The Rise of the Urban Entrepreneur

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.

A second attitude problem is the tendency of community leaders to view business as a means of directly meeting social needs. For example, businesses interested in locating in Boston's inner city have been driven away by demands that they give community-based organizations control over their hiring and training, build playgrounds, and fund scholarships. Businesses exist primarily to earn profits for their owners. They are not, nor should they be, social-services providers. Such demands on business only serve to drive jobs and investment to more welcoming locations.

Instead of intimidating potential inner-city investors with their demands, community-based organizations and their leaders can work to improve the business climate in the inner city. They might, for instance, create referral networks to help companies screen potential employees, help educate the community to the needs of business, and facilitate commercial site development.

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