The Theory of the Growth of the Firm

301 Pages·2009·1.68 MB·English

by  Edith Penrose

THE THEORY OF THE GROWTH OF THE FIRM
EdithoutsideherhouseinBaltimorearound1956(photo:PerranPenrose).
The Theory of
the Growth of
the Firm
With a New Introduction by
Christos N. Pitelis
Edith Penrose
FOURTHEDITION

1
3
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TABLE OF CONTENTS
IntroductionbyChristosN.Pitelis ix
Preface xlviii
I Introduction 1
II TheFirminTheory 8
TheFirmintheTheoryofPriceandProduction 9
TheLimitstoSize 10
The‘Firm’isnotaFirm 12
TheFirmasanAdministrativeOrganization 13
TheFunctionandNatureoftheIndustrialFirm 13
SizeandAdministrativeCo-Ordination 16
IndustrialFirmsandInvestmentTrusts 17
Continuityinthe‘History’ofaFirm 20
TheFirmasaCollectionofProductiveResources 21
TheMotivationoftheFirm 23
TheProfitMotive 23
Long-RunProfitsandGrowth 26
III TheProductiveOpportunityoftheFirmandthe‘Entrepreneur’ 28
TheRoleofEnterpriseandtheCompetenceofManagement 30
EntrepreneurialversusManagerialCompetence 31
TheQualityofEntrepreneurialServices 32
EntrepreneurialVersatility 32
Fund-RaisingIngenuity 34
EntrepreneurialAmbition 35

EntrepreneurialJudgment 37
TheRoleofExpectationsintheProductiveOpportunity
oftheFirm 37
IV ExpansionWithoutMerger:TheRecedingManagerialLimit 39
TheNatureoftheManagerialLimit 40
TheManagement‘Team’ 41
ReleaseofManagerialServices 45
TheGrowthofManagerialServices 46
vi TableofContents
TheRecedingLimitandthe‘Static’Approach 49
TheEffectofUncertaintyandRisk 50
UncertaintyandInformation 52
RiskandUnavoidableUncertainty 54
V ‘Inherited’ResourcesandtheDirectionofExpansion 58
TheContinuingAvailabilityofUnusedProductiveServices 60
Indivisibilityandthe‘BalanceofProcesses’ 61
TheSpecializedUseofResources 63
TheHeterogeneityofResources 66
InteractionbetweenMaterialandHumanResources 67
TheCreationofNewProductiveServices 69
‘Demand’andtheProductiveResourcesoftheFirm 71
WhatistheRelevantDemand? 71
TheDirectionofExpansion 75
VI TheEconomiesofSizeandtheEconomiesofGrowth 78
TheEconomiesofSize 79
TechnologicalEconomies 80
ManagerialEconomies 82
EconomiesinOperationsandEconomicsinExpansion 84
TheEconomiesofGrowth 87
DisappearingversusEnduringEconomies 89
VII TheEconomicsofDiversification 92
MeaningofDiversification 94
‘AreasofSpecialization’ 97
TheSpecificOpportunitiesforDiversification 98
TheImportanceofIndustrialResearch 99
TheSignificanceofSellingEfforts 102
TheImportanceofaTechnologicalBase 104
SomeExamples 105
TheRoleofA cquisition 112
TheRoleofCompetition 116
TheNecessityofContinuedInvestmentinExistingFields 116
Full-LineDiversification 118
CompetitionandDiversificationintoNewAreas 120
DiversificationasaSolutiontoSpecificProblems 122
TemporaryFluctuationsinDemand 122
PermanentAdverseChangesinDemand 125
TheDirectionofDiversification 125
DiversificationasaGeneralPolicyforGrowth 126
VerticalIntegration 128
TheFirmasaPoolofResources 132
TableofContents vii
VIII ExpansionThroughAcquisitionandMerger 135
TheEconomicBasisofAcquisition 138
PersonalConsiderationsandSpecialSituations 139
CriticalPointsintheProcessofExpansion 142
TheCompetitiveExpansionofAlpha 145
WhereBetaBlockstheExpansionofAlpha 148
Combination 151
ThePurchaseandSaleof‘Businesses’thatarenotFirms 152
EconomicBasisfortheSaleofa‘Business’ 154
EffectontheProcessofGrowth 157
TheAppropriatenessofDiversification 158
TheRoleofEntrepreneurialServices 160
EntrepreneurialTemperamentandtheProfitMotive 160
Empire-BuildingandMerger 163
RoleofManagerialServices 166
TheNecessityofAdministrativeIntegration 167
MergerandtheDominantFirm 170
IX TheRateofGrowthofaFirmThroughTime 172
SpecialAssumptions 173
Measurability 173
TheFundamentalRatio 175
ManagerialServicesAvailableforExpansion 176
IncreaseintheAdministrativeTaskwithGrowth 176
ImpactofChangingEnvironmentalConditions 179
ManagerialServicesRequiredforExpansion 180
CharacterofExpansion 181
RelationtoExistingActivitiesandMarketConditions 183
MethodofExpansion 184
ChangesintheRateofGrowthwithIncreasingSize 186
The‘GrowthCurve’ 186

X ThePositionofLargeandSmallFirmsinaGrowingEconomy 189
TheSpecialPositionofSmallFirms 191
CompetitiveHandicaps,EspeciallyFinance 192
TheContinuedExistenceofSmallFirms 193
OpportunitiesforGrowth 194
‘Interstices’inaGrowingEconomy 196
ThePrincipleofComparativeAdvantage 197
XI GrowingFirmsinaGrowingEconomy:TheProcessof
IndustrialConcentrationandthePatternofDominance 201
BarrierstoEntry 202
viii TableofContents
GeneralEffectonInvestmentintheEconomyasaWhole 202
TheImportanceof‘BigBusiness’Competition 204
CapitalRequirementsandConsumerLoyalty 206
ArtificialBarriersandtheInterstices 208
MergerinaGrowingEconomy 209
MergerinRelationtoIndicesofBusinessActivity 211
TheEffectontheIntersticesof‘Natural’Limitationson
Acquisition 212
IntersticesandtheBusinessCycle 214
TheProcessofIndustrialConcentration 215
MeasurementofConcentration 216
ConcentrationandGrowingFirmsinaGrowingEconomy 217
SomeShakyEvidence 219
ConcentrationWithinIndustries 222
DiversificationandIndustryConcentration 225
ConcentrationandDominance 226
TheContinuedDominanceofLargeFirms 227
Conclusion 229
Appendix:ForewordtotheThirdEdition 234
Index 245
Edith Penrose’s ‘The Theory
of the Growth of the Firm’
Fifty Years Later*
By Christos N. Pitelis
I. Introduction
T HEyear2009marksthe50thanniversaryofEdithPenrose’sTheTheoryof
the Growth of the Firm (hereafter TGF). In a review of the book in the
Economic Journal,RobinMarris(1961)predictedthat TGFwouldproveoneof
the most influential of the decade. In his 1987 entry to the New Palgrave he
addedthat‘thisprovedanunderstatement’(p.831).Marris’sstatementswere
referringmainlytotheeconomictheoryofthefirm,especiallytheliteratureon
‘managerialtheories’,whichwerepopularinthe1960sandtowhichhehimself
wasamajorcontributor(Marris1964).NeitherMarrisnorPenroseherselfcould
foreseewhatappearstobethecase50yearson;asituationwheretheinfluence
ofTGFinmainstreameconomicshasbeenratherlimited(seealsoMarris1987
and below). The managerial theories of the firm turned out to be little more
than a footnote in the history of the neoclassical theory of firm, with TGF
receivingnomentioninleadingneoclassicalmicroeconomics,IndustrialOrga-
nisation(IO),andeconomicsofregulationtextbooks(forexampleKreps1990,
Tirole1988,andViscusietal.2001respectively)andeveninleadingEconom-

ics, Organization, and Management textbooks, such as Milgrom and Roberts
(1992).
Thebook’sreceptionineconomicswasanticipatedbythereputableOxford
economist P. W. S. Andrews. In his 1961 review of TGF Andrews noted that
‘A theory of the growth of firms surely should involve generalizations about
theireconomicenvironment,or,inotherwords,justthosequestionsaboutthe
(equilibrium)structuresofindustrieswhichtheauthorrulesoutofcourtatthe
start’(p.114).
*ThisintroductiondrawsandbuildsuponearlierworkbyPenroseandPitelis(1999)
and Pitelis (2004, 2005, 2007a, 2007b). I am grateful to numerous colleagues for
comments and discussion on earlier drafts, especially Mie Augier, John Dunning, Joe
Mahoney,RobinMarris,PerranPenrose,DavidTeece,andAlainVerbeke.Errorsaremine.