Michael Porter has been studying the inner city for a decade. What started as research into business opportunities in blighted neighborhoods has become a nonprofit organization, the Initiative for a Competitive Inner City, and an annual ranking of the fastest-growing private companies in those areas, which is published in Inc. magazine. Porter recently spoke with senior editor Mike Hofman to outline what he has learned from the project.
What do you hope to accomplish by ranking a hundred companies that are growing fast and happen to have operations in inner city neighborhoods?
The premise is this: No matter what amount of social intervention we engage in, whatever kind of philanthropy or charity there is, communities can't possibly be healthy unless the economy works. So the focus of the Inner City 100 has been to examine the nature of the business base and the opportunities for success in inner cities.
Why a list rather than another kind of project?
The Inner City 100 was first and foremost an effort to prove that there really were businesses that could thrive in these communities. And through finding these companies and talking about them and writing about them, we hoped to help them. We hoped to give them motivation. We hoped to help them develop better relationships and a better image and more recognition. And we hoped to change perceptions in the wider business community because the typical perception of the inner city is that this is not a good place to do business. We now know that there actually are about 800,000 companies located in the economically distressed areas of the 100 largest cities in the United States. This fact alone is a great surprise to most people. And yes, a lot of the 800,000 companies are small but a significant number of them--80,000 of them--gross greater than a million dollars in annual revenue.
And these companies continue to expand?
Right. They're not just clinging by their toenails. They're not just little mom-and-pops. They're not just bumping along. We've got a lot of high-growth companies in these communities, and they've been able to stay in this growth mode for long periods of time.
Given that only 10% of this year's list were unprofitable, could they be growing even faster?
We don't have any evidence of that. I think that these companies have found very, very profitable segments and niches, in many cases directly related to their inner city location and focus. And they have earned superior returns as a result.
Are these companies financially sophisticated?
I wouldn't characterize them as financially sophisticated. They don't like the idea of giving up control, so conservative is perhaps a good word. In many cases, they don't have big enough sights; they don't necessarily think they could be a $100 million company. And even though capital market activity is springing up around these companies, we find that they don't want equity financing if it means they have to give up control over the business. They are much more interested in subordinated debt. This is a maturity thing. When you're more financially sophisticated you understand that having 75% of a smaller company is kind of silly if you could have 45% of a company that's 10 times bigger, you know? But typically, these entrepreneurs have not come from families that have had entrepreneurs in them, and they have not gotten M.B.A. degrees from Harvard and Wharton. And so I think the big issue that Inner City Ventures, our affiliated investment arm, is struggling with is how to help these companies understand the value of outside capital, of equity capital. We are also trying to create new financial products and vehicles that are responsive to the kind of perceived desires and needs of these companies.
Years ago, you identified four advantages of the inner city: access to labor, transportation, local purchasing power, and urban economic clusters such as the tourism and legal industries. Do these four still top the list?
Well, I think that when we survey all these companies, the top two advantages that they hype are access to transportation systems and the available labor force. On labor, we've actually surveyed the companies, and we find that the average turnover rate is somewhat less than 14%, versus the national average of about 20%. So these companies enjoy a more loyal work force, and they are telling us that that is a big deal.
Given the small number of retailers on the 2004 list, is purchasing power no longer as big a deal as you thought? Or did the success of people like Magic Johnson simply draw a lot of competition into this market?
I think it's harder for retailers to grow at the same rates as business services companies. And we've been in an economic downturn for the last two or three years, so the retail finding could be cyclical. But there's been tremendous retail investment in the inner city over the last five years, based in part on research that ICIC did to quantify the vast purchasing power of inner city America. So it's very likely that what you're saying has some merit to it.
Are there any advantages to being in an inner city that you would now add to that original list?
We've found that another locational benefit is access to broadband telecommunications. The inner cities tend to be sitting right on the big cyber hubs, and so getting access to broadband communications is very easy relative to suburban locations, where you may have to build out cyber capacity at your office park yourself. That's rated as an advantage by many of our Inner City 100 CEOs, and a number of businesses that make the list are directly accessing that broadband for some of their key business processes.
And the disadvantages of being in an inner city?
One is the perception of crime--and I emphasize the word perception. You know, in our survey, our CEOs don't believe that actual crime is particularly an issue.
Certainly, national crime statistics have been moving in the right direction for some time.
Right. But the conception that the inner city is somehow a hotbed of crime is still, unfortunately, alive and well. So this is a signal that we have a lot of work to do to communicate that these neighborhoods are indeed quite safe, and in some cases safer than suburban locations. The other disadvantage that pops up over and over again is just the regulatory morass. You know, although there's been one-stop-shop business-development centers and things put up, there's still much too much red tape in cities in terms of selling property and renovating property--getting pretty much anything done. And so we would highlight this as a critical area where mayors and city governments and leaders in metropolitan areas need to get busy.
Is this just the standard complaint against regulation, or do you agree that the regulatory framework in cities is more onerous than it is in the suburbs and elsewhere?
There's no question about it--it's overwhelmingly more complex. Now part of that is inevitable: Where you have a lot of people crammed together you've got to be a little more careful about where you dig and how you build things and all that. But, you know, cities got into the habit of overregulating everything. I remember that it wasn't so long ago that powerful constituencies for most city governments were antibusiness, pro-union, liberal Democratic social service organizations, neighborhoods groups, and church groups. They could go to their alderman or city councilor and could pass legislation so trucks couldn't park near a business because the neighbors didn't like trucks.
We wondered as this economic downturn started whether or not it would obliterate these companies. The answer: Hell, no!
And the situation persists?
Yes. Among all of the 364 companies that are still around that have ever been on the Inner City 100, something like 81% were considering expanding and 99% wanted to do it in the inner city. But when we surveyed companies that left inner cities we found that the No. 1 reason by far--like five times over No. 2--is that they couldn't expand in the time frame they required.
Yet the businesses that remain are doing well.
You know, we wondered as this economic downturn started whether or not it would obliterate inner city companies. And I think we have a pretty resounding answer to that question: Hell, no! They've steamed ahead pretty well. In fact, I suspect that if we looked at the revenue and job security of the average 364 companies in America, we wouldn't see they were anywhere near this group. We'd have seen the recession have an effect.
At a time when there is so much anxiety among workers about job security, the fact that secure jobs can be found in these rundown neighborhoods is somewhat ironic.
And these companies really have a profound, broader impact. Let me just kind of tick off a few of the dimensions of that. First of all, we find that these companies pay higher than average wages. They disproportionately offer health care, retirement benefits, and life insurance. Many of them have programs to help their employees with home ownership. Some of them actually insist that their employees go back to school part-time as a condition of employment. We've also surveyed some of the individuals working for these companies--the employees--and we find that a very large portion of them, like almost 50%, have considered starting their own business as a result of working in the company. So we're finding that these companies are incredible social programs for health care, for home ownership, for education, and for entrepreneurship. I think it's not understood how powerful business is in addressing the social agenda.