Michael E. Porter (1995) "The Competitive Advantage of the Inner City,"
Harvard Business Review (May/June), pp. 55+.

Michael E. Porter is the C. Roland Christensen
Professor of Business Administration at the Harvard Business School in
Boston, Massachusetts.

ABSTRACT:

The economic distress of America's inner cities may be the most pressing
issue facing the nation. The lack of businesses and jobs in disadvantaged
urban areas fuels not only a crushing cycle of poverty but also crippling
social problems such as drug abuse and crime. And, as inner cities continue
to deteriorate, the debate on how to aid them grows increasingly divisive.

The sad reality is that the efforts of the past several decades to
revitalize inner cities have failed. The establishment of a sustainable
economic baseand with it employment opportunities, wealth creation, role
models, and improved local infrastructure -- still eludes us despite the
investment of substantial resources.

The time has come to recognize that revitalizing the inner cities will
require a radically new approach. While social programs will continue to
play a critical role in meeting human needs and improving education, they
must support -- and not undermine -- a coherent economic strategy. The
question we should be asking is how innercity-based businesses and nearby
employment opportunities for inner city residents can proliferate and grow.
A sustainable economic base can be created in the inner city, but only as it
has been created elsewhere: through private, for-profit initiatives and
investment based on economic self-interest and genuine competitive
advantage.

An economic model must begin with the premise that inner city businesses
must be profitable and positioned to compete on a regional, national, and
even international scale. Our policies and programs have fallen into the
trap of redistributing wealth. The real need -- as well as the real
opportunity -- is to create wealth.
 

THE COMPETITIVE ADVANTAGE OF THE INNER CITY

The economic distress of America's inner cities may be the most pressing
issue facing the nation. The lack of businesses and jobs in disadvantaged
urban areas fuels not only a crushing cycle of poverty but also crippling
social problems, such as drug abuse and crime. And, as the inner cities
continue to deteriorate, the debate on how to aid them grows increasingly
divisive.

The sad reality is that the efforts of the past few decades to revitalize
the inner cities have failed. The establishment of a sustainable economic
base -- and with it employment opportunities, wealth creation, role models,
and improved local infrastructure -- still eludes us despite the investment
of substantial resources.

Past efforts have been guided by a social model built around meeting the
needs of individuals. Aid to inner cities, then, has largely taken the form
of relief programs such as income assistance, housing subsidies, and food
stamps, all of which address highly visible -- and real -- social needs.

Programs aimed more directly at economic development have been fragmented
and ineffective. These piecemeal approaches have usually taken the form of
subsidies, preference programs, or expensive efforts to stimulate economic
activity in tangential fields such as housing, real estate, and neighborhood
development. Lacking an overall strategy, such programs have treated the
inner city as an island isolated from the surrounding economy and subject to
its own unique laws of competition. They have encouraged and supported
small, subscale businesses designed to serve the local community but ill
equipped to attract the community's own spending power, much less export
outside it. In short, the social model has inadvertently undermined the
creation of economically viable companies. Without such companies and the
jobs they create, the social problems will only worsen.

The time has come to recognize that revitalizing the inner city will require
a radically different approach. While social programs will continue to play
a critical role in meeting human needs and improving education, they must
support -- and not undermine -- a coherent economic strategy. The question
we should be asking is how inner-city-based businesses and nearby employment
opportunities for inner city residents can proliferate and grow. A
sustainable economic base can be created in the inner city, but only as it
has been created elsewhere: through private, for-profit initiatives and
investment based on economic self-interest and genuine competitive advantage
-- not through artificial inducements, charity, or government mandates.

We must stop trying to cure the inner city's problems by perpetually
increasing social investment and hoping for economic activity to follow.
Instead, an economic model must begin with the premise that inner city
businesses should be profitable and positioned to compete on a regional,
national, and even international scale. These businesses should be capable
not only of serving the local community but also of exporting goods and
services to the surrounding economy. The cornerstone of such a model is to
identify and exploit the competitive advantages of inner cities that will
translate into truly profitable businesses.

Our policies and programs have fallen into the trap of redistributing
wealth. The real need -- and the real opportunity -- is to create wealth.

Toward a New Model: Location and Business Development

Economic activity in and around inner cities will take root if it enjoys a
competitive advantage and occupies a niche that is hard to replicate
elsewhere. If companies are to prosper, they must find a compelling
competitive reason for locating in the inner city. A coherent strategy for
development starts with that fundamental economic principle, as the
contrasting experiences of the following companies illustrate.

Alpha Electronics (the company's name has been disguised), a 28-person
company that designed and manufactured multimedia computer peripherals, was
initially based in lower Manhattan. In 1987, the New York City Office of
Economic Development set out to orchestrate an economic "renaissance" in the
South Bronx by inducing companies to relocate there. Alpha, a small but
growing company, was sincerely interested in contributing to the community
and eager to take advantage of the city's willingness to subsidize its
operations. The city, in turn, was happy that a high-tech company would
begin to stabilize a distressed neighborhood and create jobs. In exchange
for relocating, the city provided Alpha with numerous incentives that would
lower costs and boost profits. It appeared to be an ideal strategy.

By 1994, however, the relocation effort had proved a failure for all
concerned. Despite the rapid growth of its industry, Alpha was left with
only 8 of its original 28 employees. Unable to attract highquality employees
to the South Bronx or to train local residents, the company was forced to
outsource its manufacturing and some of its design work. Potential suppliers
and customers refused to visit Alpha's offices. Without the city's attention
to security, the company was plagued by theft.

What went wrong? Good intentions notwithstanding, the arrangement failed the
test of business logic. Before undertaking the move, Alpha and the city
would have been wise to ask themselves why none of the South Bronx's
thriving businesses was in electronics. The South Bronx as a location
offered no specific advantages to support Alpha's business, and it had
several disadvantages that would prove fatal. Isolated from the lower
Manhattan hub of computer-design and software companies, Alpha was cut off
from vital connections with customers, suppliers, and electronic designers.

In contrast, Matrix Exhibits, a $ 2.2 million supplier of trade-show
exhibits that has 30 employees, is thriving in Atlanta's inner city. When
Tennessee-based Matrix decided to enter the Atlanta market in 1985, it could
have chosen a variety of locations. All the other companies that create and
rent tradeshow exhibits are based in Atlanta's suburbs. But the Atlanta
World Congress Center, the city's major exhibition space, is just a
six-minute drive from the inner city, and Matrix chose the location because
it provided a real competitive advantage. Today Matrix offers customers
superior response time, delivering trade-show exhibits faster than its
suburban competitors. Matrix benefits from low rental rates for warehouse
space-about half the rate its competitors pay for similar space in the
suburbs -- and draws half its employees from the local community. The
commitment of local police has helped the company avoid any serious security
problems. Today Matrix is one of the top five exhibition houses in Georgia.

Alpha and Matrix demonstrate how location can be critical to the success or
failure of a business. Every location -- whether it be a nation, a region,
or a city -- has a set of unique local conditions that underpin the ability
of companies based there to compete in a particular field. The competitive
advantage of a location does not usually arise in isolated companies but in
clusters of companies -- in other words, in companies that are in the same
industry or otherwise linked together through customer, supplier, or similar
relationships. Clusters represent critical masses of skill, information,
relationships, and infrastructure in a given field. Unusual or sophisticated
local demand gives companies insight into customers' needs. Take
Massachusetts's highly competitive cluster of information-technology
industries: it includes companies specializing in semiconductors,
workstations, supercomputers, software, networking equipment, databases,
market research, and computer magazines.

Clusters arise in a particular location for specific historical or
geographic reasons -- reasons that may cease to matter over time as the
cluster itself becomes powerful and competitively self-sustaining. In
successful clusters such as Hollywood, Silicon Valley, Wall Street, and
Detroit, several competitors often push one another to improve products and
processes. The presence of a group of competing companies contributes to the
formation of new suppliers, the growth of companies in related fields, the
formation of specialized training programs, and the emergence of
technological centers of excellence in colleges and universities. The
clusters also provide newcomers with access to expertise, connections, and
infrastructure that they in turn can learn and exploit to their own economic
advantage.

If locations (and the events of history) give rise to clusters, it is
clusters that drive economic development. They create new capabilities, new
companies, and new industries. I initially described this theory of location
in The Competitive Advantage of Nations (Free Press, 1990), applying it to
the relatively large geographic areas of nations and states. But it is just
as relevant to smaller areas such as the inner city. To bring the theory to
bear on the inner city, we must first identify the inner city's competitive
advantages and the ways inner city businesses can forge connections with the
surrounding urban and regional economies.

The True Advantages of the Inner City

The first step toward developing an economic model is identifying the inner
city's true competitive advantages. There is a common misperception that the
inner city enjoys two main advantages: low-cost real estate and labor. These
so-called advantages are more illusory than real. Real estate and labor
costs are often higher in the inner city than in suburban and rural areas.
And even if inner cities were able to offer lower-cost labor and real estate
compared with other locations in the United States, basic input costs can no
longer give companies from relatively prosperous nations a competitive edge
in the global economy. Inner cities would inevitably lose jobs to countries
like Mexico or China, where labor and real estate are far cheaper.

Only attributes that are unique to inner cities will support viable
businesses. My ongoing research of urban areas across the United States
identifies four main advantages of the inner city: strategic location, local
market demand, integration with regional clusters, and human resources.
Various companies and programs have identified and exploited each of those
advantages from time to time. To date, however, no systematic effort has
been mounted to harness them.

Strategic Location. Inner cities are located in what should be economically
valuable areas. They sit near congested high-rent areas, major business
centers, and transportation and communications nodes. As a result, inner
cities can offer a competitive edge to companies that benefit from proximity
to downtown business districts, iogistical infrastructure, entertainment or
tourist centers, and concentrations of companies.

For example, Boston's food processing and distribution industry gains a
competitive edge from its inner city location in Newmarket Square. The
industry consists of such businesses as seafood importers, meat processors,
bakeries, and food distributors. Because they are near downtown Boston,
these businesses can make rapid deliveries, and downtown buyers have a
convenient location at which to purchase goods. Land, although more costly
than in the suburbs, is cheaper in the inner city than it is downtown, and
zoning regulations permit food processing operations. Newmarket Square has
excellent access to trucking as well as sea and air transport, which
provides it with a particular competitive advantage in the export of
seafood. The combination of those factors has produced a dense concentration
of processors, caterers, truckers, wholesalers, distributors, and other
suppliers in the inner city.

Although the location of Boston's food processing cluster has historic roots
that predate the modern inner city, examples of newly formed companies
underscore how critical an advantage proximity can be. Consider the catering
supplier Be Our Guest. Founded in 1984, the company rents linens, party
equipment, and other hard goods associated with the catering business.
Located in Boston's inner city neighborhood of Roxbury, the company enjoys
immediate and easy access to downtown Boston. As a result, it is able to
offer a higher level of service to customers than its competitors can. To
reinforce its service strategy, Be Our Guest maintains sufficient inventory
levels to meet peaks in demand. Today the company has 36 full-time employees
and annual sales of $ 1.2 million.

In Boston and Los Angeles, it is striking how many of the businesses that
have remained in the inner city in the face of numerous difficulties are
ones for which location matters. For example, both cities have a
concentration of logistics and storage businesses. Advances in
transportation and communications may have reduced the importance of
location for some kinds of businesses. However, the increasing importance of
regional clusters and of such concepts as just-in-time delivery, superior
customer service, and close partnerships between customers and suppliers are
making location more critical than ever before.

There is significant potential, then, for expanding the inner-city business
base by building on the advantage of strategic location. Among the initial
prospects are location-sensitive industries now situated elsewhere, nearby
companies and industries that face space constraints, and back-office or
support functions amenable to relocation or outsourcing. Consider Boston's
Longwood medical area, a huge concentration of world-class health care
facilities. Longwood is located near the inner city neighborhoods of Roxbury
and Jamaica Plain. Today such activities as laundry services, building
maintenance, and just-in-time delivery of supplies are performed in-house or
by suburban vendors. But, because of Longwood's proximity to the inner city,
activities like these could be shifted to businesses based in Roxbury or
Jamaica Plain -- especially if basic infrastructure such as roads could be
improved.

Local Market Demand. The inner city market itself represents the most
immediate opportunity for inner-city-based entrepreneurs and businesses. At
a time when most other markets are saturated, inner city markets remain
poorly served -- especially in retailing, financial services, and personal
services. In Los Angeles, for example, retail penetration per resident in
the inner city compared with the rest of the city is 35% in supermarkets,
40% in department stores, and 50% in hobby, toy, and game stores.

The first notable quality of the inner city market is its size. Even though
average inner city incomes are relatively low, high population density
translares into an immense market with substantial purchasing power.
Boston's inner city, for example, has an estimated total family income of $
3.4 billion. Spending power per acre is comparable with the rest of the city
despite a 21% lower average household income level than in the rest of
Boston, and, more significantly, higher than in the surrounding suburbs. In
addition, the market is young and growing rapidly, owing in part to
immigration and relatively high birth rates.

A handful of forward-looking entrepreneurs have recognized the opportunities
for profit and growth in this large, underdeveloped market and have opened
retail outlets in the inner city. Chicago's historic retailer Goldblatt
Brothers found new life after bankruptcy with a strategy built on inner city
stores. In 1981, the company closed all its stores but six profitable ones
located in the inner city. Focusing on cash-and-carry items and offering
goods at closeout prices, Goldblatt Brothers has reemerged as a competitive
retailer. Today the company has 14 stores, most of which are located in
Chicago's inner city. Similarly, Stop & Shop and Purity Supreme are opening
new stores in the inner city of Boston.

Another important quality of the inner city market is its character. Most
products and services have been designed for white consumers and businesses.
As a result, product configurations, retail concepts, entertainment, and
personal and business services have not been adapted to the needs of inner
city customers. Although microsegmentation has been slow to come to the
inner city, it holds promise for creating thriving businesses.

Inner city consumers, in fact, represent a major growth market of the
future, and companies based in the inner city have a unique ability to
understand and address their needs. For example, Miami-based, Latino-owned
CareFlorida has rapidly expanded its HMO business by tailoring its marketing
to Latino customers. And Detroit's Universal Casket has grown to $ 3 million
in sales by focusing on African-American-owned funeral homes. Many of the
largest and most enduringly successful minority-owned (although not
necessarily innercity-based) businesses have drawn their advantages from
serving inner city residents' cultural and ethnic needs in fields such as
food products (Parks Sausage and Brooks Sausages); beauty care (Soft Sheen,
Proline, Dudley, Luster Products, and Johnson Products); and media (Essence,
Earl Graves, Johnson Publishing, and Black Entertainment Television).
Although inner city businesses need not be limited to serving local needs,
this kind of focused strategy is one way to gain a clear competitive
advantage over established businesses such as Procter & Gamble, Safeway, and
Levi Strauss.

More important, businesses catering to local demand have the potential to
expand beyond the inner city and become major players. Companies can target
and sell not only to their own local communities but also to similar
communities nationally and even internationally. Consider Americas' Food
Basket, a Cuban-owned supermarket based in Boston's inner city. In its
second year of operation, the company has reached sales of $ 8 million
annually and is profitable. It has developed a product mix that satisfies
local demand better than mainstream supermarkets do. Its management's strong
relationship with the community has reduced security problems and employee
turnover. Unlike other nearby mom-and-pop stores, Americas' Food Basket has
developed a partnership with a leading national wholesaler that provides
goods and financing at competitive rates. As a result, its selection,
prices, and service are far superior to those of smaller competitors. More
important, Americas' Food Basket shows signs of becoming a major regional
business by seeking ways to export its goods to the surrounding region. It
is currently expanding into wholesaling with a start-up called Selmac
Corporation. Selmac will supply mainly Latino products to Americas' Food
Basket and to small bodegas throughout the inner city and the surrounding
region. It also plans to bid on contracts to supply wholesale food services
to schools, prisons, and other institutions throughout Massachusetts.

Tailored retailing concepts in a broad range of areas such as food,
clothing, pharmaceuticals, toys, books, and restaurants could also set off a
chain reaction of opportunities: Companies create demand for new types of
products, which in turn creates new opportunities for manufacturers of
specialized products. For example, tailored supermarkets are increasing the
demand for established ethnic food producers and distributors such as Goya
Foods, a supplier of Latino foods with annual sales of approximately $ 500
million. Such stores also represent a critical distribution channel for
recent startups such as Glory Foods, which sells canned foods targeted at
African-American consumers.

The most intriguing attribute of the inner city market is its potential to
be a leading indicator of major nationwide trends. The tastes and
sensibilities of inner city communities are cutting-edge in a number of
respects and often become mainstream. Popular music is one example. Or
consider Parks Sausage, based in Baltimore, Maryland, which developed its
food products for African-American consumers but has found a receptive
market nationally. Today it is competing head-to-head with Jimmy Dean
Sausage, the industry leader.

Ultimately, what will attract the inner city consumer more than anything
else is a new breed of company that is not small and high-cost but a
professionally managed major business employing the latest in technology,
marketing, and management techniques. This kind of company, much more than
exhortation, will attract spending power and recycle capital within the
inner city community.

Integration with Regional Clusters. The most exciting prospects for the
future of inner city economic development lie in capitalizing on nearby
regional clusters: those unique-to-a-region collections of related companies
that are competitive nationally and even globally. For example, Boston's
inner city is next door to world-class financial-services and health-care
clusters. South Central Los Angeles is close to an enormous entertainment
cluster and a large logistical-services and wholesaling Complex.

The ability to access competitive clusters is a very different attribute --
and one much more far reaching in economic implication -- than the more
generic advantage of proximity to a large downtown area with concentrated
activity. Competitive clusters create two types of potential advantages. The
first is for business formation. Companies providing supplies, components,
and support services could be created to take advantage of the inner city's
proximity to multiple nearby customers in the cluster. For example,
Detroit-based Mexican Industries has emerged as one of the most respected
suppliers of head rests, arm rests, air bags, and other auto parts by
forging close relationships with General Motors, Ford, Chrysler, and
Volkswagen of America. Last year, the company had more than 1,000 employees,
most of whom live in the inner city, and revenues of more than $ 100
million. Bing Steel, a 54-person company with $ 57 million in sales, has
made similar connections, supplying flat roll steel and coils to the auto
industry.

The second advantage of these clusters is the potential they offer inner
city companies to compete in downstream products and services. For example,
an inner city company could draw on Boston's strength in financial services
to provide services tailored to inner city needs -- such as secured credit
cards, factoring, and mutual funds -- both within and outside the inner city
in Boston and elsewhere in the country. Boston Bank of Commerce (BBOC) is a
trusted local institution in the inner city with strong ties to the
community. It has many small nonprofit customers, such as the Dimock
Community Health Center in Roxbury, which has a $ 1 million endowment. There
are many nonprofit organizations like Dimock whose funds are sitting idle in
lowdnterest savings accounts because they lack the investment savvy and size
to attract sophisticated money managers. In toto, however, such
organizations represent a significant pool of capital. BBOC sees an
opportunity here to take advantage of the trust it enjoys within the
community and the proximity of world-class asset managers in the city's
nearby financial services cluster. The company is developing a product to do
asset management for nonprofits in its service area; it will pool funds from
its clients and then subcontract their management to companies in the nearby
cluster.

Few of these opportunities are currently being pursued. Most of today's
inner city businesses either have not been export oriented, selling only
within the local community rather than outside it, or have seen their
opportunities principally in terms defined by government preference
programs. Consequently, networks and relationships with surrounding
companies are woefully underdeveloped. New private sector initiatives will
be needed to make these connections and to increase inner city
entrepreneurs' awareness of their value. Integration with regional clusters
is potentially the inner city's most powerful and sustainable competitive
advantage over the long term. It also provides tremendous leverage for
development efforts: By focusing on upgrading existing and nascent clusters,
rather than on supporting isolated companies or industries, public and
private investments in training, infrastructure, and technology can benefit
multiple companies simultaneously.

Human Resources. The inner city's fourth advantage takes on a number of
deeply entrenched myths about the nature of its residents. The first myth is
that inner city residents do not want to work and opt for welfare over
gainful employment. Although there is a pressing need to deal with inner
city residents who are unprepared for work, most inner city residents are
industrious and eager to work. For moderate-wage jobs ($ 6 to $ 10 per hour)
that require little formal education -- for instance, warehouse workers,
production-line workers, and truck drivers), employers report that they find
hardworking, dedicated employees in the inner city. For example, a company
in Boston's inner city neighborhood of Dorchester bakes and decorates cakes
sold to supermarkets throughout the region. It attracts and retains area
residents at $ 7 to $ 8 per hour (plus contributions to pensions and health
insurance) and has almost 100 local employees. The loyalty of its labor pool
is one of the factors that has allowed the bakery to thrive.

Admittedly, many of the jobs currently available to inner city residents
provide limited opportunities for advancement. But the fact is that they are
jobs; and the inner city and its residents need many more of them close to
home. Proposals that workers commute to jobs in distant suburbs-or move to
be near those jobs-underestimate the barriers that travel time and relative
skill level represent for inner city residents. Moreover, in deciding what
types of businesses are appropriate to locate in the inner city, it is
critical to be realistic about the pool of potential employees. Attracting
high-tech companies might make for better press, but it is of little benefit
to inner city residents. Recall the contrasting experiences of Alpha
Electronics and Matrix Exhibits. In the case of Alpha, there was a complete
mismatch between the company's need for highly skilled professionals and the
available labor pool in the local community. In contrast, Matrix carefully
considered the available workforce when it established its Atlanta office.
Unlike the Tennessee headquarters, which custom-designs and creates exhibits
for each client, the Atlanta office specializes in rentals made from
prefabricated components-work requiring less-skilled labor, which can be
drawn from the inner city. Given the workforce, low-skill jobs are realistic
and economically viable: they represent the first rung on the economic
ladder for many individuals who otherwise would be unemployed. Over time,
successful job creation will trigger a self-reinforcing process that raises
skill and wage levels.

The second myth is that the inner city's only entrepreneurs are drug
dealers. In fact, there is a real capacity for legitimate entrepreneurship
among inner city residents, most of which has been channeled into the
provision of social services. For instance, Boston's inner city has numerous
social service providers as well as social, fraternal, and religious
organizations. Behind the creation and building of those organizations is a
whole cadre of local entrepreneurs who have responded to intense local
demand for social services and to funding opportunities provided by
government, foundations, and private sector sponsors. The challenge is to
redirect some of that talent and energy toward building for-profit
businesses and creating wealth.

The third myth is that skilled minorities, many of whom grew up in or near
inner cities, have abandoned their roots. Today's large and growing pool of
talented minority managers represents a new generation of potential inner
city entrepreneurs. Many have been trained at the nation's leading business
schools and have gained experience in the nation's leading companies.
Approximately 2,800 African Americans and 1,400 Hispanics graduate from
M.B.A. programs every year compared with only a handful 20 years ago.
Thousands of highly trained minorities are working at leading companies such
as Morgan Stanley, Citibank, Ford, Hewlett-Packard, and McKinsey & Company.
Many of these managers have developed the skills, network, capital base, and
confidence to begin thinking about joining or starting entrepreneurial
companies in the inner city. Two Harvard Business School graduates, for
example, have launched Delray Farms with the aim of creating a national
chain of small inner city supermarkets that focus on produce and other
perishables. Backed by significant private-equity capital, Delray Farms is
operating its first store in Chicago and is planning to open six new stores
within a year.

The Real Disadvantages of the Inner City

The second step toward creating a coherent economic strategy is addressing
the very real disadvantages of locating businesses in the inner city. The
inescapable fact is that businesses operating in the inner city face greater
obstacles than those based elsewhere. Many of those obstacles are needlessly
inflicted by government. Unless the disadvantages are addressed directly,
instead of indirectly through subsidies or mandates, the inner city's
competitive advantages will continue to erode.

Land. Although vacant property is abundant in inner cities, much of it is
not economically usable. Assembling small parcels into meaningful sites can
be prohibitively expensive and is further complicated by the fact that a
number of city, state, and federal agencies each control land and fight over
turf. For example, development of the Jeffrey Plaza shopping center in
Chicago's South Side required government efforts over eight years to
assemble 21 contiguous parcels. Similarly, attempts to rebuild South Central
Los Angeles after the 1992 riots have been hampered because only 9 of 200
vacant or underutilized properties are larger than one acre. (By comparison,
Wal-Mart requires four to six acres for a single store). Once assembled, an
inner city site often requires expensive demolition, environmental cleanup,
and extensive litigation. Private developers and banks tend to avoid sites
with even a hint of environmental problems because of punitive liability
laws.

Building Costs. The cost of building in the inner city is significantly
higher than in the suburbs because of the costs and delays associated with
logistics, negotiations with community groups, and strict urban regulations:
restrictive zoning, architectural codes, permits, inspections, and
government-required union contracts and minority setasides. Ironically,
despite the desperate need for new projects, construction in inner cities is
far more regulated than it is in the suburbs -- a legacy of big city
politics and entrenched bureaucracies.

More damaging than regulatory costs is the uncertainty that the regulatory
process creates for potential investors. Managers interviewed in Boston, Los
Angeles, and Chicago expressed frustration with the three-year to five-year
waiting periods necessary to obtain the numerous permit and site approvals
required to build, expand, or improve facilities. Undeniably, the wait is
expensive; but the uncertainty about whether an application will be approved
or when a ruling will be made makes forming a financial strategy nearly
impossible.

Other Costs. Compared with the suburbs, inner cities have high costs for
water, other utilities, workers' compensation, health care, insurance,
permitting and other fees, real estate and other taxes, OSHA compliance, and
neighborhood hiring requirements. For example, Russer Foods, a manufacturing
company located in Boston's inner city, operates a comparable plant in
upstate New York. The Boston plant's expenses are 55% higher for workers'
compensation, 50% higher for family medical insurance, 166% higher for
unemployment insurance, 340% higher for water, and 67% higher for
electricity. High costs like these drive away companies and hold down wages.
Some costs, such as those for workers' compensation, apply to the state or
region as a whole. Others, such as real estate taxes, apply citywide. Still
others, such as property insurance, are specific to the inner city. All are
devastating to maintaining fragile inner city companies and to attracting
new businesses.

It is an unfortunate reality that many cities -- because they have a greater
proportion of residents dependent on welfare, Medicaid, and other social
programs -- require higher government spending and, as a result, higher
corporate taxes. The resulting tax burden feeds a vicious cycle -- driving
out more companies while requiring even higher taxes from those that remain.
Cities have been reluctant to challenge entrenched bureaucracies and unions,
as well as inefficient and outdated government departments, all of which
unduly raise city costs.

Finally, excessive regulation not only drives up building and other costs
but also hampers almost all facets of business life in the inner city, from
putting up an awning over a shop window to operating a pushcart to making
site improvements. Regulation also stunts inner city entrepreneurship,
serving as a formidable barrier to small and start-up companies. Restrictive
licensing and permitting, high licensing fees, and archaic safety and health
regulations create barriers to entry into the very types of businesses that
are logical and appropriate for creating jobs and wealth in the inner city.

Security. Both the reality and the perception of crime represent profound
impediments to urban economic development. First, crime against property
raises costs. For example, the Shops at Church Square, an inner city strip
shopping center in Cleveland, Ohio, spends $ 2 per square foot more than a
comparable suburban center for a full-time security guard, increased
lighting, and continuous cleaning -- raising overall costs by more than 20%.
Second, crime against employees and customers creates an unwillingness to
work in and patronize inner city establishments and restricts companies'
hours of operation. Fear of crime ranks among the most important reasons why
companies opening new facilities failed to consider inner city locations and
why companies already located in the inner city left. Currently, police
devote most of their resources to the security of residential areas, largely
overlooking commercial and industrial sites.

Infrastructure. Transportation infrastructure planning, which today focuses
primarily on the mobility of residents for shopping and commuting, should
consider equally the mobility of goods and the ease of commercial
transactions. The most critical aspects of the new economic model -- the
importance of the location of the inner city, the connections between inner
city businesses and regional clusters, and the development of
export-oriented businesses-require the presence of strong logistical links
between inner city business sites and the surrounding economy.
Unfortunately, the business infrastructure of the inner city has fallen into
disrepair. The capacity of roads, the frequency and location of highway
on-ramps and off-ramps, the links to downtown, and the access to railways,
airports, and regional logistical networks are inadequate.

Employee Skills. Because their average education levels are low, many inner
city residents lack the skills to work in any but the most unskilled
occupations. To make matters worse, employment opportunities for
less-educated workers have fallen markedly. In Boston between 1970 and 1990,
for example, the percentage of jobs held by people without high school
diplomas dropped from 29% to 7%, while those held by college graduates
climbed from 18% to 44%. And the unemployment rate for African-American men
aged 16 to 64 with less than a high school education in major northeastern
cities rose from 19% in 1970 to 57% in 1990.

Management Skills. The managers of most inner city companies lack formal
business training. That problem, however, is not unique to the inner city;
it is a characteristic of small businesses in general. Many individuals with
extensive work histories but little or no formal managerial training start
businesses. Inner city companies without well-trained managers experience a
series of predictable problems that are similar to those that affect many
small businesses: weaknesses in strategy development, market segmentation,
customer-needs evaluation, introduction of information technology, process
design, cost control, securing or restructuring financing, interaction with
lenders and government regulatory agencies, crafting business plans, and
employee training. Local community colleges often offer management courses,
but their quality is uneven, and entrepreneurs are hard-pressed for time to
attend them.

Capital. Access to debt and equity capital represents a formidable barrier
to entrepreneurship and company growth in inner city areas.

First, most inner city businesses still suffer from poor access to debt
funding because of the limited attention that mainstream banks paid them
historically. Even in the best of circumstances, smallbusiness lending is
only marginally profitable to banks because transaction costs are high
relative to loan amounts. Many banks remain in small-business lending only
to attract deposits and to help sell other more profitable products.

The federal government has made several efforts to address the inner city's
problem of debt capital. As a result of legislation like the Community
Reinvestment Act, passed in order to overcome bias in lending, banks have
begun to pay much more attention to inner city areas. In Boston, for
example, leading banks are competing fiercely to lend in the inner city --
and some claim to be doing so profitably. Direct financing efforts by
government, however, have proved ineffective. The proliferation of
government loan pools and quasi-public lending organizations has produced
fragmentation, market confusion, and duplication of overhead. Business loans
that would provide scale to private sector lenders are siphoned off by these
organizations, many of which are high-cost, bureaucratic, and risk-averse.
In the end, the development of highquality private sector expertise in inner
city business financing has been undermined.

Second, equity capital has been all but absent. Inner city entrepreneurs
often lack personal or family savings and networks of individuals to draw on
for capital. Institutional sources of equity capital are scarce for
minority-owned companies and have virtually ignored inner city business
opportunities.

Attitudes. A final obstacle to companies in the inner city is antibusiness
attitudes. Some workers perceive businesses as exploitative, a view that
guarantees poor relations between labor and management. Equally debilitating
are the antibusiness attitudes held by community leaders and social
activists. These attitudes are the legacy of a regrettable history of poor
treatment of workers, departures of companies, and damage to the
environment. But holding on to these views today is counterproductive. Too
often, community leaders mistakenly view businesses as a means of directly
meeting social needs; as a result, they have unrealistic expectations for
corporate involvement in the community. For example, some businesses
interested in locating in Boston's inner city decided against it because of
demands to build playgrounds, fund scholarships, and cede control of hiring
and training to community-based organizations. Such demands on existing and
potential businesses rarely help the community; instead, they drive
businesses -- and jobs -- to other locations.

Demanding linkage payments and contributions and stirring up antibusiness
sentiment are political tools that brought questionable results in the past
when owners had less discretion about where they chose to locate their
companies. In today's increasingly competitive business environment, such
tactics will serve only to stunt economic growth.

Changing Roles and Responsibilities for Inner City Development

Overcoming the business disadvantages of the inner city as well as building
on its inherent advantages will require the commitment and involvement of
business, government, and the nonprofit sector. Each will have to abandon
deeply held beliefs and past approaches. Each must be willing to accept a
new model for the inner city based on an economic rather than a social
perspective. The private sector not government or social service nizations,
must be the focus of the new model.

The New Role of the Private Sector. The economic model challenges the
private sector to assume the leading role. First, however, it must adopt new
attitudes toward the inner city. Most private sector initiatives today are
driven by preference programs or charity. Such activities would never stand
on their own merits in the marketplace. It is inevitable, then, that they
contribute to growing cynicism. The private sector will be most effective if
it focuses on what it does best: creating and supporting economically viable
businesses built on true competitive advantage. It should pursue four
immediate opportunities as it assumes its new role.

1. Create and expand business activity in the inner city. The most important
contribution companies can make to inner cities is simply to do business
there. Inner cities hold untapped potential for profitable businesses.
Companies and entrepreneurs must seek out and seize those opportunities that
build on the true advantages of the inner city. In particular, retailers,
franchisers, and financial services companies have immediate opportunities.
Franchises represent an especially attractive model for inner city
entrepreneurship because they provide not only a business concept but also
training and support.

Businesses can learn from the mistakes that many outside companies have made
in the inner city. One error is the failure of retail and service businesses
to tailor their goods and services to the local market. The needs and
preferences of the inner city market can vary greatly -- something that
companies like Goldblatt Brothers have recognized. The Chicago retailer
understands that its inner city customers buy to meet immediate needs, and
it has tailored its retail merchandise and purchasing planning to its
customers' buying habits. For example, unlike most stores, which stock
winter coats in the fall, Goldblatt Brothers stocks its coats in the winter.

Another common mistake is the failure to build relationships within the
community and to hire locally. Hiring local residents builds loyalty from
neighborhood customers, and local employees of retail and service businesses
can help stores customize their products. Evidence suggests that companies
that were perceived to be in touch with the community had far fewer security
problems, whether or not the owners lived in the community. For example,
Americas' Food Basket hires locally and is widely viewed as a good citizen
of the community. As a result, management reports that it has not had to
hire a security guard and that neighbors often call if they witness anything
amiss.

Companies have discovered a number of other effective tactics for dealing
with security. For instance, large concentrations of businesses spread
security costs and reinforce perceptions of safety. MetroTech, a back-office
operations complex serving nearby Wall Street, is located in a high-poverty
and high-crime area near the federal buildings in downtown Brooklyn. The
developers created an 18-acre campus that could support 4 million to 8
million square feet of office space. The complex is so large that tenants
pay only 33 cents per square foot for 24-hour private security. Because
transportation infrastructure adds to perceptions of safety in traveling to
and from business locations, MetroTech enlisted the city government to
renovate the local subway stations and to locate a police branch near the
site. Crime has been insignificant, and MetroTech is fully occupied by
leading financial institutions.

In other cases, companies have organized themselves into associations to
increase the effectiveness of security and to spread costs. The associations
work closely with the police department and with members of the community to
identify and address security problems. In some cities, special
neighborhood-managed tax-assessment districts -- such as New York City's
many Business Improvement Districts -- have been established to provide
funds for supplemental security protection and other services.

2. Establish business relationships with inner city companies. By entering
into joint ventures or customer-supplier relationships, outside companies
will help inner city companies by encouraging them to export and by forcing
them to be competitive. In the long run, both sides will benefit, For
example, AB&W Engineering, a Dorchester-based metal fabricator, has built a
close working relationship with General Motors. GM has given AB&W management
assistance and a computerized ordering system and has referred a lot of new
business to AB&W. In turn, AB&W has become a high-performing and reliable
supplier. Such relationships, based not on charity but on mutual
self-interest, are sustainable ones; every major company should develop
them.

3. Redirect corporate philanthropy from social services to
business-to-business efforts. Countless companies give many millions of
dollars each year to worthy inner-city social-service agencies. But
philanthropic efforts will be more effective if they also focus on building
business-to-business relationships that, in the long run, will reduce the
need for social services.

First, corporations could have a tremendousimpact on training. The existing
system for job training in the United States is ineffective. Training
programs are fragmented, overhead intensive, and disconnected from the needs
of industry. Many programs train people for nonexistent jobs in industries
with no projected growth. Although reforming training will require the help
of government, the private sector must determine how and where resources
should be allocated to ensure that the specific employment needs of local
and regional businesses are met. Ultimately, employers, not government,
should certify all training programs based on relevant criteria and likely
job availability.

Training programs led by the private sector could be built around industry
clusters located in both the inner city (for example, restaurants, food
service, and food processing in Boston) and the nearby regional economy (for
example, financial services and health care in Boston). Industry
associations and trade groups, supported by government incentives, could
sponsor their own training programs in collaboration with local training
institutions.

Programs that help inner city residents with the school-to-work transition
could also take advantage of regional clusters. Project ProTech in Boston
lets high school students compete for apprentice-like positions in the
health care cluster. The program mixes classroom work and internship
training during the school year and over the summer, beginning in the junior
year of high school. Project ProTech is currently expanding to include other
clusters, such as utilities and financial services.

Second, the private sector could make an equally substantial impact by
providing management assistance to inner city companies. As with training,
current programs financed or operated by the government are inadequate.
Outside companies have much to offer companies in the inner city: talent,
know-how, and contacts. One approach to upgrading management skills is to
emphasize networking with companies in the regional economy that either are
part of the same cluster (customers, suppliers, and related businesses) or
have expertise in needed areas. An inner city company could team up with a
partner in the region who provides management assistance; or a consortium of
companies with a required expertise, such as information technology, could
provide assistance to inner city businesses in need of upgrading their
systems.

Professional associations could develop advisory programs for inner city
managers. Business schools could develop and teach custom-designed short and
practical executive programs or assist inner city companies through field
studies programs. The Harvard Business School, for example, offers a
forcredit course that matches teams of M.B.A. students with inner city
companies. We are encouraging the development of such programs elsewhere.

4. Adopt the right model for equity capital investments. The investment
community -- especially venture capitalists -- must be convinced of the
viability of investing in the inner city. There is a small but growing
number of minority-oriented equity providers (although none specifically
focus on inner cities). A successful model for inner city investing will
probably not look like the familiar venture-capital model created primarily
for technology companies. Instead, it may resemble the equity funds
operating in the emerging economies of Russia or Hungary -- investing in
such mundane but potentially profitable projects as supermarkets and
laundries. Ultimately, inner-city-based businesses that follow the
principles of competitive advantage will generate appropriate returns to
investors -- particularly if aided by appropriate incentives, such as tax
exclusions for capital gains and dividends for qualifying inner city
businesses.

The New Role of Government. To date, government has assumed primary
responsibility for bringing about the economic revitalization of the inner
city. Existing programs at the federal, state, and local levels designed to
create jobs and attract businesses have been piecemeal and fragmented at
best. Still worse, these programs have been based on subsidies and mandates
rather than on marketplace realities. Unless we find new approaches, the
inner city will continue to drain our rapidly shrinking public coffers.

Undeniably, inner cities suffer from a long history of discrimination.
However, the way for government to move forward is not by looking behind.
Government can assume a more effective role by supporting the private sector
in new economic initiatives. It must shift its focus from direct involvement
and intervention to creating a favorable environment for business. This is
not to say that public funds will not be necessary. But subsidies must be
spent in ways that do not distort business incentives, focusing instead on
providing the infrastructure to support genuinely profitable businesses.
Government at all levels should focus on four goals as it takes on its new
role.

1. Direct resources to the areas of greatest economic need. The crisis in
our inner cities demands that they be first in line for government
assistance. This may seem an obvious assertion. But the fact is that many
programs in areas such as infrastructure, crime prevention, environmental
cleanup, land development, and purchasing preference spread funds across
constituencies for political reasons. For example, most transportation
infrastructure spending goes to creating still more attractive suburban
areas. In addition, a majority of preference-program assistance does not go
to companies located in low-income neighborhoods.

Investments that boost the economic potential of inner cities must receive
priority. For example, Superfund cleanup dollars should go to sites in
high-unemployment inner city areas before they go to low-unemployment
suburban sites. Infrastructure improvements should go to making inner city
areas more attractive business locations. And crime prevention resources
should go to high-crime inner city areas. Spending federal, state, and local
money in that way will have the added benefit of easing critical social
problems, thus reducing social service spending.

Unfortunately, the qualifying criteria for current government assistance
programs are not properly designed to channel resources where they are most
needed. Preference programs support business based on the race, ethnicity,
or gender of their owners rather than on economic need. In addition to
directing resources away from the inner city, such race-based or
gender-based distinctions reinforce inappropriate stereotypes and attitudes,
breed resentment, and increase the risk that programs will be manipulated to
serve unintended populations. Location in an economically distressed area
and employment of a significant percentage of its residents should be the
qualification for government assistance and preference programs. Shifting
the focus to economic distress in this way will help enlist all segments of
the private sector in the solutions to the inner city's problems.

2. Increase the economic value of the inner city as a business location. In
order to stimulate economic development, government must recognize that it
is a part of the problem. Today its priorities often run counter to business
needs. Artificial and outdated government-induced costs must be stripped
away in the effort to make the inner city a profitable location for
business. Doing so will require rethinking policies and programs in a wide
range of areas. There is early evidence that self-inflicted regulatory costs
can be overcome. Consider the success of the Indianapolis Regulatory Study
Commission in Indiana. In two short years, Indianapolis ended its taxi
monopoly, streamlined its building permitting process, and eliminated a wide
range of needless regulations.

Indeed, there are nuumerous possibilities for reform. Imagine, for example,
policy aimed at eliminating the substantial land and building cost penalties
that businesses face in the inner city. Ongoing rent subsidies run the risk
of attracting companies for which an inner city location offers no other
economic value. Instead, the goal should be to provide building-ready sites
at market prices. A single government entity could be charged with
assembling parcels of land and with subsidizing demolition, environmental
cleanup, and other costs. The same entity could also streamline all aspects
of building -- including zoning, permitting, inspections, and other
approvals.

That kind of policy would require further progress on the environmental
front. A growing number of cities -- including Detroit, Chicago,
Indianapolis, Minneapolis, and Wichita, Kansas -- have successfully
developed so-called brownfield urban areas by making environmental cleanup
standards more flexible depending on land use, indemnifying land owners
against additional costs if contamination is found on a site after a
cleanup, and using tax-increment financing to help fund cleanup and
redevelopment costs.

Government entities could also develop a more strategic approach to
developing transportation and communications infrastructures, which would
facilitate the fluid movement of goods, employees, customers, and suppliers
within and beyond the inner city. Two projects in Boston are prime exampies:
first, a new exit ramp connecting the inner city to the nearby Massachusetts
Turnpike, which in turn connects to the surrounding region and beyond; and a
direct access road to the harbor tunnel, which connects to Logan
International Airport. Though inexpensive, both projects are stalled because
the city does not have a clear vision of their economic importance.

3. Deliver economic development programs and services through mainstream,
private sector institutions. There has been a tendency to rely on small
community-based nonprofits, quasi-governmental organizations, and
special-purpose entities, such as community development banks and
specialized small-business investment corporations, to provide capital and
business-related services. Social service institutions have a role, but it
is not this. With few exceptions, nonprofit and government organizations
cannot provide the quality of training, advice, and support to substantial
companies that mainstream, private sector organizations can. Compared with
private sector entities such as commercial banks and venture capital
companies, special-purpose institutions and nonprofits are plagued by high
overhead costs; they have difficulty attracting and retaining high-quality
personnel, providing competitive compensation, or offering a breadth of
experience in dealing with companies of scale.

Consider access to capital. Government must help create the conditions
necessary for private, mainstream financial institutions to lend and invest
profitably in inner city businesses. Efforts to eliminate discrimination are
vital but are not sufficient. Financing in the inner city must be
profitable, or private sector institutions will never have the enthusiasm to
develop it aggressively. Some conventional lenders claim that the reason
they have not found inner city loans profitable is not higher default rates,
as is commonly assumed, but the high transaction costs of finding and
actually making inner city loans. Government should address those costs head
on through better information and relaxed paperwork requirements and
regulations. In addition, it could provide direct incentives, giving banks a
transaction fee rather than a loan guarantee for closing a qualifying
innercity-based business loan. Such an approach would encourage banks to
make and maintain good loans, instead of forcing capital into bad loans to
fill lending quotas based on race, ethnicity, or gender.

The most important way to bring debt and equity investment to the inner city
is by engaging the private sector. Resources currently going to government
or quasi-public financing would be better channeled through other private
financial institutions or directed at recapitalizing minority-owned banks
focusing on the inner city, provided that there were matching private sector
investors. Minority-owned banks that have superior knowledge of the inner
city market could gain a competitive advantage by developing
business-lending expertise in inner city areas.

As in lending, the best approach to increase the supply of equity capital to
the inner cities is to provide private sector incentives consistent with
building economically sustainable businesses, One approach would be for both
federal and state governments to eliminate the tax on capital gains and
dividends from long-term equity investments in inner-city-based businesses
or subsidiaries that employ a minimum percentage of inner city residents.
Such tax incentives, which are based on the premise of profit, can play a
vital role in speeding up private sector investment. Private sector sources
of equity will be attracted to inner city investment only when the creation
of genuinely profitable businesses is encouraged.

4. Align incentives built into government programs with true economic
performance. Aligning incentives with business principles should be the goal
of every government program. Most programs today would fail such a test. For
example, preference programs in effect guarantee companies a market. Like
other forms of protectionism, they dull motivation and retard cost and
quality improvement. A 1988 General Accounting Office report found that
within six months of graduating from the Small Business Association's
purchasing preference program, 30% of the companies had gone out of
business. An additional 58% of the remaining companies claimed that the
withdrawal of the SBA's support had had a devastating impact on business. To
align incentives with economic performance, preference programs should be
rewritten to require an increasing amount of non-set-aside business over
time.

Direct subsidies to businesses do not work. Instead, government funds should
be used for site assembly, extra security, environmental cleanup, and other
investments designed to improve the business environment. Companies then
will be left to make decisions based on true profit.

The New Role of Community-Based Organizations. Recently, there has been
renewed activity among community-based organizations (CBOs) to become
directly involved in business development. CBOs can, and must, play an
important supporting role in the process. But choosing the proper strategy
is critical, and many CBOs will have to change fundamentally the way they
operate. While it is difficult to make a general set of recommendations to
such a diverse group of organizations, four principles should guide
community-based organizations in developing their new role.

1. Identify and build on strengths. Like every other player, CBOs must
identify their unique competitive advantages and participate in economic
development based on a realistic assessment of their capabilities,
resources, and limitations. Community-based organizations have played a
much-needed role in developing low-income housing, social programs, and
civic infrastructure. However, while there have been a few notable
successes, the vast majority of businesses owned or managed by CBOs have
been failures. Most CBOs lack the skills, attitudes, and incentives to
advise, lend to, or operate substantial businesses. They were able to master
low-income housing development, in which there were major public subsidies
and a vacuum of institutional capabilities. But, when it comes to financing
and assisting for-profit business development, CBOs simply can't compete
with existing private sector institutions.

Moreover, CBOs naturally tend to focus on community entrepreneurship: small
retail and service businesses that are often owned by neighborhood
residents. The relatively limited resources of CBOs, as well as their focus
on relatively small neighborhoods, is not well-suited to developing the more
substantial companies that are necessary for economic vitality.

Finally, the competitive imperatives of for-profit business activity will
raise inevitable conflicts for CBOs whose mission rests with the community.
Turning down local residents in favor of better-qualified outside
entrepreneurs, supporting necessary layoffs or the dismissal of poorly
performing workers, assigning prime sites for business instead of social
uses, and approving large salaries to successful entrepreneurs and managers
are only a handful of the necessary choices. Given these organizations'
roots in meeting the social needs of neighborhoods, it will be difficult for
them to put profit ahead of their traditional mission.

2. Work to change workforce and community attitudes. Community-based
organizations have a unique advantage in their intimate knowledge of and
influence within inner city communities, and they can use that advantage to
help promote business development. CBOs can help create a hospitable
environment for business by working to change community and workforce
attitudes and acting as a liaison with residents to quell unfounded
opposition to new businesses. When BayBank wanted to open a new branch in
Dorchester, for example, a local community development corporation was
instrumental in smoothing relations with a few vocal critics who could have
delayed the project or even driven the bank away.

3. Create work-readiness and job-referral systems. Community-based
organizations can play an active role in preparing, screening, and referring
employees to local businesses. A pressing need among many inner city
residents is work-readiness training, which includes communication,
self-development, and workplace practices. CBOs, with their intimate
knowledge of the local community, are well equipped to provide this service
in close collaboration with industry. The Urban League of Eastern
Massachusetts, for example, has taken up the challenge in its new Employment
Resource Center. The center provides workers with basic training as well as
instruction on specific topics, such as customer-service and interviewing
skills and written and oral communication.

CBOs can also help inner city residents by actively developing screening and
referral systems. Admittedly, some innercity-based businesses do not hire
many local residents. The reasons are varied and complex but seem to revolve
around a few bad experiences that owners have had with individual employees
and their work attitudes, absenteeism, false injury claims, or drug use. A
study of the impoverished Red Hook neighborhood in Brooklyn points to the
importance of social networks -- networks that are often lacking in inner
cities -- as informal job referral systems. n1 The study found that a local
development corporation, the South Brooklyn LDC, played an important role in
helping local residents get jobs by developing relationships with nearby
businesses and screening and referring employees to them.

4. Facilitate commercial site improvement and development. Community-based
organizations (especially community development corporations) can also
leverage their expertise in real estate and act as a catalyst to facilitate
environmental cleanup and the development of commercial and industrial
property. For example, the Codman Square Neighborhood Development
Corporation in Boston was part of a group including the Boston Public
Facilities Department, local merchants, and the local health center that
encouraged 36 businesses to move into a depressed neighborhood. The group
used its considerable community organizing talent to help merchants form an
association to identify the neighborhood's needs as well as barriers to
meeting them. It negotiated with the police to increase patrols in the area
and pushed the mayor's office to board up abandoned buildings and to rid the
area of trash and abandoned cars. After bringing together many different
constituencies, it led a campaign to encourage businesses to locate in the
neighborhood.

Overcoming Impediments to Progress

This economic model provides a new and comprehensive approach to reviving
our nation's distressed urban communities. However, agreeing on and
implementing it will not be without its challenges. The private sector,
government, inner city residents, and the public at large all hold
entrenched attitudes and prejudices about the inner city and its problems.
These will be slow to change. Rethinking the inner city in economic rather
than social terms will be uncomfortable for many who have devoted years to
social causes and who view profit and business in general with suspicion.
Activists accustomed to lobbying for more government resources will find it
difficult to embrace a strategy for fostering wealth creation. Elected
officials used to framing urban problems in social terms will be resistant
to changing legislation, redirecting resources, and taking on recalcitrant
bureaucracies. Government entities may find it hard to cede power and
control accumulated through past programs. Local leaders who have built
social service organizations and merchants who have run mom-and-pop stores
could feel threatened by the creation of new initiatives and centers of
power. Local politicians schooled in old-style community organizing and
confrontational politics will have to tread unfamiliar ground in
facilitating cooperation between business and residents.

These changes will be difficult ones for both individuals and institutions.
Nonetheless, they must be made. The private sector, government, and
community-based organizations all have vital new parts to play in
revitalizing the economy of the inner city. Businesspeople, entrepreneurs,
and investors must assume a lead role; and community activists, social
service providers, and government bureaucrats must support them. The time
has come to embrace a rational economic strategy and to stem the intolerable
costs of outdated approaches.
 

n1. See Philip Kasinitz and Jan Rosenberg, "Why Enterprise Zones Will Not
Work: Lessons from a Brooklyn Neighborhood," City Journal, Autumn 1993,
pp.63-9.

The research that this article is based on would not have been possible
without the generous support of the Harvard Business School and the
assistance of many individuals. Whitney Tilson, Michael Marubio, and Barbara
Paige were integrally involved in preparing this article. I would also like
to thank the many M.B.A. students from both the Harvard Business School and
other schools who have been involved in the research effort that made this
article possible.


              Inner City Economic Development
         New Model                        Old Model

* Economic: create wealth         * Social: redistribute wealth

* Private sector                  * Government and social service
                                    organizations

* Profitable businesses           * Subsidized businesses

* Integration with the            * Isolation from the
    regional economy                larger economy
 

* Companies that are              * Companies that serve the
   export oriented                  local community

* Skilled and experienced         * Skilled and experienced
   minorities engaged in            minorities engaged in the
   building businesses              social service sector

* Mainstream, private             * Special institutions created
  sector institutions enlisted

* Innter city disadvantagees      * Inner city disadvantages
   addressed directly               counterbalanced with subsidies

* Government focused on improving * Government involved directly in
the environment for business        providing services or funding


Copyright 1995 President and Fellows of Harvard College