In order to test Michael PorterÕs theory of competitive advantage of the inner city, we investigated three cities that received the market based incentives recommended by Porter. Through the Empowerment Zone and Enterprise Communities initiative, six cities were provided with tax incentives for business relocation and $100 million to promote capital investment and infrastructure improvement. Each case study implemented the Empowerment Zone initiative differently and experienced varied success.

   In the ÒCompetitive Advantage of the Inner City,Ó Professor Michael Porter advances his theory of how the inner city can be saved through its own characteristics. Porter claims that certain companies can locate in inner cities in order to take advantage of the benefits that inner cities can provide - location and cheap low-skilled labor. However, in order to facilitate that movement of companies into the inner city, local governments must aid in the establishment of a convincing business environment. Porter begins by citing two different companies as examples. Alpha Electronics was a company which was lured into locating in the South Bronx by the cityÕs offers of subsidy and other measures aimed at lower costs and boosting profits. However, the location offered no advantages to a company like Alpha Electronics, since the high-tech company was too far away from computer-design and software companies to benefit by sharing customers, suppliers and electronic designers and could not induce potential suppliers or customers to visit them. They were also troubled by a lack of security and an inability to find or train high-skilled workers. The other example Porter gave was of Matrix Exhibits, a supplier of trade-show exhibits who located themselves in the middle of AtlantaÕs inner city. Unlike Alpha, Matrix was able to benefit from several advantages. They were closer to the Atlanta World Congress Center, the cityÕs chief exhibition center, and were also able to hire members of the local community to work for them. The main factor that distinguished the two companies were their respective locations to clusters. Clusters are important because they provide access to expertise, connections, and infrastructure, which they can in turn learn and exploit to their own economic advantage.

  The true advantage of the inner city lies within its strategic location, integrations with regional clusters, and human resources. According to Porter, Òinner cities can offer a competitive edge to companies that benefit from proximity to downtown business districts, logistical infrastructure, entertainment or tourist centers, and concentrations of companies.Ó In terms of integration with regional clusters, the proximity of inner cities to many different types of clusters would make them more attractive for companies planning to relocate. In order to capitalize on this advantage, local governments should take steps to allow for upgrading of existing and nascent clusters by way of training, infrastructure and technology upgrades. In the example of Alpha Electronics, the company was a complete mismatch. Inner cities do not offer much in terms of high-skilled labor but offer much in low-skill labor. Over time, with a good amount of companies situated within the inner city, Òsuccessful job creation will trigger a self-reinforcing process that raises skill and wage levels.Ó There are also many examples of local entrepreneurship in the inner city which is something that governments should take a hand in encouraging and rewarding. As there are multiple advantages to locating to inner cities there are also real disadvantages to locating in inner cities which explain why there are so few companies that do. In terms of land, although there are abundant plots of vacant property, they are not all usable. And even if land bundles are assembled, expensive demolition, environmental clean-up and litigation is necessary before building. Building costs in the form of delays and fees associated with logistics, negotiations with community groups and strict urban regulations cause headaches and make locating to inner cities unattractive. There are also numerous other costs, such as when compared to suburbs, Òinner cities have high costs for water, other utilities, workersÕ compensation, health care, insurance, permitting and other fees, real estate and other taxes, OSHA compliance, and neighborhood hiring requirements.Ó There is also a greater proportion of inner city people who depend on welfare which results in higher corporate taxes in that area and Òthe resulting tax burden feeds a vicious cycle Ð driving out more companies while requiring even higher taxes from those that remain.Ó These barriers, besides making the inner city an unattractive place to locate, also cause barriers to entry of entrepreneurs. Crime also causes a problem, as it raises costs (for clean-up, extra security and more lighting). Besides financial costs, crime also causes an environment of fear, and few people would be willing to work in an area of high crime. Any advantages that an inner city may have is diluted by a lack of developed infrastructure. In terms of human capital, there are low-skilled workers available, and managers lack formal business training. An important problem is the lack of capital. The access to debt and equity represents a formidable barrier to entrepreneurship and company growth in inner city areas. It is hard to gain capital as an entrepreneur since banks find small business lending only marginally profitable. Proliferation of government loan pools and quasi-public lending organizations produce fragmentation, market confusion, and duplication of overhead. And finally, there are many anti-business attitudes stemming from past history with exploitative businesses.

   PorterÕs model is very different from the old model of the urban renewal of the inner city and calls for the establishment of new roles of the private sector, government, and community-based organizations. According to Porter, the private sector must create and expand business activity in the inner city. Retail and service businesses must tailor their goods and services to the local market, as well as build relationships with the community (which is easier if they also hire locally). Such changes would result in fewer security problems. Large concentrations of businesses located in close proximity to one another in clusters also help to spread security costs and reinforce perceptions of safety. The private sector must also establish business relationships with inner city companies so as to encourage such companies to export and thus remain competitive. Corporate philanthropy should also be redirected from social services to building business-to-business relationships, since an increase in business would decrease the need for such social services in the long run. Employers should certify training programs based on relevant criteria and likely job availability. The private sector could also make a substantial impact by providing management assistance to companies in the inner city. And finally, the private sector should adopt the right model for equity capital investments, so that the investment community will be convinced of the viability of investing in the inner city.

   As of the time Porter developed his model, most government programs were based on subsidies rather than on market realities. Government must shift its focus from involvement and intervention to creating a favorable business environment. Often, most of the funds which go to developing or maintaining infrastructure go to middle class residential areas. Instead, the government should direct resources to the areas of greatest economic need. The should also increase the economic value of the inner city as a business location. Porter suggests that a Òsingle government entity could be charged with assembling parcels of land and with subsidizing demolition, environmental cleanup, and other costs. The same entity could also steamline all aspects of building Ð including zoning, permitting, inspections, and other approvals.Ó Porter gives the example of Indianapolis as such a streamlining governmental body. As there are too many rules governing inner cities in terms of building, government should deregulate such rules to cut costs of introducing businesses to the inner city. And most importantly, the government needs to upgrade the infrastructure of potential business areas. Government should deliver economic development programs and services through mainstream, private sector institutions. They should make a bigger effort to eliminate discrimination for entrepreneurs to get their loans, and find a way to lower transaction costs which have discouraged many banks from finding and making inner city loans. And finally, government should align incentives built into government programs with true economic performance. According to Porter, Òdirect subsidies do not work.Ó Such subsidies should be used for site assembly, extra security, environmental cleanup, and other investments designed to improve the business environment.

   Porter also explains that community-based organizations must also develop a new role. They should identify and build on their own strengths. Most community-based organizations (CBOs) lack the skills, attitudes, and incentives to advise, lend to, or operate substantial businesses. But when it comes to financing and assisting for-profit business development, CBOs cannot compete with private sector institutions, but what they can do, given the organizationsÕ roots in meeting the social needs of the neighborhood, it would be difficult for them to put profit ahead of their traditional mission. They should work to change workforce and community attitudes, and to create work-readiness and job-referral systems as well as facilitate commercial site improvement and development.

   There are many different types of responses to PorterÕs model of utilizing competitive advantage. In Johnson, Farrell, and HendersonÕs response, ÒMr. PorterÕs ÔComeptitive AdvantageÕ for Inner-City Revitalization: Exploitation or Empowerment,Ó they claim that PorterÕs model neglects to mention that some companies that enter the inner city tend to displace independently-owned stores. They then monopolize the market and are able to set higher prices. Despite PorterÕs suggestions that companies develop relationships with the community, companies in the inner city tend to not focus on the cultural and ethical needs of the community. PorterÕs model places a blank trust in private businesses and does not provide a strategy to avoid repeating past exploitative experiences. Companies also tend to hire immigrants rather than members of the community that have been there for a long time, maintain a sweatshop environment and do little to help the community at all. In short, they argue that companies will have difficulty establishing relationships since they will have more interest in exploiting the community. Johnson, Farrell and Henderson also make the claim that government subsidies do work, and that funding businesses in inner cities have helped them gain a solid foothold and that funds to support job training as offered by local colleges are appropriate and help to revitalize the inner-city economy. They explain that a proper alternative strategy is to establish Òemployment anchorsÓ to provide jobs for inner-city workers that pay decent wages, establish rules that require hiring to be supplemented by customized training for specific job placements, fund social programming such as those offered by YMCA\YWCA and churches, coordinate all community assets of government, including: CBOs, business sectors, philanthropic community and colleges, and to develop the training programs of community development companies and educational institutions in an effort to make managers and entrepreneurs more effective. They cite the example of the Urban Investment Strategies Center, developed by the University of North Carolina, as a proper community-oriented group that targets entrepreneurship and community development, child and family development, and education and literacy. They also cite the example of Urban Enterprise Core which trains MBA students to help out in Urban development. They conclude by stating that Òit is imperative that the Ôcomparative advantageÕ be designed for the empowerment of inner-city workers and entrepreneurs rather than for the exploitation of inner-city resources by outside majority and business.Ó

   In Blakely and SmallÕs response, ÒMichael Porter: New Gilder of Ghettos,Ó PorterÕs model is seen as nothing new to the economic community due to Booker T. Washington and WEB DuboisÕs own arguments and ideas about the subject of improving the lifestyles of minorities. Blakely and Small claim that the traditional structure has Òsystematically frozen out blacksÓ due to immigration and the sea of immigrants as a cheap labor source. They also suggest a need to keep members of the community who have advanced into the middle class in the inner city. They agree with Porter in that perceptions are a problem, but bring up culture as one of the impediments to any economy revitalization and cite a culture of poverty and underclass values as factors that have kept the economy of the inner city down. As a result of the culture of poverty and the perceptions of it, most employers prefer immigrants or outsourcing over inner city workers. Blakely and Small also support PorterÕs argument that government funding has largely failed since the programs during the Johnson-Nixon era had helped politically and only helped some people advance, who then left the ghetto and moved into other areas. They claim also that plans to subsidize ghetto workers hurt upward mobility and thus penalizes any ambition. They suggest that government should concentrate on human capital wealth formation, the need to provide community members with their own equity capital, providing community development banks and welfare reform in a way which would give men more incentive to stay in families.

   In ÒIs the Inner City Competitive,Ó Simms and Allen focus on job creation for inner-city residents, increased tax revenues through property or business tax, more goods and services for inner-city residents, and creation expansion of the entrepreneurial class. They explain that government should also award companies that are not located in the inner city who hire inner-city workers since they provide jobs for those people. Simms and Allen also explain that in accordance to the Becker model, minority companies are able to hire inner-city workers in order to profit maximize. They explain that other central city companies will do the same once there is developed infrastructure and lower land costs. In ÒEconomic Development Strategies for the Inner City: The Need for Governmental Intervention,Ó Fainstein and Gray explain that any model of urban revitalization tends to displace low income people. They also explain that only some companies will do well in the inner-city environment, and most of these are Òoften unglamorous, non-leading-edge companies,Ó such as warehousing, distribution, recycling, automotive repair and food processing. They also claim that some of the companies cited in PorterÕs argument, notably HuntÕs Point which did receive government subsidies earlier on in its establishment, proves government funding to companies work too. They also explain that CBOs are still learning and improving. But most importantly, they have compared PorterÕs model to the 1950s-1960s project of urban renewal which resulted in a growth of urban development in terms of increases in employment and overall local economy. Although there was economic growth in the area, there was no redistribution of the profits, resulting in much of the same living conditions as before. They propose that the government needs to play a larger role in the distribution of money.

   In his own response to the responses, Porter clarifies his model by explaining in more detail how the roles of the private sector, government and CBOs would change. In the role of the private sector, Porter explains that there is a desire for local control of development efforts, which although understandable given the track record of outsiders is not practical. He explains that the private sector will step forward since the inner city can offer an attractive market, advantageous location and good employees. He explains that market forces are not working on their own because the are many misperceptions and biases that surround the inner city. For example, employers and potential customers feel that inner cities are largely combat zones and that the workers they will encounter there have no ambitions, skills or resources. Porter also explains that since community groups have too many demands that fewer companies will want to locate there so as to avoid the hassles. To give a fair example of what CBOs and schools can do, PorterÕs group created an initiative named the Initiative for a Competitive Inner City, which develops programs to engage companies, professional service firms and business school students, faculty and alumni in assisting and creating inner-city companies. In terms of the roles of CBOs, Porter explains that they deserve credit for helping create conditions under which the private sector would consider investing, but needs to move on to next phase and seek to build networks with mainstream business institutions (such as business schools, banks, corporations, and chambers of commerce) rather than trying to be them. CBOs can also help by playing a role in connecting inner-city residents to nearby jobs and with their experience in the community, facilitate site improvement, development and expansion. And finally, local governments should bear responsibility for the ÒdisinvestmentÓ by the private sector in inner cities by failing to maintain schools, infrastructure, and public safety, raising taxes excessively, and creating a morass of costly regulations. They should help by acting as marketers in courting, welcoming and assisting companies (for example, they could greet leaders at the airport, facilitate the obtainment of building permits and exhibit different building sites). Government should also award any company that hires inner-cit workers. Subsidies should not be given to companies directly, and instead be used to create a more comfortable business environment by assembling parcels of land, improving infrastructure, doing environmental remediation and providing better public safety. Porter claims that tax incentives have been used over the years to support economic development in designated depressed areas, called enterprise zones (of which we have case studies of) and are not as effective since companies that locate based on tax breaks rather than genuine competitive advantages are not sustainable. These subsidies fail to encourage hiring residents of the depressed area, but only encourage locating there and also fail to promote entrepreneurship. If tax breaks are to exist, then they should at least be based on successfully turning a profit. And finally, Porter suggests that the government should revise their regulations in order to lower transaction costs and make it easier for companies to locate in the inner city so as to take advantage of the competitive advantage.