More businesses are locating in inner cities, where lower rents and proximity to suppliers, customers, and willing workers are boosting the bottom line. Outside investors who have not caught on will find this article enlightening.Business enterprises - New England ; Industrial location ; Job creation

Deirdre Coyle

English

Research Papers in Economics

Summer  2006 28
Offer Competitive Advantages
by
Deirdre Coyle
Inner Cities
lthough attitudes have changed slightly over
the past decade, the widespread perception
remains that inner cities have little to offer for-
profit businesses. A closer look, however, proves oth-
erwise. In fact, America’s inner cities are home to
more than 800,000 small and midsize businesses.
According to research conducted by the Initiative
for a Competitive Inner City (ICIC), nearly
12,000 new businesses are started each year
in the inner cities of the country’s 100 largest cities,
and New England cities are well represented.
by Deirdre Coyle
AOther fast-growing inner city
companies cater to the underserved
inner city population. Still others sup-
ply support services—printing, back-
office functions, just-in-time sup-
plies—to dominant industry clusters in
the region, such as financial services,
health care, and education. 
Harvard Business School professor
Michael E. Porter, who founded ICIC
in 1994, believes that in generating
jobs and economic opportunity, for-
profit businesses do more to improve
conditions in inner cities than short-
term social programs with uncertain
funding cycles. Such programs are valu-
able, but only the private sector has the
resources to solve the intractable social
problems that beset low-income urban
neighborhoods.
Inner cities have inherent compet-
itive advantages. If understood correct-
ly, these advantages—location, avail-
able workforce, untapped consumer
market, and opportunities to support
major regional industrial clusters—can
be leveraged to build profitable busi-
nesses. Companies will prosper if they
pursue economic self-interest founded
on genuine competitive advantages and
do not rely on government subsidies
and incentives.
A major barrier to business devel-
opment in low-income urban neighbor-
hoods is the perception that inner cities
either have nothing to offer a business or
that crime and isolation offset competi-
tive advantages. But research shows that
under the radar thousands of companies
operate profitably in inner cities. Of
course, among the many companies are
mom-and-pop enterprises that appear
and disappear. But the overwhelming
majority of inner city companies are
profitable businesses that have passed
the test of time. 
A more accurate picture is seen in
the list of the 100 fastest-growing busi-
nesses located in the inner city, present-
ed annually since 1998 by ICIC and
Inc. magazine. 
Consider the statistics for the
companies selected for the 2006 Inner
City 100:
• The average five-year standard
growth rate of the winners is 655
percent.
• Average revenue (2004) is $31.1
million.
• Average estimated value of compa-
nies is $24 million.
• The number of people employed
by the 100 companies is 17,181.
• The number of jobs created by the
companies between 2000 and
2004 is 10,381.
When asked to name the advan-
tages of their inner city location, 46
percent of the owners cited access and
proximity to transportation nodes; 42
percent said proximity to downtown
customers; 37 percent cited the diversi-
ty of the local workforce; and 35 per-
cent cited the size and availability of
the local workforce as a major compet-
itive advantage. 
The Workforce Advantage
Over the next decade the workforce
is projected to grow less than 1 percent.
Considering that during the past decade
the economy was producing jobs at
twice that rate, new sources of labor are
needed. Inner cities, with their dense
populations of immigrants and unem-
ployed and underemployed residents,
are a mostly untapped resource.
Although unfit workers do exist in
the inner city, there is a far greater
number of eager workers who make
excellent employees. The challenge for
urban economic development is to cre-
ate jobs that are more accessible and
then to connect people to them. 
Companies that need a large pool
of unskilled and semiskilled workers
have a clear competitive edge in inner
cities. Consider Dancing Deer Bakery,
which bakes gourmet cookies and
cakes. Dancing Deer employs 20 work-
ers during most of the year, but during
the busy season around the holidays the
number may reach 60. The company’s
regular employees, mainly Latino
immigrants, recruit their neighbors and
relatives to provide the seasonal man-
power.
Underserved Markets
Because of the density of housing,
inner cities often have more consumer
spending capacity per square mile than
wealthy suburbs. Research conducted
in 2004 by ICIC and the Boston
Consulting Group found that inner-
city residents nationwide have $90 bil-
lion in retail buying power.1 Several
major supermarket operators reported
that their inner city stores were among
their most profitable. 
&Banking Communities 29 Photographs courtesy of ICICSummer  2006 30
This Communities & Banking article is copyrighted by the Federal Reserve Bank of Boston.The views expressed are not necessarily those of the Bank  or the Federal Reserve System.
Copies of articles may be downloaded without cost at www.bos.frb.org/commdev/c&b/index.htm.
An earlier study looked at four
small-to-large supermarkets implement-
ing inner-city strategies: Schnucks in St.
Louis, Shaw’s in New Haven, Pathmark
in Newark, and America’s Food Basket
in Dorchester.2 Each company adapted
its business plan to accommodate the
characteristics of potential customers—
stocking shelves with hard-to-get ethnic
foods and hiring neighborhood people
who understood the culture and could
speak the language.3
Regional Clusters
Inner-city companies are a boon to
a region’s leading industries. They pro-
vide back-office support for the finan-
cial-services industry, maintenance
services for hospital and educational
institutions, and catering services for
business meetings. The central location
of urban suppliers allows just-in-time
service, a competitive edge.
Argus Communications, a Latino-
owned advertising and marketing com-
pany in the warehouse district of South
Boston, is an example. It provides serv-
ices to companies that want to reach
ethnic clients, particularly Latinos.
Argus’s offices are lofts in a renovated
factory. The rental rate is reasonable,
and yet the location is convenient to
downtown customers.
Similarly, Horizon Staffing Services
in East Hartford provides recruiting
services for administrative-support,
information-technology, engineering,
and biotech openings. The company
benefits from proximity not only to
clients, but also to a large pool of moti-
vated immigrant workers. Company
owner, Ahmed Ahsan, himself from
Bangladesh, reports that close to a quar-
ter of his employees are immigrants.
Those employees, in turn, have helped
Horizon find qualified immigrants
when it recruits for clients.
The Future
Many inner city companies are
doing well, but challenges remain. One
barrier owners have identified is access-
ing the capital needed to take their
companies to the next level. In a 2005
survey conducted by ICIC of past
Inner City 100 winners, owners
reported that accessing equity capital
was a significant barrier to further
growth, that there were no clear
channels available for them to access
capital, and that in general they
lacked knowledge of how the private
equity investment process works.
Meanwhile, a survey of equity
investors conducted by ICIC at the
same time showed that investors are
not very familiar with opportunities
in the inner city. 
ICIC is currently engaged with
partners at Bank of America and
other major capital sources in an
effort to accelerate the flow of capital
to inner city companies so that they
can scale up, providing more jobs
and more economic opportunities
for residents.
Deep-rooted misperceptions
take time to change. But market
opportunities have a way of attracting
savvy entrepreneurs who are willing to
look beyond the negative images. And
the sooner that happens, the sooner the
inner city will be able to share in the
benefits of the mainstream economy.
Deirdre Coyle is senior vice president
at the Initiative for a Competitive Inner
City, a Boston-based national nonprofit
economic development organization.
1 See http://imaps.indygov.org/ed_portal/
studies/bcg_inner_city_retail.pdf.
2 Michael E. Porter, The Changing Models of
Inner City Grocery Retailing (Boston: ICIC,
2002), http://www.community-wealth.org/
_pdfs/articles-publications/cdcs/report-
porter.pdf. 
3 Although in recent months, America’s Food
Basket has experienced difficulties, none is relat-
ed to the market plan. AFB was attracting cus-
tomers from as far away as Brockton, 40 miles to
the south.
Inner cities have inherent competitive
advantages. If understood correctly, these
advantages can be leveraged to build 
profitable businesses.

Inner cities offer competitive advantages

http://www.bostonfed.org/commdev/c&b/2006/summer/innercities.pdf

Inner cities offer competitive advantages

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