Kotkin: Innovation, Immigrant Entrepreneurs Helped LA & Houston Recover – It Can Work For NYC, T00

New Yorkers are not known for their willingness to look outside the city limits for edification, but sometimes the experiences of other cities have important and relevant lessons for us. Like New York today, Houston in the late 1980s and Los Angeles in the early 1990s were suffering massive corporate downsizing and a devastating loss of civic direction.

Yet under the leadership of strong business-oriented mayors, Bob Lanier in Houston and Richard Riordan in Los Angeles, these two cities were able to stave off collapse and rebuild their economies from the ground up. Today, even amidst a stubborn national recession, both cities have been able to use their highly diversified, small business oriented economies as a way to stay on an even keel.

Some might thumb their noses at such comparisons. New Yorkers may prefer to look at other global cities like London or Paris as models. Yet in reality, New York is more like Los Angeles and Houston than it may want to believe-all three cities are highly immigrant dominated, magnets for young people with ideas.

At the moment, however, those two cities are doing much more to leverage those assets into entrepreneurial strength. In several key indicators-minority business growth and expansion, the Inc. 500 list of fast growing companies and the NCOE index of growth companies-Houston and Los Angeles far outpace New York's performance. New York would be better served to seek ways to boost its standing in these areas than worry about competition over museums, restaurants and celebrity sightings with Paris or London.

Houston may prove the strongest case. Back in the 1980s, the city went through a near-total economic meltdown; between 1982 and 1987, the area lost one out of every eight jobs. Dependent even more on energy than New York is on Wall Street, Houston's economy disintegrated when energy prices plummeted. "Seethrough" office towers replaced construction cranes as the metaphor for the city. The city lost over 200,000 jobs during this period.

Yet over the next decade, Houston re-invented itself and vastly diversified its economy. By the mid-1990s, the city had one of the highest rates of new business formations in the nation. It had the third highest "growth company index" in the 1990s, according to the National Commission on Entrepreneurship's study of the 13 largest metro areas.

New entrepreneurs swarmed into the city, in part to take advantage of sagging real estate prices. Unlike New York, which sees high real estate prices as a summum bonum of economic development, Houston allowed "creative destruction" to take full force.

Entrepreneur Andrew Segal headed out to Texas to make his fortune after graduating from New York University Law School in 1994. Young, aggressive and full of entrepreneurial energy, Segal decided to stake his nest egg on properties in both Dallas and Houston, cities not fashionable at the time among the real estate "experts" who saw in Texas' oversupply of "see through" office towers a disaster for any investor.

But to Segal and other savvy investors-including legendary Bass Brothers advisor Richard Rainwater-Houston's predicament represented an enormous opportunity.

Since then Segal has accumulated some four million square feet of space in Houston. Segal says most of his growth has come not from oil companies or other traditional bulwarks of Houston's economy but from a new generation of small firms covering everything from trade and media to food processing and specialty chemicals. "There's the beginnings of explosive growth here but very few people have focused on it," he maintains. "People still look for oil companies that can buy up big blocks of space. What I did is turn my focus on smaller companies and startups because that's where the growth is."

Segal and other observers credit three factors for Houston's recovery: the city's entrepreneurial culture, immigrants and the six-year tenure of Mayor Bob Lanier.

In sharp contrast to New York, Houston's immigrants and minorities-who now comprise roughly two-thirds of the city's population-have built some strong economic institutions. Perhaps the most important is Metrobank, which was founded by local entrepreneur Don Wang and now is Houston's fourth largest bank, with assets over $840 million.

"In the 1980s, everyone was giving up on Houston, but we stayed. It was cheap to start a business here and easy to find good labor," Wang observes. "We consider this the best place to do business in the country, even if no one on the outside knows it."

Finally, government played an important role here. In 1992, Bob Lanier, a former developer, became mayor. Like New York's Rudy Giuliani, he concentrated on reducing crime, but he also made bringing services to the city's varied neighborhoods a priority. Lanier focused mainly on infrastructure-roads, sewers, cleaning the streets and other essential services-and gave no overwhelming preference to any part of the city. Not only did the downtown recover, but many of the neighborhoods of the city came back as well.

Lanier took a similar approach on business. His administration focused largely on making it easy for companies to start with a minimum of interference from City Hall. He tried to diversify Houston's economy and create wealth across a broad spectrum of communities. Lanier claimed his primary goal was to improve the neighborhoods. "First you bring back the residents and then the commercial flows, and then the jobs come back." To a remarkable extent, he succeeded.

During the 1990s, Houston enjoyed one of the most bouyant economic expansions of any major American city, recovering all the jobs lost in the 1980s and then some. Even after the collapse of Enron, the city's economy has performed somewhat better than the national average, most large metros, and far better than New York. Although some areas, particularly downtown, have seen rising vacancies as a result of the company's implosion, most other parts of the city have continued to do well, as smaller firms, and the burgeoning medical sector, have taken up the slack.

Los Angeles, by all accounts, did not recover as well, nor has it withstood the current recession nearly as comfortably as Houston. Yet the city, which shares liberal politics and high costs with New York, did stage a remarkable comeback from what may be considered an even deeper crisis. The first blow was structural, a meltdown of the once dominant aerospace industry in the aftermath of the Cold War. The second was a massive escalation of costs mostly imposed by state government in Sacramento. The third came from a substantial withdrawal of Japanese capital following the onset of that nation's long recession.

Adding to these problems, Los Angeles suffered the worst riots in modern American history in May 1992. Fires, a major earthquake and floods all added to the area's devastation. By 1993, Los Angeles had lost 400,000 jobs, its unemployment rate was close to 10 percent and a large number of large established companies-such as Lockheed-were deserting the city.

Yet despite these problems, Los Angeles was able to turn around. As in Houston, one key element lay in "creative destruction"-when the older firms moved out of the city, new ones, particularly those run by immigrants, stepped in. The vast upsurge of new businesses came in a host of fields, including mainstays like entertainment, but also new ones like digital media. Most notably, there was actually a surge of blue-collar job creation, particularly in garments, textiles, food processing and warehousing. Unemployment dropped dramatically.

One critical contributing factor to the recovery-largely missing from New York-was the presence of numerous large minority-owned banks. By 2001, four of the L.A.'s six largest financial institutions were run by minorities and immigrants. These and a host of much smaller, community banks run largely by Asians financed much of the growth that took place in the mid-1990s even as most national and mainstream banks were busily writing off Los Angeles as a hopeless dystopia.

But government policy also made a difference. In sharp contrast to New York's leaders during the same period, Los Angeles mayor Richard Riordan, elected in 1993, saw the job of the city government to help all businesses: large and small, high-tech and low. Organizing what became known as "Mayor's Business Teams," Riordan dispatched scores of his most trusted people to help a vast array of firms cut through regulatory hurdles. Some were located around the downtown core, but many were in outlying sections like the San Fernando Valley and south Los Angeles.

"What the business teams did is make firms feel welcome in L.A. and expedite things," explains Riordan, a retired venture capitalist and native of Flushing. "It didn't matter to us whether they were large or small and we actually went after manufacturing firms because they created the jobs we needed."

Over Riordan's eight years, the "Business Teams" helped more than 3,000 businesses in a vast array of fields, from new media to food processing. This helped L.A. maintain a far more diverse economy than areas that depended on the stock market boom of the 1990s, such as San Francisco, Seattle and, of course, New York. As a result, it has suffered a much less severe job loss even in a bad economy, and despite the state's budget crisis.

Houston and Los Angeles offer both specific and general lessons for New York. The notion of using city resources to help a broad diversity of industries and neighborhoods is one that New York leaders have rejected for far too long. The specific focus in both cities on such things as basic infrastructure and small businesses could restore New York's long-lost status as an entrepreneurial hotbed.