New strategies for inner-city economic development by: Porter, Michael E

THE ROLE OF COMMUNITY-BASED ORGANIZATIONS

Great effort and funding has been directed at creating and building community-based organizations (CBOs), and many have been remarkably successful in building and managing low-income housing, providing needed services, stabilizing neighborhoods, and re-creating local market demand. They deserve much credit for helping to create the conditions under which the private sector would consider investing.

Now, inner cities are ready to move to the next stage, which will require new strategies from CBOs of all types. Our model, with its focus on private, for-profit initiatives, seems threatening to some CBOs, who see themselves as advising, financing, and owning inner-city companies. It should not be. CBOs can and must play a role in inner-city economic development efforts. But choosing the proper strategy is critical, and many CBOs will have to refocus their activities. CBOs, like every other player, must identify their capabilities, resources, and limitations, and participate in economic development with the right strategy.

In the area of true business development, the record of CBOs is mixed. Although there are a number of noteworthy successes--for example, New Communities Corporation has a majority equity stake in a Pathmark supermarket in Newark's Central Ward, with sales per square foot twice the national average(n65)--the strategy of advising, lending to, or operating businesses is a questionable one for most CBOs. In general, they are not equipped to provide many of the specialized inputs businesses need, and their efforts often end in failure. Moreover, CBOs can and must reach out to private-sector institutions and entities that will be essential to the ongoing growth and development of local communities. It makes little sense to attempt to re-create the expertise and resources that already exist.

Although it is difficult to generalize about such a diverse group of organizations, we believe that CBOs' economic development efforts should be guided by a business-based model. They should seek to build networks with mainstream business institutions (e.g., business schools, banks, corporations, chambers of commerce) instead of attempting to duplicate them. In many cases, CBOs already have strong relationships with the mainstream business community through, for example, efforts to develop affordable housing. These relationships can be leveraged to broker valuable business-to-business connections and resources. Thus, instead of advising businesses directly, CBOs should connect local companies with high-quality existing resources. Instead of setting up a new loan program, they should facilitate access by businesses to financing--first through banks and, failing that, through the myriad of public and quasi-public financing sources already present in most cities.

Many CBOs are also well positioned to address the vexing problem that many inner-city-based businesses hire few or no inner-city residents.(n66) CBOs have, on occasion, responded by demanding that new inner-city companies hire a certain percentage of employees from the local area or by criticizing and ostracizing existing companies that do not hire enough local residents. This approach has backfired in the long run, by driving companies away and contributing to the general perception of a hostile business environment. A more productive approach is to understand the needs and perceptions of local businesses and to develop programs to address them.

The roots of this problem often go beyond poor work ethic, training, and work readiness to issues such as lack of informal networks and employer bias. CBOs, with their networks both in the community and in the private sector, can play an important role in helping overcome these barriers and connecting inner-city residents to nearby jobs. To cite a case study mentioned in my Harvard Business Review article, the South Brooklyn Local Development Corporation (SBLDC) played an important role in connecting local residents to jobs in the Red Hook industrial area, by developing relationships with nearby businesses and screening and referring employees to them.

Finally, CBOs with relevant experience can facilitate site improvement, development, and expansion. We have found that many businesses seeking to expand or locate in the inner city have difficulty finding suitable sites or navigating the approval and permitting process. CBOs often have significant expertise in real estate that could be applied to the development of commercial and industrial property (including site assembly, demolition, and environmental cleanup), identifying appropriate sites for expansion, and assisting companies in the permitting and approval process.

There are many examples of CBOs that are successfully collaborating with businesses. In Boston, the Dorchester Bay Economic Development Corporation was responsible for rehabilitating a building that was then occupied by a Latino-focused supermarket. The supermarket has operated successfully there and has helped revitalize the entire Uphams Corner shopping district. Another example of collaboration is cited by the CEO of First National, a leading supermarket chain:

Cultivating close ties to community groups is the place to start. They can help identify and train local residents who will be reliable workers. Nonprofit community groups may also have development expertise and access to government financing and tax breaks.... It creates trust that dispels the view that outside chains come in to take advantage--a problem that Korean grocers had in Los Angeles and the Arabs in Cleveland.(n67)

These examples do not involve CBOs owning and operating supermarkets but helping to create the conditions whereby private investors and entrepreneurs will invest.

CONCLUSION

Inner cities need new, market-oriented strategies that will build on their strengths and engage the private sector. Inner cities must and can compete. Developing a new strategy will require an understanding of what is unique about each inner city, how to build on its advantages, and a plan to eliminate or reduce the many disadvantages to conducting business. This process will require the commitment and involvement of business, government, and the nonprofit sector.

This approach has been characterized by some as out of step with the globalization of the economy and as nothing more than laissez faire. It is neither. Instead, it reflects the new shape of the postglobal, postrestructuring economy and the actual pattern of competitive success and failure of companies in inner cities. It also reflects the types of intervention by the private sector, CBOs, and government that are truly effective and needed.

The private sector must play a central role, as it has in successful economic development everywhere. The private sector is already investing in inner cities, and this trend can be accelerated by improving perceptions and addressing problems in the inner-city business environment. There is a continuing, vital role for government and for public resources in inner-city economic development to create a favorable environment for business (e.g., assembling and improving sites, training workers, upgrading infrastructure, streamlining regulation). CBOs deserve much credit for helping to create the conditions under which the private sector would consider investing. Now, however, inner cities are ready to move to the next stage, which will require new CBO strategies. CBOs should facilitate private-sector involvement, change attitudes, train residents and link them to jobs, and, when appropriate, develop sites.

As funding for traditional urban programs comes under increasing attack, those of us concerned with inner cities should not be defending failed past approaches. We must stop arguing from exceptions and recognize the rule. Instead of justifying the past, we need to turn our attention to new, market-oriented strategies that will build on strengths and engage the private sector. Although my approach has room for improvement, it is a positive way of moving forward. Despite popular perceptions, there is genuine economic opportunity in inner cities. Working together, we can unlock it.

NOTES

(n1.) There are several definitions of the term "inner city." We use the term to refer to economically distressed urban communities that we have defined, drawing on the literature and federal Empowerment Zone guidelines, as census tracts in which the median household income is no more than 80% of the median for the SMSA and in which the unemployment rate is more than 25% greater than the state average. The term is perhaps most widely understood to mean urban areas that commonly have large minority populations and high levels of poverty, unemployment crime, single parent families, high school dropout rates, and so forth. Because of these realities (and even worse perceptions), some are uncomfortable with the term. Our definition recognizes these realities and perceptions, and attempts to address them bead on.

(n2.) Michael E. Porter, The Competitive Advantage of Nations (New York Free Press. 1990).

(n3.) Atlanta, Baltimore, Boston, Chicago, Los Angeles, Newark, New York City, Oakland and Washington, DC.

(n4.) Given the paucity of attention to inner-city business development, there is little or no comprehensive data yet available on inner-city companies, even in individual cities. Although we have begun to compile such data, this remains an important priority for future research.

(n5.) Richard D. Bingham and Robert Mier, eds., Theories of Local Economic Development: Perspectives from across the Disciplines (Newbury Park, CA: Sage, 1993), p.i.

(n6.) John P. Blair, Local Economic Development (Thousand Oaks, CA: Sage, 1995), p. 22.

(n7.) See analysis of literature of inner-city economic development in Initiative for a Competitive Inner City (ICIC). Dwight Hutchins, and Kate Moriarty, "Benchmarking Theory and Best Practices of Inner City Economic Development" (Unpublished report, Boston, 1996).

(n8.) ICIC and The Boston Consulting Group, "Leveraging Boston's Competitive Advantage: Strategies for Inner City Business Growth" (Unpublished report, Boston, 1996).

(n9.) ICIC, Keba Gordon Linwood Herndon, and Rod Stovall, "A Profile of Atlanta's Inner City Competitivenes" (Unpublished report sponsored by Boral Industries, Atlanta, 1996).

(n10.) See Michael E. Porter, The Competitive Advantage of Nations. A large body of literature is developing around clusters, including, for example, Michael Enright, "Organization and Coordination in Geographically Concentrated Industries," in Coordination and Information: Historical Perspectives on the Organization of Enterprise, ed. Daniel Raff and Naomi Lamoreaux (Chicago: Chicago University Press for the National Bureau of Economic Research, 1995), and idem, "Regional Clusters and Economic Development: A Research Agenda," working paper 94-942. Harvard Business School, Boston, MA, 1994.

(n11.) For a partial discussion of clusters and their relationship to related concepts, see Michael E. Porter, "Comment on `Interaction between Regional and Industrial Policies: Evidence from Four Countries,' by Markusen," in Proceedings of The World Bank Annual Conference of Development Economics 1994, Supplement to The World Bank Economic Review and The World Bank Research Observer, ed. Michael Bruno and Boris Pleskovic (Washington, DC: The World Bank, 1995).

(n12.) Mercer Management Consulting and ICIC, "The Competitive Advantages of Inner City Baltimore" (Unpublished report, Baltimore, 1995).

(n13.) For example, a study by the New York City Department of Consumer Affairs showed one supermarket for every 5,700-7,000 residents of the Upper East Side, Brooklyn Heights, and Upper West Side, but only one supermarket for every 63,818 residents of parts of Williamsburg and Bedford-Stuyvesant (cited in The New York Times, June 6, 1992).

(n14.) Quoted in Susan Diesenhouse, "As Suburbs Slow, Supermarkets Return to Cities," The New York Times, June 27, 1993, p. 5.

(n15.) Quoted in Dana Milbank, "Doing Well: Finast Finds Challenges and Surprising Profits in Urban Supermarkets," The Wall Street Journal, June 8, 1992, p. 1.

(n16.) Quoted in Diesenhouse, "As Suburbs Slow, Supermarkets Return to Cities," p. 5.

(n17.) Chris Reidy, "Shaw's Joins Grocery Run Back to City," The Boston Globe, September 28, 1996. p. 1.

(n18.) For further information on inner-city retailing, see Jon Patricof and Willy Walker, "Inner City Retailing" (Unpublished report for ICIC, Boston 1995) For information on franchising, see Paul Singh, "Inner City Franchising Opportunities" (Unpublished report for ICIC, Boston 1996).

(n19.) ICIC and The Boston Consulting Group, "Leveraging Boston's Competitive Advantage."

(n20.) Craig Horowitz, "A South Bronx Renaissance," New York Magazine, November 21, 1994, p. 54.

(n21.) Laura Bird, "Shunned No More, New York's Harlem Entices Big Chains Seeking Fresh Turf," The Wall Street Journal, July 25,1996, p. B1.

(n22.) Kenneth B. Noble, "Magic Johnson Finding Success in a New Forum," The New York Times, January 8, 1996.

(n23.) Anthony Flint, "Diversity and Dollars at South Bay," The Boston Globe, December 3, 1995, p. 41.

(n24.) Based on ICIC interviews with inner-city supermarket operators nationwide.

(n25.) The management of Delray Farms, interview by ICIC, 1995.

(n26.) Robert Berner, "Urban Rarity: Stores Offering Spiffy Service," The Wall Street Journal, July 25, 1996, p. B1.

(n27.) Richard M. Rosenberg, Chairman and CEO of BankAmerica Corporation, "Banking on the New America The Business Case for Investing in the Inner City" (Speech delivered to the 17th Annual Real Estate and Economics Symposium, U.C. Berkeley Center for Real Estate and Urban Economics, San Francisco, December 14, 1994).

(n28.) This is a program of the Small Business Administration, which provides certain tax benefits and capital to leverage private equity investments in SSBICs, which lend to disadvantaged businesses. The program has been widely criticized, as most SSBICs are undercapitalized and lose money. See Timothy Bates, (Unpublished report to the Small Business Association, 1996), and Roy Furchgott, "Defer Capital Gains on Stock Sales? Here's the Catch," The New York Times, September 8, 1996, Business Section, p. 3.

(n29.) The management of Medallion Funding, interview by ICIC, April 11, 1996.

(n30.) ICIC and The Boston Consulting Group, "Leveraging Boston's Competitive Advantage."

(n31.) ICIC et al., "A Profile of Inner City Competitiveness."

(n32.) Quotations from ICIC interviews in Boston and Oakland, 1995.

(n33.) Chauncy Lennon and Katherine Newman, "Finding Work in the Inner City: How Hard Is ItNow? How Hard Will It Be for AFDC Recipients?" working paper, Russell Sage Foundation, New York, 1995.

(n34.) Quotations from the following: an inner-city Baltimore manufacturer, interview by ICIC, April 1996; an inner-city manufacturing and distribution business in New Jersey and Louisiana, interviewed June 1995; and a manufacturer in Harrison, NJ, letter dated March 1995.

(n35.) Quoted in speech by Treasury Secretary Robert E. Rubin, Los Angeles Town Hall, July 29. 1996.

(n36.) ICIC and The Boston Consulting Group, "Leveraging Boston's Competitive Advantage." Boston Police Department data, 1995.

(n37.) In addition to the direct investment cited earlier. "corporate philanthropy in 1993 totaled $5.3 billion, while during the same period corporations purchased $20.5 billion in goods and services from minority-owned firms; invested $2.2 billion in Low Income Housing Tax Credits; and loaned $37 billion to low and moderate income neighborhoods," ("An Exploration of Corporate Involvement in Community & Economic Development," staff paper, Office of Program-Related Investments, Ford Foundation, June 1995, p. 1).

(n38.) In Boston, beginning in early 1994, ICIC organized a program to marshal in-depth consulting support from experienced MBA students and faculty to help inner-city-based companies realize their competitive advantages. The two-to-four-person teams addressed a range of managerial issues and produced concrete benefits for client companies. Over the past three years, 69 students working on 20 teams have provided consulting services worth an estimated $350,000. In addition, the principals of ICIC and I have provided further assistance to client companies and established relationships with legal, accounting, information technology, and financial partners in the region to provide pro bono services to clients. Overall, since the program began, our clients have created nearly 200 new jobs for inner-city residents, representing over $3,000,000 per year in wage income ICIC is now expanding this program to other cities and business schools.

(n39.) Anonymous, interview by ICIC, 1996.

(n40.) ICIC and The Boston Consulting Group, "Leveraging Boston's Competitive Advantage," and ICIC et al., "A Profile of Atlanta's Inner City Competitiveness." Our findings were similar in the other cities we surveyed.

(n41.) ICIC et al., "A Profile of Atlanta's Inner City Competitiveness."

(n42.) An inner-city Atlanta company, interview by ICIC, 1996.

(n43.) Eric Pooley, "One Good Apple," Time, January 15, 1996, p. 54; George L. Kelling, "How to Run a Police Department," City Journal, Autumn 1995, p. 34.

(n44.) Quoted in Michele Galen, Susan Garland, and Catherine Yang, "Now, Affirmative Action May Help White Men," Business Week, July 31. 1995.

(n45.) See survey led by Margaret Simms done by the Joint Center for Political and Economic Studies (in conjunction with Black Enterprise magazine and the National Minority Supplier Development Council), published in Black Enterprise, June 1996, p. 194. Also, see various studies by Timothy Bates, Wayne State University; and Thomas Boston and Catherine Ross, "Location Preferences of Successful African American-Owned Businesses in Atlanta," The Review Of Black Political Economy: Special Issue on Michael Porter's "Competitive Advantages of the Inner City" (forthcoming).

(n46.) For example, The Lark and Run `N' Shoot, cited earlier, each of which hires more clan 90% of its managers and employees locally, are White-owned. This is also true of the ICIC's clients in Boston that are White-owned.

(n47.) For example, "The citizens of Detroit must contend with a total tax burden that is about seven times higher than the average Michigan municipality" (Stephen Moore, Director of Fiscal Policy Studies, Cato Institute, quoted in The Detroit News, December 19, 1993, p. 3B).

(n48.) A General Accounting Office study found that fewer than 30% of employers cited "financial inducements" as an important location decision factor. Eleven other factors were more important.

(n49.) "Academic studies have found that as little as 15% of the workers in some enterprise zones actually live there" (The New York Times, January 26, 1996). In a Louisville, Kentucky, enterprise zone, only 14% of the jobs created by companies that received tax breaks were filled by people who were unemployed or on welfare (Steven A. Holmes, "Enterprise Zone for Louisville: Past the Limit?" The New York Times, October 31, 1990, p. A18). In Indiana, only 6.35% of manufacturing jobs and 30% of retail jobs went to enterprise zone residents: "A survey of 155 zones in 28 states by the National Center for Enterprise Zone Research found that only 5.3% of zone businesses were minority-owned" (Dan Cordtz "Mainstreaming the Ghetto," Financial World, September 1, 1992, p. 23).

(n50.) See a multitude of studies, including ICIC, Chelli Devadutt, and Julie Fletcher, "A Survey and Analysis of the Inner City Job Training System" (Unpublished report, Boston, May 1995).

(n51.) Jason DeParle, "Debris of Past Failures Impedes Poverty Policy," The New York Times, November 7, 1993.

(n52.) See Bidwell Training Center. Harvard Business School Case Study No. 9-693-087. Cambridge, MA: Harvard Business School, 1993.

(n53.) Robyn Meredith, "An Exit from the Inner City: Training for New Auto Jobs," New York Times, April 21, 1996, p. 10.

(n54.) Michael E. Porter, "The Competitive Advantage of de Inner City," Harvard Business Review 73 (May-June 1995): 55-71.

(n55.) Michael Porter, testimony to the House Ways and Means Committee, Subcommittee on Human Resources, Joint Hearing on H.R. 3467, "Saving Our Children: The American Community Act of 1996," July 30, 1996.

(n56.) In Massachusetts, for example, the number of state regulations written increased from 103 in the 1960s to 375 in the 1970s to 585 in the 1980s. Today, "the complete set occupies eight feet of shelf space, and contains 15 times as many regulations as it did in 1960" (Michael Grunwald, "Quietly, Weld Aides Rewrite the State's Rulebook," The Boston Globe, October 3, 1996, p. 1).

(n57.) Edward O. Welles, "It's Not the Same America," Inc., May 1994, p. 85.

(n58.) Ibid., p. 86.

(n59.) Quoted in John Holusha, "E.P.A. Helping Cities to Revive Industrial Sites," The New York Times, Decemaer 4, 1995, p. A1.

(n60.) Quoted in Philip K. Howard, The Death of Common Sense (New York: Random House, 1994), p. 106.

(n61.) Grunwald, "Quietly, Weld Aides Rewrite the State's Rulebook," p. 1.

(n62.) See John Casey, "Urban Fields of Dreams: From Contaminated Industrial Sites, Jobs and Hope," Business Week May 27, 1996, p. 80.

(n63.) Ibid.

(n64.) Comments made by the CEO of Dreyers Ice Cream at the Holy Names College Business Symposium in October 1995.

(n65.) New Communities Corporation, interview by ICIC, 1996; and Andrew C. Revkin, "A Market Scores a Success in Newark," The New York Times, April 28, 1995.

(n66.) See study of the Red Hook area of Brooklyn by Philip Kasinitz and Jan Rosenberg, "Why Enterprise Zones Will Not Work: Lessons from a Brooklyn Neighborhood," City Journal, Autumn 1993, pp. 63-9. Also, see their latest unpublished work, cited by Malcolm Gladwell, "On the Waterfront, a Clash of Attitudes," The Washington Post National Weekly Edition, March 25-31,1996, p. 34. Also, see study by Shorebank Corporation that shows that, of the nearly 46,000 light manufacturing jobs in the Austin neighborhood of Chicago, fewer than 10% go to local inner-city residents (senior management of Shorebank, interview by ICIC, February 12, 1996). Finally, see various enterprise zone studies cited in note 49.

(n67.) John A. Shields, CEO, First National Supermarkets, quoted in Diesenhouse, "As Suburbs Slow, Supermarkets Return to Cities," p. 5.

GRAPH: Figure 1: Inner-City Competitive Advantages: Baltimore's Unmet Local Demand

AUTHOR'S NOTE: This article has benefited from extensive research and assistance by Whitney R. Tilson, executive director of the Initiative for a Competitive Inner City. I would also like to thank Barbara J. Paige and Ronald A. Homer for their invaluable comments, as well as many other students and individuals whose research over the last several years made this article possible.

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By Michael E. Porter, Harvard Business School/Initiative for a Competitive Inner City

_=Michael E. Porter is the C. Roland Christensen Professor of Business Administration at the Harvard Business School and a leading authority on competitive strategy and international competitiveness. He is the author of 14 books and over 50 articles, and has served as a counselor on competitive strategy to many leading U.S. and international companies and governments.

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Source: Economic Development Quarterly, Feb97, Vol. 11 Issue 1, p11, 17p, 1 graph.