logistical infrastructure, entertainment and tourist destinations, and concentrations of companies. Strategic location creates opportunities for relocating warehousing, data processing, food preparation, and other activities that benefit from downtown proximity away from more expensive downtown headquarters (or other company locations).
For example, Boston's fresh produce and food-processing cluster derives a critical competitive advantage from its inner-city location in Newmarket Square. Containing such businesses as flower wholesalers, seafood importers, meat processors, bakeries, and food distributors, the cluster is in close proximity to downtown; its location permits rapid deliveries and gives downtown buyers a convenient location for purchasing. The location has excellent access to highway, sea, and air transport, which gives businesses a particular advantage in the importing and distribution of seafood. The location is also within walking distance of a supply of able employees from inner-city neighborhoods. That combination of factors has led to a dense concentration of processors, caterers, truckers, wholesalers, distributors, and other suppliers, which together form a vibrant cluster.
