Researchers, pundits and policy makers have argued that existing businesses increasingly have been substituting for new businesses as a source of new establishment (locations at which business takes place) formation and job creation by new establishments.
Dubbed the “Walmart effect” for the tendency of big box retailer’s stores to replace a variety of independent business establishments in the areas it enters, this pattern has come to signify the challenges that independent entrepreneurs face when big chains move into their territory.
Over the past 35 years, an increasing share of the new establishments and the jobs at those establishments have gone to existing businesses adding new locations rather than to newly founded businesses setting up shop.
Because most people can envision the replacement of mom and pop variety stores by Target, Old Navy, and similar companies, many observers have focused on the retail sector when discussing this pattern. However, such a focus is misleading. The substitution of existing businesses for new businesses as the source of new establishment creation reaches far beyond the retail sector of the economy.
The need for new establishments doesn’t necessarily mean that new companies have to be founded. New establishments can be set up either by new entrepreneurs founding new firms or by existing firms adding new business locations. For example, when Target opens up a new store, the creation of the new establishment represents the choice by an existing business to create a new business location.
Examination of the Business Dynamics Statistics database that Mark Schweitzer of the Federal Reserve Bank of Cleveland, Ian Hathaway of Ennsyte Economics and I conducted shows that the shift away from new firm formation and job creation by new firms towards new establishment formation by existing firms and job creation by new establishments of existing businesses are widespread, and are larger in industry sectors other than retail.
We looked at the share of new establishments in 1978 and 2011 set up by new and existing businesses by broad industry sector. We found that the rise in the share of new establishments set up by existing businesses rather than new firms is not restricted to retail. In all nine major industry sectors, new locations of existing businesses account for a larger fraction of establishments in 2011 than they did in 1978. Moreover, the growth in the existing business share of new establishments was larger in all of the other sectors than it was in retail.
Job creation by existing businesses opening up new locations as a share of new establishment job creation also grew in more than just the retail sector. In seven of nine sectors, new locations of existing businesses were responsible for a larger share of new establishment job creation in 2011 than they were in 1978. (Manufacturing and mining are the two exceptions.) Moreover, of the seven industries in which job creation in new establishments of existing businesses rose as a share of new establishment job creation, the retail sector was the one with the smallest amount of growth in that measure.
In short, the Walmart effect exists outside of retail. Existing businesses are responsible for an increasing share of new establishment creation and new job creation at new establishments in most sectors of the economy.
Walmart Photo via Shutterstock