Agglomeration economies in urban retailing: are there productivity spillovers when big-box retailers enter urban markets?

ABSTRACT

Previous studies have found that big-box retail entry does not affect the productivity of incumbent retailers when entry occurs in urban areas. In this paper, we show that there are positive spillover effects of big-box retail entry for incumbent retailers in urban areas, but these effects are limited to relatively small retailers; thus, it is difficult to detect these effects in a full sample of firms by using traditional econometric methods, such as difference-in-difference estimation. In a two-step procedure, we first use panel smooth transition regression to determine size thresholds that delimit incumbent retail firms by their possible reactions to the new big-box entry. We then use difference-in-difference estimations to determine the direction and magnitude of the effects of big-box entry on the productivity of firms in each subgroup. For the group of small incumbent retailers, we find positive spillover effects on productivity of approximately 9%.

KEYWORDS:

• Productivity growth
• Cobb-Douglas production function
• IKEA
• panel smooth transition regression
• regression tree analysis

JEL CLASSIFICATION:

• D22
• L11
• L25
• P25

Acknowledgments

Research funding from the Swedish Retail and Wholesale Development Council, grant number 2015:4, is gratefully acknowledged.

 Disclosure statement

No potential conflict of interest was reported by the authors.

Supplemental material

Supplemental data for this article can be accessed here.

Notes

¹ These are the most recent studies. For a comprehensive literature review regarding the effects of big-box retail entry, see e.g. Rudholm, Li, and Carling (2018).

² The PSTR has recently been used when analysing how corporate social responsibility (Chen and Lee 2017) and the number of patents (Chen, Shih, and Chang 2014) affect firm value, and in these studies the PSTR is described in more detail.

³ For details regarding the measurement of all variables, see e.g. Han et al. (2018) using the same dataset.

⁴ These calculations are presented in Appendix A in the supplemental online material, while Appendix B contains descriptive statistics regarding the share of large and small firms.

⁵ We have also tested if there should be more than one threshold level, and these tests show that the one-level model is preferred to models having two or more levels.

⁶ In the supplemental online material, Appendix C, additional results show that changes in model specification or changes in the estimation method determining the size thresholds does not alter the results.

Additional information

Funding

This work was supported by Swedish Retail and WholesaleDevelopment Council (Handelns Utvecklingsråd, grant number 2015:4)