Drive through the downtown area of a half-dozen small and medium-sized cities in the U.S. and you are likely to find that they all have one thing in common: empty store fronts. Small retail businesses that have been a crucial part of the American economy for more than a century seem increasingly to be disappearing. These businesses have not died as a result of the “malling of America”. Indeed, many once-thriving shopping malls have closed as well. In a booming economy we to ought to expect just the opposite.

Edward B. Shils, George Taylor Emeritus professor of Entrepreneurial Studies at the Wharton School and founder and Director Emeritus of Wharton’s Sol C. Snider Entrepreneurial Research Center, argues in a report, Measuring the Economic and Sociological Impact of the Mega-Retail Discount Chains on Small Enterprise in Urban, Suburban and Rural Communities, that the advent of the mega-retailer has driven thousands of small retailers out of business and has had a resounding impact on not only the economy, but the very social fabric of countless communities.

Controversy usually accompanies Wal-Mart, Home Depot, and other giant retailers each time they announce plans to open a new store. The small retailer knows that the mega-retailer has the potential to underprice him by a wide margin and eventually put him out of business. The mega-retailer argues, however, that it will bring jobs and increased revenues to the community. Shils questions not only the impact such stores have on local communities, but also challenges the wisdom of local and state governments when they grant relief and other benefits to the mega-retailers. Indeed, he refers to such government largess as corporate welfare.

Shils observes, “traditionally small retailers, department stores and well-known retail chains were able to live together in relative peace. With the advent of Kmart, Wal-Mart, Target, and other mega-retail discount chains, a new era in retailing developed.” The effects of this new era include the wiping out of small downtowns, the death of “mom & pop” stores, and the diversion of government funds to construct huge new facilities rather than assist deteriorating downtowns.

Shils points out that small business employs more than half the work force and is responsible for more than half the U.S. gross domestic product. Further, small business has been the principal engine for job growth throughout the past decade. Saving the small retailer or the blighted downtown is not something to be done to preserve a quaint historic notion, he argues; rather, it is essential to the vigor of our economy at every level. “Today, the advent of the mega-discount chain has not only undermined the survival of the traditional department store and the Main Street retailer, but it also has begun to disfigure and transform former grandiose retail malls into replicas of the city ghettos.”

Shils believes that small business is the preferred vehicle for retailing. He cites a report by the federal government which found that the establishment of a small business has a large, positive effect on the local economy. “A small business with 100 employees in a town adds: 351 more people; 79 more school children; 97 more families; $490,000 more bank deposits; one more retail establishment; $565,000 more retail sales per year and $1,036,000 more personal income per year. Small businesses also seem to be more community minded. They give more in charity to community service organizations per employee than do large businesses, according to the SBA’s Office of Advocacy. In addition, small firms tend to target their donations to direct service providers.”

State and local governments have been eager to attract the mega-retailers based on the hope that the new stores would provide more jobs and tax revenues. Shils questions the assumptions government officials rely on when they make their decisions: “The economic and social impact made by the mega-retail discount chains needs to be measured by a large variety of criteria. Did the municipality make mistakes in judgment by encouraging the free entry of these giant discount retailers into the areas? Did the promises of additional employment take place? How long were the jobs viable? Did the chains demand tax abatements and other preferences? Were those abatements more than offset by an increase in sales taxes and income taxes resulting from increased employment?”

Small retailers can survive, according to Shils, if they develop a unique niche, learn more effective marketing techniques, and join purchasing co-ops to allow them to compete more effectively on price. When a local retailer finds himself shopping at Sam’s Club for inventory, the end is not far in sight.

Local governments have an active role to play in downtown revitalization, too. Government officials must determine whether the promises of increased revenue and more jobs has in fact occurred. It may be far more effective to channel scarce resources into redeveloping downtown areas to give the community a focal point.

Shils is a strong proponent of the entrepreneurial spirit. He expresses admiration for the way companies like Wal-Mart and Home Depot have grown as successful as they have. He realizes, however, that their very success threatens thousands of other businesses and entire communities. The enormous growth of e-commerce may be the force that checks that growth. But local communities must work together to minimize the disruptive impact of the mega-retailer.