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The Wal-Mart Effect Wave of Destruction or Creativ
The Wal-Mart Effect Wave of Destruction or Creativ
The Wal-Mart Effect Wave of Destruction or Creativ
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Srikanth Paruchuri
Warrington College of
During the past quarter century, large multistore
abstract
Business
University of Florida retailers have experienced considerable growth. In
Gainesville, FL 32611 this article, we examine the widely held belief that
paruchur@ufl.edu the expansion of these chain stores, Wal-Mart in par-
ticular, has had a large negative impact on the small
Joel A. C. Baum locally owned retail sector. Our analysis of four
Rotman School of types of independent retailer entries and exits in
Management Florida from 1980, prior to the opening of the first
University of Toronto Wal-Mart store in the state, to 2004, reveals that
105 St. George Street Wal-Mart’s impact varies with independent retailers’ 209
Toronto, Ontario market overlap with and proximity to Wal-Mart.
Canada M5S 3E6 Notably, our findings suggest that within zip codes,
baum@rotman.utoronto.ca the Wal-Mart effect is driven by the suppression of
entry rates, but not by the increase in exit rates,
Key words:
Wal-Mart
independent retailers
competition
entry
exit
www.economicgeography.org
ECONOMIC GEOGRAPHY
1
See, for example, the anti-Wal-Mart website, Wal-
martsucks.com, set up to persuade the public that the retailer
is bad for communities, and the wal-martfacts.com website,
developed by Wal-Mart to counter such attacks.
Vol. 85 No. 2 2009
access with zoning regulations and “living wage” ordinances, while others have wel-
comed Wal-Mart with infrastructure developments and subsidies, including site-
preparation assistance, job training grants, property tax exemptions, and sales tax
abatements. Places that have limited Wal-Mart’s entry have often cited its potential
impact on urban sprawl, traffic, and congestion, as well as its significant harm to small,
independent retailers (Rosen 2003). Places that have encouraged Wal-Mart have argued
that it is better to have a Wal-Mart open in one’s own jurisdiction than in a neighboring
jurisdiction. Although these beliefs are common (if divided), they remain largely uncon-
firmed empirically.
Wal-Mart’s biggest and most obvious effect is that it offers lower prices to consumers
(Basker 2005b) and that it has had a ruinous influence on several large retail chains (Graff
1998; Shields and Kures 2007; Stone 1995; Vias 2004) and supermarket chains (Franklin
2001). Many of its other economic effects have been less well quantified, however. There
is, for example, an ongoing debate regarding the effect of Wal-Mart on local employment
and wage rates (Basker 2005a; Bernstein and Bivens 2006; Dube, Lester, and Eidlin 2007;
Hicks and Wilburn 2007; Ketchum and Hughes 2004; Neumark, Zhang, and Ciccarella
2005). Moreover, little rigorous empirical work has directly examined how the entry of 211
Wal-Mart stores affects the entrepreneurial entry and fates of small, independent busi-
nesses, despite their local and national economic significance. Small businesses are
homogeneity and is dominated by small, young independent retailers, rather than chain
stores.
Our analysis aims to disentangle some of the harmful and beneficial aspects of
Wal-Mart’s disruptive influence on the economy. Following Schumpeter (1942), we
view the entry of Wal-Mart into a local market as an event in the process of creative
destruction. For Schumpeter, capitalism is a system of economic change driven by
“competition from the new commodity, the new technology, the new source of supply,
the new type of organization (the largest-scale unit of control for instance)—competition
which commands a decisive cost or quality advantage and which strikes not at the
margins of the profits and the outputs of the existing firms but at their foundations and
their very lives” (1942, 84). The process is unfortunate for the failing firms but benefits
consumers and frees capital and resources for new businesses and further advancements.
Wal-Mart openings, while resulting in the failure of some small retailers, thus create
opportunities for other new retailers to enter, not only in that location but in more distant
places (Basker 2007). These dynamics are difficult to identify, however, because they
vary by type of business and proximity to the event. Nevertheless, attending to them is
212 essential to clarifying Wal-Mart’s economic impact and to developing instructive policy
recommendations.
There may also be variation geographically. Because they outcompete other retailers on
price and (often) convenience, Wal-Mart stores typically draw customers from a larger
area. For example, Holmes (2008) estimated that in rural areas (with 1,000 people within
a 5-mile radius), increasing the distance of consumers from a Wal-Mart store from zero
to 5 miles has only a small effect on the demand, which declines from 100 percent to 98
percent. Raising the distance further from 5 to 10 miles, however, lowers the demand
appreciably to 57 percent, but a substantial demand still remains. In more urban areas,
where there are more substitutes, the geographic scope of a Wal-Mart store’s demand
is narrower. In higher-density areas (with 20,000 people within a 5-mile radius), for
instance, Holmes estimated that 91 percent of consumers visit a Wal-Mart located near
their place of residence. Increasing the distance to 5 miles lowers the demand to 40
percent, and increasing the distance to 10 miles lowers the demand to 4 percent.
Neighboring communities may thus experience declines in some retail sectors as
consumers choose to travel farther for lower prices and the convenience of “one-stop”
shopping. Consumers evaluate competing stores on the basis of their overall utility, with
the probability of a consumer patronizing a particular shopping area a function of the size
and proximity of the shopping area relative to competing shopping areas (Huff 1963, 213
1964; Lakshmanan and Hansen 1965). For example, the entry of a Wal-Mart store that
does not sell groceries in Chicago increased revenue at an adjacent grocery store, but
Wal-Mart Entry
214
Time
Competing Business Founding Rate Noncompeting Business Founding Rate
Competing Business Failure Rate Noncompeting Business Failure Rate
entries had a positive impact on employment and wage benefits in a county in West
Virginia.2 Such effects on other businesses and other locations have rarely been consid-
ered simultaneously in previous studies, resulting in an incomplete picture of how
Wal-Mart influences the small retail business sector.
Because of their reliance on county-level data and emphasis on directly competing
retailers, most previous studies have not captured the process of creative destruction. If a
Wal-Mart opening prompted, for example, a local hardware store to fail and a new antique
store to open in its place, only the failure of the hardware store has typically been counted
in previous studies. The opening of the antique store was not reflected in the data because
such a store was not a direct competitor of Wal-Mart. In reality, one business was
substituted for another, but this effect was not reflected in the data because expansions in
sectors that do not directly compete with Wal-Mart were, by definition, excluded from the
analyses.
Thus, while it is clear that some small, independent businesses fail as a result of
competition from Wal-Mart, we anticipate, on the basis of Schumpeter’s theory, that
offsetting positive impacts of Wal-Mart open up opportunities for new types of businesses
to emerge. Figure 1 summarizes our expectations, particularly the positive and negative
effects of a Wal-Mart opening as a function of competitive overlap, geographic proximity,
and time.
In close proximity to the Wal-Mart (i.e., within the same zip code), the entry rate of
competing businesses is expected to decline, their exit rate is expected to rise, and thus
their net entry (i.e., entries compared to exits) is expected to fall relative to their
pre-Wal-Mart levels. These effects should be the strongest initially but then decline after
2
But see, for example, Bernstein and Bivens (2006), who found that Wal-Mart entries drive wages down
faster than prices.
Vol. 85 No. 2 2009
the weakest competitors exit and cumulative exits begin to attract (brave) new competing
entrants. At the same time, the entry, exit, and net entry rates of noncompeting businesses
are expected to move in the opposite directions but more slowly as externalities emerge
and consumers shift consumption patterns over time.
In neighboring locations (i.e., adjacent zip codes), entry rates of both competing and
noncompeting businesses are expected to decline, while their exit rates are expected to
increase, and thus net entry is expected to fall. These effects are expected to develop over
time as consumers increasingly shift consumption to the Wal-Mart store and nearby
noncompeting businesses, reducing the demand for all businesses in adjacent locations,
but particularly for those that compete directly with Wal-Mart.
The question is whether the benefits that are summarized in Figure 1 outweigh the harm
that Wal-Mart causes its most direct local competitors and those in adjacent locations. The
opening of a Wal-Mart store causes various local and nonlocal businesses to fail but,
at the same time, creates opportunities for others to enter. At issue, then, is the
“net mortality” or “net entry” of different kinds of businesses in the same and adjacent
locations. With multiple, opposing effects at work, it is difficult to predict Wal-Mart’s
overall effect on the small business sector. In part, this overall effect depends on the 215
location and overlap of small businesses with Wal-Mart. In the end, it is an empirical
question, and the question to which we now turn.
3
Zip codes that were merged sometime during the observation period were considered as single zip codes
throughout the observation period.
ECONOMIC GEOGRAPHY
600
500
400
Number of Zip Codes
300
200
100
0
216 1980 1982 1984 1986 1988 1990 1992
Year
1994 1996 1998 2000 2002 2004
video rentals, and fast-food outlets. So, among the population of independent retailers,
we selected four categories—home furnishings (competitors in products), photo studios
(competitors in services), beauty salons (noncompetitors in services), and antique stores
(noncompetitors in products)—to compare the impact of Wal-Mart openings on different
types of retailers. As we noted earlier, we chose these four categories because each
exhibits high within-category homogeneity and is dominated by small, young indepen-
dent retailers, rather than chain stores.4
For each category of retailer, Figure 3 shows the entry, exit, and cumulative net entry
rates defined, respectively, as the annual new venture registrations, deregistrations, and
cumulative net registrations, divided by the number of retailers, for zip codes without a
Wal-Mart (see Figures 3a, 3b, 3g), with a Wal-Mart (see Figures 3c, 3d, 3h), and with an
adjacent Wal-Mart (see Figures 3e, 3f, 3i).
Entry and exit rates appear to have been comparable across the three settings during the
study period, although they were more varied in zip codes with or adjacent to a Wal-Mart.
This finding likely reflects the smaller number of observations for these locations,
particularly early in the observation period. Net entry rates were also similar, with the
exception of antique stores, which exhibited greater cumulative net entry rates in zip
codes without a Wal-Mart.
Figure 4 presents the data in a manner that is more comparable to those in Figure 1. For
each type of retailer, Figure 4 shows the entry, exit, and cumulative net entry rates for
zip codes experiencing (see Figures 4a, 4b, 4e) or adjacent to (see Figures 4c, 4d, 4f) a
Wal-Mart entry from the year before the entry to 10 years afterward.
4
In our sample, roughly 85 percent of the hair salons and antique stores had operated fewer than 10 years,
and 70 percent had operated fewer than 5 years. Among home furnishing stores and photo studios, roughly
80 percent had operated fewer than 10 years, and 65 percent had operated fewer than 5 years. In 2005, 51
percent of home furnishing stores employed fewer than 4 people, and 89 percent employed fewer than 20
people. Comparable figures are 82 percent and 97 percent for photo studios and 66 percent and 95 percent
for hair salons (U.S. Small Business Administration 2005).
Vol. 85 No. 2 2009
0.5
0.4
Founding Rate
0.4
Failure Rate
0.3
0.3
0.2
0.2
0.1 0.1
0 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year Year
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
0.5 0.4
Founding Rate
0.4
Failure Rate
0.3
0.3
0.2
0.2
0.1
0.1
0 0
217
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year Year
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
0.5
0.4
Founding Rate
0.4
Failure Rate
0.3
0.3
0.2
0.2
0.1
0.1
0 0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year Year
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
2 1.5
Cumulative Net Entry
Cumulative Net Entry
1.5 1
1 0.5
0.5 0
0 -0.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year Year
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
1.5
Cumulative Net Entry
0.5
-0.5
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004
Year
Furnishings Salons Antiques Photo Studios
Figure 3. The founding and failure of retailers in zip codes with no, local, and adjacent Wal-Mart
stores.
ECONOMIC GEOGRAPHY
0.35 0.35
0.3 0.3
Founding Rate
Failure Rate
0.25 0.25
0.2 0.2
0.15 0.15
0.1 0.1
0.05 0.05
0 0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Time Since Wal-Mart Entry Time Since Wal-Mart Entry
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
0.25 0.25
0.2
Founding Rate
0.2
Failure Rate
0.1 0.1
0.05 0.05
0 0
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Time Since Wal-Mart Entry Time Since Wal-Mart Entry
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
0 0.1
Cumulative Net Entry Rate
-0.2 0
-0.4 -0.1
-0.6 -0.2
-0.8 -0.3
-1 -0.4
-1.2 -0.5
-1.4 -0.6
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Time Since Wal-Mart Entry Time Since Wal-Mart Entry
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
Figure 4. The founding and failure of retailers in zip codes with local and adjacentWal-Mart stores.
Entry rates for photo studios tended to decline, consistent with the expected effect of
a local entry on competing retailers, but the expected curvilinear pattern is not apparent.
For antique stores, the rate shows the expected curvilinear shape for noncompetitors, but
home furnishings did as well. Exit rates appear to have trended upward over the decade
following the entry of a local Wal-Mart, and for several types of retailers, particularly
photo studios and antique stores, they also appear to have followed a curvilinear pattern
similar to that in Figure 1. Relative to photo studios, the peak appeared later for antique
stores, which were expected to compete less directly with Wal-Mart. The peak was also
later for home furnishing stores but occurred at roughly the same time for beauty salons.5
5
Fitting linear and second-order polynomial trend lines to the data confirmed these conclusions.
Vol. 85 No. 2 2009
The effects of an adjacent entry are more mixed. Entry rates tended to fall and exit rates
tended to rise for antique stores, while both rates tended to increase for photo studios.
Only the exit rates for photo studios followed a curvilinear pattern consistent with
Figure 1.
Overall, following the entry of a local Wal-Mart, antique stores, beauty salons, and photo
studios exhibited greater net entry than did home furnishing stores. Following an adjacent
entry, antique stores and beauty salons also experienced greater net entry than did photo
studios, but so did home furnishing retailers. Notably, yearly net entry was higher for
antique stores immediately following the entry of an adjacent rather than a local Wal-Mart;
in contrast, cumulative net entry was higher for photo studios following a local entry.Taken
together, the plots in Figure 3 suggest a relatively benign impact of Wal-Mart. Across types
of retailers, annual net entry rates in zip codes with a local Wal-Mart were, on average, 4
percent to 6 percent higher than in zip codes without either a local or an adjacent Wal-Mart,
and in locations with an adjacent Wal-Mart, they were zero to 2 percent higher.
Figure 3 is misleading, however. Wal-Mart does not locate its stores randomly; rather,
it places its stores in locations where it expects them to be most profitable, and these
locations should also be better for small retailers—but according to the figure, they are 219
only limitedly so. This finding suggests that net entry may be suppressed by competition
in locations with a local or adjacent Wal-Mart. What Figure 3 does not show is whether
Methods
Dependent Variables and Estimation
Our dependent variables, the yearly number of entries and exits of independent retailers
in a zip code, were measured, respectively, as annual counts of registrations and dereg-
istrations of new ventures. From among the population of all independent retailers, we
distinguished specific types of retail businesses: home furnishings and photo studios,
which compete more directly with Wal-Mart, and beauty salons and antique stores, which
do not, to contrast the impact of Wal-Mart openings on these types of stores.
Because the yearly numbers of entries and exits are count variables, we used the
Poisson model,6 which provides a natural baseline for such processes (Hausman, Hall, and
Griliches 1984). The basic Poisson model for count data is
6
Geographically weighted regression (GWR) (e.g., Fotheringham, Brunsdon, and Charlton 1999) extends
traditional regression, permitting local, rather than global, parameters to be estimated. Although GWR is
intuitively appealing, it has two limitations that render it unsuitable for our purposes. The first is that it
requires specification of a matrix of geographic weights that specify the decay in the importance of data as
a function of distance. Unfortunately, we lack a theoretical basis from which to derive such weights for the
Wal-Mart effect. Moreover, it seems likely that the various factors in our empirical model are likely to
operate over different geographic ranges—some highly localized (e.g., retailer entries and exits) and others
over greater distances (e.g., Wal-Mart entries). The second, and more important in our setting, is that GWR
provides a single, weighted estimate of a given factor’s effect and thus would not permit us to distinguish
local (within zip code) and adjacent (within neighboring zip codes) effects of Wal-Mart entries. Given these
ECONOMIC GEOGRAPHY
where both the probability of a given number of events in an interval, Pr(Yt = y), and the
variance of the number of events in each interval equal the rate, l(xt). However, the
variance exceeds the mean in our data, and such overdispersion causes standard errors of
parameters to be underestimated and levels of statistical significance to be overstated.
Therefore, we used a negative binomial model, which takes such overdispersion into
account by relaxing the assumption that the conditional mean is equal to the variance. A
common formulation, which allows the Poisson process to include heterogeneity by
relaxing the assumption that the mean and variance are equal is
λt = exp ( π ′xt )εt , (2)
where the error term, et, follows a gamma distribution. The presence of et produces
overdispersion. The specification of overdispersion that we used takes the form
Independent Variables8
To estimate the local impact of the opening of a Wal-Mart on entries and exits in a given
zip code, we created an indicator variable, zip code Wal-Mart, coded 0 until a Wal-Mart
store opened in that zip code and 1 thereafter. To examine the dynamic effect of a local
entry, we used a clock variable, zip code time since Wal-Mart opened, to track the time
since a Wal-Mart opened in a zip code. We logged this clock in the analyses because we
expect the importance of a year passing to diminish over time (i.e., that the time from Year
1 to 2 is more important than from Year 11 to 12).
To model the effect of the opening of a Wal-Mart in an area adjacent to a given zip code,
we created a second indicator variable, adjacent zip code Wal-Mart, coded 0 until a
Wal-Mart store opened in a zip code whose population centroid was within five miles of
the focal zip code population centroid and 1 thereafter. We again used a clock (logged),
adjacent zip code time since Wal-Mart opened, to track the dynamic effect of a Wal-Mart
opening in an adjacent zip code.
Because a small number of zip codes in which Wal-Mart operated also had a Wal-Mart
operating in an adjacent zip code during the study period (see Figure 2), we also included
a zip code and adjacent zip code Wal-Mart indicator variable (coded 1 if this was the case
and 0 otherwise) to control for this effect and obtain accurate estimates for the local and
adjacent effects.9
limitations, we chose to operationalize the theoretically distinct local and adjacent spatial effects of
Wal-Mart entries using separate measures for within the same and adjacent zip codes to the focal retailers.
7
We also estimated models that included county dummy variables to account for the fact that there are
multiple zip codes within the same county. The findings are consistent with those reported later.
8
Detailed descriptions of the operationalization, measurement level, and sources for all of the study variables
are given in Appendix A, and descriptive statistics are presented in Appendix B.
9
We also estimated models that distinguish Wal-Mart’s standard and supercenter formats, the latter of which
are larger and more likely to offer a range of Wal-Mart-operated specialty shops (particularly grocery) and
Vol. 85 No. 2 2009
Control Variables
Entries and exits of independent retail businesses in a zip code are affected by many
factors beyond openings of Wal-Mart stores, so we specified a detailed baseline model
to control for a range of such factors. Control variables were lagged one year to avoid
simultaneity problems.
Environmental munificence. Because the demand for and supply of retail busi-
nesses likely depends on local population and resource levels, for each zip code, we
included population, per capita income, governmental revenues, and intergovernmental
funds received for the county in which the zip code is located. We also included the
proportion of a county government’s infrastructure expenditures on human resource
development, economic development, and cultural activities, which likely influence the
supply of potential entrepreneurs and the survival of retailers. Because these data are not
available at the finer zip-code level, we assigned values for each county to all zip codes in
a county.10
Because metropolitan areas may differ in terms of opportunity and competitive struc-
ture (e.g., urbanization economies), we also included an indicator variable coded 1 for zip 221
codes located in metropolitan areas and 0 otherwise, to distinguish urban from rural areas
Local and adjacent business activity and turnover. The number and prior
turnover (i.e., entries and exits) of independent retailers operating in a particular area can
influence the availability and costs of resources in that area. These dynamics also provide
information to entrepreneurs about the feasibility of conducting business at a given
location. For example, certain types of retailers benefit from agglomeration economies
that accrue to organizations that locate close to each other (Graitson 1982). These
economies include shared infrastructure, notably transportation, communication, and
ease of supply, as well as reductions in consumer search costs, which increase demand at
a particular location, as with geographic clusters of antique shops, apparel, nightclubs,
alcove shops. Because this distinction rarely influenced founding and failure rates significantly and did not
alter our findings substantively, for parsimony, we do not consider it in the models reported here.
10
To check the robustness of our theoretical findings to this assignment, we reestimated our models after
(1) dropping the county-level variables and (2) adding county-level fixed effects. The estimates for the
alternative specifications are consistent with those reported later.
11
To permit more complex time variation than a linear trend, we also estimated models with year fixed effects
and obtained similar estimates for the theoretical variables.
ECONOMIC GEOGRAPHY
theaters, restaurants, and hotels. Therefore, for each zip code, we included measures of the
number of retailers, as well as the number of entries and exits in the prior year.
Although the effects of these variables are likely to be strongest within retailer
categories, symbiotic clustering of differentiated sellers within shopping malls and
districts has also been discussed in terms of reduced consumer search and travel costs
(e.g., Stuart 1979). Therefore, for the analysis of each type of retailer, we included
separate counts of prior entries and exits and businesses for that type of retailer and all
other types (i.e., in the analysis of the entry and exit antique stores, we included counts
based on antique stores and all other types of businesses).12
The turnover of retailers can affect the age distribution of incumbents, which, in turn,
can influence the rates of entry of subsequent retailers, and particularly exits, since
younger retailers are more likely to fail. Therefore, our models also included separate
counts of the cumulative number of same-type retailer entries and exits that occurred in
a zip code since a Wal-Mart entered. Prior to a Wal-Mart entering a given zip code, we set
this variable to zero.
In addition to the number and turnover of businesses operating in the same zip code, we
222 included analogous variables for adjacent zip codes, as defined earlier. We included these
variables to account for the possible presence of spatial dependence in business activity.
To the extent that the turnover of retailers in one zip code is influenced by the level of
retailer activity and turnover in adjacent zip codes, we had to control for this dependence
to obtain unbiased coefficient estimates (LeSage and Pace 2004).
The attractiveness of particular locations can result in the clustering of “big box” retail
chains. If uncontrolled, such clustering may result in estimates that spuriously capture the
presence of large chain retailers in general, rather than Wal-Mart in particular. Therefore,
we obtained information on the locations and opening dates of Target and Home Depot
stores in Florida by contacting each store and created indicator variables, zip code Target
and zip code Home Depot and accompanying time clocks (logged) analogous to those
used to model the effect of Wal-Mart entries.
12
The variables for all other types are based on all other businesses, not only on the four other types of
retailers on which we focus.
Vol. 85 No. 2 2009
Because Wal-Mart stores are not randomly located, estimating Wal-Mart’s impact on
local markets without accounting for the endogeneity of Wal-Mart’s entry decisions is
subject to omitted variable and selection biases. If Wal-Mart tends to enter fast-growing
areas, then we might observe new retailers enter and few exit following a Wal-Mart’s
entry, even if the stores actually have negative effects. To account for such endogeneity, we
could adopt the popular instrumental variable approach. However, it has been shown that
this approach, while effective for linear regression systems, does not correct for endoge-
neity properly for nonlinear estimators (Davidson and MacKinnon 1993). For this reason,
Blundell and Powell (2003) and Villas-Boas and Winer (1999) proposed a control-
function approach. The endogenous variable, Wal-Mart store opened, is regressed against
exogenous instruments, and the residual from this regression, the endogeneity control
factor, is entered as an additional explanatory variable in failure and foundings analyses.
We found that local demographic factors, such as population, did not significantly predict
the opening of a Wal-Mart store, but local economic factors, including the number and
entries and exits of independent firms in a zip code, were significant predictors of the
entry of Wal-Mart. Although prior research has found that controlling for the endogeneity
of Wal-Mart store locations makes little difference in the results and has typically rejected 223
endogeneity (e.g., Hicks and Wilburn 2001; Graff 1998), using this approach, we found
strong endogeneity effects on both the entry and exit of all four types of retailers.
13
The estimates of control variables are presented in Appendix C.
14
Since prior failures and prior foundings of the same type of retailer are significant in the foundings and
failures analyses, respectively, we were concerned that the errors may be correlated across the equations.
Therefore, we also estimated our models using seeming unrelated regression, a technique for analyzing a
system of multiple equations with cross-equation-correlated error terms. The results of these analyses were
consistent with those reported in the article.
15
To make the interpretation of regression results that include interaction coefficients easier, we examined
the effects of zip code Wal-Mart when adjacent zip code Wal-Mart entry was set to 0 and examined the
effects of adjacent zip code Wal-Mart entry when zip code Wal-Mart entry was set to 0. Another issue to
note is that when the interaction coefficient is significant, the significance of the main effects does not
matter in interpreting the effects. But when the interaction coefficient is not significant, the main effects
have to be interpreted according to their significance in the regression results.
224
Table 1
Random Effect Negative Binomial Regressions of the Four Types of Independent Retailers
Entries Exits
Furnishing Stores Beauty Salons Antique Stores Photo Studios Furnishing Stores Beauty Salons Antique Stores Photo Studios
Zip code Wal-Mart -.596** -.185 -.478* -.061 -.365** -.440** -.632* -.831**
(.116) (.121) (.231) (.233) (.132) (.142) (.271) (.296)
Zip code time since .251** .106* .293** .059 .262** .303** .433** .346**
Wal-Mart opened (.048) (.049) (.083) (.092) (.055) (.059) (.096) (.114)
Adjacent zip code Wal-Mart -.367** -.102 .078 .024 -.089 .090 .278* .265*
(.068) (.067) (.114) (.120) (.072) (.077) (.131) (.134)
Adjacent zip code time since .223** .140** .072 .165** .113** .100** .071 .035
Wal-Mart opened (.032) (.031) (.052) (.056) (.034) (.036) (.059) (.063)
Zip code and adjacent zip -.027 -.141 -.116 -.376* -.087 -.463** -.334 -.304
code Wal-Mart (.095) (.095) (.185) (.180) (.108) (.109) (.215) (.203)
ECONOMIC GEOGRAPHY
Log likelihood -25,172.9 -21,040.1 -11,980.8 -10,616.6 -18,555.9 -15,950.5 -9,191.9 -8,067.0
Wald chi-square 6,970.6 4,663.4 2,195.35 2,245.7 4,974.6 4,851.9 2,751.9 3,276.6
Notes: N = 40,050; number of unique zip codes = 1,602; standard errors in parentheses; + p < 0.10, * p < 0.05, ** p < 0.01; two-tailed tests; estimates for control variables are presented in
Appendix C.
Vol. 85 No. 2 2009
1.40 1.40
Estimated Founding
Estimated Founding
Rate Multiplier
Rate Multiplier
1.20 1.20
1.00 1.00
0.80 0.80
0.60 0.60
0.40 0.40
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Time Since Wal-Mart Entry Time Since Wal-Mart Entry
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
1.40 1.40
Estimated Failure
Estimated Failure
Rate Multiplier
Rate Multiplier
1.20 1.20
1.00 1.00
0.80 0.80
1.80
Rate Multiplier
Rate Multiplier
1.20
1.60
1.40 1.00
1.20
0.80
1.00
0.60
0.80
0.60 0.40
0 1 2 3 4 5 6 7 8 9 10 0 1 2 3 4 5 6 7 8 9 10
Time Since Wal-Mart Entry Time Since Wal-Mart Entry
Furnishings Salons Antiques Photo Studios Furnishings Salons Antiques Photo Studios
Figure 5. Regression estimates of the founding, failure, and net entry rates of retailers.
subsequent 10 years. In the figures, a multiplier of 2 indicates a doubling of the rate, and
a multiplier of 0.5 indicates a halving of the rate.
Entry Rates
Figure 5a shows the immediate drop in entry rates in a zip code following a Wal-Mart
entry for all retailers. The initial drops are dramatic for home furnishings and antique
stores and less so for beauty salons and photo studios. All these retailers, except photo
studios, have subsequent increases in entry rates and reach their pre-Wal-Mart entry rates
within 7 years. After 10 years, the founding rate of beauty salons has recovered to its
original pre-Wal-Mart entry rate, while home furnishing and antique stores rates are about
10 percent higher than the pre-Wal-Mart rates. For photo studios, the rate remains roughly
15 percent lower.
Figure 5b shows the large initial drop and subsequent increase in the entry rate of home
furnishing stores following the opening of a Wal-Mart in an adjacent zip code. After 5
years, the entry rate recovers, however; by 10 years, the rate exceeds the pre-Wal-Mart
levels by roughly 20 percent. The figure also shows the increase in the rates of entry of
ECONOMIC GEOGRAPHY
photo studios and beauty salons over time, which, after 10 years, have increased by 50
percent and 38 percent, respectively. The entry rates of antique stores are unaffected by the
entry of a Wal-Mart store in an adjacent zip code.
Exit Rates
Figure 5c shows the immediate, often dramatic, drop and subsequent increase in exit
rates in a zip code following the entry of a Wal-Mart store for all four types of retailers.
After 10 years, the exit rate for photo studios remains marginally below its pre-Wal-Mart
rate, while the rates for all other types of retailers are higher than their pre-Wal-Mart rates:
home furnishings by 26 percent, beauty salons by 49 percent, and antique stores by 31
percent.
Figure 5d shows the initial drop and subsequent increase in exit rates for home
furnishing stores after a Wal-Mart opens in an adjacent zip code. After 3 years, home
furnishings returns to its preadjacent Wal-Mart level; after 10 years, the rate is about 17
percent higher. After an adjacent Wal-Mart entry, the exit rates of photo studios and
antique stores jump immediately (36 percent and 37 percent, respectively) and remain
226 substantially higher thereafter. The exit rate for beauty salons increases slowly and is 37
percent higher than its pre-Wal-Mart level after 10 years.
Discussion
The reality of the Wal-Mart effect on independent retailers is more complex than
available theory and evidence led us to anticipate. The opening of a Wal-Mart store seems
to have varied effects on colocated and adjacent retailers, some of which diverged from
our theoretical expectations in Figure 1. In this section, we examine some of the notable
differences in the effects of opening Wal-Mart stores in local and adjacent zip codes on
entry, exit, and net entry patterns, in both the short and long term.
Over time, entry rates increased, however, rising above the pre-Wal-Mart levels after
seven years for all types of retailers except the service competitor (photo studios). Thus,
at least initially, potential entrepreneurs, even in noncompeting categories, were discour-
aged from entry by the presence of a local Wal-Mart store.
When a Wal-Mart opened, the exit rates of all types of retailers in the same zip code
followed a pattern that we expected of noncompeting retailers: declining initially and then
increasing over time. While the product-competitor (home furnishings) had the smallest
decline initially, the service-competitor (photo studios) had the largest initial decline. Exit
rates eventually rose above the pre-Wal-Mart levels for all types of retailers but after
different lengths of time. One explanation for this unexpected finding is that incumbent
retailers initially benefited from the increased traffic flow, but as consumers switched to
Wal-Mart over time, weaker retailers began to fail, increasing the exit rate. Another
explanation is that incumbent retailers respond to the entry of a Wal-Mart by emphasizing
service, expanding hours, strategically adapting operations and stock, and so on, and these
investments commit them to fight (rather than flee), suppressing the failure rate. Because
the success or failure of these new initiatives cannot be evaluated immediately, until a
sufficient amount of negative information about performance accumulates, incumbent 227
retailers are thus unlikely to exit and may even persist until considerable losses have been
incurred.
stores). For the other types of retailers, the net entry rate eventually recovered to the
pre-Wal-Mart levels, driven by entry rates increasing faster than exit rates except in the
case of the noncompetitor product (antique stores).
Conclusion
Motivated, in part, by local policy debates over the opening of Wal-Mart stores and, in
part, by the large size of Wal-Mart relative to the retail sector, researchers have started to
explore some of the effects of the entry of Wal-Marts, for example, on labor markets,
consumer prices, and competitors’ earnings (for a review, see Basker 2007). These studies
are becoming increasingly sophisticated and conclusive. However, little rigorous empiri-
cal work has directly examined how Wal-Mart stores affect the entrepreneurial entry and
fates of small, independent retailers. That is our focus.
Our analyses and findings advance understanding of the Wal-Mart effect for small
independent retailers in several important ways. First, whereas past studies typically
focused on changes in the number of retailers in a given location, this change is the net
228 result of retailers’ entries and exits. Consequently, we distinguished entry and exit
processes, the engine of creative destruction (Schumpeter 1942), to enhance our under-
standing of the underlying dynamics. Second, earlier studies typically focused exclusively
on the effect of Wal-Mart on competing retailers, but overlooked its effect on noncom-
peting retailers (for an exception, see Basker’s 2005a examination of employment). In
contrast, we examined the effects of Wal-Mart store openings on four types of stores:
competitors and noncompetitors in products and services. Our findings indicate not only
that entry and exit processes are affected differently by competition from Wal-Mart, but
also that the effects of Wal-Mart on the entry and exit of retailers differ by the type of
retailer, in terms of the degree of competition and whether the competition is in the
product or service category.
Third, few earlier studies examined how the effect of competition from Wal-Mart varies
with distance. Yet the question of distance seems crucial to the policy debate at the
municipal level. Our findings tend to support the view that it is better to have a Wal-Mart
open in one’s own than in a neighboring jurisdiction. At the local zip code level, across
retailer categories, a competitive Wal-Mart effect emerges but, unexpectedly, not as a
result of exit rates rising, rather, as a result of entry rates falling below the level necessary
to maintain retailer numbers. These findings are consistent with the idea that the presence
of a Wal-Mart erodes local social capital and reduces the local class of entrepreneurs
(Goetz and Swaminathan 2006). In adjacent locations, both entry and exit rates rise, but
the exit rate increases more, resulting in a net decline in independent retailers. Contrary
to the view that the arrival of a Wal-Mart store forces smaller independent retailers out of
business, our results thus indicate that the local Wal-Mart effect results more from a
“scaring off” of potential entrants than from a “killing off” of incumbents. In adjacent
locations, however, the Wal-Mart effect does indeed “kill off” incumbents; however, it
does not (unfortunately) “scare off” potential entrants.
Finally, our study contributes to an understanding of the dynamic nature of the
Wal-Mart effect over time. Locally, short- and longer-term effects tended to differ. When
a Wal-Mart store opened, retailer entry and effect rates both tended to fall initially.
However, these patterns reversed over the longer term, with both entry and exit rates
increasing above their pre–Wal-Mart levels. This increase in the turnover of retailers over
time suggests the emergence of a more dynamic competitive environment proximate to
Wal-Mart. The effects of a Wal-Mart opening on retailers in adjacent locations are more
consistent over time, however, with entry and exit rates rising above pre-Wal-Mart levels
Vol. 85 No. 2 2009
initially and remaining higher over time. The transitions in the local Wal-Mart effect merit
further attention. One possibility is that potential entrants wait to observe consumers’
reactions to incumbents’ efforts to adapt and begin to enter only after successful adapta-
tions (if any) become apparent.
Are these patterns of retailers’ entry and exit over time consistent with the view of
Wal-Mart as an agent of creative destruction? Or just of destruction? Within zip codes, we
anticipated that negative net entry for retailers competing with Wal-Mart would create
opportunities for noncompeting retailers to enter and replace them. This pattern indeed
occurred, at least initially, with beauty salons and antique stores exhibiting positive net
entry at the expense of home furnishing stores. However, it resulted not from competing
retailers exiting and noncompeting retailers replacing them but from the competing
retailers being deterred more strongly than the noncompeting retailers from entering. In
adjacent zip codes, we expected negative net entry rates for both competing and non-
competing retailers as exit rates rose and entry rates fell. Although net entry is indeed
predominantly negative, particularly shortly after a Wal-Mart entry, this is not the result
of entry being deterred but, rather, of incumbent exits rising more than entrepreneurial
entries. At the local level, these findings suggest a weak form of creative destruction that 229
is driven by the relative deterrence of entry, rather than by the exit of competing retailers
creating opportunities for new noncompeting retailers. The process in adjacent locations
1. Different store type entries Number of store entries in (t + 1) of that type Zip code Florida Department of State
2. Different store type exits Number of store firms ceased to exist in (t + 1) of that type Zip code Florida Department of State
3. Zip code probability of Wal-Mart opening Probability of store opening in a zip code in the year Zip code-year Calculated from regression
4. Year Calendar year Annual
5. Dow Jones Index Average annual index Annual Yahoo! Financials
6. Recession Indicator variable Annual NBER
7. County population County population in t County Census Bureau
8. County per capita Income County per capita income in t County Census Bureau
9. County revenues Total county revenue in millions of dollars in t County County governments
10. County intergovernmental funds % of county revenue from state and federal governments in t County County governments
11. County human resources expenses % of expenses on improving human resources in t County County governments
12. County economic environment development % of expenses on improving economic environment in t County County governments
expenses
13. County cultural expenses % of expenses on cultural and recreation in t County County governments
14. County % Democrats % of votes for Democrat candidates in t County Florida Election Board
15. Metropolitan area Indicator variable Zip code Census Bureau
16. Zip code same store type density Number of stores in the area in t of that type Zip code Florida Department of State
17. Zip code same store type prior exits Number of similar stores in the area that exited in t Zip code Florida Department of State
18. Zip code same store type prior entries Number of similar stores in the area that entered in t Zip code Florida Department of State
19. Zip code cumulative same type exits Number of similar stores in the area that exited since Wal-Mart entered Zip code Florida Department of State
20. Zip code cumulative same type entries Number of similar stores in the area that entered since Wal-Mart entered Zip code Florida Department of State
ECONOMIC GEOGRAPHY
21. Zip code other store density Number of businesses in the area in t of the nonfocal type Zip code Florida Department of State
22. Zip code other store type prior exits Number of stores of the nonfocal type in the area that exited in t Zip code Florida Department of State
23. Zip code other store type prior entries Number of stores of the nonfocal type that entered in the area in t Zip code Florida Department of State
24. Adjacent zip code same store type density Number of stores in adjacent areas in t of that type Zip code Florida Department of State
25. Adjacent zip code same store type prior exits Number of similar stores in adjacent areas that exited in t Zip code Florida Department of State
26. Adjacent zip code same store type prior entries Number of similar stores in adjacent areas that entered in t Zip code Florida Department of State
27. Adjacent zip code other store density Number of businesses in adjacent areas in t of the nonfocal type Zip code Florida Department of State
28. Adjacent zip code other store type prior exits Number of stores of the nonfocal type in adjacent areas that exited in t Zip code Florida Department of State
29. Adjacent zip code other store type prior entries Number of stores of the nonfocal type that entered in adjacent areas in t Zip code Florida Department of State
30. Zip code Wal-Mart/Target/Home Depot 1 if Wal-Mart/Target/Home Depot opened a store in the same zip code Zip code Respective retail stores
31. Zip code time since Wal-Mart/Target/Home Depot Log (time since Wal-Mart/Target/Home Depot opened in the same zip code) Zip code Respective retail stores
opened
32. Adjacent zip code Wal-Mart 1 if Wal-Mart was opened in an adjacent zip code (centroid < 5 miles) Zip code Wal-Mart and Census Bureau
33. Adjacent zip code time since Wal-Mart opened Log(clock since Wal-Mart opened in an adjacent zip code) Zip code Wal-Mart and Census Bureau
Vol. 85 No. 2 2009
Appendix B
Summary Statistics
Standard Standard
Variable Mean Deviation Variable Mean Deviation
Appendix C
Random Effect Negative Binomial Regressions of Independent Retailers—Control Variable Estimates
Entries Exits
Endogeneity control .471** .320** .445** .587** .407** .563** .682** .769**
factor (.083) (.090) (.170) (.166) (.099) (.107) (.196) (.198)
Year .174** .150** -.001 -.264** -.117** -.062* -.162** -.118**
(.025) (.027) (.037) (.039) (.025) (.029) (.040) (.042)
Dow Jones Index -.099** -.041** -.007 -.007 -.088** -.057** .041* -.092**
(.010) (.010) (.017) (.018) (.011) (.012) (.019) (.022)
Recession -.042+ .009 -.013 -.009 .002 .045 .008 .051
(.024) (.024) (.041) (.041) (.025) (.028) (.046) (.047)
County population .170* .569** .083 .607** .186* .573** .088 .375**
(.073) (.089) (.096) (.094) (.074) (.085) (.097) (.095)
County per capita .098** .182** .211** .263** .117** .144** .127** .241**
232 income (.021) (.023) (.027) (.032) (.023) (.025) (.029) (.033)
County revenues .000** .000 -.000 .000 .000** .000 -.000 .000
(.000) (.000) (.000) (.000) (.000) (.000) (.000) (.000)
County .854** -.533* -1.539** -1.349** -1.796** -1.269** -5.568** -1.256**
intergovernmental (.232) (.257) (.414) (.392) (.256) (.300) (.499) (.446)
funds
County human resources -1.114** -.501+ -2.066** -2.198** -1.137** -2.029** -2.214** -2.007**
expenses (.269) (.280) (.508) (.461) (.283) (.347) (.548) (.517)
County economic 1.106** .119 .238 .711 1.366** .153 1.157 1.381+
environmental (.388) (.427) (.721) (.646) (.436) (.502) (.878) (.761)
expenses
County cultural 1.814** 1.029** 1.916** .755 .023 .686 -.025 .536
expenses (.345) (.377) (.482) (.623) (.398) (.447) (.627) (.717)
County % Democratic -1.308** -1.295** -1.345** -1.094** -.817** -1.191** -.547 -.885*
presidential votes (.197) (.207) (.316) (.316) (.206) (.238) (.352) (.355)
Zip code same store .224** .054** .054** .130** .651** .399** .365** .508**
type density (.013) (.009) (.010) (.013) (.014) (.010) (.012) (.016)
Zip code same store .133** .109** .140** .150** -.025** -.041** -.003 -.074**
type prior deaths (.004) (.003) (.006) (.005) (.004) (.004) (.006) (.007)
Zip code same store .044** .111** .128** .144** .028** .448** .377** .345**
type prior foundings (.004) (.012) (.012) (.012) (.005) (.014) (.014) (.016)
Zip code other types .071** .056** .219** .132** -.058** -.039** .203** -.058**
density (.007) (.007) (.018) (.011) (.009) (.009) (.022) (.013)
Zip code other types .077** .071** .138** .097** .087** .063** .143** .068**
prior deaths (.006) (.006) (.013) (.010) (.007) (.007) (.015) (.011)
Zip code other types .048** .045** .065** .043** .038** .011* .040** .022**
prior foundings (.004) (.004) (.007) (.006) (.004) (.005) (.008) (.007)
Adjacent zip codes same .043+ -.061** .166** .121** -.027 -.166** .122** .146**
type density (.023) (.023) (.028) (.033) (.025) (.025) (.028) (.032)
Adjacent zip codes same -.016** -.010** .036** .005 -.023** -.005 .059** -.010
type prior foundings (.004) (.004) (.009) (.007) (.004) (.004) (.009) (.008)
Adjacent zip codes same -.035** -.012** -.001 -.002 -.018** .004 .063** .007
type prior deaths (.004) (.004) (.009) (.007) (.004) (.004) (.010) (.007)
Adjacent zip codes other -.110** .019+ .060** .010 -.033** -.004 .212** -.012
types density (.010) (.010) (.023) (.010) (.010) (.011) (.024) (.012)
Adjacent zip codes other -.097** -.035** -.020 -.054** -.031** .037** .002 -.011
types prior deaths (.007) (.006) (.013) (.010) (.007) (.007) (.015) (.011)
Adjacent zip codes other -.023** -.016** -.056** -.025** .008 -.018** -.029** -.002
types prior foundings (.005) (.004) (.008) (.007) (.005) (.005) (.009) (.009)
(Continued on next page)
Vol. 85 No. 2 2009
Appendix C
Random Effect Negative Binomial Regressions of Independent Retailers—Control Variable Estimates
(Continued)
Entries Exits
Cumulative same type -.024** -.007 .033** .106** -.059** -.063** -.047** -.036**
foundings since (.006) (.005) (.005) (.009) (.007) (.006) (.007) (.010)
Wal-Mart opened
Cumulative same type -.060** -.059** -.012+ -.023** .038** -.023** -.090** -.002
deaths since Wal-Mart (.004) (.005) (.007) (.007) (.005) (.007) (.007) (.008)
opened
Zip code in metropolitan .800** .921** .345** .630** .833** .906** .301** .621**
area (.071) (.091) (.083) (.079) (.070) (.078) (.075) (.071)
Zip code Target .000 .142* .135 -.033 -.013 .048 .141 .181
(.073) (.067) (.116) (.131) (.081) (.081) (.127) (.143)
Zip code time since .012 -.008 -.051** .016 .021* .017 -.032+ -.004 233
Target opened (.009) (.009) (.016) (.018) (.010) (.011) (.017) (.020)
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