Working Paper : 99-03-C The Locational Impact of Wal-Mart Entrance : A Panel Study of the Retail Trade Sector in West Virginia

This paper examines the retail trade sector in 14 West Virginia counties from 1989 through 1996. A series of random effects models are tested on these panel data to measure the effect of the entrance of WalMart stores in the county and in adjacent counties, and business cycle effects. This paper differs from earlier research in that it controls for endogeneity in the entrance decision of Wal-Mart in faster growing counties. This research finds a dramatic net increase in employment and wages in the Retail Trade sector (SIC 52) and a mild increase in the number of firms. The study finds a per capita wage increase in this industry, which is surprising but small. The paper concludes with further research recommendations. The views expressed in this paper are the authors’ and do not reflect the policy or opinion of the Lewis College of Business, Marshall University or any of its entities. 2 Introduction The putative economic impact of the entrance of a discount store in a community has been hotly debated among local leaders across the U.S. throughout the past decade. The extension of these stores, especially Wal-Mart, Inc. overseas provides grist to an ongoing critique of everything from unfettered markets to cultural imperialism. Among the perceived impacts of these types of discounts stores, which we feel competent to address, include lower regional wages, capital outflows and loss of independent, locally owned businesses. These costs are balanced against proponent arguments of increased efficiency, employment and tax revenues. Less frequently discussed are the consumption benefits. Economists, for the most part, have been silent on these issues, feeling that the economies of scale inherent in a discount store, and the success of local market mechanisms meant increased welfare effects for local communities. Simply, the matter was not investigated on a broad scale within the academic community. The few studies that have been performed do not generate a consensus result. Nearly all work in this area has focused on the location of Wal-Mart stores in local communities since the mid 1980's. The earliest of these studies (Keon, et. al., 1989) performed a static comparison of economic conditions in 14 Missouri counties with and without Wal-Mart stores. These researchers found no evidence of a negative impact of Wal-Mart location, instead finding increases in broad measures of income, retail employment and income, and sales tax revenues. They found that the overall number of retail stores had declined, but that in the sector there were more employees and higher payrolls. They did not note per capita wages in the retail sector, nor did they account for potential growth related entrance by Wal-Mart. This final problem plagues all the studies in the current literature. Simply, the This study is notable for its use of actual statistical analysis, not merely comparisons of growth rates. The authors used the difference-in-difference-in-difference method (Gruber, 1994) to approximate second derivative analysis for functions whose empirical specifications were not continuous. 3 question of endogeneity in the growth variable in explicit or implicit modeling has not been adequately addressed, static analysis fails to capture the possibility that Wal-Mart stores enter counties with higher growth rates. This problem was addressed in a later paper (Ozment, et. al., 1990) which found few significant positive effects of Wal-Mart in a sample of rural counties. The study examined population, income, number of establishments, per capita bank deposits, employment, sales revenue and tax receipts. The authors suggested that Wal-Mart may have selected the better performing counties for store locations, and that the mildly better performance of the economies in these counties was not likely caused by the store entrance. A study of employment and wages in Maine (Ketchum, et. al., 1997) concluded that there was no evidence of negative impact in a sample of 12 counties with and 12 counties without Wal-Mart stores. These findings were similar to the earlier studies in that the impacts were not significant and the authors recognized the possibility that Wal-Mart entered counties with higher growth rates. A broader study (Barnes and Connell, 1996) examined regional variation in Wal-Mart impacts across several northeastern states. The study examined impacts on specific industries finding a pattern of results. They found increased sales of general merchandise, but with number of establishments unchanged, little or no change in the food stores and sales, decreased auto and furniture sales and increases in eating, apparel and drug store sales. The authors sought to find patterns, not causation, and the results point to that effort. Two historians conducted a study that evaluated the social and economic effect of Wal-Mart The inclusion of an historical study in this review suggests the paucity of economic research on the subject. The weakness of the economic analysis by these authors (and their interpretation of the existing economic literature) highlights the problems that surround the analysis of discount stores. For example, the authors write “Walton hit upon another innovation. that by lowering his price per item he could sell a greater quantity of goods. ” (Vance & Scott, 1994, pg. 8, our italics). These type of wild assertions are endemic to journalistic reviews of the company, and sadly among some academic writing. The notion that Sam Walton discovered the demand curve is incredible, and casts real doubt on the veracity of the remaining analysis of the book. 4 entrance in southern towns (Vance & Scott, 1992). The study addressed several sticky issues such as capital outflows and the benefits of locally owned firms. They concluded that the benefits Wal-Mart brought to the local communities outweighed the costs. Perhaps the best known research on Wal-Mart impacts focused on small towns in Iowa (Stone, 1989, 1995, 1997). The 1997 comparative study of 34 towns (5,000 40,000 pop.) examined changes in the same sets of variables as did the earlier studies, examining a metric known as the pull factor (the proportion of sales in a county as a proportion of statewide sales) in several industry sectors. The short run effects pointed to Wal-Mart induced increases (or slower decreases) in several sectors. This took the form of comparison between cities with and without Wal-Marts. The author suggested that long term growth rates would diverge much more modestly than the pronounced short run effects. He attributed this, in part, to the travel of shoppers to the Wal-Mart area from adjoining counties. Changes in the pull factors were used to capture this inter-county movement of consumers. We call this the travel-substitution effect. Stone’s work was primarily aimed at describing the local effects of Wal-Mart entrance by focusing on large samples of towns. This work is both the most extensive and analytical of the existing literature. This study went further in establishing retail strategies for local stores facing Wal-Mart entrance, expanding this section into a widely read book on retail strategies for competing with discount stores. The prime element of Stone’s analysis we