Method, Structure and Argument in Edith Penrose's Theory of Growth

Abstract

Edith Penrose's The Theory of the Growth of the Firm proposed a process theory of growth based on the pursuit and coordination of knowledge. From 1956 to 1973, Penrose began to focus on large international firms operating in developing countries. She found government to be a continuous input to the growth process. We argue here that Penrose was a heterodox economist, who followed the methodological style and structure of her Austrian mentor Fritz Machlup, embraced the neoclassical case study method of Marshall, and articulated a viewpoint on international growth that is much in line with Roy Harrod, Maurice Byé and Charles Kindleberger, who devoted considerable attention to why governments find it necessary to impose restraints on how such firms invest in their economies. The background and development of Penrose's work has implications for theory and policy, specifically for the Resource-based view which recognizes Penrose as its founder.

Notes

¹Penrose had made the same observation a decade earlier, in a defence of her single process theory against internalization theory and the eclectic paradigm (Penrose, 1985).

²Penrose's source for this argument was Maurice Byé (1958), whose influence on her work is discussed in Section 4 below.

³Two other researchers were engaged in the effort, which was supported by the Merrill Foundation. Dr Gertrude Schroeder worked on ‘The Growth of the Major Basic Steel Companies, 1900–1950’; and Dr Edgar O. Edwards worked on ‘Studies on the Growth of the Individual Firm, with Application to Firms in the Chemical Industry.’ (Report on the Study of ‘The Growth of the Business Firm,’ Conducted by Professors Evans and Machlup from 1949 to 1952, June 1952; Fritz Machlup Papers, Hoover Institution, Box 226, folder 2).

⁴Penrose & Pitelis (1999) claim erroneously that that the Hercules Powder Company research preceded The Theory of the Growth of the Firm. Actually, the work that became Theory began in 1949; the fellowship that funded Edith Penrose's Hercules study began in 1954.

⁵This is in the context of much more relaxed FDI rules and reduced import controls. The local GM subsidiary, GM-Holden has, in the past decade, become a major exporter of vehicles to the Middle East and the US and, on a smaller scale, the UK, and a major supplier of engines to GM affiliates around the world. Foreign debt is now about half of GDP and being fuelled by consumer spending and overseas funding of housing loans.

⁶See ‘Profit Sharing Between Producing Countries and Oil Companies in the Middle East’ (Penrose, 1959). Here, Penrose notes that one of the parties invests capital to start the industry and runs it; the other supplies the raw material, a ‘wasting asset.’ While both are interested in promoting the most profitable long-run expansion of the industry, the governments of oil producing countries are concerned with their own oil production and the oil companies with locating their operations in the country that will provide the highest return on investment. Penrose argues that the proportion of its profit that a company will be willing to give up to obtain concession rights from a government depends of the relative costs associated with meeting or resisting the government's demands, while those demands will depend on the government's estimate of the value of the concession to the company or what it thinks the company is prepared to give up in order to avert political disturbances and maintain political good will. (The situation is similar to franchise bidding for a natural monopoly, where the need for a complicated administrative apparatus to manage the bidding is comparable in cost to regulation.)

⁷It should be noted that nationalization could be done without inhibiting technological progress if the government-owned firm was able to do technology licensing deals or call in consultants. Indeed, given that rival firms stand to make money from technology licensing or consulting services, there is scope for playing them off against one another, as per Foss's notion of ‘real options’ and the franchise bidding approach mentioned above.