Other nonwage costs. Many inner cities have high costs for utilities, workers' compensation, health care, property insurance, unemployment and liability insurance, real estate and other taxes, Occupational Safety and Health Act compliance, neighborhood hiring requirements, and "linkage" payments. One manufacturing company in Boston's inner city operates a comparable plant in upstate New York. The Boston plant's expenses are 50% higher for family medical insurance, 55% higher for workers' compensation, 67% higher for electricity, 166% higher for unemployment insurance, and 340% higher for water.
Because they have a greater proportion of residents dependent on welfare, Medicaid, and other social programs than the suburbs do, many inner cities must spend more and thus charge higher taxes. But the costs cities incur are often exacerbated by the same factors that drive up building costs: entrenched unions and inefficient bureaucracies.
Security. Crime is a real deterrent to doing business in the inner city, but the perception of crime is greater than the reality. Crime against property raises costs. For example, the Shops at Church Square, an inner-city strip shopping center in Cleveland, spends $2 per square foot more than a comparable suburban center because it has a full-time security guard, more lighting, and continuous cleaning. Its overall costs are thus raised by more than 20%. Crime against employees and customers discourages people from working in and visiting inner-city establishments and restricts their hours of operation.
Infrastructure. The competitive-advantage model rests on the locational value of the inner city. Thus, good transportation infrastructure is critical to the development of "exporting" businesses as well as the integration of inner-city business with regional clusters. Although the need is obvious, the infrastructure of the inner city has fallen into dismal disrepair. The capacity of highways and the location of on and off ramps, the inner city's access to rail and airport facilities, and the road and communication links to downtown from the inner city are often inadequate.
Employee skills. Many inner-city residents are not work-force ready and lack the skills to work in all but the most unskilled occupations. With large pools of lower-wage labor available across the globe, many inner-city residents need more than just basic skills. They need skills appropriate to the particular occupations and industries located in or near their communities.
Management skills. Many managers of inner-city companies, like managers of small businesses everywhere, lack formal managerial training, especially in the areas of strategy development, market segmentation, information technology, process design, and cost control. Unfortunately, the quality of the government-sponsored programs that teach those skills is uneven, and entrepreneurs are hard-pressed to find time to attend them.
Access to capital. Poor access to debt and equity capital is a formidable barrier to entrepreneurship and company growth in inner-city areas. Banks and other sources of debt financing are perceived as unfairly withholding capital because of bias, redlining, or poor understanding of inner-city companies. While those problems must be addressed, they are exacerbated by two other conditions. First, relatively few inner-city businesses meet investors' and lenders' underwriting standards. Capital will flow to inner-city companies once viable, competitive businesses are in place. Second, banks find small-business lending only marginally profitable because transaction costs are high relative to amounts lent.
The federal government has made several efforts to address the dearth of debt capital available to inner-city companies. The Community Reinvestment Act (CRA), intended to overcome bias in lending, has forced banks to pay more attention to inner-city areas. Additionally, the Specialized Small Business Investment Company (SSBIC) program of the U.S. Small Business Administration targets smaller enterprises for equity investments. While those efforts help, some of their underlying assumptions are questionable. Far more debt capital is earmarked for business lending in the inner city than has actually been lent. Quasi-government institutions are more risk averse than commercial banks out of fear of losing public money and being accused of mismanagement. The proliferation of special financing sources also leads to fragmentation, duplicates overhead, confuses borrowers, and discourages the development of high-quality, private-sector expertise in minority and inner-city business financing.
Equity capital is all but absent in inner cities. Entrepreneurs usually lack personal or family savings and networks of individuals to draw on for capital. Institutional equity investors have virtually ignored inner-city business opportunities.
Attitudes. Attitude issues exist on at least three levels. First, the private sector has a checkered track record in inner cities, resulting from its disinvestment, redlining, worker exploitation, and environmental pollution. That history has contributed to a general antibusiness attitude within inner-city communities, especially toward companies that are not owned by minorities or local residents. While understandable, that attitude constitutes a significant barrier to current and future economic development. Locally owned or minority-owned businesses are more likely to hire locally, but the hard truth is that inner cities do not have the human or financial capital to revitalize themselves without outside participation. In neighborhoods where the attitude is "development will be on our terms or not at all," the result has been little or no development. Inner cities must welcome outside investors -- as long as the businesses they support provide decent jobs for local residents, do not pollute, and are good citizens.
