IS T H E I N N E R C I T Y C O M P E T I T I V E ?
Margaret C. Simms and Winston J. Allen I
Michael Porter's article in the Harvard Business Review (May-June 1995) on "The Competitive Advantage of the Inner City" in many ways is a valuable contribution to our thinking about economic redevelopment in metropolitan areas. Its appearance in a mainstream journal read by corporate and public policy leaders puts the discussion of one of our major economic policy challenges back on the table. However, the main issue is: Does it make a positive contribution in terms of designing a "coherent economic strategy," which he says is so sorely needed at this point in time (p. 55). Unfortunately, it does not. From a series of anecdotes or case studies (each one different), Porter weaves a rationale for inner-city competitiveness that is internally inconsistent and perhaps unduly confining as a development strategy. For example, he asserts that businesses can be successful catering to the inner-city market because the relatively low income of residents is offset by high density. Yet this is likely to be in conflict with other guidance that he offers, such as the establishment of businesses that export goods to other markets. Porter also suggests that the ideal company is one that "is not small and high-cost but a professionally managed major business employing the latest in technology, marketing and management techniques." By the end of the article, a reader could conclude that virtually any business can be successful in the inner city. While that may be true, this information does not help a policymaker or lender develop a focused economic development strategy. Part of the problem with the Porter analysis is that it does not distinguish clearly the different ways in which success can be measured. A strategy that is effective in reaching one goal may not move us very far along in terms of achieving another objective. Sorting out and analyzing each objective separately has taken on greater importance as federal policymakers have begun to consider "place-based" not "race-based" business development strategies. A public policymaker might have at least
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four objectives in mind when considering economic development strategies. They could include: 1. Job creation or job upgrading for inner-city residents; 2. Increasing tax revenues received by the central city through increased property values and/or increased business taxes; 3. More goods and services for inner-city residents; 4. Creation or expansion of the entrepreneurial class among minority groups. While it may be possible for some firms to meet most or all of these objectives simultaneously, it is more likely that some types of firms will be relatively successful in some areas and not so successful in achieving other goals. In addition, the overarching question is the long-term viability of the firms; can they be profitable in the inner city? The answer in most cases is: it depends. IS THE INNER CITY C O M P E T I T I V E ? : FINDINGS F R O M A N E W STUDY
In late 1993, the Joint Center for Political and Economic Studies began a study of the employment potential within minority-owned businesses. One of the primary objectives was to expand our knowledge of the hiring patterns within such firms. From pioneering studies by Timothy Bates, 2 we know that minority firms are more likely to employ minority workers than are nonminority firms, but little is known about the characteristics of those workers and which types of firms are more likely to employ workers from low-income communities. The Joint Center study was designed to provide answers to those questions by surveying a sample of medium-sized and large minority firms and comparing them with similar firms owned by whites. While the focus was on characteristics of the workers, information on firm location allows us to match up firms and their employment patterns with the characteristics of the neighborhoods in which they are located. 3 We used some of the data from that study to determine whether a narrowly targeted place-based strategy leads to job creation for inner-city residents. The Joint Center's sample of minority-owned firms consisted of a total of 3,060 firms, nearly 600 black-owned businesses surveyed annually by Black Enterprise magazine when it constructs its BE 100 industrial/service firms and just over 2500 minority-owned firms that are affiliated
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with regional councils of the National Minority Supplier Development Council in four states--California, Florida, Illinois, and Texas. 4 Surveys were also sent to 2,000 nonminority firms that were similar in sales volume and industry distribution. 5 The responses to the survey confirmed Bates's findings; minority firms are more likely to employ minority workers. Moreover, they are more likely to recruit in low-income neighborhoods. Nearly one-quarter of minority respondents said that they always recruited in these neighborhoods, while only 10 percent of the nonminority firms said that was the case. Another 37 percent of the minority finns said they sometimes recruited there, in contrast to only 24 percent of nonminority firms that did so. Substantial proportions of the employees in minority firms had a high school education or less, indicating that these businesses are providing jobs to people with education levels comparable to those of many innercity residents. It is clear then that a strategy that focuses on minority firms can make a positive contribution to job creation for individuals who live in lowincome neighborhoods. The next question is: Are these firms actually located in those neighborhoods? Indeed, are they located in the central city at all? Our findings in this regard are mixed. A substantial proportion of minority-owned businesses are located in minority neighborhoods. For example, 41 percent of black-owned businesses responding to our survey are located in zip codes where the proportion of blacks in the population is higher than blacks' representation in the U.S. population. However, very few of these firms are located in high poverty areas. Therefore, requiring firms to be located in high poverty areas may be unduly restrictive if the major objective is to provide employment for residents of those areas. Our findings with regard to central city location are not as easy to interpret. Overall, over one-half of all minority respondents were located in the central city. An examination of black-owned finns by themselves shows a similar distribution. While firms located in the central city tended to have been in that location longer than those in the suburbs, location did not appear to affect sales volume significantly one way or the other. When the firms are disaggregated by industry, it turns out that a majority of firms in the emerging industries (as the nontraditional industries are known) are in the central city, including 65 percent of construction firms and 72 percent of business services firms. So central city firms can be as viable as those in the suburbs and central city location is not necessarily disadvantageous for minority entrepreneurs entering new industries.
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The Review of Black Political Economy/Fall/Winter 1996 TABLE 1 Percent of Firms that Always or Sometimes Recruit in Low-Income Neighborhoods by Location and Industry
Central City All Minority Firms* Manufacturing Construction Business Services Professional Services
66.2** 67.3 72.1 71.9 62.0**
Suburbs
All Firms
52.6 58.2 79.2 53.9 30.3
60.2 62.8 74.6 66.7 47.6.
** Statistically significantcentralcity-suburbandifferenceat the 99% confidencelevel. The central city firms were more likely to derive more than 50 percent of their sales from state and local government, but few firms overall cater exclusively to government. Only about 7 percent of firms received more than 50 percent of their revenue from either federal or state and local governments. So one can hardly conclude that minority firms are being sustained by noncompetitive government contracts. Suburban firms were more likely to be heavily focused on national markets than were their central city counterparts. Therefore, suburban firms could be said to be somewhat more "export" oriented. It would appear then that when proximity to local consumers or businesses is not an issue, firms tend to locate where intercity transportation and land use costs are lower. In other words, they make profit-maximizing decisions that are similar to those of nonminority firms. Our data indicate that central city firms are significantly different from their suburban counterparts in ways which suggest that a strategy promoting central city (over suburban) location can be more effective than a general minority business strategy--if the objective is to increase employment of residents of low-income communities. Minority firms located in the central city were significantly more likely to target lowincome neighborhoods when they recruited and have a significantly larger proportion of black employees. There are no significant differences for any other minority group in terms of employment. The difference for recruitment in low-income areas was particularly noticeable in professional services firms, one of the emerging industries for minority entrepreneurs. However, among all minority firms, even 50 percent of those in the suburbs indicated that they always or sometimes recruited in low income neighborhoods. What is not clear is whether the employment pattern is the result of
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Simms and Allen TABLE 2 Percent of Firms in which More than 50 % of Employees are Black by Location and Industry
Central City All Minority Firms Manufacturing Construction Business Services Professional Services
50.9** 40.0 44.2 33.3 46.5
Suburbs
All Firms
37.2 24.1 23.1 55.5 37.2
45.6 34.2 38.3 39.4 42.5
** Statistically significantcentral city-suburbandifferenceat the 99% confidencelevel. differential recruiting patterns or differences in access to transportation since minority firms that are located in the central city were more likely to be on or near a public transportation route than were their suburban counterparts. 6 If it turns out that recruiting patterns are affected by business location then making assistance location-specific may be critical to achieving the employment objective. However, if the problem is merely one of transportation, then lowering that barrier may be sufficient. A policymaker may be more interested in the total number of jobs created than in the racial or neighborhood characteristics of those employed. In other words, if the total numbers are high, more people from all groups may have a better chance of being employed. Although that does not necessarily follow, the number of jobs created is an issue of concern. If we use Porter's criterion of fifteen or more employees as a measure of a firm that has crossed the threshold between "morn and pop" and "big" business, then nearly 40 percent of the minority respondents to our survey were in that category. 7 Among firms in the emerging industries, manufacturing companies were more likely to have large workforces: over 50 percent of firms in both the central city and the suburbs had at least sixteen employees. 8 (Just over 30 percent had fifty or more.) Minority firms in the manufacturing industry were also more likely to have increased their workforces recently, with a large proportion of the increase among blue collar positions. While service industries also showed large increases in employment, their expansion was more heavily concentrated in white collar jobs. Within the service industry, business services ranked second (behind manufacturing) in terms of high employment and for these companies there was a significant difference between city and suburb. Firms located in the city
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Table 3 Percent of Firms with 15 or More Employees by Location and Industry
All Minority Firms Manufacturing Construction Business Services Professional Services
Central City
Suburbs
All Firms
39.7 52.3 36.4 47.1" 39.5
39.6 59.6 31.8 23.1 33.2
39.6 55.8 34.8 40.5 36.8
* Statistically significantcentral city-suburbandifferenceat the 95% confidencelevel. were much more likely to have large workforces. This may be related to the high proportion of these firms that are janitorial services firms, although this cannot be confirmed by our data. POLICY I M P L I C A T I O N S Our data does indicate that location patterns for minority-owned businesses differ by industry, market orientation, and employment. Porter's location-based strategy is an imperfect but not totally incorrect way of looking at economic development issues. Our study confirms the fact that race is important; minority firms are more likely to employ individuals from populations with high unemployment rates. If the major objective is one of creating jobs for inner-city residents (as opposed to generating tax revenue or providing services to residents) then a general locational strategy can have a positive impact on employment. Firms in the central city are more likely to recruit in low-income neighborhoods and employ black workers. However, firms do not have to be in highpoverty neighborhoods in order to generate these employment gains. The fact that suburban firms are less likely to employ black workers and have higher proportions of their employees living in the suburbs suggests that black workers may be disadvantaged by limited housing choices or higher transportation barriers. An alternative policy might focus on building low-moderate income housing near suburban plants or reducing transportation costs. However, the former strategy does not help the central city policymaker achieve the objective of improving the economic conditions of central city residents if it results in employed residents relocating in the suburbs. For local policymakers, incentives that increase minority business formation in central cities may be successful in creating jobs. Our study
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would suggest that, even though the U.S. m a n u f a c t u r i n g sector p r o v i d e s f e w e r j o b s overall, minority firms have identified profitable niches within the industry and are a m o n g those minority entrepreneurs p r o v i d i n g the largest n u m b e r o f jobs. Identifying the types o f incentives that m a y be m o r e important to these firms could be a particularly fruitful exercise, at least for s o m e cities. Land a s s e m b l y might be a n e c e s s a r y incentive. H o w e v e r , given the new technology used in m a n y m a n u f a c t u r i n g plants, another incentive could very well be higher expenditures on " s o c i a l " services, such as education and training, which Porter feels h a v e r e c e i v e d a disproportionate share of g o v e r n m e n t resources. NOTES I. The authors are Director of Research Programs and Research Associate, respectively, at the Joint Center for Political and Economic Studies. The findings reported here are based on research supported by the Ford Foundation, grant 09300798. The views expressed here are those of the authors and not necessarily those of the Ford Foundation, the Joint Center's Board of Governors or any of its sponsors. 2. Timothy Bates, "Do Black-Owned Businesses Employ Minority Workers? New Evidence," Review of Black Political Economy 16 (Spring 1988). 3. Two variables allow us to determine neighborhood characteristics: responses to a survey question about location--"central city," "suburban," etc., and a Joint Center-created file that matches zip code to selected neighborhood characteristics taken from the Census of Population and Housing; 1990 (Summary Tape file 3 on CD-ROM). 4. In 1987, over 50 percent of all minority-owned firms included in the Census Bureau Survey of Minority-Owned Businesses were in these four states. In 1992, the same four states included 30 percent of all black-owned businesses. (At the time this article was written, the Census Bureau had not released data for other minorityowned businesses.) 5. The overall response rate for the minority firms, which are the focus of this discussion, was 21.9 percent, for a total of 669 minority respondents. 6. A recent study by the Joint Center indicates that non-Hispanic blacks are over four times as likely as whites to depend on public transportation for the worktrip. Hispanics were somewhat less dependent, being slightly less than three times as likely as whites to use public transit to get to their jobs. Joint Center for Political and Economic Studies, The Trip to Work: A Demographic Profile of Public Transit Users, A Report to the Federal Transit Administration under Cooperative Agreement No. DC-26-6020, May 1995. 7. Porter's other measure is one million dollars or more in sales. In our sample the two measures were highly correlated. 8. This size difference was statistically significant at the 99 percent confidence level.
