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Article Excerpt
[ILLUSTRATION OMITTED]
Many believe the mega discount store Wal-Mart is a plague set upon small "mom-and-pop" businesses. The instant Wal-Mart moves into town, all small businesses are destroyed in its path, leaving downtowns barren and empty.
This popular misconception has garnered significant media publicity and widespread public acceptance. President Clinton's former secretary of labor, Robert B. Reich, wrote in a 2005 New York Times op-ed that Wal-Mart turns "main streets into ghost towns by sucking business away from small retailers." One of the largest anti-Wal-Mart organizations, Wal-Mart Watch, released a report in 2005 claiming that a Wal-Mart expansion in Iowa was solely responsible for the extensive closings of mom-and-pop stores, including 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety shops, 158 women's stores, and 116 pharmacies.
Are those claims true? In this article, we use rigorous econometric estimation techniques to examine the rate of self-employment and the number of small-employer establishments in communities where Wal-Mart has entered the market. We find that Wal-Mart has no statistically significant impact on the overall size of the small business sector in the United States. When all is said and done, there are just as many small businesses that are just as profitable despite the presence of Wal-Mart.
PREVIOUS ESTIMATION PROBLEMS
The oft-cited estimates of Wal-Mart's alleged negative impact on small businesses, such as the Iowa example, are misleading for several reasons. First, many of those estimates, found in a series of applied policy studies, lack formal econometric estimating procedures. The studies simply compare averages for counties with Wal-Mart stores to those without Wal-Mart stores. Although the studies have attracted considerable media publicity, they are problematic and misleading because of the deficiency of econometric analysis, which makes it impossible to know whether the differences are statistically significant. Furthermore, without the use of control variables found in standard econometric analysis, the studies ignore the effects of other economic and demographic factors that differ between counties with and without Wal-Mart stores.
The second problem with previous studies is that, as part of the data for "small business," they often lump in numbers from competing mega-retailers such as Kmart, Target, and Home Depot. Those retailers all suffer negative impacts as a result of Wal-Mart's entrance into the market. Given that flaw, it is uncertain to what extent the previous negative estimates can be used to approximate the effect Wal-Mart has on true mom-and-pop businesses, as a Kmart's store closing should not be counted in a true measure of the small business failure impact of Wal-Mart.
The final two, and perhaps most noteworthy, problems with previous studies are (1) they only use data for directly competing retail business sectors, and (2) they only evaluate those sectors within the specific county in which Wal-Mart opens, instead of the store's broader area. Our research finds that a new Wal-Mart store results in both the immediate failure of some small businesses and the emergence of other small businesses--both in other sectors and in other counties. For example, if a new Wal-Mart store opens, causing a directly competing hardware store to close and subsequently a new antique boutique opens in its place, the previous studies would only observe the failure of the hardware store. Yet Wal-Mart saves consumers a significant amount of money that they can then spend on other goods and services, and we would expect this to result in more new business opportunities. For example, if the money saved by consumers creates a greater demand for recreational activity and, as a result, a whitewater rafting company opens in a neighboring county, this new business would not be accounted for in previous studies. We now consider this process in more detail.
CREATIVE DESTRUCTION
The previous research on Wal-Mart's effects did not correctly model the welfare-enhancing process of "creative destruction." Creative destruction occurs when the introduction of a new idea or product results in the obsolescence...
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