When Carl Falletta decided to expand his Orlando, Fla.-based business a few years ago, he found plenty of factory space at a price he could afford within the City of Buffalo.

Much of the workforce at DDM Direct has also been found in the city - about 85 percent of the company's 85 local jobs, he said.

"We worked with the Workforce Investment Board to help find and screen employees," said Falletta, CEO of DDM.

As the company continues to expand, Falletta looks to those same resources, as well as his existing staff, to refer and recommend friends and family to join the team, making it likely that new employees will come largely from the city.

That bucks a trend found in a new national study released by the Small Business Administration's Office of Advocacy. While small businesses are revitalizing America's inner cities, the study found, most of these workers - 78 percent - live elsewhere, which is one reason why poverty remains a problem in inner-city neighborhoods.

The SBA study found that despite their high poverty rates, inner cities are home to 814,000 businesses employing 9 million people. And those small businesses employ 80 percent of the people who work in inner cities, the study found.

The Initiative for a Competitive Inner City (ICIC), which conducted the study, used census data to track economic activity in inner cities, which were defined as urban areas with high poverty or unemployment rates. Central business districts were included if their census tracts met the inner-city poverty criteria.

From 1995 to 2002, the number of jobs in inner cities grew by only 0.1 percent, compared with 1.9 percent for metropolitan areas as a whole. Job growth in 10 inner cities, however, outpaced growth in the metropolitan area.

The study shows that inner cities are lands of opportunity for local officials who want to grow their economies and businesses that want to tap new customers, says Steve Adams, the SBA's small-business advocate for New England.

Adams is the former director of the Center for Urban Entrepreneurship at Boston's Pioneer Institute. He says the study should convince policymakers to "throw off their old preconceived notions" of inner cities as places with social problems and look at them as "economic spaces." Inner-city entrepreneurs are "serious business people" who can contribute more to local economies with a little help, he says.

Governments should ease regulatory burdens that make it hard for inner-city businesses to grow, publish business information in Spanish and other languages used by immigrants, and facilitate business networks, Adams says.

"These people are facing barriers to growth that policymakers can help them overcome," he says.

Inner-city investments 'make money'

Large businesses, meanwhile, should see inner cities "as a real economic opportunity," Adams says. Small businesses in these urban areas need financial services and products that large businesses can provide.

Dan Penberthy, executive vice president at Rand Capital, said that although an inner-city address is not one of the requirements for funding, the firm does encourage its portfolio companies to remain in the city.

Those companies include Synacor Inc., with offices downtown in Key Tower, and G-TEC Natural Gas Systems, located at the William Gaiter Parkway on the city's East Side.

"We do have a commitment to finding the best space for our companies, and lately, the best space has been in some of these City of Buffalo properties," he said. "We have seen both members of their employee base move into the area and it's been easier to find some young, maybe entry-level staffing (from the city)."

Venture-capital firms with a focus on community development are "finding strong investment opportunities in inner cities," says Kerwin Tesdell, president of the Community Development Venture Capital Alliance.

Most of the investment capital for the alliance's 100-plus members comes from banks and other financial institutions.

"Our investments do make money for them," Tesdell says.

Disconnect between jobs, residents

These funds, however, also pursue a second bottom line: investing in businesses that provide good jobs for inner-city residents. Many inner-city businesses don't do that, he says.

The SBA study's finding that 78 percent of inner-city jobs are filled by commuters from elsewhere was "surprising," says Deirdre Coyle, director of communications for the ICIC.

"What that is telling you is, there's not a connection between jobs in inner cities and the inner-city workforce," she says.

Making that connection provides an opportunity for policymakers, she says.

Job-training programs need to match the jobs that actually are available, she says.

James Finamore, executive director of the Buffalo & Erie County Workforce Investment Board, said the organization has worked with companies in the past to encourage hiring from the city through programs with the Buffalo Economic Renaissance Corp. and the various Empire Zones.

"That was a case where we made a concerted effort to get people from the neighborhoods to staff those, in effect, ma and pa businesses in those commercial strips," he said.

Unfortunately, the WIB doesn't have the ability to offer incentives to make employers hire from the neighborhood, he said.

"Theoretically, where that is supposed to be happening is in the Empire Zones, based in low-income neighborhoods where they're incentivizing companies to locate there and to hire from those neighborhoods," he said.

Business services, financial services and information technology generated the most new jobs among inner-city small businesses from 1998 to 2001, the study found. Most manufacturing sectors lost jobs. Retail jobs declined in the inner city while booming in the suburbs.

At Integrity Distribution Inc., about 30 to 40 percent of the Buffalo company's 36 employees are city residents, including executives Ron Raccuia, president, and Tom Naples, vice president.

Integrity was previously listed on the Inner City 100 and continues to grow rapidly. Revenues have grown from $6.8 million in 2000 to a projected $12.5 million for 2005. The company is a commercial office-products and furniture dealer, and a supplier of apparel and footwear to sports teams through its AdPro Team Sports division.

"Both Ron and I are born and bred in the city and remained here and are loyal to the City of Buffalo, so we to take that into consideration," Naples said. "But it is an issue of matching skills for the positions we have and using the referrals we gather from our employees."

DDM was ranked 25th on Inc. magazine's annual listing of the 100 fastest-growing inner-city businesses, a list cosponsored by the ICIC. The index ranks companies based on revenue growth over a five-year period. DDM's revenues have grown from $4.7 million in 2002 to $8 million last year. Additional growth is projected next year, Falletta said.

The company, which operates from 70,000 square feet spread among three buildings on William Street, provides printing, advertising, marketing and mailing services. Another 35 employees work from the Orlando office, but Buffalo is where the company is growing. This summer, Falletta invested nearly $1 million in new full-color commercial printing equipment that will allow the company to offer complete services from design and printing to data processing and mailing. He credits his skilled workforce with enabling the expansion.

"If it wasn't for the employee base, we would not have been able to do that," he said.