Academic journal article Management International Review

Edith Penrose's Theory of the Growth of the Firm and the Strategic Management of Multinational Enterprises

Academic journal article Management International Review

Edith Penrose's Theory of the Growth of the Firm and the Strategic Management of Multinational Enterprises

Article excerpt

Abstract and Key Results

* This paper provides a formal model of Edith Penrose's Theory of the Growth of the Firm which has important implications for the strategy of multinational enterprises.

* The model provides an analysis of the trade-off between product diversification and foreign market penetration. It also can account for the speed of entry into foreign markets.

* Formalizing Penrose's Theory of the Growth of the Firm provides an account of internationalization incorporating geographical expansion patterns, sequential decision making and learning.

Key Words

Internationalization, Multinational Firms, Global Strategic Management, Edith Penrose, Foreign Market Entry, Product Diversification

Introduction

Foss (2002, p. 148) says "Penrose's work is, in the crucial dimensions, at variance with economic orthodoxy ... It should be thought of as a contribution to economic heterodoxy" Penrose and Pitelis (2002, pp. 19 et seq.), in describing Fritz Machlup as "Edith's supervisor" at Johns Hopkins says "A fascinating paradox is how Machlup, a doyen of neo-classical economics, should have been partially responsible for a work so far removed from the mainstream". Penrose has also been claimed as a feminist economist (Best/Humphries 2003). Our argument is that Penrose sought to create a theory of the growth of the firm which was logically consistent and empirically tractable. Her subsequent adoption as grandmother of the resource based view has only limited validity, based on a selective reading of her work and in defiance of its holistic qualities. See the debate between Rugman and Verbeke (2002, 2004) and Kor and Mahoney (2004) and Lockett and Thompson (2004), the latter based on Penrose's (1960) analysis of the Hercules Powder Company.

This paper presents a formalisation of Penrose's model contained in the Theory of the Growth of the Firm (1959) and applies it to the strategic decisions of multinational enterprises (MNEs). Previous research on Penrose and the multinational firm (e.g. Dunning 2003; Pitelis 2002, 2004) has focused on Penrose's overall contributions to strategic decisions in MNEs. This paper focuses solely on her 1959 model and compares it to the model of Buckley and Casson (1976). Interesting contrasts are found and a synthetic approach suggests that this combination is a useful basis for further theorising about the MNE and its strategic decisions.

In contrasting Penrose's theory with that of Buckley and Casson (1976), we shall see that the former's concentration on product diversification can be considered complementary to the latter's emphasis on innovation. Combining the two gives a satisfying model of the strategic management decisions within an MNE and opens up a new research agenda.

A Simple Formal Model of Penrose's Theory of the Growth of the Firm

The key to formalising Penrose's ideas is the recognition that she reformulated the familiar cost functions used in the theory of the firm. She argued that the average cost of output is independent of the scale of production, but increases with respect to the rate of growth. Thus in so far as the average cost curve is U-shaped, it is U-shaped with respect, not to the scale of production, as commonly assumed, but to the rate of growth.

The simplest way to understand this postulate is to recognise that average costs are increased by adjustments in the rate of output. Changing the rate of output has a bigger impact on average cost than setting steady state output at a higher or lower level. Changes in the rate of output dislocate the allocation of resources. This is particularly true for human resources. Employees are usually most productive when they repeat the same routines; furthermore, when their work is repetitive, productivity may improve as a result of learning on the job. As a firm grows, the internal division of labour has to change, and this forces people to change their roles. …

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