Theory of the Growth of the Firm

by Edith Penrose

  Penrose’s work was analytical, not normative or prescriptive, and she advocated no managerial practice of any kind. Having said this, she actually felt that rents, of both the monopoly type and through the building of ‘relatively impregnable bases’, were important for the sustainable competitive advantage of firms. Whilst monopoly power could give rise to short-term success, only the building of ‘relatively impregnable bases’ was important for the long-term successful expansion of firms (Pitelis 2004; 2009b).

  The building of ‘relatively impregnable bases’, however, is itself predicated upon the successful redeployment of resources, competences, and other advantages, in a dynamic, changing, uncertain environment. In such an environment, the key to long-term success was to build technology bases through perennial innovations, through knowledge creation, and by internalizing the Schumpeterian process of ‘creative destruction’. In her words:

  The Schumpeterian process of ‘creative destruction’ has not destroyed the large firm; on the contrary it has forced it to become more and more ‘creative’ (1959/2009, p. 94).

  In more recent years such ‘creativity’ might have involved ‘externalization’ and ‘open innovation’ which could also be leveraged to achieve value capture (Panagopoulos and Pitelis 2009; Dunning and Pitelis 2008; and Pitelis and Teece 2009). There is a clear message for management practice from that, which is also good for practice, namely a focus on firm and market creation and co-creation through appropriable and perennial innovation (Pitelis and Teece 2009).

  However, Penrose also felt that good managerial practice might not be by itself adequate. She therefore also advocated suitable anti-trust policies by government, which aimed to marry firm-level sustainable advantage with nationwide sustainable advantage. She also saw an important role for government in developing countries, especially as concerns their relationship to multinational firms and FDI. While such aspects of Penrose’s work have been less noticed, they are gradually becoming very relevant, especially in the post-Washington consensus global financial crisis context we are currently experiencing. It is arguable that Penrosean concerns and ideas about sustainable economic development, the role of the state and state–MNE interactions (thus development economics), are a more natural milieu through which Penrosean ideas can be appreciated than in economics. We consider sustainable development to be a major area in which Penrosean ideas will gradually become very influential. Related capabilities-based independent work by Sen (1999), but also the endogenous macroeconomic growth literature (see Pitelis 2009a) point in this direction.

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