Big-box retail entry in urban and rural areas: are there productivity spillovers to incumbent retailers?

ABSTRACT

This paper empirically measures the potential spillover effects of big-box retail entry on the productivity of incumbent retailers in the entry regions, and investigates whether the effects differ depending on the size of the new establishment relative to the size of the local market. The results indicate that big-box entry increases the productivity of incumbent stores in two of three rural entry regions where the IKEA is large relative to the local retail market, while no productivity spillover effects could be found in the case of the urban IKEA entry in Gothenburg.

KEYWORDS:

• IKEA; Big-box entry
• retail productivity
• retail entry subsidies
• agglomeration

Acknowledgments

The authors would like to thank Sven-Olov Daunfeldt and participants at the 5th Nordic Retail and Wholesale Conference, Århus, Denmark, November 9–10, 2016, as well as participants in a seminar held at Mälardalen University, 12 September 2016, for valuable comments and suggestions. Research funding from the Swedish Retail and Wholesale Council (Handelns Utvecklingsråd, grant number 2015:4) is gratefully acknowledged.

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

1. See, for example, Ozment and Martin (1990), Stone (1997), Ailawadi et al. (2010), Davidson and Rummel (2000), Basker (2005), Artz and Stone (2006), Hicks (2007), Hicks (2008), Jia (2008), Neumark, Zhang, and Cicarella (2008), Sobel and Dean (2008), Paruchuri, Baum, and Potere (2009), Haltiwanger, Jarmin, and Krizan (2010), Zhu, Singh, and Dukes (2011), Artz and Stone (2012), and Merriman et al. (2012).

2. Incumbent retailers are all firms in the retailing industry that were active before the entry by the new IKEA warehouses that we focus on in the paper. We are thus considering only those firms that were active before and remained active after the entry year.

3. We use the market area (municipality or metropolitan area) as spatial limit of the spillover as this helps us at a later point choose appropriate controls for our analysis (see the section describing our identification strategy and empirical model). Moreover, previous studies (Daunfeldt et al. 2017; Han et al. 2018) have shown that the effects of new IKEA stores are restricted to the entry municipalities and to even narrower areas around the spatial entry point. However, municipalities in the Swedish metropolitan areas are geographically very small and do not represent the market of the new big-box retailer. Also, the municipalities in the metropolitan areas need to take their neighbours into account more when using the Plan and Building Act to allow or prevent entry than does rural municipalities. Consequently, we have opted to use the metropolitan area rather than the individual municipality when studying the IKEA entry in Gothenburg.

4. The measurement of output and input variables will be described in detail in the section about the data and its descriptive statistics.

5. The low number of municipality-years makes it difficult to estimate more dynamic models investigating if the effects of an IKEA entry change over time.

6. To obtain the change in factor productivity due to IKEA entry in percentage terms, the formula 100 × [e(β₈) – 1] (Wooldridge 2010) is used to calculate the effects presented in Table 3.

7. A description of the stores in our sample, by assortments, is included in Appendix 3.

8. Our study is restricted to retailers that report sales for each store, whereas multi-store firms that only report sales figures for their headquarters are excluded from our study. However, as many as 81% of all retail stores in Sweden are single establishments (Statistics Sweden [SCB], 2016).

9. An alternative would be to use wages and the cost of capital, which would allow us to control for differences in the productivity of workers employed in different firms. However, the cost of capital is not readily available in the data, and calculating a good measure of the cost of capital of the firm is difficult due to the complicated tax legislation regarding how to report cost of capital in the annual reports. As wages in Sweden are very similar (although not identical) in firms in the same line of business (Skedinger 2014), we believe that the problem of arriving at a good measure of the cost of capital is more severe than using the number of employees as a proxy for labor in the production function estimations.

10. Data regarding the sales index and total durable goods retail turnover for Haparanda was collected from Trade in Sweden (Handeln i Sverige), which is a free database that includes information on a variety of retail related variables, e.g. turnover, employment, the sales index, and their development over time. The database is maintained by HUI Research and can be accessed at http://www.handelnisverige.se/ (in Swedish).

Additional information

Funding

This work was supported by the The Swedish Retail and Wholesale Council (Handelns Utvecklingsråd) [2015:4].