Where Small Businesses Are Powering Inner-City Neighborhoods

Note: The following was originally published by Next City on October 18th, 2016.  

Written by Oscar Perry Abello

It’s no secret that small businesses are the engine of the U.S. economy, typically making up 64 percent of net new private sector jobs in a given year. It turns out, that’s even more true when it comes to the economies of inner cities, according to a new report from the Initiative for a Competitive Inner City (ICIC).

The report looked at five cities — Detroit, D.C., Dallas, Chicago and Los Angeles. ICIC researchers defined small businesses as those with fewer than 250 employees. They compared the share of jobs in small businesses in each city overall with the share of inner-city jobs in small businesses. With one exception, small businesses accounted for a higher percentage of jobs in inner-city areas than cities overall.

ICIC defines an inner city as a set of contiguous census tracts in a city that have higher poverty and unemployment rates than the surrounding metropolitan area and, in aggregate, represent at least five percent of a city’s population. These neighborhoods also must have a poverty rate of at least 20 percent, and unemployment rates at least 150 percent of metropolitan area unemployment (or a median household income that is 50 percent or less than median income for the metropolitan area).

So, while inner-city areas remain economically depressed, they are also safer than they’ve ever been. Perhaps it’s because entrepreneurship is connected with lower violent crime. After all, minorities, particularly black women, are the fastest growing segment of entrepreneurs.

In L.A., small businesses account for 74 percent of aggregate jobs. In L.A. inner-city areas, small businesses account for 77 percent of jobs. Both were the highest percentages in the study, which points to the film and entertainment industry as a possible cause for those high percentages. One small business developer to told ICIC, “There are a lot of small businesses in the entertainment industry. The studios outsource a lot — almost everything. There is a real symbiosis between major entertainment studios and the small businesses that serve them.”

In D.C., a city of only 659,000 people within district limits, small businesses account for 220,785 jobs, or 62 percent of aggregate jobs. In D.C. inner-city areas, mostly in the far northeast and southeast parts of the city, small businesses account for 74 percent of jobs.

In Chicago, small businesses accounted for 58 percent of jobs overall, compared with 70 percent of jobs in inner-city areas.

Detroit small businesses accounted for 108,465 jobs, or just 53 percent of all jobs within city limits. Detroit’s inner-city map is striking, covering nearly the entire city. Small businesses accounted for 64 percent of jobs in Detroit inner city areas.

Dallas was the exception, with small businesses accounting for 48 percent of jobs overall and just 38 percent of jobs in Dallas inner-city areas. The study points to Dallas’ historical strategy of “attracting and retaining” large employers. Considering Dallas’ inner-city areas are mostly in the southern parts of the city, that strategy hasn’t worked out well at all for those neighborhoods.

One easily ignored reality that the report points out: Inner cities aren’t economically isolated pockets of survival-driven entrepreneurs with no options elsewhere. In fact, they are deeply embedded within larger regional economies. While small businesses account for most jobs located in inner-city areas, most inner-city residents leave inner cities to get to work. The small businesses that are located in inner cities serve neighbors employed in other parts of the city and all over metropolitan areas. In the cities ICIC studied, only 11-25 percent of inner-city residents also work in the inner city; in Detroit, 67 percent of inner-city residents leave the city entirely to find work.

The report points to other studies showing that Detroit suffers from a lack of entry-level job opportunities, forcing many Detroiters to find work elsewhere. Detroit would need to increase small business jobs by 63 percent in order to eliminate inner-city unemployment, ICIC estimates. None of the other cities needed more than an 18 percent increase in small business jobs to eliminate inner-city unemployment.

The report includes a playbook for supporting urban small business job creation. None of the cities studied had a comprehensive small business plan, although every city had other plans or frameworks in place for inner-city job creation and economic development, such as Detroit Future City, which involved over 1,000 residents in a comprehensive sustainable development planning process.

JPMorgan Chase funded the ICIC report, which comes out just as they’ve also announced a new $75 million, three-year commitment to support women, minority and veteran-owned small businesses.

In a statement announcing the new commitment, JPMorgan Chase’s Janis Bowdler said that “recent research from ICIC shows small businesses are more likely to hire from distressed neighborhoods where unemployment is high, reinforcing that small businesses are critical for employment.”

Learn more and read the full report here.