29 May 2001  Research & Ideas

Good News, Not Blues, For the Inner City

What's located at the crossroads of a sophisticated infrastructure—containing airports, railroads, and ports—and boasts a large potential workforce of consistently underemployed people? A typical inner city, of course. And, says Harvard University Professor Michael E. Porter; inner cities are already rewriting the map of competitive advantage.

 

It's the dream business location. Vital infrastructure feeds the area. A committed workforce lives nearby. A large number of potential customers are packed around you.

And it's the last place you thought to look: the inner city.

But the typical inner city, far from being "a relic of the old economy," is ripe for economic vitality, says HBS Professor Michael E. Porter. And, as he explained in a plenary session called "Inner City Renewal" at the HBS 2001 Global Alumni Conference, there are hundreds of new examples each year to prove it.

Porter, one of the Harvard University's most influential professors and the author of numerous books and publications including On Competition (HBSP 1998) and co-author of Can Japan Compete? (Perseus Press, 2000), told the audience that it's time to look at inner cities through a new lens, the lens of competitive advantage.

"As businesspeople, we've seen ourselves as helpless" in eradicating seemingly intractable problems like poverty, he said. Though giving money and volunteering time are good things to do, a better solution, he insisted, is to apply market techniques to equip people in inner cities and assist them in becoming more competitive and moving up.

"We can't expect government to be on the front line," he stated. "We have to step up and demonstrate the power of the market system."

Businesspeople should be thinking about the inner city as a place to do business, "not out of charity but out of self interest," Porter told the group. "Economic development in inner cities must be approached from a competitiveness perspective and be based on business opportunities in the inner city that are genuinely profitable."

While not discounting problems like crime, Porter insisted that the greatest barriers for inner city development today are negative perceptions. These areas are not just economically distressed because of social issues, he said, adding that unless businesspeople take steps to build economic vitality, the social problems will never be solved.

The inner city advantage

In 1994, Porter founded the Initiative for a Competitive Inner City, a non-profit program to study and catalyze inner city business development. He and the group in ICIC define inner cities as urban areas with high poverty and high unemployment, "all those neighborhoods that aren't doing well."

His group came to the conclusion that there was no logical economic reason why all job growth had to be in suburbs. Indeed, he said, they saw plenty of reasons for bringing jobs into the inner city. Sprint was one example. The company had started a call center in the pleasant suburb of Lenexa, near Kansas City, but was burdened by high employee turnover. When Sprint changed course and opened a call center at 18th Street and Vine, in the inner city of Kansas City, the company was "overwhelmed" with applicants, Porter said. Most employees could walk from home to work, foregoing a lengthy commute, and the turnover remains significantly lower than it was in Lenexa.

We can't expect government to be on the front line. We have to step up and demonstrate the power of the market system.
—Michael Porter

Another reason for optimism is the Inner City 100, an annual project that identifies and recognizes fast-growth inner city companies in America, which Porter's group began several years ago in collaboration with Inc. magazine. The hundred top companies are highlighted each spring in Inc.'s May issue; this year there were 2,300 nominations, Porter said. To be a candidate for the Inner City 100, each company nominee must employ ten or more employees at year end; be private with at least a five-year operating history; and have at least $1 million in sales. It also must be headquartered in the inner city or have 51 percent or more of physical operations in inner city areas.

"If we can get companies growing in the inner city, jobs, income and wealth will follow," asserted Porter.

Advantages of inner cities start with unmet market needs. "If you're a retailer, you can put another site in an over-stored suburban area," he said. The advantage of the inner city, though, comes not through the income of residents but rather what he called "income density"—a high population living in close quarters within any individual area. Inner cities can also boast efficient locations near railroads, ports, and airports.

One common myth of globalization, Porter said, is that people tend to think of the world as a giant shopping basket. Ironically, he continued, the world is in fact becoming increasingly specialized down geographical lines. And competitive advantage, he suggested, goes to companies that create products and services that can't be accessed from a distance.

In concert with capitalism

Porter also said he's concerned that agendas of economic and social policy are viewed increasingly as conflicting. "There's a growing sense that something is wrong with capitalism," he said, adding that such a notion entails a "simplistic view of capitalism and competition and what the market system has to offer. There is no conflict between capitalism and developing skills. Creating a safe work environment is consistent with what capitalism aims to do."

Where typical economic development programs presume that subsidies are key, and that businesses require high-powered incentives to tempt them into dicey neighborhoods, any business propped up by subsidies will not last very long, he said. Subsidies also overlook the real problem of inner cities, Porter said, and many businesspeople have automatically seen the inner city as a separate part of the economic landscape.

Almost always, he said, entrepreneurs would rather borrow money from a leading local bank than from a community development bank.

"The challenge [is] to connect the inner city to the other part of the economy," he said. "So many of us have been blinded by the news, the story of social distress."