#ICSummit15 Panelists: Access to Capital, Skilled Labor Remain Critical to Inner City Growth

Written by Kim Zeuli.

This week, ICIC’s 11th Inner City Economic Summit convened a national audience of economic development practitioners, business leaders, policymakers and researchers for a series of discussions related to a single question: what strategies are working to create jobs, income and wealth for the nation’s inner city residents?  A growing body of research finds that the levers to inner city business success may have two key components: increasing access to capital and connecting inner city entrepreneurs to skilled labor.

Our afternoon panel, Opportunities for Business in the Inner City: Evidence from Research and Practice, included new research on the drivers and barriers for small business growth in inner cities, with responses from practitioners with experience in those fields.

Access to Capital

This has long been a topic of study for the ICIC team, which has established programs including Inner City Capital Connections to address the disparity. Panelist Timothy Bates of Wayne State University, presenting research conducted with Alicia Robb of the E.M. Kauffman Foundation, moved the needle a bit farther during the panel and dove into what some consider a hard topic to discuss: is the lack of capital flowing to minority neighborhoods an issue of place—or of race?

Drawing on data from the Kauffman Firm Survey, Bates and Robb found that while minority-owned businesses express the need for traditional bank loans, many do not even bother applying. The reason? Minority entrepreneurs are often turned off by the burdensome loan application process, one that Bates and Robb claim tends to be more stringent than the process faced by their white peers—creating what they call the “discouraged borrower problem.” Based on their research, minority business owners do have a reason to be discouraged. They found that demographically-matched loan applicants are treated very differently based upon their race:

• 82.8 percent of minority owners were asked to furnish their income tax returns, compared to only 50 percent of white owners.
• 86.2 percent of minority owners were asked to provide the lender with detailed financial statements; only 52.4 percent of white owned businesses were asked to do so.
• Loan officers offered nearly 82 percent of white business owners a business card; only 42.9 percent of minority business owners received the same.
• Approximately six in ten white business owners were given help completing their loan applications, compared to less than two in ten minority business owners.

Intentionally or not, their research suggests that banks are discouraging otherwise credit-worthy minority owned businesses. With inner city neighborhoods overwhelmingly dominated by minority owned businesses, it’s unsurprising then that so many businesses in ICIC’s network express trouble accessing capital. “If equally credit-worthy applicants were treated equally, a lot of this problem would go away,” said Bates.

The need to help small businesses grow was particularly pronounced in Cleveland, which struggled in the early 2000s to encourage entrepreneurship. It took more than a decade for the city to show significant economic growth – and as panelist Ray Leach, CEO of JumpStart, noted, he is proud of the role his organization played in Cleveland’s resurgence. JumpStart is a locally-based, nonprofit “venture development” organization that combines venture capital investment with mission-based economic development.

Founded in 2004, JumpStart’s approach is to leverage capital investment, intensive technical assistance and collaborative ecosystem building to spark growth in the local business community. The firm began by focusing on one niche: early stage tech companies. JumpStart invested $30 million into 80 companies, and expects to realize a return of $70 to $90 million.

Leach was quick to point out: “Early stage investments were for economic development, not for return. But it generated returns that will allow us to lean into the most distressed areas.” JumpStart has begun investing in inner city businesses of all sizes, paying particular attention to more established firms that show promise for creating new jobs. This three pronged approach – capital, technical assistance, and building industry ecosystems – has resulted in 10,000 net new jobs for the region already.

Access to Skilled Labor

Another important ingredient in building a healthy business ecosystem is ensuring that entrepreneurs have access to skilled labor. New research by Richard Florida and Charlotta Mellander, and presented by co-author Kevin Stolarick of the India Institute for Competitiveness, finds that it matters where the skilled labor force lives: small metros fare well when there’s a high concentration of highly-educated workers that live in the suburbs; large metros experience more economic growth when human capital is located in the central city.

For Detroit, a large metro, this means strengthening the labor pool within the urban core, something that local nonprofit leader Rashida Thomas discussed how Focus: HOPE has worked toward that goal since the 1960s. Focus: HOPE provides comprehensive services for inner city residents looking to improve their job prospects.

Founded in 1967, the nonprofit Focus: HOPE emerged in response to Detroit’s race riots. Today, the civil and human rights organization is a key player in Detroit’s workforce development network. Focus: HOPE serves some of the hardest-to-hire residents: only 37 percent demonstrated math and reading skills above a ninth grade level, explained Thomas, Director of Education and Workforce Development. More than half lack a high school diploma. Yet Focus: HOPE still manages to place each of its program graduates in jobs.

The success, says Thomas, can be attributed to a number of factors. First, the organization solicits input (and program participation) from the private sector and trains clients for jobs in high-demand industries. Second, strict policies emphasize the importance of academics, attendance, attire and attitude. Finally, the organization provides critical wraparound services to ensure program participants excel – including support with housing, transportation, healthcare and overcoming the barriers that exist from having a criminal record. While the organization has achieved impressive outcomes, it’s more important, warns Thomas, for organizations to focus on those who need the help most, irrespective of the final outcome.

As the research and experiences of the panelists made clear, access to capital and effective workforce development will go a long way in helping inner city businesses flourish. Efforts in cities like Cleveland and Detroit are proving that these strategies have already made a difference for inner city economies.