Online Extra: Pitting Markets vs. Poverty

In 1994, Harvard University management professor Michael Porter started a nonprofit group called the Initiative for a Competitive Inner City. Its goal is to convince Corporate America that inner-city ghettos and surrounding neighborhoods represent overlooked investment opportunities. On Oct. 16, the ICIC released the first comprehensive study of the 100 largest inner cities in the U.S.

Porter spoke with BusinessWeek Senior Writer Aaron Bernstein, about the study and the ICIC. Edited excerpts of their conversation follow:

Q: What are your conclusions from the study?

A: First, let me back up and explain why we did it. In the past few years we've gotten a good national consensus on moving to a market-based approach to reviving distressed areas. It used to be that people thought inner cities were a social problem that needed a social solution. So it's considerable progress to see it as a market problem.

But until now we've never had a rigorous, concrete data set describing inner cities across the U.S. That's what the new study provides. It lets us compare and contrast all the major inner cities, to see who's doing well and poorly.

Q: The initial findings look pretty good, right?

A: The good news here is that there is already a substantial, diverse business base in these communities. In fact, we found that it's not all that different from the surrounding metropolitan and regional economies as a whole. We also saw that extreme poverty has gone down. However, inner cities haven't been growing their employment base as much as the surrounding economies, which isn't good.

Q: Can you tell why?

A: We haven't gone through all the data yet, but the preliminary indications are that it has to do with things like having a healthy housing stock, which correlates to success in the inner city. Also with immigrants, and if the city's regional economy is growing or not.

Q: So is the goal of doing the study to influence public policy?

A: Our goal broadly is to make markets work better, to get market forces to bring inner cities up to surrounding levels. That requires knowledge and information, which are powerful forces for catalyzing change. Some retailers have realized that there's a big market opportunity in the inner city. I'm hopeful that a broader data set will influence others in the private sector and help them to see the opportunities, too. We also want to influence public policy, by trying to figure out what works and what doesn't.

Q: You think if companies know more about the economics of inner cities that they will be more likely to invest there?

A: The great irony is that companies have been putting retail stores in poor countries like Mexico, even though purchasing power is multiples higher in our own inner cities. We also found that there are 814,000 companies in U.S. inner cities. That tells me there's an underserved market for commercial services, things like accounting and so on. The same is true with other kinds of investments -- retailers, and the like.

Q: The study found surprisingly high incomes in inner cities.

A: That's right, and it's true about other measures, too. Workforce educational levels are much higher than we thought. We all tend to focus on the bottom, the worst-off people, when we think of inner cities, which is probably a good instinct. But in doing so we've ignored the positive, the assets and the people who aren't that far from being mainstream.

Q: Do you think the outlook for inner cities remains positive?

A: A major belief I have is that a lot of the opportunity here is getting communities to look at themselves differently. Many people in inner cities don't have any hope of having a successful economy. They don't see themselves as potential entrepreneurs, for example.

Q: So you're trying to change the perception of inner cities?

A: We're trying to get people to understand that revitalizing inner cities is good for the economy and business. It's not just a social fairness thing. It's good for demand, and it unlocks the labor force we're going to need badly as population growth slows. It also unlocks land that's now just going to waste. So we're trying to reframe the debate.

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