Brewing up entrepreneurship: government intervention in beer
| Published date | 07 November 2016 |
| Pages | 325-342 |
| DOI | https://doi.org/10.1108/JEPP-02-2016-0004 |
| Date | 07 November 2016 |
| Author | Trey Malone,Jayson L. Lusk |
| Subject Matter | Strategy,Entrepreneurship,Business climate/policy |
Brewing up entrepreneurship:
government intervention in beer
Trey Malone and Jayson L. Lusk
Department of Agricultural Economics, Oklahoma State University,
Stillwater, Oklahoma, USA
Abstract
Purpose –While previous studies have looked at the negative consequences of beer drinking often as
a prelude to discussing benefits of laws that curtail consumption, the purpose of this paper is to
understand the downside of such regulations insofar as reducing entrepreneurial activity in the
brewing industry.
Design/methodology/approach –Using a unique data set from the Brewers’Association that contains
information on the number and type of brewery in each county, this study explores the relationship
between the number of breweries and regulations targeted at the brewing industry. Zero-inflated negative
binomial regressions are used to determine the relationship between the number of microbreweries and
brewpubs per county and state beer taxes, self-distribution legislation, and on-premises sales.
Findings –The authors find that allowing breweries to sell beers on-premises as well as allowing for
breweries to self-distri bute have statistically si gnificant relationshi ps with the number of
microbreweries, brewpubs, and breweries. The authors do not find an economically significant
relationship between state excise taxes and the number of breweries of any type.
Originality/value –Results suggest that whatever public health benefits are brought about by
alcohol laws, they are not a free lunch, as they may hinder entrepreneurial development.
Keywords Business development, Regulatory policy, Craft beer
Paper type Research paper
Introduction
Since the days of Joseph Schumpeter (1942), economists vigorously herald the economic
benefits of entrepreneurship. “The fundamental impulse that sets and keeps the
capitalist engine in motion comes from the new consumers’goods, the new methods of
production or transportation, the ne w markets, the new forms of industrial
organization that capitalist enterprise creates”(p. 83). Entrepreneurship has the
potential to increase measures of economic growth from the national scope to more
localized levels (Hafer, 2013). While few argue with the value and importance of
creating thriving entrepreneurial environments, many disagree about what policies
actually foster such a culture. Some scholars argue that regions in the USA will develop
if its policymakers promote a “creative class”of residents (McGranahan and Wojan,
2007). Some states race to promote the next Silicon Valley through construction
projects and subsidies for new venture startups where other locales pursue
entrepreneurial development through relaxed tax policies (Porter, 2000).
For example, Kansas significantly decreased the tax rate for small businesses
hoping to spur economic activity (Rose, 2015). Others still seek to promote economically
free business environments, with the understanding that economic freedom can lead to
entrepreneurial growth as well as statewide spillover effects (Bologna, 2014).
Journal of Entrepreneurship and
Public Policy
Vol. 5 No. 3, 2016
pp. 325-342
©Emerald Group Publis hing Limited
2045-2101
DOI 10.1108/JEPP-02-2016-0004
Received 9 February 2016
Revised 30 April 2016
3 May 2016
Accepted3May2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
The authors would like to thank Stephan Gohmann at the University of Louisville, Martin Stack
at Rockhurst University, and Bart Watson at the Brewers Association for providing access to
their data and expertise. The authors are also grateful to two anonymous reviewers, whose
comments and suggestions significantly improved the article.
325
Government
intervention
in beer
While some policies are written to promote entrepreneurial growth, others have the
potential to unintentionally hinder it. Paradoxically, policies initially designed to
protect the consumer also have the potential to limit consumer utility by restricting
entrepreneurial activity. Regulation proves to be an especially serious concern for
would be small business owners involved with consumable goods (Lougui and
Nyström, 2014). Business owners often list an environment of low regulatory entry
barriers as a characteristic of strong entrepreneurial promotion (Klapper et al., 2006).
Even if it were possible to craft a perfect policy, evaluating its effects on the abstract
concept of entrepreneurship would prove to be difficult. As such, it is useful to turn to a
specific example to explore the effects of particular policies on particular industries.
For example, mandating that milk must be pasteurized not only limits the potential
entry for small dairies, but also prevents many artisanal cheeses from being produced
in the USA (Echols, 1998).
Many barriers can prohibit firms from entering a new marketplace (Demsetz, 1982).
Natural barriers such as economies of scale might prevent smaller, more inefficient
firms from earning profits. Absent a natural barrier, older firms might strategically
implement obstacles such as predatory pricing, required technological processes,
or regulatory barriers to minimize competition. Of particular interest for this paper is
the latter, as regulatory barriers have the potential to limit entrepreneurship in craft
brewing. Even though it is relatively simple to homebrew, the beer market has
remained heavily concentrated for decades (Bhuyan and McCafferty, 2013).
The tension between protectionism and economic freedom can influence the number
of firms by either reducing entry or increasing exit (Kaplan et al., 2011; Bruhn, 2011).
By extension, government policies can encourage entrepreneurship either by increasing
profits in existing markets or by opening new markets to would be entrepreneurs.
Indeed, government intervention can play an important role in the uncertainty that
confronts many would be entrepreneurs. The influences of these regulatory barriers to
entry are likely to vary given the inherent diversity of brewery business plans.
This study contributes to the literature in two ways. First, we show that using a
specific industry with specific regulations can provide an insight separate from other
abstract entrepreneurial measures. Historically, quantifying entrepreneurship has
proven difficult. Some studies have proxied entrepreneurship with the number of
establishments in a region. Cross-country studies often use survey data, which estimate
the proportion of the population actively engaged in starting or running a new business
(McMullen et al., 2008; Bjørnskov and Foss, 2008). Other studies proxy
entrepreneurship with measures of sole proprietorships (Nyström, 2008). Campbell
et al. (2013) find differing results depending on the metric used for entrepreneurial
activity within the American states. Instead of focusing on aggregate measures,
we focus on a specific industry with specific regulations. We choose craft brewing to
study the relationship between entrepreneurship and regulation because brewing
fulfills the preconditions for being an entrepreneurial venture. Namely, brewing
involves some combination of inputs to create a unique, previously non-existent
product. Furthermore, state legislative heterogeneity allows for a “natural experiment”
at the county level as both regulation and local demand plays a noticeable role in a
brewery’s location decisions. In fact, state laws are so inconsistent that it leads industry
leaders to describe the domestic market as “almost like selling in fifty different
countries”(Morrison, 2013).
By using cross-section data for the growing industry of craft beer, we contribute to
the literature in a second way. Until recently, the craft beer market has received little
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