More Tales of the Inner City

A remarkable group of entrepreneurs deserves credit for transforming America's toughest neighborhoods, writes Michael E. Porter. But there is still much that cities can and must do to support these crucial growth companies.

In 1998, my colleagues and I created the Inner City 100, a list of companies that were growing rapidly despite (that is how most people would see it) being located in inner city neighborhoods. My hypothesis was that certain characteristics of inner city communities -- centrality and proximity to transportation nodes, availability of labor, and unmet local market demand -- suggested that companies based in inner cities could actually enjoy a distinct competitive advantage over rivals in the suburbs and elsewhere.

In the years that have followed, the team at the Initiative for a Competitive Inner City, working with Inc. magazine, has identified hundreds of fast-growing inner city companies that do in fact derive competitive advantage from the factors I had identified. We also learned that the advantages were even greater than we had imagined -- centrality meant access to broadband, for example. There was also unmet local demand for business services, not just consumer goods. What we have, then, is a vibrant entrepreneurial economy emerging in neighborhoods that were ravaged a generation ago by violent crime, the drug trade, riots, poverty, and neglect. The aggregate revenue of the 413 firms that have appeared on the seven Inner City 100 lists stands at $7 billion (counting the highest revenue attained by a ranked firm, and subtracting the handful that have gone out of business), and they are growing on average at a compounded 54% per year. But the influence of these companies is not merely economic. They are also powerful engines for social change. They transform neighborhoods and the lives of residents, more so than most any social program.

Of equal importance, they offer us a window onto the future. Significant economic and social forces -- both the positive and the negative -- have historically appeared first in inner city settings. It stands to reason that the businesses that operate in these neighborhoods will face important changes before most others, and that the best companies -- the smartest entrepreneurs -- will master these changes before the rest of us. And yet the good news is tempered by the fact that even the most successful inner city businesses still face daunting obstacles to their continued success -- obstacles that are entirely man-made, as avoidable as they are costly.

Red Tape and Misguided Activism

In the past seven years, the Inner City 100 companies have created 40,000 new jobs, half of which are held by inner city residents. Inner City 100 companies also enhance their communities in a number of other ways, from boosting home ownership to refurbishing buildings. Sometimes they directly address pressing neighborhood concerns, by running charter schools, for example, or providing affordable health care or child care.

This is the economic model for urban revitalization, and it is a virtuous cycle: The more inner city businesses form and grow, the more jobs they create and the more transformation they catalyze in their communities. The economic model offers a powerful alternative to the social model of the past, which favors subsidies, public real estate projects, income assistance, and other programs to support individuals in need. For the economic model to take hold, however, it is imperative that inner city growth companies remain in the city and expand operations locally. And according to our research, 75% of these companies are planning to expand, and all of them would prefer to remain in the inner city. Yet we also find that the single most important reason companies leave the inner city is that they are unable to find a site or otherwise expand in a timely fashion.

City bureaucracy is often to blame. Shortsighted community activists also often drive growing companies out of the very neighborhoods that need them the most. This is tragic. As we have all observed, most inner cities have no dearth of vacant buildings and plots. The problem lies in the fact that available property often consists of small noncontiguous parcels with multiple owners. Assembling the land to create a usable site for a business is a complicated and lengthy process. Municipal governments, though they are starved for tax revenue, nevertheless make life miserable for companies in terms of construction codes and permits. And city, state, and federal agencies often engage in protracted territorial battles over land rather than expediting development.

Meanwhile, community organizations routinely raise objections to business expansion projects. For example, when Cleveland-based real estate developer Rysar Properties (No. 92 on this year's list) tried to expand its headquarters onto a neighboring plot that was vacant, it encountered fierce opposition from a local community group lobbying to build a homeless shelter on the same site. After months of negotiation, the land still lies vacant. The $20 million expansion project, which would have created 50 new jobs by Rysar's estimate, never got off the ground.

Other regulatory and bureaucratic delays drive up costs. Brownfield sites are not uncommon in inner cities. To build on one of them often requires the demolition of existing structures and environmental cleanup, which makes the reclamation of the land expensive. Rather than supporting businesses that seek to reclaim brownfield land, however, many cities have in place archaic laws full of clauses and subclauses that add further time and cost to a project. Instead, cities should see that businesses are their best allies in reclaiming brownfield sites.

Still other easily remedied circumstances stunt the ability of inner city businesses to grow. An innocuous issue like the lack of adequate parking or inadequate access to highway ramps is often enough to hobble business development. In some cities, roads and bridges built over viaducts are too old and narrow to accommodate modern-day vehicles. Take the case of Kim & Scott's Gourmet Pretzels (No. 48). The company's manufacturing facility in Chicago is located in an industrial corridor between housing developments. There is no holding zone for trucks in the area and Kim & Scott's loading zone is inadequate, so the company must pay between $50 and $100 per hour per truck in waiting charges on delivery days. The costs add up: The company receives eight to 10 truck deliveries per week. For now, Kim & Scott's plans to stay in Chicago, preserving 100 jobs. Cities need to be aware of such issues and play a role in helping companies address them. Otherwise, cities stand to lose their winners, as fast-growth companies will be forced to leave the city when they expand.

The best cities and the most effective mayors are addressing these problems head on. Once they do, inner city business development can thrive. For example, in my hometown of Boston, we have an unusual situation. Economic growth in the inner city is outpacing growth in the rest of the city (for our working definition of an inner city, see "What Is an Inner City Company?" on page 94). Mayor Thomas Menino deserves a good deal of credit for this feat. Recognizing that inefficient government departments and processes were stifling entrepreneurship, Menino streamlined city licensing procedures and created the BackStreets program as a one-stop shop to serve the needs of the city's more than 4,000 business owners. Mayors nationwide should follow his lead.

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