Smith insists Walcott has every right to consider his future and believes it is unfair to claim the 23-year-old should feel morally obliged to stay at the Emirates Stadium.
He told talkSPORT: "I 'don't agree with that. I know managers try to use that as a negotiating ploy but Arsene Wenger wouldn't have put Theo Walcott in the team if he didn't think he was good enough.
"As a manager, you pick the best eleven players at your disposal. You are not doing a favour to anybody just to try and develop them and help their career.
"He obviously thought Theo was good enough when he went in the team at 16, 17 and now that Walcott has developed he wants to get the best for himself. If you’re not good enough, the club get rid of you."