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

Author

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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)

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.

Suggested Citation

  • Danchi Tan & Joseph T. Mahoney, 2005. "Examining the Penrose effect in an international business context: the dynamics of Japanese firm growth in US industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 113-127.
  • Handle: RePEc:wly:mgtdec:v:26:y:2005:i:2:p:113-127 DOI: 10.1002/mde.1212
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    References listed on IDEAS

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    Cited by:

    1. repec:spr:manint:v:47:y:2007:i:2:d:10.1007_s11575-007-0015-3 is not listed on IDEAS
    2. Hutzschenreuter, Thomas & Horstkotte, Julian, 2013. "Performance effects of international expansion processes: The moderating role of top management team experiences," International Business Review, Elsevier, vol. 22(1), pages 259-277.
    3. Jiang, Ruihua Joy & Beamish, Paul W. & Makino, Shige, 2014. "Time compression diseconomies in foreign expansion," Journal of World Business, Elsevier, vol. 49(1), pages 114-121.
    4. repec:pal:jintbs:v:48:y:2017:i:9:d:10.1057_s41267-017-0119-3 is not listed on IDEAS
    5. Kim, Jongwook & Mahoney, Joseph T., 2006. "How Property Rights Economics Furthers the Resource-Based View: Resources, Transaction Costs and Entrepreneurial Discovery," Working Papers 06-0100, University of Illinois at Urbana-Champaign, College of Business.
    6. repec:eee:iburev:v:27:y:2018:i:1:p:113-124 is not listed on IDEAS
    7. Riaz, Suhaib & Glenn Rowe, W. & Beamish, Paul W., 2014. "Expatriate-deployment levels and subsidiary growth: A temporal analysis," Journal of World Business, Elsevier, vol. 49(1), pages 1-11.
    8. Ine Paeleman & Catherine Fuss & Tom Vanacker, 2013. "The relationship between slack resources and firms’ exporting behavior," Working Paper Research 248, National Bank of Belgium.
    9. Tan, Danchi & Mahoney, Joseph T., 2005. "The Dynamics of Japanese Firm Growth in U.S. Industries: The Penrose Effect," Working Papers 05-0121, University of Illinois at Urbana-Champaign, College of Business.
    10. Dong, John Qi, 2016. "On the contingent rent-generating potential of firm-specific managerial experience," Journal of Business Research, Elsevier, vol. 69(10), pages 4358-4362.
    11. Tan, Danchi & Meyer, Klaus E., 2010. "Business groups' outward FDI: A managerial resources perspective," Journal of International Management, Elsevier, vol. 16(2), pages 154-164, June.
    12. Peng, Mike W. & Su, Weichieh, 2014. "Cross-listing and the scope of the firm," Journal of World Business, Elsevier, vol. 49(1), pages 42-50.
    13. Hashai, Niron & Delios, Andrew, 2012. "Balancing growth across geographic diversification and product diversification: A contingency approach," International Business Review, Elsevier, vol. 21(6), pages 1052-1064.
    14. 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 06-0121, University of Illinois at Urbana-Champaign, College of Business.
    15. Hutzschenreuter, Thomas & Horstkotte, Julian, 2013. "Managerial services and complexity in a firm’s expansion process: An empirical study of the impact on the growth of the firm," European Management Journal, Elsevier, vol. 31(2), pages 137-151.
    16. Thomas Hutzschenreuter & Fabian Guenther, 2009. "Complexity as a constraint on firm expansion within and across industries," Managerial and Decision Economics, John Wiley & Sons, Ltd., vol. 30(6), pages 373-392.

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