The dynamics of Japanese firm growth in U.S. industries: the Penrose effect.
| Verfasser | Tan, Danchi |
Abstract and Key Results
* This paper proposes that multinational firms that are more capable in developing new managerial resources are less vulnerable to the Penrose effect in the process of international expansion.
* We hypothesize that firms were more capable to achieve growth in consecutive time periods when they send more expatriates to the local operations and when they have greater home experience before entering into the local market.
* The empirical results based on a sample of Japanese investments in the United States support our arguments.
Key Words
Penrose Effect, Firm Growth, Multinational Firms, Expatriates, Development of Managerial Resources, Japan
Introduction
In the seminal research book of resource-based theory, The Theory of the Growth of the Firm, Penrose (1959) submits that a lack of managerial resources is typically the major obstacle that impedes the growth rate of a firm. Growth does not take place automatically, but must be planned strategically and implemented effectively by managers who have firm-specific experiences internal to the firm (Penrose 1959, Kor/Mahoney 2000, Pitelis 2002, Mahoney 2005). Because such managers must be developed within the firm and cannot be hired from the outside, the capacities of internally experienced managers set a limit to the expansion projects that a firm can undertake in any period of time (Rubin 1973, Slater 1980). Accordingly, a firm that expands rapidly in one time period is likely to incur managerial problems and consequently the firm's growth may stagnate in the subsequent time period. The logic here is essentially that the firm is not likely to be able to adjust timely its managerial resources to the desired level to deal with the increased organizational complexity that is typically associated with a rapid rate of firm-level expansion, leading to time compression diseconomies (Dierickx/Cool 1989) and dynamic adjustment costs (Lucas 1967, Treadway 1970, Mortensen 1973, Slater 1980).
The economic impact of managerial constraints on the rate of growth of the firm is cited as the Penrose Effect in the research literature (Marris 1963, Shen 1970, Hay/Morris 1991). A limited number of research studies have empirically examined whether the Penrose Effect exists (Shen 1970, Gander 1991, Thompson 1994, Shane 1996, Orser/Hogarth-Scott/Riding 2000, Tan 2003). 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/Mahoney 2005).
While these research studies improve our understanding of the economic impact of managerial constraints on the rate of the growth of the firm, at least two research issues require further consideration. First, previous empirical studies mainly focus on whether the Penrose Effect exists. Just as firms are endowed with different technological capabilities, firms may be endowed with different managerial capabilities and thus may encounter managerial constraints differently. 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/Mahoney 2005).
The current empirical paper attempts to improve such an understanding by exploring the conditions under which the Penrose Effect is more likely to prevail from the perspective of the supply of managerial resources and by examining these conditions empirically in an international business context. To our knowledge, only three empirical studies have investigated the conditions under which firms encounter more substantial managerial constraints. All have centered on the demand for managerial resources. 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/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.
The current research paper complements the previous empirical studies by focusing on the supply of managerial resources. Specifically, we consider the possibility that multinational firms may have different organizational capabilities for developing new managerial resources (Nelson/Winter 1982, Teece/Pisano/Shuen 1997, Verbeke 2003). We posit that multinational firms are less likely to be impeded by the Penrose Effect when these firms have greater organizational capabilities in developing new managerial resources abroad in a timely fashion (Chang 1995). We explore several conditions under Which firms are more likely to do so, and we test these conditions empirically.
The current paper is organized as follows. The next section summarizes Penrose's (1959) theory of the growth of the firm and develops several hypotheses concerning the conditions under which firms are likely to face greater managerial constraints on the rate of growth. We then describe the data and measures for empirical tests of the hypotheses and report the empirical results. The final section discusses the empirical results and provides conclusions.
Penrose's Theory of the Growth of the Firm
What influences the rate at which a firm grows? According to Penrose (1959), managers that have experience internal to the firm can influence the growth rate of the firm in at least three ways. First, the managerial services from internally experienced managers are a required input for the operation of a firm and the capacities of the existing management team set a limit to the rate at which a firm can grow in any given period of time. Penrose suggests that the very nature of a firm is an administrative organization, which requires that managers with experience internal to the firm "at least know and approve, even if they do not in detail control all aspects of, the plans and operations of the firm" (1959, p. 45). In particular, internally experienced managers typically work together as a team. Individuals new to the firm cannot provide services that allow the managerial team to function as a team, and to be useful for the firm these new personnel need to gain experience from working together with existing managers. In addition, the process of decision-making within the firm is too complex to be codified as a management "blueprint" for implementation by these newly recruited managers. Because internally experienced managers can only be developed within the firm over time, firms are faced with an inelastic supply of managerial resources, at least in the short run. Consequently, the capacities of internally experienced managers set a limit to the scope and complexity of operations that a firm can plan and manage in any given period of time.
Second, the managerial capacities of management not only limit, but also provide an inducement to firm-level growth, because these managerial capacities within a firm can grow over time. Specifically, strategic planning and implementation of different expansion projects expose the existing managers to various stimuli that allow the managers to develop their managerial repertoires (Huber 1991, Mahoney 1995). As a result, existing managers can expand their skills through learning on the job. A firm can also gain access to new managerial resources when its newly recruited managers gain firm-specific experience by working with existing managers. In addition, while strategic planning and implementing an expansion project absorbs the time and attention from internally experienced managers, as the firm encounters recurrent challenges in the particular environment, its responses to these challenges can evolve into a set of routines (Nelson/Winter 1982) that economize the capacities of existing managers. Therefore, managerial resources can be released from completed projects and become available for further expansion.
The increase in managerial capacities would not facilitate the growth of the firm if the firm would not attempt to utilize them. For Penrose (1959), firms that pursue long-term profits will tend to search for ways of using resources more profitably. Because at least a part of the (excess) managerial resources are firm specific in nature, these resources are more valuable economically within the firm than outside the firm in strategic factor markets (Barney 1986). As a result, the growing managerial resources, once not fully used in the current operations of a firm, provide an economic incentive to further expansion.
Finally, the capacities of existing managers also influence the development of new managerial resources. To be able to provide managerial services that are economically valuable to the firm, newly recruited personnel need to learn "the best way of doing things in the particular set of circumstances in which they are working" (Penrose 1959, p. 52). Existing managers mentor newly recruited managers in the sense that the existing managers provide to the new recruits the tacit knowledge (Polanyi 1962, Subramaniam/Venkatraman 2001) of the ways things work. Because the process of mentoring involves face-to-face interactions between existing managers and new recruits, the capacities of existing managers limit the rate at which new managerial resources can be developed. In addition, newly recruited managers gain team-level...
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