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Summary Article: Penrose, Edith Elura Tilton from Encyclopedia of the History of American Management

Edith Penrose was born on Sunset Boulevard in Los Angeles on 15 November 1914. She died at Waterbeach, Cambridgeshire in October 1996. She attended the University of California at Berkeley, where she was granted a scholarship after her first semester, and graduated with a BA in economics in 1936. She attended summer extension classes taught by E.F. (‘Pen’) Penrose, a British-born economist, and also acted as his assistant. In 1939 Pen joined the International Labour Organzation (ILO) in Geneva, and Edith followed, taking a place there as a researcher. Her first work Food Control in Great Britain, published by the ILO in 1940, analysed the problems of production, distribution and consumption of food in wartime Britain. When Pen took a job in London as economic adviser to John Winant, the US ambassador to Britain, who had previously worked at the ILO, Edith joined Winant’s staff as a researcher. As Pen was at the time involved in a network of economists working on postwar planning, she had many opportunities for interaction with prominent economists, such as SCHUMPETER, by whom she was greatly influenced, and also Keynes, Meade, D.H. Robinson, Austin Robinson, H.D. Henderson, Robbins, Jewkes and others.

Edith married Pen in 1945. After the war the Penroses joined the US delegation to the United Nations. In 1947 Pen accepted a chair in human geography in Baltimore; Edith then started her master’s degree and moved on to doctoral studies at Johns Hopkins University under the supervision of Fritz Machlup, receiving her Ph.D. in 1951. She then took a position as lecturer and research associate at Johns Hopkins, where she remained until 1959. She then taught at the London School of Economics and the School of Oriental and African Studies, where she had a joint reader-ship in economics until 1978. On her retirement in 1978 she held a professorship of political economy at INSEAD, where she was also associate dean for research and development. She taught at other institutions including the universities of Baghdad, Cairo and Khartoum, and the American University of Beirut, and consulted for governments including those of India, Tanzania and Indonesia. When Pen passed away in 1984, she moved to Waterbeach, near Cambridge, to be close to her two sons, continuing to lead a full personal, academic and consulting life until her death. She participated in several governing bodies and committees including the Council of the Overseas Development Institute, the board of the Commonwealth Development Corporation and the Pharmaceuticals Committee, and continued to offer consulting services to governments.

Penrose’s interest in the growth of firms started to grow when she undertook fieldwork at the Hercules Powder Company, under Fritz Machlup’s supervision. She realized that traditional economic theory was not dealing with the growth of firms. Her work at Hercules Powder gave birth to her ideas about the growth of the firm, which she first shaped in an article for American Economic Review in 1955, and then in her book The Theory of the Growth of the Firm (1959) and an article for Business History Review about The Hercules Powder Company (1960; see also Penrose 1956a, 1956b).

Her stay in the Arab world in the 1960s also spurred her interest in the oil industry, and multinationals in general, especially in reference to the impact that multinational firms may have as investors in developing countries (see Penrose 1956a, 1964, 1968, 1973a, 1973b, 1989, 1990). While her main theme revolved around the growth of firms, her interest in multinationals, developing countries and policy followed as a direct offshoot of the former. At INSEAD she elaborated on the way firms grow and die, and more generally on the ways in which firms change. In the years after her retirement, Penrose focused more on the issues of cooperation and networking of firms, being interested in whether alliances, clusters and business networks could be accommodated within her theory, and also with the idea of a theory of the change (‘metamorphosis’) of firms.

Her work gained widespread recognition at the time, but the major interest came in the 1980s, especially in terms of the context of the resource-based (or competence-based or knowledge-based) theory of the firm. In contrast to traditional economic theory that offered little understanding of the processes taking place inside the firm, Penrose offered insights to understanding the firm as a ‘real life’, ‘flesh and blood’ organization of the real business world, emphasizing the generation of knowledge that takes place within it. She defines the firm as a collection of (tangible and intangible) resources, bound together under an administrative coordination and authoritative communication. Firms differ from markets exactly because activities within the firm take place under authoritative coordination, while in the market they do not. In her theory, the product, market and technology are not givens over time, and demand may be found elsewhere than in the ‘traditional’ line of products of the firm, or created by the firm. Management is not a fixed factor either. The availability and quality of (managerial, entrepreneurial and other) services rendered by resources to the firm very much depend on the firm’s internal workings. The firm grows by making profitable use of its ‘excess’ (generated via knowledge creation) productive resources in order to exploit perceived opportunities.

Penrose defines a firm’s ‘productive opportunity’ as the entrepreneurs’ perception of both the environment and the internal abilities of the firm to exploit it profitably. The productive opportunity of the firm is not fixed: it may change with a change in external conditions, and/or with a change in a firm’s knowledge and, consequently, with a change in the internal supply of productive services (rendered by its resources). A firm’s growth rate is therefore determined by both its perception of profitable opportunities in the environment and (relatedly) its resources. Individual firms grow with different rates since they do not possess the same resources and they are not subject to the same constraints by their environment.

It follows that the existence of unused productive services within the firm is of great significance for the inducement of the process of growth. During the ordinary activity of the firm, some resources are normally not fully utilized (mainly due to indivisibility of resources). Furthermore, as the firm as a working group gains experience (which may change both acquired knowledge and the ability to use it), new productive services may be created, which furthermore are unique to the firm’s configuration of resources and cannot be found in the market or easily copied by other firms. Therefore, as resources are freed and new services become available, a firm has an endogenous incentive to expand, that is to use the services of its resources more profitably and/or make fuller use of its existing resources. As a result of indivisibilities, expansion may lead to further resources which are not fully used, sustaining the internal stimuli to growth.

The rate of growth of the firm is thus different for different firms, and may decline for the very same reasons that it may increase. That is, the capacities of the existing managerial personnel (and the existing size of the firm) both limit the amount of activity that can be physically planned, and, consequently, the amount of new personnel and other productive resources that can be profitably absorbed in the firm. Further, the environment may no longer allow for an increasing rate of growth and profitable expansion: competition may become keener, and entry into new, even ‘neighbouring’ areas (where one only of the following is not new: technology, market, product) may be costly or legally impossible. Although a firm may infinitely generate new, unused productive services as well as face opportunities for expansion, its internal structure and capabilities may not allow it profitably to exploit them. It follows that the accumulation of knowledge through experience determines the growth trajectory of the firm and the latter determines the path (as a combination of opportunities and internal capabilities for their exploitation) for further growth.

Therefore, there may exist limits to the rate of growth, but not to size. Firms may grow infinitely, but larger firms may experience slower growth rates and (as) they may also face keener competition. Further, it is likely that large firms cannot take advantage of all the opportunities available to them; therefore, in a growing economy there will always exist profitable opportunities (‘interstices’ of activity within an economy) available to small firms. It is, therefore, expected that concentration will tend to be restricted, albeit not the absolute size of firms. However, the basic dilemma is that competition, ‘at once the god and the devil’ (Penrose 1959: 265), induces innovation but may also lead to industry structures that hinder growth (see also Penrose 1956b).

The new knowledge and services available in the firm might also be useful for the production of products other than the existing ones (Penrose 1959: 114). It is thus likely that when a firm produces for a market of which the rate of growth is not sufficient to accommodate its growth potential (its idle resources and accumulated knowledge), then it may exploit opportunities for expansion through diversification into new products or markets. In fact, Penrose maintains that, since firms are defined in reference to their (unique) resources, ‘diversification’ is the normal course of events for a growing firm.

It is also possible that (external) expansion through merger and/or acquisition may be a profitable opportunity for a firm, or a less costly way to obtain the productive services (notably managerial) and knowledge necessary for diversification in a new field. External expansion may bear the same limitations as internal expansion: the existing resources of the firm determine the extent to which new resources might be absorbed and organically integrated into the firm.

Profits are significant as a motivating power, as a condition of successful growth of the firm, which in turn results in long-term profits. In this sense, profit would be desired for the ‘sake of the firm itself and in order to make more profit through expansion (Penrose 1959: 29). It is maintained that it is indirectly, through the growth of firms, that individuals gain satisfaction and increase their personal utility, not directly through the realization of profit itself. According to Penrose, ‘growth and profits become equivalent as the criteria for the selection of investment programmes’ (1959: 30) if the firm seeks profit to reinvest it in the firm and not to pay out to the capital owners more than needed to maintain a supporting capital structure for the firm.

To summarize, Penrose explained the growth of firms, based on their continuously generating ‘excess’ productive services, which can be profitably redeployed to ‘neighbouring’ activities and markets. The centrepiece of her analysis is the accumulation of knowledge, in firms and individuals, as well as the concept that the firm is more than a collection of individuals’ capabilities and skills. A firm’s knowledge, capabilities and skill determine both the ‘perceived’ profitable opportunities as well as the ability to exploit and enhance them. Penrose applied this insight to firms’ integration, including the multinational firm, industry organization and the wider sphere (see Penrose 1956a, 1956b, 1987, 1989).

Penrose’s work is widely viewed as the basis of what is commonly called competence-based, resource-based or knowledge-based perspective. However, her contribution is far broader than that, and it is safe to suggest that she had gained a place alongside the twentieth century’s leading economists including Ronald COASE, Friedrich von Hayek and Joseph Schumpeter.

Acknowledgements

I am deeply grateful to Christos Pitelis and Perran Penrose for invaluable help, and for providing me with all relevant material and support.

BIBLIOGRAPHY
  • Penrose, E. T. (1940). Food Control in Great Britain, Geneva: ILO.
  • Penrose, E. T. (1955). ‘Research on the Business Firms: Limits to Growth and Size of Firms’, American Economic Review 45(2).
  • Penrose, E. T. (1956a) ‘Foreign Investment and the Growth of the Firm’, Economic Journal 46(June).
  • Penrose, E. T. (1956b) ‘Towards a Theory of Industrial Concentration’, Economic Record (May).
  • Penrose, E. T. (1959). The Theory of the Growth of the Firm, Oxford: Basil Blackwell; 3rd edn, Oxford: Oxford University Press, 1995.
  • Penrose, E. T. (1960). ‘The Growth of the Firm – A Case Study: The Hercules Powder Company’, Business History Review 34(1): 1-23.
  • Penrose, E. T. (1964). ‘Monopoly and Competition in the International Petroleum Industry’, The Yearbook of World Affairs, London: Stevens, vol. 18.
  • Penrose, E. T. (1968). ‘Problems Associated with the Growth of International Firms’, in Tijdschrift voor Vennootschappen, Vereiningingen en Stichtingen 9.
  • Penrose, E. T. (1971). The Growth of Firms, Middle East and Other Essays, London: Cass.
  • Penrose, E. T. (1973a) ‘International Patenting and the Less Developed Countries’, Economic Journal 83(September): 768-86.
  • Penrose, E. T. (1973b) ‘The Changing Role of Multinational Corporations in Developing Countries’, paper submitted to the United Nations Groups of Eminent Persons to Study the Impact of Multinational Corporations on Development and on International Relations, Geneva.
  • Penrose, E. T. (1987). ‘Multinational Corporations’, in The New Palgrave: A Dictionary of Economics, London: Macmillan, 562-4.
  • Penrose, E. T. (1989). ‘History, the Social Sciences and Economic Theory with Special Reference to Multinational Enterprise’, in Teichova, A., Levy-Leboyer, M. and Nussbaum, H. (eds), Multinational Enterprise in Historical Perspective, Cambridge: Cambridge University Press.
  • Penrose, E. T. (1990). ‘“Dumping2”, “Unfair” Competition and Multinational Corporations’, Japan and the World Economy 1(May).
  • Penrose, E. T. (1996). ‘Growth of the Firm and Networking’, in Warner, M. (ed.), International Encyclopedia of Business and Management, London: Routledge, vol. 2, 1716-24.
  • Penrose, E. T. and Penrose, E. F. (1978). Iraq: International Relations and National Development, Westview, CT: Benn.
  • Penrose, P. and Pitelis, C. (1999). ‘Edith Elura Tilton Penrose: Life, Contribution and Influence’, Contributions to Political Economy, special issue on Edith Penrose, 18.
  • Penrose, P. and Pitelis, C. (2001). ‘Edith Penrose’, Reader’s Guide to Social Sciences, London: Fitzroy Dearborn.
  • Pitelis, C. and Pseiridis, A. (1999). ‘Transaction Costs versus Resource Value?’, Journal of Economic Studies 26(3): 221-40.
  • Pitelis, C. and Pseiridis, A. (2001). ‘Resource-based Economics’, Reader’s Guide to Social Sciences, London: Fitzroy Dearborn.
  • Pitelis, C. (2001). The Theory of the Growth of the Firm: The Penrosean Legacy, Oxford: Oxford University Press.
  • © Thoemmes Continuum, 2005

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