Urban Economic Development

The two works which inspired this post are The Economy of Cities by Jane Jacobs and “Alleviating the Financial Capital Barriers Impeding Business Development in Inner Cities”, A study by Timothy Bates.

In Jacobs' 1970 book, she not only lays out her theory that cities developed before agriculture, but also explains her theories for urban economic growth, the import-replacement effect, the export-multiplier effect, (which operate in tandem) and the addition of new work. In short, they state that as a city grows, its development of manufactured goods will allow it to produce domestically goods which it previously imported, and then add these goods to its exports to other cities. The principle of the addition of new work states that as these imports are converted to exports, ideas for new exports and new processes for making these new exports are derived, thus creating more economic opportunities.

However, the economic engine of cities (and of the United States as a whole) has changed radically since the 1960s. Commercial service has replaced industry as the driving economic force, and with the exception of highly specialized manufacturing (streetcars, airplanes, and medical equipment, for example), this is likely to remain the case. It also depends on the abilities of a city's educational system, for adding new work to old requires a constant supply of creativity, something that schools are increasingly unable to provide given standardized curricula and benchmarks based on standardized tests.

On the other hand, Bates' study focuses on the perils of inner city and minority run businesses, including access to start up capital through various means. Bates' study, however, does not discern small businesses from larger corporations that happen to be minority run or located in inner cities.

In his study, he focuses primarily on testing and debunking claims made by Michael Porter, such as urban areas representing untapped markets and logistical advantages present in inner cities.

Bates did not find that these claims held true, he also noted that a venture capital fund set up by Porter to test these theories was profitable due to its investments in ventures not located in inner cities, which balanced out investments in inner city firms.

However, Bates did find that there were substantial roadblocks to inner city firms who desired capital and credit, and his study examined efforts already in place to mitigate these as well as proposing new solutions.

One promising solution Bates examined was that of a firm called Medallion Funding, that would provide loans when given capital to back the loans up on (taxi medallions in New York City, or dry cleaning equipment for laundromats, for example). He states that this method holds promise, because it can both diversify and cater to smaller establishments, as it can recoup failed loans by selling off this capital.

To extend this into a firm that can provide start up capital for any type of small commercial businesses or boutique manufacturing company, a large organization would be required. This is so it can diversify its holdings and better absorb the failure of some companies it lends capital to, a reality in a market driven society. However, this organization would also need to be able to tailor itself to the needs of a specific city or even a specific neighborhood or district within a city.

Also, this organization would need a reliable source of capital to back the loans given out to urban businesses. One possibility is the building that the business is located in, which could be repossessed and sold off or re-leased for substantially more than the amount of the original loan.