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Globalization, Development, and History in the Work of Edith Penrose

  • Christos N. Pitelis
Abstract

Edith Penrose's work on the multinational enterprise and the political economy of globalization and development is assessed as it relates to her views on business history. This essay was written on the occasion of the fiftieth anniversary of Penrose's classic 1959 book and her 1960 prize-winning paper on Hercules Powder, which was published in the Review. Penrose came close to providing a theory of “internalization,” compared foreign direct investment to market-type contracting relations, and even discussed transaction costs–related arguments. However, she largely accepted the existence of fi rms and did not examine why firms exist vis-à-vis alternatives, such as markets. Her views on the political economy of globalization, relations between multinational enterprise and the state, and development have proved to be incisive, mostly accurate, and ahead of their time.

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1 See Kor, Yasemin Y. and Mahoney, Joseph T., “Edith Penrose's (1959) Contributions to the Resource-based View of Strategic Management,” Journal of Management Studies 41, no. 1 (2004): 183–91; Pitelis, Christos N., ed., The Growth of the Firm: The Legacy of Edith Penrose (Oxford, 2002); Pitelis, Christos N., “A Behavioral Resource-based View of the Firm: The Synergy of Cyert and March (1963) and Penrose (1959),” Organization Science 18, no. 3 (2007): 478–90; Augier, Mie S. and Teece, David J., “Strategy as Evolution with Design: The Foundations of Dynamic Capabilities and the Role of Managers in the Economic System,” Organization Studies 29, no. 8/9 (2008): 1187–208; Pitelis, Christos N. and Teece, David J., “Cross-border Market Co-creation, Dynamic Capabilities and the Entrepreneurial Theory of the Multinational Enterprise,” Industrial and Corporate Change 19, no. 4 (2010): 1247–70.

2 With about 11,500 citations in Google scholar at the time of writing, The Theory of the Growth of the Firm is now one of the most cited books in the fields of economics, business, and management.

3 See the following by Penrose, Edith T.: “The Growth of the Firm—A Case Study: The Hercules Powder Company,” Business History Review 34 (Spring 1960): 123; The Growth of Firms, Middle East Oil and Other Essays (London, 1971), 4363; “The Theory of the Growth of the Firm: Twenty-Five Years After,” Acta Universitatis Upsaliensis: Studia Oeconomicae Negotiorum (Uppsala Lectures in Business) 20 (1985): 116; “Multinational Corporations,” in The New Palgrave: A Dictionary of Economics (London, 1987); and The Theory of the Growth of the Firm (Oxford, 1959; 3rd ed. 1995).

4 Her focus on these topics is reflected in her decision to serve as the (first) editor of the Journal of Development Studies (as opposed to editing a journal on the theory of the firm, or on international business).

5 Kay, Neil, “Hercules and Penrose,” Contributions to Political Economy 18 (1999): 6786.

6 Penrose, Edith T., “Foreign Investment and the Growth of the Firm,” Economic Journal 66, no. 262 (1956): 220–35; Penrose, Growth of Firms, Middle East Oil, 64–81.

7 Hymer, Stephen H., The International Operations of National Firms: A Study of Foreign Direct Investment (Cambridge, Mass., 1976).

8 See, for example, Kindleberger, Charles P., American Business Abroad (New Haven, Conn., 1969).

9 Pitelis, Christos N., “A Theory of (the Growth of) the Transnational Firm,” Contributions to Political Economy 19, no. 1 (2000): 7189; Pitelis, Christos N., “Edith Penrose and the Resource-based View of (International) Business Strategy,” International Business Review 13, no. 4 (2004): 523–32.

10 Rugman, Alan M. and Verbeke, Alain, “Edith Penrose's Contribution to the Resource-Based View of Strategic Management,” Strategic Management Journal 23 (2002): 769–80.

11 Dunning, John H., “The Contribution of Edith Penrose to International Business Scholarship,” Management International Review 43, no. 1 (2003): 319; Management International Review, special issue on Edith Penrose and the Future of the Multinational Enterprise,” 47, no. 2 (2007). Penrose herself (as well as her supervisor Fritz Machlup) was uneasy about the scope for formalizing her work; see Pitelis, “Edith Penrose and the Resource-based View of (International) Business Strategy”; Buckley, Peter J. and Casson, Mark, “Edith Penrose's Theory of the Growth of the Firm and the Strategic Management of Multinational Enterprises,” Management International Review 47, no. 2 (2007): 151–73.

12 Li, Peter Ping, “Toward a Learning-Based View of Internationalization: The Accelerated Trajectories of Cross-Border Learning for Latecomers,” Journal of International Management 16, no. 1 (2010): 4359.

13 See, among others, the Journal of International Business Studies, JIB/AIB 50th Anniversary Issue: Innovations in International Business Theory,” special issue 40, no. 9 (2009).

14 Penrose, Perran and Pitelis, Christos N., “Edith Elura Tilton Penrose: Life, Contribution and Influence,” Contributions to Political Economy 18 (1999): 322.

15 In her words: “To treat the growth of the firm as the unfolding of its genetic nature is downright obscurantism. To treat innovation as chance mutations not only obscures their significance, but leaves them essentially unexplained, while to treat them directly as purposive attempt of men to do something makes them far more understandable.” Penrose, Edith T., “Biological Analogies in the Theory of the Firm,” American Economic Review 42, no. 5 (1962): 819.

16 Penrose, Theory of the Growth of the Firm, xiii.

17 Penrose, Edith T., “History, the Social Sciences and Economic Theory with Special Reference to Multinational Enterprise,” in Multinational Enterprise in Historical Perspective, ed. Teichova, Alice, Levy-Leboyer, Maurice, and Nussbaum, Helga (Cambridge, U.K., 1986), 10.

18 Ibid., 11.

19 Jones, Geoffrey and Khanna, Tarun, “Bringing History (Back) into International Business,” Journal of International Business Studies 37 (2006): 353–68.

20 For an incisive recent discussion on business history and international business theory, see Buckley, Peter J., “Business History and International Business,” Business History 51, no. 3 (2009): 307–33.

21 Hymer, International Operations of National Firms.

22 Penrose, Edith T., “Limits to the Growth and Size of Firms,” American Economic Review 45, no. 2 (1955): 531–43.

23 Penrose, “Foreign Investment and the Growth of the Firm”; Penrose, Growth of Firms, Middle East Oil, 64–81; letter to Martin Slater, 10 Apr. 1979, Penrose Archive, Queen's College, Cambridge, U.K.

24 As explained below, the transaction-costs perspective originated from Coase, Ronald H., “The Nature of the Firm,” Economica 4 (1937): 386405. It suggested that high costs of exchanging in markets could be seen as a reason for the emergence of firms (which in this context internalize market-exchange transactions). Penrose's own resource-based view suggests that firms are likely to be superior to markets in terms of developing and leveraging intrafirm resources and capabilities, in order to achieve their objectives. Applications of such insights to cross-border transactions led to the theory of the MNE and FDI.

25 Boulding, Kenneth E., The Image: Knowledge in Life and Society (Ann Arbor, 1956).

26 Jones, Geoffrey, Beauty Imagined: A History of the Global Beauty Industry (New York, 2009); Loasby, Brian, “Uncertainty and Imagination, Illusion and Order: Shackleian Connections,” G. L. S. Shackle Biennial Memorial Lecture, 4 Mar. 2010, University of Cambridge, St. Edmund's College.

27 Penrose, “The Hercules Powder Company”; Penrose, Growth of Firms, Middle East Oil, 43–63.

28 Pitelis, “Edith Penrose and the Resource-based View of (International) Business Strategy.”

29 Penrose, “The Hercules Powder Company”; Penrose, Growth of Firms, Middle East Oil, 43–63.

30 Penrose, Growth of Firms, Middle East Oil, 49.

31 Ibid., 62.

32 Coase, “The Nature of the Firm”; Hymer, International Operations of National Firms ; and the following by Williamson, Oliver E.: Markets and Hierarchies: Analysis and Antitrust Implications—A Study in the Economics of Internal Organization (New York, 1975); Economic Organization: Firms, Markets, and Policy Control (New York, 1986); Transaction Cost Economics: The Natural Progression,” American Economic Review 100, no. 3 (2010): 673–90.

33 Dunning, John H. and Pitelis, Christos N., “Stephen Hymer's Contribution to International Business Scholarship: An Assessment and Extension,” Journal of International Business Studies 39 (2008): 167–76; Penrose, “Foreign Investment and the Growth of the Firm”; Penrose, Growth of Firms, Middle East Oil, 64–81; Dunning, John H., American Investment in British Manufacturing Industry (London, 1958); Peter J. Buckley, “The Theory of International Business Pre-Hymer,” Journal of World Business, forthcoming, available online at doi:10.1016/j.jwb.2010.05.018. Accessed 30 June 2010.For a discussion of other reasons for Hymer's cult status in international business circles, see Dunning and Pitelis, “Stephen Hymer's Contribution.”

34 Penrose, “Foreign Investment and the Growth of the Firm”; Penrose, Growth of Firms, Middle East Oil, 69–70, emphasis added.

35 Penrose, “Multinational Corporations.”

36 Penrose, Theory of the Growth of the Firm, xv.

37 Penrose, Edith T., “Growth of the Firm and Networking,” in International Encyclopaedia of Business and Management (London, 1996), 1720.

38 Hymer, International Operations of National Firms; Buckley, Peter J. and Casson, Mark, The Future of Multinational Enterprise (London, 1976); Dunning, John H., “Toward an Eclectic Theory of International Production: Some Empirical Tests,” Journal of International Business Studies 11, no. 1 (1980): 931; Rugman, Alan M. and Verbeke, Alain, “Edith Penrose's Contribution to the Resource-Based View of Strategic Management,” Strategic Management Journal 23 (2002): 769–80.

39 Chandler, Alfred D. Jr., Strategy and Structure: Chapters in the History of the Industrial Enterprise (Cambridge, Mass., 1962); Chandler, Alfred D. Jr., “Organizational Capabilities and the Economic History of the Industrial Enterprise,” Journal of Economic Perspectives 6, no. 3 (1992): 79100; Wilkins, Mira, “Chandler and Global Business History,” Business History Review 82, no. 2 (2008): 251266.

40 Hymer, The International Operations of National Firms; and the following also by Hymer, Stephen H.: “The Large Multinational ‘Corporation,’” in Multinational Corporations, ed. Casson, Mark (London, 1968), 631; The Efficiency (Contradictions) of Multinational Corporations,” American Economic Review 60, no. 2 (1970): 441–48; “The Multinational Corporation and the Law of Uneven Development,” in Economics and World Order, ed. Bhagwati, J. N. (London, 1970), 113–40. See also Dunning and Pitelis, “Stephen Hymer's Contribution.”

41 Buckley, and Casson, , Future of Multinational Enterprise (London, 1976).

42 Teece, David J., The Multinational Corporation and the Resource Cost of International Technology Transfer (Cambridge, Mass., 1976); Teece, David J., “Technology Transfer by Multinational Firms: The Resource Cost of Transferring Technological Know-How,” Economic Journal 87, no. 346 (1977): 242–61; Williamson, Oliver E., “The Modern Corporation: Origins, Evolution, Attributes,” Journal of Economic Literature 19, no. 4 (1981): 1537–68; Hennart, Jean-Francois, A Theory of Multinational Enterprise (Ann Arbor, Mich., 1982); Kogut, Bruce and Zander, Udo, “Knowledge of the Firm and the Evolutionary Theory of the Multinational Corporation,” Journal of International Business Studies 24, no. 4 (1993): 625–45.

43 Pitelis, Christos N. and Teece, David J., “Cross-Border Market Co-creation, Dynamic Capabilities and the Entrepreneurial Theory of the Multinational Enterprise,” Industrial and Corporate Change 19, no. 4 (2010): 1247–70.

44 Pitelis, Christos N., “Edith Penrose and a Learning-Based Perspective on the MNE and OLI,” Management International Review 47, no. 2 (2007): 207–19; Johanson, Jan and Vahlne, JanErik, “The Uppsala Internationalization Model Revisited: From Liability of Foreignness to Liability of Outsidership,” Journal of International Business Studies 40 (2009): 1411–33.

45 Penrose, “Multinational Corporations,” 562.

46 Ibid., 563; Ohlin, Bertil, Interregional and International Trade (Cambridge, U.K., 1933).

47 Coase, , “The Nature of the Firm”; Demsetz, Harold, The Economics of the Business Firm: Seven Critical Commentaries (Cambridge, U.K., 1995).

48 Penrose, “Foreign Investment and the Growth of the Firm”; Penrose, Growth of Firms, Middle East Oil, 72.

49 Penrose, Growth of Firms, Middle East Oil, 67.

50 Ibid., 70.

51 Papanastassiou, Marina and Pearce, Robert, The Strategic Development of Multinationals: Subsidiaries and Innovation (Houndmills, Basingstoke, 2010).

52 Penrose, Edith T., “International Economic Relations and the Large International Firm,” in New Orientations: Essays in International Relations, ed. Penrose, E. F., Lyons, Peter, and Penrose, Edith T. (London, 1969). Reprinted in Penrose, Growth of Firms, Middle East Oil, 91.

53 Penrose, Edith T., “Problems Associated with the Growth of International Firms,” Tijdschrift voor Vennootschappen, Vereinigingen en Stichtingen 9 (1968). Reprinted in Penrose, Growth of Firms, Middle East Oil, 82–90.

54 Ibid., 84.

55 Penrose, Edith T., “The State and the Multinational Enterprise in Less-Developed Countries,” paper read to a conference at the University of Reading, May 1970. Reprinted in Penrose, Growth of Firms, Middle East Oil, 119–35.

56 Hymer, “The Efficiency (Contradictions) of Multinational Corporations,” 441–48; Hymer, “The Multinational Corporation and the Law of Uneven Development”; Penrose, “The State and the Multinational Enterprise in Less-Developed Countries,” 121.

57 Penrose, “Problems Associated with the Growth of International Firms,” 82–90.

58 It is important to emphasize that my statements here come from an international business perspective. Economists have largely ignored Penrose and Hymer, even when dealing with the same issues and even when employing similar ideas. For example, economics-based theories of the MNE, such as Markusen, James R., Multinational Firms and the Theory of International Trade (Cambridge, Mass., 2002), apply similar ideas to Hymer, in the context of formal models of the MNE. Hymer is rarely cited. See, for example, the review by Russ, Katheryn N., “The New Theory of Foreign Direct Investment: Merging Trade and Capital Flows,” International Finance 12, no. 1 (2009): 107–19. Russ cites Hymer in a final draft, having failed to do so in earlier ones (an observation made by an anonymous reviewer of this article and incorporated here with gratitude). As Russ observes, “In the 1980s, it became the work of theorists like Ethier, Grossman, Helpman, Markusen and Razin to pinpoint exactly why FDI differs from the way Mundell and neoclassical growth models envisioned it, as it became clear that Hymer was right: FDI was increasing, but between rich countries and in tandem with intrafirm trade” (p. 108).

59 Teece, David J., “Towards an Economic Theory of the Multiproduct Firm,” Journal of Economic Behavior and Organization 3, no. 1 (1982): 3963; Pitelis and Teece, “CrossBorder Market Co-creation.”

60 For example Penrose, Edith T., The Large International Firm in Developing Countries: The International Petroleum Industry (London, 1968); Penrose and Pitelis, “Edith Elura Tilton Penrose.”

61 Kindleberger, American Business Abroad; Penrose, Edith T., “Profit Sharing between Producing Countries and Oil Companies in the Middle East,” Economic Journal 69, no. 274 (1959): 238–54; Page, H. W., “Profit Sharing between Producing Countries and Oil Companies in the Middle East: A Reply,” Economic Journal 70, no. 279 (1960): 622–26; Penrose, Edith T., “Profit-Sharing in Middle East Oil—Rejoinder,” Economic Journal 70, no. 279 (1960): 626.

62 Penrose, Edith T., “Monopoly and Competition in the International Petroleum Industry,” The Year Book of World Affairs (London, 1964). Reprinted in Penrose, Growth of Firms, Middle East Oil, 182.

63 Penrose, The Large International Firm in Developing Countries.

64 Penrose, Edith T., “The Development of Crisis,” in The Oil Crisis, ed. Vernon, Raymond (New York, 1976), 53.

65 Vernon, Raymond, Sovereignty at Bay (Harlow, U.K., 1971). Pitelis, Christos N., “Beyond the Nation State: The Transnational Firm and the Nation State,” Review of Radical Political Economics 22, no. 1 (1990): 98114; Pitelis, Christos N., Market and Non-Market Hierarchies: Theory of Institutional Failure (Oxford, U.K., 1991).

66 Penrose, “The State and the Multinational Enterprise in Less-Developed Countries,” in Penrose, Growth of Firms, Middle East Oil, 123, 132, 133.

67 Penrose, Edith T., “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, 1973.

68 Ibid, 38.

69 Ibid, 39.

70 Pitelis and Teece, “Cross-Border Market Co-creation”; Mahoney, Joseph T., McGahan, Anita M., and Pitelis, Christos N., “The Interdependence of Private and Public Interests,” Organization Science 30, no. 10 (2009): 1115–39.

71 Hymer, International Operations of National Firms.

72 Dunning and Pitelis, “Stephen Hymer's Contribution.”

73 Penrose, Edith T., “A Note on Development Planning and the Role of the Enterprise with Special Reference to Egypt,” National Institute of Planning of the United Arab Republic, Memono. 827, in Penrose, Growth of Firms, Middle East Oil, 304, 306, 315.

74 Penrose, Edith T., “Economics and the Aspirations of Le Tiers Monde,” inaugural lecture, School of Oriental and African Studies, London, 10 Feb. 1965, in Penrose, Growth of Firms, Middle East Oil, 319–36.

75 Ibid., 322.

76 Eckhaus, Richard S., “Absorptive Capacity,” in The New Palgrave: A Dictionary of Economics, vol. 1, ed. Eatwell, John, Milgate, Murray, and Newman, Peter (London, 1987), 78; Cohen, Wesley M. and Levinthal, Daniel A., “Absorptive Capacity: A New Perspective on Learning and Innovation,” Administrative Science Quarterly 35, no. 1 (1990): 128–52. I am grateful to Joe Mahoney for bringing this to my attention.

77 Penrose uses the term explicitly for the case of nations in an unpublished 1980 manuscript entitled “OPEC, Absorptive Capacity and Developing Countries,” Penrose Archive, Queens’ College, Cambridge. There she talks about “the absorptive capacity of the oil-exporting countries” (starting sentence, unpaged).

78 Penrose, “Economics and the Aspirations of Le Tiers Monde,” in Penrose, Growth of Firms, Middle East Oil, 333.

79 Sen, Amartya, Development as Freedom (Oxford, U.K., 1999); Stiglitz, Joseph E., Globalization and its Discontents (London, 2002); North, Douglass C., Understanding the Process of Economic Change (Princeton, N.J., 2005); Rodrik, Dani, One Economics, Many Recipes: Globalization, Institutions, and Economic Growth (Princeton, N.J., 2009); Acemoglu, Daron, Johnson, Simon, and Robinson, James A., “The Colonial Origins of Comparative Development: An Empirical Investigation,” American Economic Review 91, no. 5 (2001): 13691401.

80 Ostrom, Elinor, Governing the Commons: The Evolution of Institutional Forms of Collective Action (Cambridge, U.K., 1990).

81 Klein, Peter G., Mahoney, Joseph T., McGahan, Anita M., and Pitelis, Christos N., “Toward a Theory of Public Entrepreneurship,” European Management Review 7, no. 1 (2010): 115.

82 See, for example, Krugman, Paul, ed., Strategic Trade Policy and the New International Economics (Cambridge, Mass., 1986); Krugman, Paul, Rethinking International Trade (Cambridge, Mass., 1990); and Pitelis, Christos N., “The Sustainable Competitive Advantage and Catching-up of Nations: FDI, Clusters, and the Liability (Asset) of Smallness,” Management International Review 49, no. 1 (2009): 95120.

83 Penrose, Edith T., “Some Problems of Policy towards Direct Private Foreign Investment in Developing Countries,” Middle East Economic Papers (Lebanon, 1962), 138.

84 Penrose, “The Changing Role of Multinational Corporations in Developing Countries,” 8.

85 Penrose, Edith T., “Dumping, ‘Unfair’ Competition and Multinational Corporations,” Japan and the World Economy 1 (1990): 185.

86 Penrose, “Problems Associated with the Growth of International Firms” and “International Economic Relations and the Large International Firm,” both in Penrose, Growth of Firms, Middle East Oil, 82–90, 91–118.

87 Penrose, “Problems Associated with the Growth of International Firms,” 89.

88 Penrose, “International Economic Relations and the Large International Firm,” 116. Penrose returned to the issue of interfirm cooperation in The Theory of the Growth of the Firm, 3rd ed. (Oxford, 1995) and in “Growth of the Firm and Networking,” in International Encyclopaedia of Business and Management (London, 1996). She also dealt with this issue in her last published paper, “Strategy/Organization and the Metamorphosis of the Large Firm,” Organization Studies 29, no. 8/9 (2008): 1117–24. In these papers she makes the point that interfirm cooperation blurs the boundaries of the firm and may be calling for a more novel framework/theory.

89 Penrose, “International Economic Relations and the Large International Firm,” 117.

90 Jones and Khanna, “Bringing History (Back) Into International Business.”

92 See Wilkins, Mira, The Maturing of Multinational Enterprise: American Business Abroad from 1914 to 1970 (Cambridge, Mass., 1974); Penrose, “Multinational Corporations”; Penrose, Theory of the Growth of the Firm; Chandler, “Organizational Capabilities and the Economic History of the Industrial Enterprise”; Pitelis, Christos N., “Edith Penrose's ‘The Theory of the Growth of the Firm’ Fifty Years Later,” in Penrose, Edith T., The Theory of the Growth of the Firm, 4th ed. (Oxford, 2009).

93 Buckley, Peter J., “Business History and International Business,” Business History 51, no. 3 (2009): 307–33; Williamson, “Transaction Cost Economics.”

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