Academic journal article Management International Review

The Penrose Effect: "Excess" Expatriates in Multinational Enterprises

Academic journal article Management International Review

The Penrose Effect: "Excess" Expatriates in Multinational Enterprises

Article excerpt

Abstract and Key Results

* Penrose's (1959) theory of firm growth argues that firm knowledge and experience gives rise to "excess" resources which can be (re)deployed to explore and exploit productive opportunities leading, ultimately, to the achievement of firm goals.

* We examine this key insight on organizational slack in the context of expatriate managers within multinational enterprises (MNEs).

* Expatriates are not only a viable way of examining the Penrosian concept of slack but, as an unique element of MNE management, expatriates also provide an opportunity to develop new insights into international business theory.

* Using a large sample of MNE subsidiaries, we found that when host country experience is comparatively low, subsidiaries with "excess" expatriate managers are more likely to experience inferior performance. Alternatively, expatriate slack is associated with a higher likelihood of superior performance in the context of comparatively high host country experience.

Key Words

Multinational Corporations, Penrose, Expatriates, Organizational Slack, Human Resources


Penrose (1959) has become a central source of emerging ideas in the study of strategic management. While the debate as to her intended versus ascribed views continues (cf. e.g., Kor/Mahoney 2004, Lockett/Thompson 2004, Rugman/Verbeke 2004), there is a consensus that Penrose (1959) has inspired a powerful set of concepts on the relationship between intrafirm learning, the source(s) of competitive advantage, and firm performance that are useful in the analysis of MNEs (Pitelis 2002).

One of Penrose's (1959) key insights is that learning through experience causes managers to become more efficient at what they do. Thus, rising efficiency causes previously utilized managerial resources to become "slack," although not idle, and these "unused productive services are, for the enterprising firm, at the same time a challenge to innovate, an incentive to expand, and a source of competitive advantage" (Penrose 1959, p. 85). In fact, Penrose (1959, p. 45) argued that the "capacities of the existing managerial personnel of the firm necessarily set a limit to the expansion of the firm" in any given period--a bottleneck sometimes referred to as the "Penrose effect."

Kor and Mahoney (2000) provide an extensive unbundling of Penrose's model of firm growth, suggesting that firm growth is a function of firm-specific experiences in teams, that managerial capability is the binding constraint that limits the growth rate of the firm, and that excess capacity of productive services are drivers of firm growth. More specifically, these authors suggest several key questions, inspired by Penrose's work, that relate to the ways in which human resources influence a firm's growth and competitive advantage, the conditions under which a firm's knowledge and experience have an impact on performance, and the sources of firm heterogeneity.

This framing of key Penrosian questions by Kor and Mahoney (2000) is closely aligned with questions emerging in the field of international business on the source of firm-specific advantages (FSAs) within MNEs. There has been a significant evolution in thinking about MNEs over the past ten years; traditionally, researchers assumed that nonlocation-bound FSAs were developed at the corporate headquarters and leveraged overseas through a network of foreign subsidiaries (Rugman 1981). This established view is characterized by a great emphasis on cost optimization and FSA protection. As overseas subsidiaries grow in size and develop their own unique resources, however, it has become increasingly apparent that the home country is no longer the sole source of competitive advantage for the MNE (Rugman/Verbeke 1992) as reflected by alternative perspectives such as the heterarchy (Hedlund 1986), the transnational (Bartlett/Ghoshal 1989), and the interorganizational network (Ghoshal/Bartlett 1990). …

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