Think cities are death to entrepreneurial commerce? Then come see New York or L.A.

New York City's Avenue of the Americas may not be Main Street America, but for Sol Dutka there's no better place to build a fast-growing business. From his large office in a low-rise building in Chelsea, Dutka runs Audits & Surveys Worldwide, a market-research company with more than 600 employees in 60 countries.

With its concentration of ad agencies, designers, software writers, and media, Dutka's native city offers him a veritable cafeteria of talent and potential clients that would be all but impossible to assemble anywhere else. Although, like many New YorkÑbased companies, Audits & Surveys has been approached by states and municipalities with financially attractive incentives that would drastically cut Dutka's tax bill, property costs, and regulatory burden, he intends to stay put.

"To me, New York epitomizes the information and service economy," says Dutka, whose company racked up 1995 sales of nearly $60 million. "New York offers an environment that allows people to grow, to improve their skills. The universities are here, the computer schools -- you can find anything you want. In Springfield, Ill., it's just not the same. Sure, they have talented people -- but here we have them in depth."

* * *

The Valhalla Syndrome

The idea that major cities can be fertile soil for fast-growing businesses reeks of contrarianism. Disenchantment with cities has reached epidemic proportions -- even among city residents. In a recent survey conducted for the Regional Plan Association of New York, only one-third of the residents of metropolitan New York expressed satisfaction with their quality of life, less than any region in the country. And that discontent can be seen in the massive exodus of people (in the past four years more than 861,000 moved out of the New York City area alone), most of them to smaller cities and towns.

The problems facing companies in large metropolitan areas sometimes seem insurmountable. The cost of living in a city like Los Angeles or Philadelphia is as much as 30% above the national average; in Manhattan, it's more than 100% higher. The tax and regulatory burdens companies have to shoulder are also typically much heavier in cities than in small, hinterland communities. But one of the worst drawbacks is that as the major cities have become overpriced, they've become ever more plagued by poverty and despair. Since the urban riots of 1968, the cities' share of the population living beneath the poverty level has grown from 30% to 42% -- despite the expenditure of roughly $2.5 trillion on antipoverty and urban-aid programs.

It's no wonder, then, that quasi-rural "Valhallas" -- once out-of-the-way places like Lancaster, Pa.; Albuquerque, N. Mex.; and Huntsville, Ala. -- have been lionized in the press and among business-development professionals for providing the family-friendly and business-friendly environment no longer available in large metropolitan areas.

Yet even as the Valhalla syndrome captivates corporate executives and journalists as well as weary urbanites, there are signs that cities -- from New York and Philadelphia in the East to Los Angeles and San Francisco in the West -- are reinventing themselves. Equally important, the urban economies themselves appear to be undergoing an enormous, albeit painful, transformation.

As government, traditional middle-management, and mass-manufacturing jobs vanish from the urban landscape, new jobs are springing up in industries like entertainment, specialty manufacturing, international trade, and consulting. After a near-disastrous half decade marked by net job losses, New York City showed a net increase of some 34,000 jobs in 1994 and 1995, most of them in business services, the arts and culture, and tourism. In 1995 business-service employment in New York grew by 5,000 jobs, a healthy 2.2% gain, while film and video production made a gain of 10%.

The most persuasive evidence of an urban comeback, however, comes from the other coast. Last year both the San Francisco and San Jose areas generated legions of new jobs -- 20,000 in San Francisco and as many as 40,000 in the San Jose area. Those jobs cropped up largely in high-end business services and communications (which also happened in New York), as well as in high-tech manufacturing, which has hit a rebound. But the real surprise may be found in Los Angeles, which saw a boom in job growth in both 1994 and 1995. Last year at least 70,000 to 90,000 net new jobs were created in Los Angeles. As in New York, the job creators -- in fields such as international trade, services, and entertainment -- were finally beginning to exceed continued losses in middle management, government, aerospace, and traditional manufacturing jobs.

That certain industries are not only surviving but thriving in some cities reflects not so much the general competitive edge of cities as much as the specific strengths of individual urban regions. New York City, for example, is still the advertising, communications, and graphics mecca of North America. Southern California, with its talent in design and movie and television production, has emerged as the 20th century's global capital for mass culture. Madison Avenue hasn't moved to downtown Lancaster, nor has Hollywood shifted its center of operations to Phoenix or Boise.

At the same time, it's clear that some urban areas, particularly those without well-developed service-oriented industries, may not fare that well. "In this transition some cities may actually get worse," predicts Mitchell L. Moss, director of the Taub Urban Research Center at New York University's Wagner Graduate School of Public Service. "There's no reason for a Newark, a Camden, or a Detroit to get back. But there are cities that will flourish. They will be those that can attract people because of a particular industry, a university, an entertainment, something they can offer."

* * *

The Information Revolution

The roots of the cities' resurgence can be found in a massive transformation taking place in the world economic structure. Information is beginning to replace industrial production as the economy's driving force. That's why urban areas with a concentration of knowledge-intensive industries are making a comeback; their areas of strength are those that can generate high-wage jobs. Meanwhile, agriculture, mass manufacturing, and retailing -- the traditional backbone of rural Valhallas -- require increasingly fewer workers and in many cases provide largely low-wage employment. The once-torrid growth in states of the Valhallan hinterland -- such as Colorado, Utah, Arizona, and North Carolina -- shows definite signs of slowing.

When it comes to knowledge-intensive industries, one advantage of urban areas is their ability to promote interaction among companies, their customers, and their suppliers, enhancing the flow of information and the exchange of ideas. To a large extent, notes Sol Dutka, that's why market-research and other high-end business-service companies originated, and have continued to flourish, in the New York City area, even as whole other industries have fled to the hills. The higher fixed costs of doing business in a place like Manhattan -- tax, regulatory, housing, and labor costs, for example -- are more than balanced by the advantages of being close to the "action."

Take Audits & Surveys, which Dutka launched with $15,000 in 1953. Combining the statistician's precision he developed while working on the Manhattan Project during World War II with a long-standing interest in the dynamics of human behavior, he offered clients specialized insights that their own market-research staffs often failed to perceive. Dutka says that New York's density of service providers, academics, think tanks, and artists has provided a powerful strategic advantage -- even for out-of-town clients like Coca-Cola, AT&T, and Ford. And their proximity helps him give clients better information and speedier turnaround. "I can get 24-hour service for anything in New York, whether it's in graphics, getting extra time on someone's computer, or getting something photographed," he says. "It's terribly important. You want a consultant or a technician? You can get one at a minute's notice."

Dutka's perceptions are clearly shared. New York City continues to dominate the world of high-end business services. Today, of the top 50 market-research companies in the country, 6 are in New York, by far the most in any urban area. Equally impressive, the New York metropolitan region boasts 14 of those top 50 companies; no other region claims more than 3. The city's primacy extends across a large number of service fields, particularly in finance and international trade.

* * *

The Rise of the Digital City

Despite all the talk about "lone eagles" operating from their high-tech aeries in the country, perhaps the best example of the urban resurrection lies in the "electronic cottage," or home-based business. The 10 highest concentrations of electronic cottages are found not in Charlotte, Boulder, or Bend, but in decidedly urban areas such as downtown San Diego; midtown and downtown Manhattan; Beverly Hills; Santa Monica; and Berkeley, Calif. (See "The 10 Highest Concentrations of Electronic Cottages," below.)

Similarly, the largest colonies of the hottest new branch of the communications industry -- multimedia companies -- are in urban areas. Most major developments in new communications technologies have come out of the San Francisco Bay Area or Southern California, which together account for roughly 60% of the total industry, or from centers in cities like Seattle or New York.

By settling in the cities, the new digital-communications industries are beginning to reverse the trend of migration to the edge cities and rural Valhallas seen in the recent past. Much of the Bay Area's multimedia industry, for example, is clustered not in Silicon Valley but in the urban core of San Francisco.

With its ties to Silicon Valley and its well-developed network of services for large corporations, San Francisco is a natural location for the development of Web sites and kiosks. But what's surprising is Manhattan's rise as a key center of the multimedia industry. New York City, an almost complete nonentity in the personal-computer explosion of the 1980s, now boasts as many as 50,000 people working in a diverse array of multimedia enterprises. That, notes Steve Schklair, vice-president of new media at Digital Domain, in Venice, Calif., is linked intimately with the city's traditional strength in communications and publishing.

But it's in Los Angeles that the multimedia revolution may be finding its fullest expression. Los Angeles has more multimedia companies than any U.S. city. And as in New York City and the Bay Area, much of the L.A. interactive and multimedia scene is clustered not in the edge cities but closer to the historic core of the city. The lion's share of the roughly 150,000 people in multimedia in Southern California, according to regional economist Rohit Shukla, work in urban Los Angeles County.

Why the multimedia explosion in L.A.? As with the boom in business services, it all has to do with the way the entertainment industry continues to flourish and grow in the Los Angeles basin. Although low-cost states such as Nevada, Arizona, Utah, Oregon, and North Carolina made valiant efforts in the field, last year Southern California gave birth to 439 of the nation's 720 film-industry start-ups. That was 100 more film start-ups than Southern California had seen the previous year. And it was more than the total number of film start-ups for the next three leading film-producing states combined. Only New York State, with 73 start-ups, even broke above 20 start-ups.

When you combine the massive L.A. entertainment industry with the slew of high-tech companies in Silicon Valley and Orange County, you get the perfect laboratory for producing multimedia businesses. "If there was ever a crucible in which the two things are fused together, it's the World Wide Web, because it's both a computer medium and an entertainment medium," suggests Norman Hajjar, the developer of Radio HK, the first radio station that broadcasts exclusively over the Internet. "This is where the computer melting pot takes place."

In many ways, the coastal strip of Los Angeles has become the Lower East Side for Hajjar's "computer melting pot." Drawn by cheap rent (a legacy of the aerospace-industry collapse), media-related businesses have crowded into abandoned factories, offices, and warehouses.

Hollywood also provides the business model that Internet companies like Hajjar's use. Just as a producer pulls a team of actors, writers, and technicians together to work on a motion picture, the new Internet companies skillfully combine people from the large local pool of talent -- freelance writers, artists, and musicians, as well as hackers -- to develop their innovative offerings. What's more, the studios, advertising agencies, theme-park developers, and other businesses in Southern California's entertainment-industry complex are all markets the digital-products companies can exploit.

* * *

The Sociology of Innovation

The biggest advantage of being in cities like Los Angeles, however, has less to do with customers in suits than it does with kids in jeans. At companies like Rhythm and Hues, whose credits include the animation effects for the hit movie Babe, the average age of the animators is 27.

"The real competition in the business now is for talent, and it's ferocious," notes Rhythm and Hues' founder John Hughes. "Our ideal person is someone who's very strong in math or engineering or technology and has a second degree in art, whether it is in photography or sculpture or illustration. Those people are very hard to find."

Cities, with their tolerance for experimentation, their nightclubs, concerts, and museums, and their lively singles scenes, lure young artists. The same streets that may seem like a dead end for aging construction workers and aerospace managers provide an ideal environment for ambitious young graphic artists, animators, and interactive-game designers. Indeed, even as Los Angeles, Chicago, San Francisco, and New York were losing residents in the early 1990s, young, well-educated people continued to flow into those urban centers.

Urban universities draw another kind of raw young talent to the cities. A recent survey of top graduate departments in such fields as biomedical engineering, electrical engineering, mathematics, computer science, and neurosciences found that the vast majority of them were located in a handful of urban areas, notably the Bay Area, Los Angeles, San Diego, New York City, and Boston.

* * *

Global Ties

Entrepreneurs who set up shop in major cities can tap one resource their country cousins cannot: an international workforce. That's one of the payoffs of the massive wave of immigration that hit key urban centers during the 1980s, when upwards of three-quarters of America's 10 million immigrants settled in a small number of urban states, with New York and California accounting for roughly half that total. Today 8 of the nation's 10 most diverse counties are located in the Bay Area, greater New York, and the Los Angeles area.

Many of the companies in the industries that now cluster in metro areas -- textiles, design, movie production, fine arts, graphics, and specialized trading services, for example -- rely on labor, capital, and expertise from around the world. At Rhythm and Hues nearly half of the roughly 170 employees are foreigners. And at Audits & Surveys, Sol Dutka's hires reflect the changing population base in the New York area, which includes many Russian Jews and Koreans, as well as other Asians.

For Dutka, the son of Czech Jewish immigrants, those newcomers provide an understanding both of foreign markets and of America's own changing demographics. "How many people in Greensville or Charlotte know about East Indians or Koreans -- both big markets?" Dutka asks. "How would you know there are five different kinds of Hispanics -- and each one is a different market?"

Besides helping to link urban businesses to the increasingly global marketplace, immigrants are rebuilding urban economies. They're reenergizing areas like New York's Long Island City and Flushing, where they're establishing companies in the food-processing and garment industries. But the place that's profiting the most from immigration is, once again, California. Not only have immigrant entrepreneurs and workers helped turn Los Angeles into the garment and light-manufacturing center of the country, but many are also beginning to bring new ideas to the industrial base. Today the Fashion Institute in downtown Los Angeles has students from 56 countries, and close to 60% of its students are Asian and Latino. The look of Los Angeles, the world's center for casual fashion and sportswear, reflects the aesthetics as well as the hard work of the newcomers.

Immigrants have helped transform Los Angeles from a defense-dependent trade backwater into the nation's largest trading center. A prime example of that phenomenon -- and of the advantageous international connections immigrants bring to the table -- is Charlie Woo, who fathered a whole new industry in the city.

When Woo first came to Southern California from Hong Kong, in 1968, he had plans to become a physicist. But shortly before he finished his Ph.D., his family asked him to help set up a business importing toys from Hong Kong to Los Angeles. Woo discovered a largely deserted old district east of downtown L.A. that once had housed small factories and warehouses. "No one wanted to be here," he recalls. "It was totally dead."

Unperturbed, Woo set up his own toy-distribution business there. Using his Asian connections, he procured large volumes of toys. Anglo distributors claimed they needed a 50% to 100% margin on their toys. Woo, taking advantage of his low-cost location, found he was making a nice profit with a 15% to 25% cushion.

As his business grew Woo invited other distributors to join him. Today Woo's MegaToys has plenty of company. More than 500 toy distributors have located in or near the area now known as Toytown. Like Woo, most of the proprietors of Toytown businesses are immigrants -- Vietnamese, Chinese, Latino, and Korean. So, too, are most of the customers in the district, which now employs some 6,000 workers and has revenues estimated as high as $1 billion.

On weekdays, and particularly on weekends, Toytown is crammed with shoppers, including representatives from toy stores as far away as Argentina. They come not only for bargains, Woo suggests, but also for the design skills, packaging, and intelligence about toy trends that the Toytown entrepreneurs provide.

* * *

Back-to-the-Future Cities

The challenge for cities of the future will be to seek out ways to nurture the growth of a new economy based on smaller, more specialized, and more flexible enterprises and not on traditional corporate giants. Ultimately, that may mean rethinking long-established planning and development mind-sets, which have traditionally fixated on huge office complexes -- the prototypical symbol of the city of the industrial age.

It's likely no happenstance that the new creative industries in San Francisco are not in the financial district but in the somewhat seedier, low-rise districts south of Market. And in Los Angeles, whose greatest blessing may well be the relative unimportance of its struggling downtown, the new digital industries are concentrated in the more villagelike atmosphere of the Marina, Venice, Santa Monica, and Burbank.

That emerging pattern can be seen even in New York, where multimedia businesses and high-end business-service companies like Dutka's Audits & Surveys now congregate in airy, lower-rise districts such as Chelsea, Tribeca, and Soho. It's there -- among the remnants of an older New York -- that the future of Gotham is likely to be spawned.

Indeed, like early-19th-century New York, the future city will rely not on its bulk or on hegemonic control of industry but on its skills as a trading and commercial center. Even as both the conventional blue-collar worker and the middle manager "in the gray flannel suit" become rarer, the city will be reinvented by less-conventional archetypes -- the artist, the computer programmer, and the global-trade expert, as well as the entrepreneur from Taiwan and the craftsperson from Guyana.

That does not imply that the rural Valhallas will not continue to grow. Industries that don't require high skills will continue to migrate to the greener -- and cheaper -- pastures of the hinterland. But when it comes to amassing the information for key corporate decisions, cutting the big deals, and providing the images and sounds for the world marketplace, the cities, so often dismissed as impractical and even pestilential, will remain at the heart of the action.

So, for Sol Dutka, the costs -- like the taxes, the regulation, and the other urban annoyances -- are more than worth it. By staying in the midst of a dynamic urban setting, Dutka believes, his workers are almost forced to become more creative and, in the long run, more productive for his business. "There's a psychic value to lifestyle," Dutka explains. "The whole purpose of a manager is to get the most from people. That's something New York does for you."

* * *

Joel Kotkin (jkotkin@earthlink.net), who is based in Los Angeles, is a senior fellow with the Pepperdine Institute for Public Policy, in Malibu, and the Pacific Research Institute, in San Francisco. Research assistance for this article was provided by Mary Furash.


THE 10 HIGHEST CONCENTRATIONS OF ELECTRONIC COTTAGES

Area % of residents who work at home

Downtown San Diego 9.4%

Midtown Manhattan 7.1%

Downtown Manhattan 7.0%

Century City/Beverly Hills, Calif. 6.4%

Bethesda/Chevy Chase, Md. 6.1%

Austin, Tex. 6.0%

Berkeley, Calif. 5.5%

Greenwich, Conn. 5.5%

Calabasas/101 Freeway, Calif. 5.2%

Santa Monica, Calif. 5.2%

* * *

Source: The Edge City News, the Edge City Group, Broad Run, Va., 1996. n

* * *