Beyond strategy: A critical review of Penrose's ‘single argument’ and its implications for economic development

Abstract

This paper offers a critical review of the ‘single argument’ that underpins Edith Penrose's, The Theory of the Growth of the Firm, which was first published in 1959. (TGF). It aims to complement and counterpoint recent examinations of Penrose's influence on strategic management, and on the resource-based view in particular. The paper examines six components of the argument, tracing their interconnected journey towards TGF's relatively neglected final chapters, which address the economic consequences of the growth of large firms. It also reflects on the implications for economic development research, with reference to Penrose's later critique of contemporary liberalisation policies.

Keywords:

• Edith Penrose
• firms
• growth
• economic development

Acknowledgements

I would like to thank Michael Best, Peter Clark, José Luís Cardoso, and the two anonymous referees for their helpful comments and suggestions. Though not consulted directly on this paper, I would also like to acknowledge the earlier generosity of Mark Casson, David Musson and Michael Rowlinson in making time to share their thoughts on Edith Penrose's legacy. Lastly, belated thanks to Tony Lawson and Christos Pitelis for organising a research seminar on Edith Penrose and critical realism at Cambridge in 1999, which provided much of the initial inspiration for this study. Any errors and omissions remain my responsibility.

Notes

1 The exceptions include a small group of economists who attempted to formalise one component of Penrose's argument, the so-called ‘Penrose effect’, or managerial limit’ to growth in the 1960s and 1970s (Marris, 1964; Rubin, 1973; Shen, 1970; Slater, 1980b; Uzawa, 1969), and Richardson's (1972) study, which provided the initial bridge between TGF and the subsequent literature on interorganisational networks (cf. Penrose, 1996).

2 Augier and Teece (2007, p. 189 n. 12), note that the David Teece's (1982) paper on the multiproduct firm was the first to apply Penrose's ideas to strategic management issues.

3 The Fourth Edition of TGF was published in 2009 with a new Introduction by Christos Pitelis, the editor of Penrose's collected papers (Pitelis, 2009).

4 The link with E.A.G. (Austin) Robinson is recalled in a striking image of Edith and her husband E.F. ‘Pen’ Penrose, driving from her home in Syria to attend a job interview in England: ‘In 1959 Edith drove across the Syrian desert (Pen did not drive), through Turkey and on to England in an old Hillman estate car so that Edith could attend an interview at Cambridge University. [Austin's wife, the economist] Joan Robinson, had read page proofs of The Theory of The Growth of The Firm and instigated the invitation. As the story goes, Austin Robinson was less impressed and a job offer was not forthcoming’. (Best and Garnsey, 1999, p. F199). We can only assume that other forces were at work since, as Jacobsen (2011, p. 13, n. 12) indicates, TGF contains several references to Robinson's 1931 study, The Structure of Competitive Industry. It also signals many points of agreement with those of her prospective employer (ibid., pp. 13–18).

5 Pitelis (2009, p. xxix) notes that, ‘while Penrose's work has been noticed and used, and has influenced mainstream thinking, this has been done in a way which downplayed, even ignored, her major insight’. He has since noted that, ‘her extensive contribution to the theory and political economy of international business and economic development has received slight attention’ (Pitelis, 2011, p. 67). For recent reviews of the entrepreneurial growth literature that highlight Penrose's contribution, see Macpherson and Holt (2007); and Leitch, Hill, and Neergaard (2010).

6 Jacobsen (2011, pp. 8–13) provides an insightful examination of this debate, and of its implications for Penrose's reputation amongst RBV scholars.

7 For example, Best (2001, pp. 243–56), indicates how his own neo-Penrosean analysis might be applied to address the ‘sustainable growth challenge’; Pitelis (2009, p. xii) suggests that Penrose's ideas in TGF might be re-applied in sustainable development research, in parallel with the work of Sen (1999) and other economic development scholars.

8 The publishers determined otherwise, and the case was published separately. However, while there may not have been sufficient space for the Hercules study, Penrose did include the final two chapters (Chapters 10 and 11), which extended her argument to address a wider set of economic issues.

9 Jacobsen (2011) provides a detailed account of Robinson's influence on Penrose and TGF, with a particular focus on the implications for strategic management and the resource-based view.

10 Penrose was characteristically caustic in her assessment of those who attempted integration: ‘Williamson finds in the development of the M-form a means of joining more fully the neoclassical theory of the firm and “bureaucratic theory”. He may be right to the extent that in the narrow sense the “profit maximisation hypothesis” becomes more applicable in the “real world”, but not if one holds as I do, that the two types of theory are designed to answer different questions and are therefore not to be compared in any meaningful way’ (Penrose, 1985, p. 13).

11 Kor and Mahoney (2000) ten-point schema is set out in the order in which the concepts appeared in Penrose (1959), while Penrose and Pitelis's (1999, pp. 11–12) 13-point list summarises their own account of TGF's main ideas.

12 In a footnote, Penrose explained that she was not attempting to extend their work, but merely drawing upon those elements that might enhance her own theorising: ‘I am concerned only with those aspects of these large and complex subjects which will be of use in the theory of the growth of the firm to be developed later’ (Penrose, 1959, p. 16, n. 2).

13 The ‘dynamic capabilities’ approach to strategy (Teece, Pisano, and Shuen, 1997) dispensed with the term ‘resource’, in favour of ‘firm-specific asset’. Its ‘processes, positions and paths’ approach builds on Penrose (Augier and Teece, 2007) but is arguably constrained by the omission of a ‘resources–services’ dynamic.

14 These arguments are revisited in Foss, Klein, Kor, and Mahoney (2008), where Penrose's approach is synthesised with Austrian economics and resource-based theorising.

15 Adam Smith's [1776] exploration also starts with the firm (Best and Garnsey, 1999, p. F193).

16 Organisational researchers have since extended this argument, challenging overoptimistic assumptions about the capacity of management teams to manipulate firm-level capabilities (e.g. Clark, 2000; Scarbrough, 1998).

17 These were, in her terms: ‘The forces inherent in the nature of firms which at the same time create the possibilities for, provide the inducements to, and limit the amount of expansion they can undertake or even plan to undertake in a given period of time’. (Penrose, 1959, pp. 4–5).

18 (Marris, 1999, p. 51) noted how this concept echoed his father's remarks on troop reinforcements (i.e. ‘they need time to bed down; they need time to learn each other's ways’). The post-Marshallian economist Philip Andrews also drew attention to internal reserves as a constraint on the rate of growth of firms, but in contrast to Penrose concentrated on physical capacity rather than managerial resources (Finch, 2000, pp. 390–1).

19 Penrose later noted that, ‘the so-called “Penrose curve” […] has been applied in a number of contexts, and even, to my surprise, to agricultural enterprises’ (Penrose, 1995, p. xii).

20 Best (1990), p. 138, had argued that the relative success of Japanese firms in the preceding decade could be explained by just such a conjunction.

21 Exceptions include Best (1990, 2001), Rathe and Witt (2001) and Lazonick (2002).

22 She defers in characteristic style to the pragmatic and the empirical practitioner: ‘Now none but the most philosophically sophisticated businessman will accept the proposition that the opportunities for the expansion of his firm are simply his ideas about what his firm can do; he will insist that the opportunities he sees reflect the “facts” of the world, facts that may be known with indifferent accuracy to be sure, but facts none the less’ (Penrose 1959, p. 216).

23 Pitelis (2011, pp. 77–8) making reference to Penrose's earlier work in the 1950s and 1960s, notes that her ‘uncompromising, objective account’ of the positive and negative effects of MNEs in developing countries attracted criticism from academics and company executives. Penrose's later (1992) article reflects on a further two decades of MNE activity in developing countries and its critique of MNEs and host country governments is arguably more radical than that of her original (1965, 1971) contributions.

24 Marris's (1961) review in the Economic Journal remarked that, ‘The book is indeed so packed with ideas that it would be impossible for all of them to be consistent’ (Marris, 1961, p. 144). However, also he maintained the position that TGF, ‘lacked an economically interpretable account of the motives growth’ (Marris, 1999, p. 48 – emphasis in original).