Edith Penrose and the future of the multinational enterprise: new research directions.
| Verfasser | Pitelis, Christos |
Abstract and Key Results
* This paper demonstrates the continued relevance of Penrose's Theory of the Growth of the Firm (1959) (TGF) to explain MNE expansion patterns.
* Explaining MNE growth requires explicit attention to three elements not addressed fully by Penrose: (1) technology-based firm-specific advantages, (2) dynamic capabilities and (3) melding location-bound and internationally transferable knowledge, especially through astute human resources management.
* TGF includes foundational insights on the dynamic capabilities approach in strategy and contributes to assessing normative models in international strategy.
* Penrose did not appreciate fully the unique knowledge recombination challenges prevailing in international business, especially in the context of the large MNE. This uniqueness of knowledge recombination is the raison d'etre of international business as a separate field of inquiry.
Key Words
Multinational Enterprise, Dynamic Capabilities, Knowledge Recombination
Introduction
Edith Penrose (1959), in her landmark study, The Theory of the Growth of the Firm (TGF)--which had earned 3745 citations on Google Scholar at the time of writing the present piece--observed that external demand per se limits neither firm-level growth rates, nor absolute size, as firms can normally search for investment opportunities inside and outside their present markets. Rather, the key constraints to rapid firm-level growth and to firm size originate inside the firm:
"A firm's rate of growth is limited by the growth of knowledge within it, but a firm's size by the extent to which administrative effectiveness can continue to reach its expanding boundaries" (Penrose 1995, xvii).
The question arises whether Penrose's thinking on firm-level growth is (still) applicable to the international business (IB) context, and whether this context requires an extension or refinement of her ideas. In an entry to the Palgrave in 1987, Edith Penrose claimed that both Hymer-based and Coase-based perspectives on international growth through foreign direct investment (FDI) and multinational enterprise (MNE) activity, fail to distinguish between domestic investments and cross-border ones. She concluded:
"There are differences between national and international firms but the differences are not such as to require a theoretical distinction between the two types of organization, only a recognition that national boundaries make an empirical difference to their opportunities and costs." (Penrose 1987, p. 563)
Later, in the 1995 Preface to the third edition of TGF, Penrose went on to claim that:
"Much of the analysis of the growth of firms as I have presented it seems by and large to apply equally well to expansion by direct foreign investment in its modern form--the processes of growth, the role of learning, the theory of expansion based on internal human and other resources, the role of administration, the diversification of production, the role of merger and acquisition are all relevant." (Penrose 1995, xv), and
"... it is easy to envisage a process of expansion of international firms within the theoretical framework of the growth of firms as outlined in this book. It is only necessary to make some subsidiary 'empirical' assumptions to analyze the kind of opportunities for the profitable operations of foreign firms that are not available to firms confining their activities to one country as well as some of the special obstacles" (Penrose 1995, xv).
Penrose's views address the core of IB scholarship; they challenge its very raison d'etre. Stephen Hymer's (1976) 'ownership advantage'--based theory of the MNE, whereby FDI is selected over alternatives such as licensing, in part for its firm-level, market power enhancing attributes, dominated IB thinking from 1960 (when Hymer completed his thesis) to the mid-1970s. At that time 'internalization scholars', most notably Buckley and Casson (1976), building upon Coasean thinking, started to emphasize the transaction cost economizing benefits of internalizing knowledge-based, intangible assets/advantages. The transaction cost economizing perspective gradually became the dominant IB theory, and remained in that position until the time of Penrose's (1987) critique noted above.
It is correct that IB scholars had not fully addressed Penrose's (1987) point about what makes IB unique as compared to domestic business. Both Hymer's (1976) and Buckley and Casson's (1976) explanations for FDI were largely compatible with the reasons for intra-country integration (horizontal and vertical), diversification and/or cooperation. The point is thus that both Hymer's (1976) and Buckley and Casson's (1976) work have a broader applicability than the MNE and its FDI decisions. The additional complexity specific to the MNE is the impact of national borders, i.e., location, as identified by Penrose.
Dunning's (1958, 1998) focus on the importance of location advantages (the L, in his OLI framework, whereby O stands for ownership advantages, and I for internalization advantages), largely addresses Penrose's observations. Yet, L too has an intra-country, as well as an inter-country element. In this context, it is not L per se, but differences in L between countries that count. These differences were in fact already recognized by Hymer (1976), as reflected in his discussion of the additional costs of doing business abroad. Hymer's focus on the additional costs of doing business abroad is consistent with the prevailing view, at that time, that MNEs would go abroad to exploit their O (Hymer-type monopolistic, ownership advantages). There was little appreciation of the benefits of being foreign, in addition to those associated with exploiting extant advantages. These additional benefits include those resulting from upgrading the firm's extant, asset-based advantages and those resulting from emerging transactional advantages associated with operating an international network. Interestingly, Penrose's views, as expressed in TGF, can help us to understand better these additional benefits of international activities. For example, recent IB scholarship on strategic asset seeking FDI and institutional asset...
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