The Penrose effect: "excess" expatriates in multinational enterprises.
| Verfasser | Goerzen, Anthony |
Abstract and Key Results
* Penrose's (1959) theory of firm growth argues that firm knowledge and experience gives rise to "excess" resources which can be (re)deployed to explore and exploit productive opportunities leading, ultimately, to the achievement of firm goals.
* We examine this key insight on organizational slack in the context of expatriate managers within multinational enterprises (MNEs).
* Expatriates are not only a viable way of examining the Penrosian concept of slack but, as an unique element of MNE management, expatriates also provide an opportunity to develop new insights into international business theory.
* Using a large sample of MNE subsidiaries, we found that when host country experience is comparatively low, subsidiaries with "excess" expatriate managers are more likely to experience inferior performance. Alternatively, expatriate slack is associated with a higher likelihood of superior performance in the context of comparatively high host country experience.
Key Words
Multinational Corporations, Penrose, Expatriates, Organizational Slack, Human Resources
Introduction
Penrose (1959) has become a central source of emerging ideas in the study of strategic management. While the debate as to her intended versus ascribed views continues (cf. e.g., Kor/Mahoney 2004, Lockett/Thompson 2004, Rugman/Verbeke 2004), there is a consensus that Penrose (1959) has inspired a powerful set of concepts on the relationship between intrafirm learning, the source(s) of competitive advantage, and firm performance that are useful in the analysis of MNEs (Pitelis 2002).
One of Penrose's (1959) key insights is that learning through experience causes managers to become more efficient at what they do. Thus, rising efficiency causes previously utilized managerial resources to become "slack," although not idle, and these "unused productive services are, for the enterprising firm, at the same time a challenge to innovate, an incentive to expand, and a source of competitive advantage" (Penrose 1959, p. 85). In fact, Penrose (1959, p. 45) argued that the "capacities of the existing managerial personnel of the firm necessarily set a limit to the expansion of the firm" in any given period--a bottleneck sometimes referred to as the "Penrose effect."
Kor and Mahoney (2000) provide an extensive unbundling of Penrose's model of firm growth, suggesting that firm growth is a function of firm-specific experiences in teams, that managerial capability is the binding constraint that limits the growth rate of the firm, and that excess capacity of productive services are drivers of firm growth. More specifically, these authors suggest several key questions, inspired by Penrose's work, that relate to the ways in which human resources influence a firm's growth and competitive advantage, the conditions under which a firm's knowledge and experience have an impact on performance, and the sources of firm heterogeneity.
This framing of key Penrosian questions by Kor and Mahoney (2000) is closely aligned with questions emerging in the field of international business on the source of firm-specific advantages (FSAs) within MNEs. There has been a significant evolution in thinking about MNEs over the past ten years; traditionally, researchers assumed that nonlocation-bound FSAs were developed at the corporate headquarters and leveraged overseas through a network of foreign subsidiaries (Rugman 1981). This established view is characterized by a great emphasis on cost optimization and FSA protection. As overseas subsidiaries grow in size and develop their own unique resources, however, it has become increasingly apparent that the home country is no longer the sole source of competitive advantage for the MNE (Rugman/Verbeke 1992) as reflected by alternative perspectives such as the heterarchy (Hedlund 1986), the transnational (Bartlett/Ghoshal 1989), and the interorganizational network (Ghoshal/Bartlett 1990).
Rugman and Verbeke (2001) provide a detailed discussion of this shift in thinking, suggesting that, among the weaknesses in the traditional view of the MNE, several important shortcomings stand out. Among them are the assumptions of ease of transfer of FSAs across international boundaries yet within the firm, sparse attention to the dynamic learning process that underpins the generation of new FSAs, a neglect of the subsidiary contribution to FSA development, and little recognition of the impact of managerial experience and reputation.
In response to these shortcomings, more recent MNE research has begun to focus on other sources of FSA development that treat the subsidiary as the relevant unit of analysis (Birkinshaw 1996, Birkinshaw 1997, Birkinshaw/Hood 1998). Birkinshaw and Hood (1998), for example, identified several interacting drivers of MNE subsidiary evolution and, thereby, capability creation: head office assignment, subsidiary choice (i.e., the freedom to develop an unique resource profile), and local environment determinism (i.e., the constraints and opportunities in the local market).
While other authors have addressed the significant differences between FSA types (cf. e.g., Rugman/Verbeke 2001), we do not distinguish between FSAs that are developed within a subsidiary in isolation, in connection with the home country, or through collaboration between two or more of the MNE's subsidiaries. Instead, since "it is clear that much more attention needs to be paid in future to the ways that capabilities are developed at a subsidiary level" (Birkinshaw/Hood 1998, p. 791), our interest pertains to the internal subsidiary-specific factors that foster FSA development and, hence, subsidiary performance. We focus specifically on the elements through which MNE subsidiaries may build new FSAs or augment existing ones by examining the conditions under which the Penrosian concept of organizational slack--in the form of "excess" expatriates--influences subsidiary performance.
The balance of this paper is organized as follows. The next section will elaborate our thinking on organizational slack and the development of FSAs. Subsequently, hypotheses will be developed and tested using a large sample of MNE subsidiaries. The final sections will provide an analysis and discussion of our results followed by conclusions and suggestions for future research.
The Role of Organizational Slack in Firm Performance
Organizational slack has been commonly understood in prior research as "a cushion of actual or potential resources that allow an organization to adapt successfully to internal pressures for adjustment or to external pressures for change in policy, as well as to initiate changes in strategy" (Bourgeois 1981). Organizations that are intent on acquiring and assimilating knowledge have been shown to maintain a conscious tolerance for redundancy (e.g., overlapping job responsibilities), since firms with resources that are fully committed to highly specified tasks have neither the time nor the free resources to invest in new ideas (Nonaka/Takeuchi 1995). Within limits, therefore, higher levels of organizational slack can lead to conditions of greater creativity and innovation as it affords the organization opportunities to experiment with new ideas (Nohria/Gulati 1996).
There is, however, a significant body of literature that suggests an alternative view on the effects of organizational slack. Some have suggested that the existence of slack is an indication of inept management or of "empire building" (Jensen 1993). This alternative view toward slack is based on the perception that the accumulation of slack is due to "inferior organization and maladapted operations" (Williamson 1991) and will lead to inferior performance unless it is rooted out.
The lack of consensus on the effects of organizational slack on firm performance suggests a need for research that focuses on the conditions under which slack yields a differential impact on firm performance. This issue is important since a common managerial tactic is to attempt to improve financial performance by reducing costs that are perceived to be unnecessary--often personnel--indicating that practitioners are enacting their own theory-in-practice as they attempt to eliminate perceived slack, making their organizations "leaner and meaner" (Harrison 1994). While approaching human resources with an emphasis on short-term efficiency and productivity may yield improvements in certain contexts, some authors have suggested that many firms worsen their long term prospects in this way (Hamel/Prahalad 1994).
Expatriate Slack within MNEs
Given that MNEs straddle time zones, national boundaries, and socio-cultural divides, MNE managers face the "liability of foreignness" which results in an inherently expensive organizational structure; to remain viable, therefore, MNEs must be particularly vigilant about cost control without impairing its capacity to protect, enhance, and develop FSAs. Since expatriates are a significant governance expense (Beamish 1998), this class of managerial talent--that is unique to the multinational organizational form--is of major concern to MNE managers.
Aside from facilitating the transfer of skills and technology, expatriates often serve as a control mechanism to ensure that affiliates adhere to corporate goals and objectives (Peterson/Sargent/Napier/Shim 1996). The relatively simple concepts of transfer and control, however, are based on the traditional economic view of the MNE, which has become a less satisfactory explanation of MNE behaviour and performance, as discussed above. Thus, an emerging concern for scholars and managers are the conditions under which expatriates play a role in FSA creation, augmentation and, ultimately, subsidiary performance.
Our argument is that resources that are located at the subsidiary in the form of "excess," although not idle, expatriates constitute a specific form of organizational slack--that of an available pool of knowledge of the...
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