City Journal

Joel Kotkin
L.A.’s Engine of Growth
The Small Business Revolution to the Rescue
Winter 1993

Despite Southern California’s economic and social troubles, there is reason for hope about the region’s future. A remarkable new manufacturing economy is evolving based on small firms. These companies, many owned by minorities and immigrants, are providing economic opportunities to the region’s poor and a basis for ethnic harmony.

Los Angeles, long dismissed as an overgrown suburb or a city without a center, now occupies center stage in the national debate over the future of American urban civilization. Last spring’s riots created a grim and misleading impression of Los Angeles as a breeding ground for poverty and racial strife. In fact, Southern California remains in large part a land of opportunity. Facing the fast-growing Pacific Rim, Los Angeles is at the heart of a profound transformation of the American urban economy. The dominance of the Fortune 500 is fading, while smaller, more flexible firms, many owned by minorities and immigrants, are coming to the fore.

American economists and urban planners have traditionally associated economic success with large companies. Yet in the new global economy, these corporate giants are fading in importance throughout the world. With new products and technologies developing at a blinding pace, modern manufacturers must learn to make products in small lots and to modify their designs continuously; stable markets for mass-produced goods are rapidly disappearing while firms that can quickly adapt to new markets by producing a wide range of sophisticated products are gaining the advantage.

Finding ways to adjust to these changes is essential to the future of U.S. cities, with their explosive social problems. As the small business revolution intensifies and big companies become less important, the core cities risk being left behind, doomed to a cycle of poverty, decay, and violence. To avoid this pitfall, policymakers must comprehend the enormous scale of the shift now taking place in the U.S. economy.

As recently as the late 1970s, America’s business environment resembled the highly centralized, corporate-dominated economy described by John Kenneth Galbraith in his New Industrial State. Yet within a decade, the share of gross national product controlled by Fortune 500 companies had dropped from 60 percent to barely 40 percent.

Once paragons of stability, giant companies now fall with an unprecedented rapidity, shaking the economic and social foundations of cities from coast to coast. During the 1980s, the Fortune 500 slashed their manufacturing payrolls by more than 1.3 million jobs, creating vast pockets of unemployment in large industrial cities. The corporate giants’ share of manufacturing employment has fallen from a high of nearly 75 percent in 1969 to roughly 50 percent today; during the same period, the proportion of. Americans working for these corporations declined from more than 20 percent to only 10 percent.

Overall during the 1980s, the Fortune 500 companies shed an estimated four million jobs. At the same time, but with less notice, smaller firms created more than twenty million new jobs, the majority of them in new companies. In manufacturing, for example, the number of people employed by companies with more than five hundred employees declined by more than 10 percent, while smaller manufacturers boosted their employment by 7.5 percent.

During the current recession, analysts and the media have focused most of their attention on the continuing cutbacks in employment by large corporations, now estimated to be reducing their job rolls at a rate of more than 2,200 workers a day nationwide. The real cause of the recent high levels of unemployment, however, has been a slowdown in small business growth. Small business employment is still growing, but only about one-fourth as fast as during the 1980s.

When the economy recovers, the new jobs will almost certainly come from smaller firms and new start-up businesses. If American cities are to remain vital centers of industry and commerce, their leaders must develop policies that meet the needs of entrepreneurial companies.

In New York, the traditional capital of corporate America, political leaders have resisted acknowledging the new economic reality. Under pressure from the press and the ruling elite, the city has bestowed its largess primarily on multinational corporations and the builders of high-rise office towers, while the needs of smaller firms, particularly in manufacturing, have largely been ignored. During the halcyon days of the financial boom, in fact, one top New York economic official proclaimed that the city didn’t want “lousy Silicon Valley-type manufacturing jobs.”

The companies that provide those “lousy jobs” obliged: They didn’t come to New York, and many that were already in the city departed. Since the early 1980s, for example, the New York area’s share of the Inc. 500 list of fastest-growing small companies has consistently been less than half that of either Los Angeles or even the San Francisco Bay area, which has a population only about one-third as large as the New York area. Overall small business growth in New York fell to less than one-third the national average.

As a result, the city—which in the 1950s had a highly diverse manufacturing base that included garments, metals, and a host of smaller specialized industries—lost more than 600,000 industrial jobs by 1982. The city’s industrial base declined an additional 20 percent by 1989—before the current recession began.

Without a vital small business sector, the city’s economy has tended to produce two kinds of jobs: extremely low-end service positions and well-paid technical and managerial positions for the educated “post-industrial” elite. Instead of providing minorities with an economic ladder, New York’s “boom years” of the mid-1980s engendered a large permanent underclass; only Cleveland, Detroit, and St. Louis had a lower overall rate of labor participation. Nationwide, the labor participation rate for teenagers out of school is 50 percent. In New York, the rate has been a mere 20 percent—and far lower for minorities.

By contrast, Southern California, which never developed a corporate headquarters culture comparable to New York’s, rode the entrepreneurial wave throughout the 1980s. Even as larger-scale industries such as aerospace and automobiles fled, Los Angeles’s industrial base remained formidable: It is now twice the size of Chicago’s, its nearest rival. Los Angeles maintained its industrial base by shifting toward flexible, smaller-scale firms in varied fields such as textiles, biomedical equipment, and computer components. By the end of the decade Southern California was home to more Inc. 500 manufacturing companies than Chicago, Pittsburgh, and Detroit combined.

During the 1980s, Southern California—in sharp contrast to New York and other traditional manufacturing regions—actually expanded its production, particularly in the “edge city” areas on its periphery. Indeed, until the recession reached California, small industrial firms were still creating enough new jobs to replace those lost by the departure of larger companies, according to a study by the Center for the New West. Not surprisingly, the 1980s saw the construction of ten times as much new industrial space in the Los Angeles area as in New York; similarly, industrial expansion in the Los Angeles suburbs vastly outpaced that of areas such as Long Island and northern New Jersey.

These expanding industries have provided immense opportunities for Southern California’s fast-growing Latino and Asian populations. Far from constituting an underclass, the region’s immigrants are less than half as likely as the general population to be dependent on welfare. And Los Angeles’s Latinos participate in the labor market at rates well above those of non-Hispanic whites.

It is true that a large portion of Southern California’s industrial growth took place in traditional low-wage industries such as garment manufacturing. But much of it was in better-paying businesses such as fabricated metal products, industrial and commercial machinery, and electronic equipment. In areas where these industries are concentrated, such as La Puente, a city of 37,000 east of downtown, predominantly Latino neighborhoods have achieved incomes roughly equal to the national average. East Los Angeles, often characterized as the “capital of the Third World” by traveling dilettantes and left-wing critics, has actually emerged as “the landscape for Latino capital accumulation and social mobility,” in the words of demographer Victor Valle.

Indeed, roughly half of the region’s small industrial firms, mostly “job shops” that make specialized products to order, are owned by Latinos, many of whom have risen from the most menial positions. “Eighty to 90 percent of the machinists and sheet-metal shop people in this town are immigrants—Hungarians, Romanians, and the greatest number Latinos,” observes Robert Barbour, a native of Argentina who has organized some eighty predominantly Latino job shops into his American Manufacturing Network (Amanet). “The labor force helps keep manufacturing above ground—and, by now, two-thirds of the owners are from the new [ethnic] groups who see this as their opportunity.”

The emergence of organizations such as Amanet suggests the shape Latino industrial power may take as it continues to expand. Amanet provides a marketing channel as well as technical assistance to its member companies, most of which employ ten workers or less. Often rather unsophisticated producers at start-up, these companies now make a vast array of goods ranging from auto parts and boating supplies to sophisticated components for commercial aircraft, biomedical devices, and consumer electronics products.

The growth of small industrial networks among Asians has been even more dramatic. In Fountain Valley, a heavily Asian city in Orange County, an entirely new economy based largely on the manufacture of computer components has emerged since the early 1980s, mostly through the efforts of Chinese, Vietnamese, and other Asians. One of the firms in the area, AST Research, is already a billion-dollar computer maker; its spinoff Kingston Technologies ranked first in Inc.’s 1992 list of the nation’s five hundred fastest-growing companies.

Kingston president John Tu takes issue with those in the press and Southern California’s old business establishment who see the region’s largely immigrant workforce as an incipient underclass. In fact, he says, his company’s 120 employees—nearly all of whom are immigrants, from Latin America and the Middle East as well as Asia—are as skillful and diligent as their counterparts in East Asia or anywhere else.

“This is still the land of opportunity, but people don’t recognize it,” says Tu, a lanky Taiwanese immigrant whose firm’s sales this year are expected to top $240 million. “If people are motivated and treated fairly, they can compete with anyone in the world, including Taiwan or Japan.”

As developments in both East Los Angeles and Fountain Valley suggest, the new Angelenos, rather than becoming dependent on welfare, are rapidly emerging as the most vital producers in Los Angeles’s entrepreneurial economy. Southern California already has the nation’s largest concentration of enterprises owned by Latinos, Asians, and blacks. In 1987, these companies had combined revenues nearly three times as large as minority-owned businesses in New York City, which has a nonwhite population comparable in size.

Perhaps the most promising sign of all has been the emergence of a strong black middle class that is among the largest in the country. Although Los Angeles’s black community is only the nation’s fourth-largest, its black-owned businesses have higher total revenues than those in any other U.S. city. Until recently, this black middle class has been overshadowed in the public debate by more-militant black leaders. But the riots—condemned by three-fifths of Los Angeles blacks in a Los Angeles Times poll—alerted middle-class blacks to the need for new leadership in their community.

At the heart of the new black middle-class agenda lies a determination to shift black attention from political to economic issues. Such a shift is partly a matter of political necessity. Blacks, whose population remained constant during the 1980s while that of Latinos and Asians exploded by two-thirds, will likely soon become only the region’s third-largest ethnic minority. Their political power will inevitably be diminished.

Middle-class blacks increasingly recognize that small business, not politics, represents the best hope for those in their community who have been left behind. “I see society as organized along predominantly an economic, not a political, paradigm,” observes Errol Smith, president of Building Maintenance of America, a company based in the northeastern suburb of Glendale. But the 37-year-old Harlem native complains that “a lot of minorities are focused on looking . . . for racism rather than for opportunities.”

Smith, who also hosts a popular radio talk show, preaches a gospel of self-help that is already deeply entrenched in the Latino and Asian communities and is increasingly resonating with blacks as well. New upscale publications such as Black Bottom-Line Magazine have appeared in the wake of the riots, challenging the traditional African-American leadership’s focus on government solutions to inner-city problems. Smith sees the region’s burgeoning Asian and Latino business communities not as enemies, but as role models and potential allies. His approach is reassuring to Asian business owners, who were deeply shocked by the anti-Asian tone of the riots, epitomized by attacks on Korean enterprises.

Traditionally quiescent, some Asian business leaders have begun to cultivate ties with other parts of the region’s ethnic economy. For example, Harold Chaung, president of the Chinese Bankers Association, has set up a series of seminars to help black and Latino entrepreneurs gain access to his community’s capital resources.

The key to building a multiracial economy must ultimately lie with the Latinos, who by 2000 will be the region’s largest ethnic group. Like other ethnic groups, the Latino community was shocked both by the ferocity of the riots and by the fact that some Latinos—mostly from the poor, largely immigrant communities just west of downtown—joined in the looting.

Although the Mexican-American communities on the East Side were untouched, looting by Central American refugees conjured up images of a Latino Los Angeles following an increasingly left-wing Third World agenda. But most Latinos are unlikely to embrace radical politics, which would simply recreate the chaos and class warfare they came to California to escape. They are more likely to find common ground with other ethnic groups in a shared work ethic, a commitment to family values, and a desire for order.

These attitudes will be strengthened by an emerging Latino business leadership that is growing in power and influence. In 1993, for instance, Dan Garcia, a top Warner Brothers executive, will become the first Hispanic head of the Los Angeles Chamber of Commerce. Leaders like Garcia see their community as consisting not of victims but of workers and entrepreneurs, the inheritors of the new Los Angeles.

“We are a minority city, an immigrant city, and there are some very positive factors that come into play,” observes Latino venture capitalist Danny Villanueva. “The future of this city is going to be the emerging entrepreneurs—read into it, minority- -who are fastest growing in producing new jobs. The big companies haven’t added a job in two generations.”

In the coming months, this new vision of a multiracial, entrepreneurial Los Angeles will increasingly dominate the debate as the city chooses a successor to five-term Mayor Tom Bradley. Already, most of the likely candidates—including former Ambassador to Mexico Julian Nava, City Councilmen Mike Woo and Joel Wachs, State Assemblyman Richard Katz, and Transportation Commissioner Nick Patsaouras—are competing to identify with the emerging ethnic and economic forces, rather than with ethnic warlords or the traditional corporate elite.

The new emphasis on economics rather than racial entitlement is a hopeful sign for Los Angeles. In an ethnically diverse society, economic opportunity is the best hope for ethnic cooperation. The small business revolution can become an engine for the creation of a new multiracial economy and a harmonious society—in New York and other cities as well as Los Angeles.

“Business is the way we can make this all work,” Villanueva says. “A lot of people think all these minorities are a disaster. But the diversity here is going to be in the end what saves us, not what dooms us.”

UNDERSTANDING THE RIOTS

In the months following the Los Angeles riots, the conventional wisdom, even among those who once looked favorably on the region, has been that Southern California is an experiment that failed. By the end of the three days of arson and looting, all the world knew what only a few here had fully suspected—that some undefined but undeniable rot had eaten into the basic structure of the Southern California megalopolis.

In New York and other East Coast centers, the fashionable analysis is that of dilettantes who, after a few weeks or even days in Los Angeles, saw it as destined to follow the pattern described in Ridley Scott’s futuristic film Blade Runner, with its images of environmental degradation, gaping barriers of class and ethnicity, and admixture of high technology and social decay. In this view, Los Angeles is hopelessly divided between a few rich whites, most working in Hollywood, and a massive, largely minority underclass seething with resentment and driven toward violence.

In truth, Southern California’s prospects, if not ideal, are hardly so bleak. To a considerable extent, the riots reflected unique political conditions—most notably the presence of a stubborn, militaristic police chief and a highly politicized African-American community leadership that condoned and even helped spur the violence.

But most of all, the riots were sparked less by rage than by envy; they were primarily a product of the massive demographic transformation that was brought on by Southern California’s entrepreneurial boom of the 1980s and that fueled its growth. Just as prosperity on the east coast had once attracted millions of Europeans to New York, the Southern California boom lured a flood of newcomers, most of them from Latin America and Asia. As a result, Southern California easily emerged as the nation’s leading center for new immigrants, by 1989 welcoming more than twice as many as second-place New York.

These changes unnerved even prosperous residents of Los Angeles. To the poor in South Central, the immigrant “invasion” seemed particularly ill-timed. Many who were not part of the great black exodus to the suburbs during the 1970s and 1980s watched economic opportunities dwindle, as up to seventy thousand Fortune 500 jobs, many of them in the aerospace and automotive industries, were lost.

Yet even as the former economic mainstays were leaving, new immigrants began participating, as entrepreneurs as well as workers, in the new small companies that were reviving the local economy. By the late 1980s Asians, whose countywide population is roughly equal to that of blacks, earned business revenues nearly twice as large. South Central Los Angeles, the traditional core of the region’s black community, was becoming predominantly Latina, with much of the business base in the hands of immigrants—particularly Koreans, who are ten times as likely as blacks to become entrepreneurs.

Los Angeles’s blacks are in many ways better off than their counterparts in other large U.S. cities—only half as likely to be living in poverty, for example. But the rapid changes in the city’s ethnic makeup and economy made many in the community feel increasingly displaced. In the months before the riots, animosity between blacks, Latinos, and Koreans was growing perceptibly. Black political leaders, such as Brotherhood Crusade head Danny Bakewell (who might be described as Los Angeles’s Al Sharpton), were exploiting and heightening tensions created when a Korean store owner shot a black girl. At the some time, blacks and Latinos competed for positions at the local Martin Luther King Hospital and over turf at public housing projects.

The tinder was dry on April 29, 1992; when it exploded with a ferocity few could have expected, the immigrants—not the white Establishment or even the police—were the main targets. Persuaded that the newcomers were the root of their problems, South Central residents turned their “rage” first on Koreans and Latinos. Even though the looting eventually spread to other communities, Latino and Asian merchants, according to both federal and city statistics, accounted for roughly 85 percent of all the businesses damaged in the riots.

 

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