An Essential Service in Penrose's Economies of Growth

Abstract

1. IntroductionEdith T. Penrose's (1914-1996) The Theory of the Growth of the Firm (Penrose, 1959, 1980, 1995, 2009) is an economics classic. This book went on to become foundation in the field of strategic management, when the resource-based view (RBV) appeared in the mid-1980s. RBV is an attempt to explain the creation, preservation, and regeneration of firm's competitive advantage by combining the properties of resources and its transformation.In 1984, we have two noteworthy papers on RBV-Wernerfelt (1984) and Rumelt (1984)-both of which cited Penrose (1959) and were followed by countless significant studies on RBV. Penrose (1959) became known as the shared source of RBV, having advocated the view that companies are essentially pool of resources, whose utilization is organized by the administrative that different companies use their resources in different ways, and even the same types of resources can provide different types of services depending on the company.However, although this interpretation of Penrose (1959) was plausible, it does not explain why Penrose titled her book The Theory of the Growth of the Firm in the first place. The key to understanding Penrose (1959) is the concept of economies of growth. This paper hypothesizes that the economies of growth occur where there are unused start-up expert managerial services.2. Unused Services in OperationFirst, Penrose (1959) assumes that the company is more than simple administrative unit. Penrose focuses on productive resources, including human resources such as managers, and defines the company as a pool of resources the utilization of which is organized in an administrative framework (Penrose, 1959, p. 149). However, even though the company is viewed as collection of productive resources, strictly speaking, the production processes of inputs are not the resources themselves (material and human resources), but the services that the resources render. While resources can essentially be defined independently of their use, services cannot be so defined because the word service implies function or an activity (Penrose, 1959, p. 25). This is the major difference between resources and services. Furthermore, unlike resources, services cannot be stocked; they function well only when they are used frequently. This distinguishing characteristic of services is fundamental pillar of the economies of growth.As long as there are resources not being fully used in current operations, the company has an incentive to look for ways to make full use of those resources to avoid having them left idle. In reality, company's internal inducements to expansion are mainly caused by unused productive services, resources, or special knowledge. The unused services do not often exist in the open form of idle man-hours, but rather in the concealed form of unused abilities (Penrose, 1959, p. 54). The existence of these unused productive services is waste; but they are free even if used profitably, that is, if they can be put to good use, they give the company competitive advantage (Penrose, 1959, pp. 67-68).3. It's Not Economies of Size, but Economies of GrowthWhat are economies of growth when considering this concept as an independent notion of economies of size? First, economies of size, according to Penrose, is the idea that larger company is able to introduce higher volume or new products into the market more effectively than smaller company simply due to its size (economies of size of expansion), and produce and sell products and services more effectively than smaller company simply due to its size (economies of size of operation).The economies of size of expansion (a) relate only to the cost of effecting an expansion; (b) exist if production can begin at lower average cost simply because of size; (c) include the cost of establishing smooth operation for additional production and the cost of enlarging or creating the market for the additional product as part of the production start-up costs. …