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Examining the Penrose effect in an international business context: the dynamics of Japanese firm growth in US industries

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  • Danchi Tan

    (National Chengchi University, Taipei, Taiwan)

  • Joseph T. Mahoney

    (Department of Business Administration, College of Business, University of Illinois at Urbana-Champaign, USA)

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    Abstract

    Penrose (1959) theoretically developed the research proposition that the finite capacities of a firm's internally experienced managers limit the rate at which the firm can grow in a given period of time. One empirical implication that follows logically from this line of reasoning is that a fast-growing firm will eventually slow down its growth in the subsequent time period because its firm-specific management team, which is posited to be inelastic at least in the short run, is unable to handle effectively the increased demands that are placed on these internally experienced managers due to increased complexity as well as the time and attention that the new managers require from these internally experienced managers. Consequently, inefficiency in the firm's current operations will follow if the firm maintains its high rate of growth. The research proposition that a firm cannot remain operationally effective if it maintains high rates of growth in successive time periods, and that consequently those firms with foresight typically will slow down their growth in the subsequent time period is known as the 'Penrose effect' in the research literature, and this effect of dynamic adjustment costs has been examined and corroborated in a few empirical research studies. However, researchers have not yet examined the Penrose effect in an international business context. The current paper examines the Penrose effect in an international business context by exploring under what conditions Japanese firms achieve high growth in consecutive time periods in the entered US industries. The empirical results indicate that, consistent with Penrose's (1959) resource- based theory prediction, Japanese multinational firms that entered in US industries where the extent of knowledge tacitness, globalization, and unionization was high, rapid expansion growth in one time period had negative impacts on growth in the subsequent time period. Thus, dynamic adjustment costs limit the rate of the growth of the firm and the development of dynamic capabilities in this international business context, which suggests that the Penrose effect may be widely applicable to international business and corporate strategy. Copyright © 2005 John Wiley & Sons, Ltd.

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    Bibliographic Info

    Article provided by John Wiley & Sons, Ltd. in its journal Managerial and Decision Economics.

    Volume (Year): 26 (2005)
    Issue (Month): 2 ()
    Pages: 113-127

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    Handle: RePEc:wly:mgtdec:v:26:y:2005:i:2:p:113-127

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    Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/7976

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    1. Hennart, J.-F., 1991. "Control in multinational firms : the role of price and hierarchy," Open Access publications from Tilburg University urn:nbn:nl:ui:12-174431, Tilburg University.
    2. Hamermesh, Daniel S & Pfann, Gerard Antonie, 1996. "Adjustment Costs in Factor Demand," CEPR Discussion Papers, C.E.P.R. Discussion Papers 1371, C.E.P.R. Discussion Papers.
    3. Mortensen, Dale T, 1973. "Generalized Costs of Adjustment and Dynamic Factor Demand Theory," Econometrica, Econometric Society, Econometric Society, vol. 41(4), pages 657-65, July.
    4. Richard C. Levin & Alvin K. Klevorick & Richard R. Nelson & Sidney G. Winter, 1987. "Appropriating the Returns from Industrial Research and Development," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 18(3), pages 783-832.
    5. Kaplan, Steven N, 1994. "Top Executive Rewards and Firm Performance: A Comparison of Japan and the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 102(3), pages 510-46, June.
    6. William G. Ouchi, 1979. "A Conceptual Framework for the Design of Organizational Control Mechanisms," Management Science, INFORMS, INFORMS, vol. 25(9), pages 833-848, September.
    7. Kendall Roth & David M Schweiger & Allen J Morrison, 1991. "Global Strategy Implementation at the Business Unit Level: Operational Capabilities and Administrative Mechanisms," Journal of International Business Studies, Palgrave Macmillan, vol. 22(3), pages 369-402, September.
    8. Treadway, Arthur B., 1970. "Adjustment costs and variable inputs in the theory of the competitive firm," Journal of Economic Theory, Elsevier, Elsevier, vol. 2(4), pages 329-347, December.
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    Cited by:
    1. Hashai, Niron & Delios, Andrew, 2012. "Balancing growth across geographic diversification and product diversification: A contingency approach," International Business Review, Elsevier, Elsevier, vol. 21(6), pages 1052-1064.
    2. Kim, Jongwook & Mahoney, Joseph T., 2006. "How Property Rights Economics Furthers the Resource-Based View: Resources, Transaction Costs and Entrepreneurial Discovery," Working Papers, University of Illinois at Urbana-Champaign, College of Business 06-0100, University of Illinois at Urbana-Champaign, College of Business.
    3. Jiang, Ruihua Joy & Beamish, Paul W. & Makino, Shige, 2014. "Time compression diseconomies in foreign expansion," Journal of World Business, Elsevier, Elsevier, vol. 49(1), pages 114-121.
    4. Tan, Danchi & Mahoney, Joseph T., 2005. "The Dynamics of Japanese Firm Growth in U.S. Industries: The Penrose Effect," Working Papers, University of Illinois at Urbana-Champaign, College of Business 05-0121, University of Illinois at Urbana-Champaign, College of Business.
    5. Thomas Hutzschenreuter & Fabian Guenther, 2009. "Complexity as a constraint on firm expansion within and across industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 30(6), pages 373-392.
    6. Tan, Danchi & Meyer, Klaus E., 2010. "Business groups' outward FDI: A managerial resources perspective," Journal of International Management, Elsevier, Elsevier, vol. 16(2), pages 154-164, June.
    7. Riaz, Suhaib & Glenn Rowe, W. & Beamish, Paul W., 2014. "Expatriate-deployment levels and subsidiary growth: A temporal analysis," Journal of World Business, Elsevier, Elsevier, vol. 49(1), pages 1-11.
    8. Peng, Mike W. & Su, Weichieh, 2014. "Cross-listing and the scope of the firm," Journal of World Business, Elsevier, Elsevier, vol. 49(1), pages 42-50.
    9. Foss, Nicolai J. & Klein, Peter G. & Kor, Yasemin Y. & Mahoney, Joseph T., 2006. "Entrepreneurship, Subjectivism, and the Resource-Based View: Towards a New Synthesis," Working Papers, University of Illinois at Urbana-Champaign, College of Business 06-0121, University of Illinois at Urbana-Champaign, College of Business.
    10. Hutzschenreuter, Thomas & Horstkotte, Julian, 2013. "Performance effects of international expansion processes: The moderating role of top management team experiences," International Business Review, Elsevier, Elsevier, vol. 22(1), pages 259-277.

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