Examining the Penrose effect in an international business context: the dynamics of Japanese firm growth in US industries

Abstract

Penrose (1959) theoretically developed the research proposition that the finite capacities of a firm's internally experienced managers limit the rate at which the firm can grow in a given period of time. One empirical implication that follows logically from this line of reasoning is that a fast-growing firm will eventually slow down its growth in the subsequent time period because its firm-specific management team, which is posited to be inelastic at least in the short run, is unable to handle effectively the increased demands that are placed on these internally experienced managers due to increased complexity as well as the time and attention that the new managers require from these internally experienced managers. Consequently, inefficiency in the firm's current operations will follow if the firm maintains its high rate of growth. The research proposition that a firm cannot remain operationally effective if it maintains high rates of growth in successive time periods, and that consequently those firms with foresight typically will slow down their growth in the subsequent time period is known as the 'Penrose effect' in the research literature, and this effect of dynamic adjustment costs has been examined and corroborated in a few empirical research studies. However, researchers have not yet examined the Penrose effect in an international business context.The current paper examines the Penrose effect in an international business context by exploring under what conditions Japanese firms achieve high growth in consecutive time periods in the entered US industries. The empirical results indicate that, consistent with Penrose's (1959) resource-based theory prediction, Japanese multinational firms that entered in US industries where the extent of knowledge tacitness, globalization, and unionization was high, rapid expansion growth in one time period had negative impacts on growth in the subsequent time period. Thus, dynamic adjustment costs limit the rate of the growth of the firm and the development of dynamic capabilities in this international business context, which suggests that the Penrose effect may be widely applicable to international business and corporate strategy. Copyright # 2005 John Wiley & Sons, Ltd. INTRODUCTIONHow a firm evolves over time has been an important issue in the fields of strategic management and industrial organization economics (Kor and Mahoney, 2000;Nelson and Winter, 1982). Looking at the historical business record from an organizational capabilities and technology trajectories perspective, Chandler (1990) suggests that modern business enterprises arise from the economies of scale and scope that are made possible by the development of new technologies. Furthermore, a number of researchers who approach these business issues more deductively in economic *Correspondence to: Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, USA. E-mail: josephm@uiuc.edu science come to a similar conclusion to Chandler's (1990) more inductive business h...

The dynamics of Japanese firm growth in U.S. Industries: The Penrose effect

“…In general, these research studies provide supportive, but not robust empirical evidence for the Penrose Effect, and the strength of the Penrose Effect varies with the types of expansion, and the firms considered in the samples (Tan and Mahoney, 2005).…”

“…Shen (1970) suggests that if not for managerial constraints, growth rates of successive periods would be positively correlated because larger firms enjoy increasing returns to scale for labor (p.706) and can benefit more from technological change (p.707 footnote) and therefore can grow faster. Tan and Mahoney (2005) suggest that it might be possible for firms to achieve growth in successive periods in foreign markets because the need for close coordination between overseas operations may be lower than between domestic ones. Our empirical results indicate that the correlation coefficient between PREGROW and GROWTH is not statistically significant at the 0.05 level in Table 1.…”

“…However, researchers have under-emphasized the possibility of firms incurring differential managerial constraints and have under-explored the conditions under which the Penrose Effect is more likely to prevail. Second, although international expansion is an important strategic option enabling a firm to achieve growth, empirical studies that examine the Penrose Effect are rare (Tan, 2003;Tan and Mahoney, 2005).…”

“…Thompson (1994) and Shane (1996) show that U.S. firms following a franchise strategy grew faster than those that expanded via establishing hierarchical outlets because the latter are subject to a greater managerial constraint. The third empirical paper (Tan and Mahoney, 2005) found that the higher the need for coordinating cross-border intra-firm units, the greater the Penrose Effect, for Japanese firms entering the U.S. market. In general, these empirical studies found that the Penrose Effect is highly likely to be more substantial for firms that engage in business activities that are more demanding of managerial services from internal experienced managers.…”

Cross-listing and the scope of the firm

“…What is the long run? Answers to these questions depend on a firm's pace of growth (Tan & Mahoney, 2005) and capabilities to adapt to a new institutional system (Peng et al, 2005: 630-631). We therefore cannot predict directly how short the short run is or how long the long run is.…”