Entrepreneurship in multinational enterprises: a Penrosean perspective.
| Verfasser | Verbeke, Alain |
Abstract and Key Results
* This paper applies Penrose's (1959) insights on the quantity of managerial services required for firm-level organic expansion to the analysis of entrepreneurial activities in MNEs.
* We use these insights to build a framework relevant to entrepreneurial activities in MNEs, and then apply this framework to assess the metanational model (Doz/Santos/Williamson 2001) in terms of the quantity of managerial services required to implement it.
* Penrose's (1959) insights on firm-level growth processes are still relevant to the analysis of entrepreneurial activities in MNEs.
* The quantity of managerial services required for the effective functioning of the metanational model appears to be particularly high, and the benefits of this model should therefore be carefully weighed against the potential costs.
Key Words
Penrose, Theory of the Growth of the Firm, Metanational Model, Entrepreneurship, Managerial Services, Multinational Enterprises
Introduction
A simple observation motivated writing this paper: there is a missing link between Edith Penrose's (1959) seminal book, The theory of the growth of the firm, and contemporary research on entrepreneurial activities in the modern multinational enterprise (MNE). Doz, Santos, and Williamson's (2001) concept of 'metanational' is the latest, mainstream international management attempt to analyze the need for new types of entrepreneurship in the MNE. The rising interest in MNE entrepreneurial activities reflects both the increased geographical dispersion of critical knowledge in the global economy (Cantwell/Iammarino 2001) and the differentiated network structure of many modern MNEs (Nohria/Ghoshal 1994, Rugman/Verbeke 1992, 2003).
First, as regards the dispersion of critical knowledge, technological activities show a strong tendency to agglomerate in specific locations, thereby creating narrowly specialized knowledge clusters (Cantwell/Iammarino 2001). This trend requires MNEs to rely on their local subsidiaries both to tap into the knowledge pool in such clusters and to search for profitable opportunities related to the newly acquired knowledge in these clusters. MNE corporate headquarters are often incapable to do so themselves given their lack of proximity to host country or host region conditions (Verbeke/Yuan 2005).
Second, in a differentiated multinational network, each subsidiary possesses an idiosyncratic set of resources, the full benefits of which may only be reaped through subsidiary driven initiatives (Birkinshaw/Hood/Jonsson 1998).
Birkinshaw and his co-authors have analyzed the characteristics, determinants, and processes of subsidiary initiatives, emphasizing the benefits for the MNE as a whole of exploiting the specialized resources present at the subsidiary level (Birkinshaw et al. 1998). This emphasis on the exploitation of dispersed knowledge in MNEs through the pursuit of entrepreneurial activities was pushed further in Doz et al. (2001). Doz et al. (2001) suggested the concept of metanational advantage, resting on "the ability to mobilize and leverage pockets of specialized knowledge that are dispersed around the world" (Doz et al. 2001, p. 169). Their idea is that MNEs must learn from the world, transform the knowledge gathered into usable innovations, and pass these innovations to an efficient manufacturing/customer delivery network.
Surprisingly, the analysis of the metanational model provided in Doz et al. (2001), based on specialized resources/competences in MNEs, does not appear to have benefited from Penrosean insights, though the exploitation of inherited resources and the pursuit of new, productive opportunities were addressed extensively in her 1959 book, albeit not in the MNE context. It is true that Penrose, in spite of extensive study of the international activities of large firms, never explicitly dealt with the distinctive characteristics of international operations (Dunning 2003, Pitelis 2000). However, the entrepreneurial activities in modern MNEs (Birkinshaw 2000, Doz et al. 2001) precisely represent these firms' endeavors to achieve (internal) growth. Therefore, Penrose's insights on the processes instrumental to such growth, and the limits thereof (Dunning 2003, Pitelis 2000, Rugman/Verbeke 2002) deserve careful consideration. In this context, we view Doz et al.'s (2001) work merely as a case study to investigate the practical, managerial implications (if any) of neglecting Penrose's pioneering insights (1959).
Our objective in this paper is to apply Penrose's (1959) insights to the analysis of entrepreneurial activities in MNEs. We shall focus especially on the quantity of managerial services (a concept used by Penrose), needed to pursue such activities. Rugman, Verbeke, and Yuan (2005) already described the quality of managerial services required for entrepreneurial activities, with an emphasis on the interactions between unused productive resources and different types of managerial strengths. These authors also reinterpreted the issue of subsidiary-driven evolution building upon those interactions. However, in section 2 we provide a review of Penrose's insights (1959) on the quantity of managerial services required for expansion. We use these insights to build a framework relevant to entrepreneurial activities in MNEs in section 3. We then apply this framework to evaluate the metanational model in section 4. The final section concludes.
The Quantity of Managerial Services Required for Expansion
According to Rugman et al. (2005), who studied the quality of managerial services required for expansion, Penrose (1959) distinguished between the 'competence of management' and the 'enterprise of management'. The competence of management "refers to the way in which the managerial function is carried out" (Penrose 1959, p. 32), i.e., to the firm's operational strengths, leading to the efficiency of current operations. In contrast, the enterprise of management "refers to the entrepreneurial function" (Penrose 1959, p. 32), i.e., to the firm's entrepreneurial strengths, leading to innovation in terms of technology, products and markets. As noted by Rugman et al. (2005)
"The above distinction is also crucial for subsidiary evolution. Obviously, the operational strength of subsidiary management alone, even it is high, will not lead to a stream of subsidiary initiatives, if subsidiary managers do not have an entrepreneurial strength. They may be good implementers of corporate strategy, but an entrepreneurial strength suggests another growth route, namely subsidiary managers exploring new opportunities." (Rugman et al. 2005, p. 21)
Rugman et al. (2005) thus suggest that the type of management strengths, i.e., the quality of these strengths, held by the individual subsidiary will determine its development path. In this context, they also emphasize, following Penrose (1959), that the mere presence of unused productive resources (i.e., the source of managerial services) will not automatically lead to subsidiary initiatives, if subsidiary management lacks entrepreneurial strengths. Although other determinants may play a role (Birkinshaw 1999), the Penrosean perspective views the existence of entrepreneurial strengths as the key condition for subsidiary initiatives.
Rugman et al.'s discussion of the determinants of entrepreneurial activities in MNEs thus identifies the conditions for firm growth, in terms of the quality of managerial services required. Similar analyses of the quality of services can also be found in other recent academic literature (e.g., Ghoshal/Hahn/Moran 1999). However, the significance of the quantity of managerial services required for firm growth to occur has remained a largely neglected area of research, in spite of Penrose's attention to this issue (Penrose 1959, pp. 197 et seq.).
From a Penrosean perspective, the managerial services needed for expansion include both a specific quality of resources, and the required quantity thereof. In her words:
"It is obvious that if all necessary productive services, including managerial and entrepreneurial services, were available in unlimited amounts at constant prices, ... a large plant would always be better than a small one" (Penrose 1959, p. 45);
and "Since there is plainly a physical maximum to the number of things any individual or group of individuals can do, there is clearly some sort of limit to the rate at which even the financial transactions of individuals or groups can be expanded" (Penrose 1959, pp. 45 et seq.).
The available managerial services, in terms of both quality and volume, thus set a limit to the firm's expansion rate. Put in other words, any set of expansion projects at a given time requires the appropriate quality and quantity of managerial services, and thus of managers able to provide these services. Clearly, in extreme cases, the presence of one or more "super" managers (the equivalent of a Jack Welch at General Electric) may reduce the quantity of managers required to implement successfully a particular expansion program. However, almost by definition, "super" managers are outliers, not relevant to a typical expansion trajectory of the MNE.
Below, we use Penrose's insights to develop a new framework that takes into account the importance of the quantity of managerial services, and we pay specific attention to the impact of trans-border activities.
Two key factors determine the firm's growth rate: the overall volume of managerial services available for expansion and the volume of managerial services required per monetary unit invested in expansion.
Penrose identified three determinants affecting the volume of managerial requirements per monetary unit invested in expansion:
"(a) the character of the expansion itself, (b) the relation between the type of expansion, the existing activities of the firm, and the complex of external circumstances that I shall simply call 'market conditions', and (c) the method of expansion"...
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