Exploring the case of The White Moustache. Entrepreneurship and regulatory capture in the milk products industry

Publication Date10 Apr 2017
DOIhttps://doi.org/10.1108/JEPP-08-2016-0031
Pages41-59
AuthorRyan M. Yonk,Kayla Harris,R. Chistopher Martin,Barrett Anderson
SubjectStrategy,Entrepreneurship,Business climate/policy
Exploring the case of
The White Moustache
Entrepreneurship and regulatory capture
in the milk products industry
Ryan M. Yonk and Kayla Harris
Department of Economics and Finance, Utah State University, Logan, Utah, USA
R. Chistopher Martin
Department of Economics and Finance, Utah State University,
Seattle, Washington, USA, and
Barrett Anderson
Department of Political Science, Utah State University, Logan, Utah, USA
Abstract
Purpose Small and emerging business failure rates are highfor numerous reasons. Government regulation
has beencited as a contributing factor,yet literature documenting the actualeffects of governmentregulation on
small business is limited. The purpose of this paper is to clearly outline the regulatory compliance costs and
effects on small businesses inthe California dairy industry.
Design/methodology/approach This paper applies a public choice framework to the history of dairy
regulation and performs a case study on a small business, The White Moustache (TWM). The case study
traces the burdens and costs of state dairy regulations placed on TWM as they sought the necessary permits
to sell their artisan yogurt.
Findings Strict and unresponsive re gulation restricted TWM fr om selling their product. To co mply
with state dairy regul ations, the direct co sts to TWM would have inc reased by 70 percent. In addition,
regulation caused two and a half years of delay before the company dec ided to leave the state. Californias
dairy regulations plac e burdens on small dairy bus inesses that work as a str ategic barrier to entry in
the marketplace.
Originality/value This case study highlights the direct effects that strict and unresponsive regulation can
have on entrepreneurs and emerging businesses through a case study. Improving the understanding of how
regulation affects small business can highlight new paths forward and help improve the small business
failure rate in the USA.
Keywords Regulation, Food safety, Entrepreneurship, Regulatory burden, Regulatory process,
Business and government
Paper type Case study
1. Introduction
Recent economic literature has increasingly focused on the effect of government regulation on
small businesses and entrepreneurs. Although small business and entrepreneurship are not
synonymous, a substantial amount of entrepreneurship stems from small businesses
(Carland et al., 1984). Small businesses have increasingly come to be seen as one of the principal
vehicles for entrepreneurs through their innovation and competitive power (Wennekers and
Thurik, 1999; Thurik and Wennekers, 2004). Despite the role of small businesses in
entrepreneurship, regulation has proven especially burdensome to small and emerging
businesses. Many entrepreneurs decry the burdens that regulation can place on their
economic endeavors while regulators point to market failures, business malpractice, and public
safety as justification for regulation. Among the differing regulatory burdens, major capital
requirements for startup and regulatory compliance have proven to be one of the greatest
obstacles for small businesses (Chilton and Weidenbaum, 1982; Everett and Watson, 1998).
Inexperienced management is also a major contributing factor (Fredland and Morris, 1976;
Journal of Entrepreneurship and
Public Policy
Vol. 6 No. 1, 2017
pp. 41-59
© Emerald PublishingLimited
2045-2101
DOI 10.1108/JEPP-08-2016-0031
Received 24 August 2016
Revised 26 October 2016
Accepted 26 October 2016
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/2045-2101.htm
41
Exploring the
case of TWM
Hall and Young, 1991; Hall, 1992; Gaskill et al., 1993). In addition, Osborne (1993) argues that
poor planning, poor money management, a lack of expertise and credibility, and failure to follow
government regulations contribute to entrepreneurial failure.
Entrepreneurs and small businesses are vital to the economy through their innovation,
job production, and collective stimulation of the economy (Audretsch and Thurik, 2001;
Birch, 1987; Kumar and Liu, 2005; Schumpeter, 1976). Since the 1970s, 55 percent of all US
jobs have been provided by small businesses (Small Business Administration, 2016).
Despite their vital role in the economy, new and small businesses face an average failure rate
of over 43 percent in their first five years[1] (Bureau of Labor Statistics, 2016a, b).
Although there are many factors that contribute to small business failure, government
agencies and regulatory compliance are a contributing factor (Clute and Garman, 1980;
Edmunds, 1979; Lewis et al., 2014; Nicoletti et al., 2003; ONeill and Duker, 1986).
Lewis et al. (2015) categorizes regulatory compliance costs for small businesses into three
categories. First, entrepreneurs bear the cost of acquiring knowledge concerning which
regulations apply to their business. This could include hiring experts (i.e. lawye rs and
accountants) to train and educate both the entrepreneur and employees as well as time spent
seeking licenses, permits, and understanding regulation. Second, they must cover the actual
costs of complying with regulations such as health and safety requirements. Third, small
businesses must demonstrate to regulators that they are compliant through record keeping and
paperwork. Compliance in these areas can prove substantially difficult for small businesses with
limited capital due to the financial strain of employee salaries, time delays, and operating costs.
Studies on the effects of differing levels of regulation across countries shows that higher
levels of regulation lead to lower levels of entrepreneurship and small business creation
(Ardagna and Lusardi, 2008; Klapper et al., 2006; Niskanen, 1968). In a comparison of
countriesregulatory regimes, Djankov et al. (2002) finds that higher levels of regulation do
not lead to higher quality products or better health outcomes. Danjkov et al. do find,
however, that more regulation over marketplace entry is associated with higher levels of
corruption (Aidis et al., 2012; Alt and Lassen, 2003). Higher levels of corruption can lead to
greater difficulty for small businesses. Following public choice theory, large corporations
and interest groups with substantial capital are able to capture lawmakers and bureaucrats
(Stigler, 1971; Peltzman, 1976), which adversely decreases the ability of small businesses to
influence regulation because they have less to offer. Regulatory capture allows incumbent
businesses to influence regulation that creates barriers to entry for new businesses. Dennis
(2004) and van Stel et al. (2007) show that lowering barriers to entry will assist small
business and decrease their failure rate.
Countless numbers of emerging small businesses fail, but these numerous cases rarely
garner enough attention to trace the actual effects of government regulation on small and
new firms. Understanding the effects of regulation on small and emerging businesses is
necessary to improve the small business failure rate (Abdelsamad and Kindling, 1978).
This paper examines one of the numerous cases of a small business that closed due to
government regulation. Unlike similar situations, however, this case garnered enough
controversy and media attention to trace the actual effects of regulation. This paper begins
with an evaluation of the history of food safety regulation using a public choice framework
and contains a case study that traces the effects of Californias dairy regulation on The
White Moustache (TWM), a small yogurt company.
2. Background
2.1 Regulation in the food industry
Around the turn of the twentieth century, assembly line production changed and expanded
the ability to produce in the modern world. Workers became much more productive in the
food industry as they specialized in a small number of tasks, which increased efficiency, and
42
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