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Article Excerpt
This paper explores the widely accepted view that Wal-Mart causes significant harm to the traditional small "mom and pop" business sector of the U.S. economy. We present the first rigorous econometric investigation of this issue by examining the rate of self-employment and the number of small employer establishments using both time series and cross-sectional data. We also examine alternative measures and empirical techniques for robustness. Contrary to popular belief our results suggest that the process of creative destruction unleashed by Wal-Mart has had no statistically significant long-run impact on the overall size and profitability of the small business sector in the United States. (JEL L81, D59, C21)
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Wal-Mart has indeed set prices low enough to drive mom & pop stores out of business all over the country and kept the prices that low forever. (1) During the last 20 years, Wal-Mart has moved into communities and destroyed them, wiping out stores, slashing the tax base, and turning downtown areas into ghost-towns. (2)
I. INTRODUCTION
The argument that Wal-Mart inflicts significant harm on the small "mom and pop" business sector of the U.S. economy is so widely accepted that one of the paper's opening quotes is actually from a pro--Wal-Mart article, which goes on to discuss the merits and efficiency enhancements that result, claiming that "[i]n a free market, large suppliers of nearly every thing will drive most small suppliers out of business." Even President Clinton's former Secretary of Labor, Robert B. Reich, writes in the New York Times that Wal-Mart will turn "main streets into ghost towns by sucking business away from small retailers." (3) Wal-Mart Watch, one of the largest anti--Wal-Mart organizations, features an article claiming that in Iowa, Wal-Mart's expansion has been responsible for widespread 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.
Previous estimates of the negative impact of Wal-Mart on other businesses, such as the numbers cited above, however, are misleading for several reasons. First, these estimates come from a series of applied policy studies that simply compare averages for counties with Wal-Mart stores to those without Wal-Mart stores. (5) While the findings from these studies have garnered significant media publicity and widespread public acceptance, they are problematic because no econometric methods are employed, making it hard to know if the differences are statistically significant and whether or not the difference is really due to the many other economic and demographic factors that differ between counties with Wal-Mart stores and those without.
The second, and biggest, problem with these previous studies is that they employed data only for directly competing retail business sectors within that specific county. (6) Because of its sheer size, Wal-Mart's true impact on the overall U.S. small business sector stretches far beyond the impact any one store has in any one county. The idea of creative destruction, first eloquently stated by Schumpeter (1934), explains how entrepreneurs, like Sam Walton, are a disruptive force in an economy. (7) Schumpeter emphasized the beneficial aspects of this process of creative destruction, one in which the introduction of new products results in the obsolescence or failure of others. Schumpeter pointed out that while these inventions do indeed result in business failures in certain areas, they result in overall net gains because of the positive impacts on economic activity in other areas. (8) These impacts are, however, widespread and often hard to identify. (9) Similarly, Wal-Mart's openings, while resulting in the failure of some small businesses, create opportunities for new businesses, both large and small, not only in that local area but also in other more distant places.
Because of its reliance on county-level data that consider only local impacts on directly competing retail firms, this process of creative destruction is not accounted for in previous research. If a new Wal-Mart store opens, for example, and it causes a local hardware store to fail, and subsequently a new art gallery opens in its place, only the failure of the hardware store is counted by previous studies. The opening of the art gallery is not reflected in the data because it is not a retail store. In reality, one business was substituted for another, but this effect would not be reflected in the data because expansions in sectors that do not directly compete with Wal-Mart are, by definition, excluded from their analysis. In addition, because previous studies used county-level data, virtually all the general-equilibrium impacts that occur--a new small business opening in another county, for example--are ignored.
Finally, previous research is problematic because it generally uses data for all competing retail businesses, including other large retailers like Kmart, Target, and Home Depot, who are all clearly negatively impacted by Wal-Mart. Thus, it is unclear to what extent these previous negative estimates can be used to infer about the impact Wal-Mart has on the mom and pop sector of the economy alone, as Kmart's store closings should not be counted in a true measure of the impact of Wal-Mart on small businesses.
From an economic standpoint, the real question of interest is how Wal-Mart impacts the overall size of the small business sector for the entire U.S. economy. To overcome the problems in previous studies, we use both state- and national-level data, restrict our analysis only to small firms, and include all small firms regardless of whether they are in a directly competing business sector or not.
To be clear, there is no question that certain specific small businesses fail because of the entry of a Wal-Mart store and that Wal-Mart has negative impacts on other major retailers like Kmart. These are the effects other studies have repeatedly documented and estimated. The question that remains unanswered, however, is how Wal-Mart has affected the overall level of small business activity in the United States after all long-run readjustments (i.e., creative destruction) have occurred, and this is what we estimate.
We proceed by first discussing what economic theory would predict with regard to Wal-Mart's impact on small business activity, focusing on Schumpeter's theory of creative destruction. We then perform statistical analysis of both aggregate time series data and state-level cross-sectional data using spatial econometric methods to arrive at an estimate of the impact Wal-Mart has on the small businesses sector in the United States.
II. THE PROCESS OF CREATIVE DESTRUCTION UNLEASHED BY WAL-MART
Virtually every U.S. citizen has witnessed, first hand, the closing of small downtown merchants after the arrival of a new Wal-Mart store. Downtowns with empty storefronts, however, soon see new small businesses opening in these vacant locations. In Morgantown, West Virginia, for example, a shop that was once a women's clothing store has now turned into a high-end restaurant. A former record and compact disc store has been converted into an ice cream parlor. Other vacated stores have been filled by a coffee shop, an indoor rock climbing facility, an art gallery, a candle shop, a collectible comic book store, a dinner theatre, an antique mall, and a new law firm.
This "recycling" of productive resources is precisely the mechanism by which the process of creative destruction increases economic efficiency. Prior to the opening of Wal-Mart stores, downtown retail space was very competitive and was generally allocated to those stores providing the type of general merchandise now sold at Wal-Mart. Only when these valuable store locations were freed up by the entry of Wal-Mart did they become economically viable locations for many other types of small businesses. This provided opportunities for new entrepreneurs--opportunities formerly unprofitable before these resources were freed from the production of general merchandise.
In addition, the money consumers save on their general merchandise purchases because of Wal-Mart's lower prices can be spent on other goods and services, such as those sold by these new specialty shops. Basker (2005b) found that the opening of a new Wal-Mart store results in city-wide price reductions of approximately 2% or 3% in the short run and about 10% in the long run, giving consumers a significant amount of additional disposable income to spend elsewhere. Some will be spent on goods and services produced by local small businesses, while some will be spent on goods and services produced by small businesses outside the local area.
Thus, while in terms of local business failures, the costs of a Wal-Mart store opening are easy to identify, the benefits are widespread and difficult to identify without examining more aggregate data. In theory, there could be one additional recreation company (like a whitewater rafting company, e.g.) in existence solely because of the time and money Wal-Mart has saved consumers. These new businesses, however, are not necessarily in the specific county in which Wal-Mart opens or in directly competing business sectors and have thus been completely excluded from previous studies. This has resulted in a very incomplete picture of how Wal-Mart actually impacts the overall size of the U.S. small business sector. (10) At issue here is whether, in total, these positive impacts outweigh the small business failures Wal-Mart causes for its direct competitors.
As this section has illustrated, based purely on theory alone, it is difficult to predict whether Wal-Mart exerts a positive or negative impact...
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