The Inner City 100

Understanding the economic potential of the inner cities

The Inner City 100 is a milestone in understanding the economic potential of America's inner cities and, as such, offers a window on the new U.S. economy. The Initiative for a Competitive Inner City (ICIC) has spent the past five years chronicling the competitive potential of inner cities. When we agreed to become partners with Inc. in compiling the first-ever ranking of inner-city growth companies, we expected the findings would be interesting. But even we were surprised by the results. The average annual compound growth rate of the companies on the list is 44%, and they collectively created 4,695 new jobs between 1993 and 1997.

The ICIC has long championed the inner city as a good place to do business because of four competitive advantages of the inner city. The Inner City 100 shows how its promise can be transformed from a theory into a concrete reality.

In the first year more than 200 applicants came forward to nominate themselves as high-growth inner-city companies. By inner city, we mean economically distressed urban areas suffering from unemployment and poverty. The ICIC's research suggests that inner cities contain about 12% of all U.S. urban households. Inner cities are usually distinct from more prosperous central business districts and often surround those areas geographically.

We knew before we compiled the Inner City 100 that there were many businesses in inner cities--a surprise to those who assume that little economic activity exists there because of those communities' well-known problems. For example, our research with the Boston Consulting Group (BCG) documented that Chicago has approximately 15,000 inner-city companies generating $50 billion in annual revenues and employing about 250,000 people.

What competitive advantages do inner cities offer businesses? Our research has revealed four principal ones:

  • a strategic location at the core of major urban areas, highways, and communication nodes with potent logistical advantages;
  • an underutilized workforce with high retention amid a tight overall national labor market;
  • an underserved local market with substantial purchasing power that can support many more retail and service businesses than it now has;
  • opportunities for companies to link up with and provide outsourcing for competitive clusters (for example, health care and tourism) in the regional economy.

The companies on the Inner City 100 list illustrate particularly well how the first three advantages can combine to create explosive growth.

Strategic location. The Inner City 100 companies overwhelmingly supply other businesses and compete on customer service rather than on price. These logistics-savvy, service-intensive companies cite proximity to customers and to transportation infrastructure as the key competitive advantages of their inner-city location. Put simply, they can get their products or services to their customers quickly and efficiently.

At a time when just-in-time services are a premium in the fast-paced economy, inner cities should be some of the most valuable locations in the competitive landscape. Inner cities are the geographical hubs of their regions. The company that tops this year's list, Pac-Van Inc., in Indianapolis, could even be said to lie at the hub of the nation. According to Indianapolis mayor Stephen Goldsmith, Pac-Van is located within a day's drive of 60% of the U.S. market.

Human resources. Over the past 20 years much of the job growth in metropolitan areas has been not at the hub but at the spokes--the suburbs. However, a dramatic shift is occurring in the labor force. For the past few decades the most pressing human-resource issue facing the U.S. economy has been the creation of jobs. Over the next 10 years the critical issue will be finding workers. Growth in the labor supply, projected to be 1.1% a year by the U.S. Census, will fall far short of the demand for labor, which has increased by an annual average of 2.6% over the past two years.

In the new economy the available and growing labor force will be in inner cities. More than 54% of workforce growth will come from minority communities, which are heavily concentrated in cities and inner cities. The challenge for many companies will be to attract, train, and retain that increasingly diverse and urban workforce. Some companies have experimented with transporting urban workers to the suburbs, with mixed results. Ultimately, the shortage of labor and high cost of commuting will make that strategy less and less tenable.