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Business History Review 85 (Spring 2011): 65–84. doi:10.1017/S0007680511000031
© 2011 The President and Fellows of Harvard College. ISSN 0007-6805; 2044-768X (Web).
E
Christos N. Pitelis
Globalization, Development, and History
in the Work of Edith Penrose
Edith Penrose’s work on the multinational enterprise and the
political economy of globalization and development is as-
sessed as it relates to her views on business history. This essay
was written on the occasion of the fi ftieth anniversary of Pen-
rose’s classic 1959 book and her 1960 prize-winning paper on
Hercules Powder, which was published in the Review. Pen-
rose came close to providing a theory of “internalization,”
compared foreign direct investment to market-type contract-
ing relations, and even discussed transaction costs–related
arguments. However, she largely accepted the existence of
fi rms and did not examine why fi rms exist vis-à-vis alterna-
tives, 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.
dith Elura Tilton Penrose has, in recent years, been widely regarded
as a founding fi gure of now dominant conceptual advances on
the theory of the fi rm, notably the resource-based, knowledge-based,
and dynamic capabilities perspectives.
1
Her classic 1959 book, The The-
ory of the Growth of the Firm, has become a canonical reference in
The author is grateful to Perran Penrose, an anonymous reviewer, and the editors of
this journal for useful comments and suggestions on an earlier draft. Any errors that appear
are his.
1
See Yasemin Y. Kor and Joseph T. Mahoney, “Edith Penrose’s (1959) Contributions to
the Resource-based View of Strategic Management,” Journal of Management Studies 41, no.
1 (2004): 183–91; Christos N. Pitelis, ed., The Growth of the Firm: The Legacy of Edith Pen-
rose (Oxford, 2002); Christos N. Pitelis, “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; Mie S. Augier and David J. Teece, “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; Christos N. Pitelis and David J. Teece,
“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.
Christos N. Pitelis / 66
strategic management and one of the most cited books in the fi eld of
business history.
2
Alongside a case study of Hercules Powder Company
that was published in this journal (and originally intended to be part of
the book but excluded for space considerations), Penrose only infre-
quently looked back to Theory of the Growth of the Firm, usually on
special occasions, such as the book’s twenty-fi fth-year anniversary, her
entry to the New Palgrave Dictionary of Economics on the multina-
tional enterprise, and, near the end of her life, in her preface to the
book’s third edition.
3
Her focus instead was more on the political econ-
omy of international business activity and its relation to nation states
and economic development.
4
From a very extensive list of publications
in a variety of subjects (including “biological analogies” in the theory of
the fi rm, international patenting, the role of history, and even stagna-
tion), most of Penrose’s work concerned issues pertaining to the multi-
national enterprise (MNE), foreign direct investment (FDI), and their
political economy, notably the nexus of the MNE and the state. The fi rm
Hercules Powder itself went on to become such an enterprise in the
years after her article about it was published in the Business History
Review.
5
Penrose’s fi rst major work on FDI, “Foreign Investment and the
Growth of the Firm,” was published in 1956 in the Economic Journal.
6
It predated the classic PhD thesis of Stephen H. Hymer (later published
as The International Operations of National Firms: A Study of Foreign
Direct Investment) and, unsurprisingly, given the dearth of literature at
the time on this topic, was cited by him in that work.
7
The Academy of International Business recognized her contribu-
tion and in 1994 elected her as an “Eminent Scholar”—the fi rst woman
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 fi elds of economics, business,
and management.
3
See the following by Edith T. Penrose: “The Growth of the Firm—A Case Study: The Her-
cules Powder Company,” Business History Review 34 (Spring 1960): 1–23; The Growth of
Firms, Middle East Oil and Other Essays (London, 1971), 43–63; “The Theory of the Growth
of the Firm: Twenty-Five Years After,” Acta Universitatis Upsaliensis: Studia Oeconomicae
Negotiorum (Uppsala Lectures in Business) 20 (1985): 1–16; “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 refl ected in her decision to serve as the (fi rst) editor of the
Journal of Development Studies (as opposed to editing a journal on the theory of the fi rm, or
on international business).
5
Neil Kay, “Hercules and Penrose,” Contributions to Political Economy 18 (1999):
67–86.
6
Edith T. Penrose, “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
Stephen H. Hymer, The International Operations of National Firms: A Study of For-
eign Direct Investment (Cambridge, Mass., 1976).
The Work of Edith Penrose / 67
to receive this honor and only the second person in the Academy’s his-
tory to be so recognized. (The fi rst was Charles Kindleberger, Stephen
Hymer’s PhD supervisor at MIT and a frequent discussant with, and
critic of, Penrose.)
8
The honor is intended for people working outside
the fi eld of international business who, however, have had a signifi cant
impact on its agenda. Penrose’s own impact was attributed to her work
on the theory of the growth, in particular, growth of the large, diversi-
fi ed fi rm and the MNE–nation-state nexus. Despite the Academy’s fore-
sight, however, and Penrose’s mostly subsequent rise to canonical sta-
tus in strategy, her extensive contribution to the theory and political
economy of international business and economic development has re-
ceived slight attention. Drawing from the relatively few writings on the
topic, I proposed a Penrose-inspired theory of the growth of the MNE
and subsequently focused explicitly on Penrose and international busi-
ness strategy.
9
Alan Rugman and Alain Verbeke drew implications from
her work for the fi eld of international strategic management.
10
John
Dunning provided an early account of Penrose’s overall contribution,
while a special issue of Management International Review on Penrose
and the MNE considered possible applications, limitations, and scope
for further Penrose-inspired work, including the possibility of formaliz-
ing some of her insights.
11
Yet, with few exceptions (such as a study by
Peter Ping Li), these issues remained underexplored.
12
This is surpris-
ing, especially in the context of the recent turn in international business
scholarship to international political economy.
13
The time, then, is opportune for attempting a critical assessment
of Penrose’s contribution (not least by way of celebrating the fi ftieth
8
See, for example, Charles P. Kindleberger, American Business Abroad (New Haven,
Conn., 1969).
9
Christos N. Pitelis, “A Theory of (the Growth of) the Transnational Firm,” Contributions
to Political Economy 19, no. 1 (2000): 71–89; Christos N. Pitelis, “Edith Penrose and the
Resource-based View of (International) Business Strategy,” International Business Review
13, no. 4 (2004): 523–32.
10
Alan M. Rugman and Alain Verbeke, “Edith Penrose’s Contribution to the Resource-
Based View of Strategic Management,” Strategic Management Journal 23 (2002): 769–80.
11
John H. Dunning, “The Contribution of Edith Penrose to International Business Schol-
arship,” Management International Review 43, no. 1 (2003): 3–19; Management Interna-
tional Review, special issue on “Edith Penrose and the Future of the Multinational Enter-
prise,” 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”; Peter J. Buckley and Mark Casson, “Edith Pen-
rose’s Theory of the Growth of the Firm and the Strategic Management of Multinational En-
terprises,” Management International Review 47, no. 2 (2007): 151–73.
12
Peter Ping Li, “Toward a Learning-Based View of Internationalization: The Accelerated
Trajectories of Cross-Border Learning for Latecomers,” Journal of International Manage-
ment 16, no. 1 (2010): 43–59.
13
See, among others, the Journal of International Business Studies, “JIB/AIB 50th Anni-
versary Issue: Innovations in International Business Theory,” special issue 40, no. 9 (2009).
Christos N. Pitelis / 68
anniversary of her book and the 1960 case study of Hercules Powder),
with an eye to highlighting possible subjects for further research, indi-
cating both their ideal scope and the limitations that should be placed
on the selections. This is my aim in the present article.
A related aim is to highlight the relation between the theory of in-
ternational business, as it relates to Penrose’s work, and business his-
tory. The timing to explore the connection is also opportune, as Penrose
can be seen as representing “good practice” on this issue, in terms not
only of her ideas, but also of her approach to organizations and institu-
tions, which is based on the idea of endogenous growth. While she did
not deal extensively with epistemological issues, her insistence that, in
order to appreciate the external one has to start by fi rst considering the
internal, could provide the scope for discussions of epistemology in so-
cial science. Possible subjects that could provide scope for discussions
of epistemology range from the internal attributes (“nature”) of the
object under investigation and the dynamic interaction between the
“nature” and the external environment (“productive opportunity”), to
Penrose’s own experience with research, both at the Hercules Powder
Company and, later, in the Arab world, as well as her views of main-
stream theory and her approach to the link between “theory,” history,
and evidence.
14
She based her work on a dynamic interaction between
induction and deduction in the context of history-based, path-dependent
evolutionary change, as shaped by the purposive actions of economic ac-
tors, and she criticized biology-based theories of the fi rm for their fail-
ure to account for human motivation.
15
In revisiting her 1959 contribution, Penrose explicitly made the
point that “history matters,” and indeed this was a critical tenet of her
theory of development.
16
Earlier, Penrose had expressed both her belief
in the need for theory and her concern that some of it was “little more
than dressed-up common sense deduction from common observations
. . . but much of it has a deeper signifi cance.”
17
She also claimed that
“theory is needed precisely because reality is so complicated.”
18
14
Perran Penrose and Christos N. Pitelis, “Edith Elura Tilton Penrose: Life, Contribution
and Infl uence,” Contributions to Political Economy 18 (1999): 3–22.
15
In her words: “To treat the growth of the fi rm as the unfolding of its genetic nature is
downright obscurantism. To treat innovation as chance mutations not only obscures their
signifi cance, but leaves them essentially unexplained, while to treat them directly as purpo-
sive attempt of men to do something makes them far more understandable.” Edith T. Pen-
rose, “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
Edith T. Penrose, “History, the Social Sciences and Economic Theory with Special Ref-
erence to Multinational Enterprise,” in Multinational Enterprise in Historical Perspective,
ed. Alice Teichova, Maurice Levy-Leboyer, and Helga Nussbaum (Cambridge, U.K., 1986), 10.
18
Ibid., 11.
The Work of Edith Penrose / 69
In this article, I make the claim that Penrose’s approach to theory de-
velopment, in both Theory of the Growth of the Firm and the Hercules
Powder case, more broadly encapsulated and supported her statements.
Regarding the proposition that “history matters,” Geoffrey Jones
and Tarun Khanna present four arguments to support the claim that
history does matter for international business scholarship: fi rst, history
is a source of variation and therefore a provider of time-series data; sec-
ond, by highlighting the point that change and dynamics matter; third,
by illuminating the sources of Penrosean “resources,” thus clarifying the
idea of path dependence; and, fourth, by explaining the relations be-
tween FDI, MNEs, and long-term economic development.
19
My claim here is that Penrose’s lifetime work contributes to all four
of the arguments listed above. After having fi rst provided a history
and then establishing “path dependence,” Penrose constructs a change-
informed conceptual framework for the very analysis of business his-
tory on which she built, in order to derive this framework.
20
In the fi rst section, I look at the issue of whether or not Penrose pro-
vided a theory of the MNE and FDI. I conclude that, although she came
close, Penrose did not quite attempt to address the question of why MNEs
exist vis-à-vis alternatives, such as markets. This Coasean question was
later answered by Stephen Hymer in the context of fi rms’ cross-border
operations.
21
In the second section, I deal with the political economy of
globalization, the MNE–developing nation-states nexus, and Penrose’s
view of the MNEs’ impact on development. In the fi nal section, I dis-
cuss the limitations and scope for further Penrose-inspired research.
The Theory of the Growth of the Firm, FDI, and the MNE
While The Theory of the Growth of the Firm was published in 1959,
the main elements of the theory had already appeared in a 1955 article.
22
This is possibly why, in a letter to Martin Slater on April 10, 1979, Pen-
rose calls the article she wrote in 1956 on foreign investment an “off-
shoot” of Theory of the Growth of the Firm.
23
There is only a tenuous
19
Geoffrey Jones and Tarun Khanna, “Bringing History (Back) into International Busi-
ness,” Journal of International Business Studies 37 (2006): 353–68.
20
For an incisive recent discussion on business history and international business theory,
see Peter J. Buckley, “Business History and International Business,” Business History 51, no.
3 (2009): 307–33.
21
Hymer, International Operations of National Firms.
22
Edith T. Penrose, “Limits to the Growth and Size of Firms,” American Economic Re-
view 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 Col-
lege, Cambridge, U.K.
Christos N. Pitelis / 70
link between the two articles. In the 1955 article, “Limits to the Size
and Growth of Firms,” Penrose came close to adopting a comparative
governance-based approach, by raising the possibility that fi rms could
“sell” their excess resources. However, what is fascinating about this is
that she did not return to the question in the remainder of the article.
Also in the 1956 article, she came close to discussing issues pertaining
to transactions cost and providing a resource-based theory of the ad-
vantages of FDI.
24
On both occasions, however, these were early, not
fully developed insights.
Concerning the growth of national fi rms, the fundamental idea in
both the 1955 article and Theory of the Growth of the Firm was that
knowledge-induced slack resources engender endogenous fi rm growth.
In Penrose’s scheme, intrafi rm learning and teamwork enhance knowl-
edge, innovation, and productivity and engender “excess resources.” En-
trepreneurial managers, assumed to be interested in as much profi t as
is feasible, and who have already paid for resources (especially human
ones), have an incentive to put these excess resources to profi table use
by seeking opportunities for expansion, which they also need to plan
and execute. The opportunities themselves depend on both the internal
resources of the fi rm and the external environmental conditions. (Pen-
rose defi nes the dynamic interaction between the two as the fi rm’s “pro-
ductive opportunity.”) She views these opportunities as perceptions, or
“images” (a term she borrows from Kenneth Boulding).
25
This is just a
step away from, and up to a point anticipates, recent work on entrepre-
neurial imagination.
26
In this context, growth is an endogenous process. It can take the form
of organic expansion, mergers and acquisitions, vertical integration,
and diversifi cation—both domestically and in foreign countries. Diver-
sifi cation, in particular, is often driven by the availability of intrafi rm
resources and is undertaken in order to profi t from these resources.
Penrose provides a fascinating example in her study of the Hercules
Powder Company, where she describes the invention of a chemical
24
As explained below, the transaction-costs perspective originated from Ronald H. Coase,
“The Nature of the Firm,” Economica 4 (1937): 386–405. It suggested that high costs of ex-
changing in markets could be seen as a reason for the emergence of fi rms (which in this con-
text internalize market-exchange transactions). Penrose’s own resource-based view suggests
that fi rms are likely to be superior to markets in terms of developing and leveraging intrafi rm
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
Kenneth E. Boulding, The Image: Knowledge in Life and Society (Ann Arbor, 1956).
26
Geoffrey Jones, Beauty Imagined: A History of the Global Beauty Industry (New York,
2009); Brian Loasby, “Uncertainty and Imagination, Illusion and Order: Shackleian Connec-
tions,” G. L. S. Shackle Biennial Memorial Lecture, 4 Mar. 2010, University of Cambridge, St.
Edmund’s College.
The Work of Edith Penrose / 71
substance called CMC that had applications outside explosives, Hercu-
les’ main area of expertise.
27
Having fi rst launched an innovative adver-
tising campaign (highlighting the properties of CMC in the national
press and inviting interested parties to answer the question, “What do
you see in CMC?”), Hercules went on to employ CMC for expansion in
“naval stores” (a term used at the time to describe wood products),
where CMC could be applied.
In all cases, Penrose suggested, expansion takes place from a “strong-
hold,” a “market,” or a “technological,” base, which she called a “relatively
impregnable base.”
28
Such bases would allow fi rms to build on strength
and to leverage resource linkages, with an eye to acquiring (in today’s
parlance) sustainable competitive advantage.
Penrose discusses these issues in the 1960 case, making this obser-
vation on Hercules’ endogenous growth diversifi cation:
During the next forty-odd years this amputated piece of DuPont,
like a cutting from a plant, continued to grow. It, like DuPont, has
over the years branched out in numerous directions in response to
external opportunities and internal developments. The parent and
its involuntary offspring have not grown in the same directions, and
in only a few fi elds are they in direct competition with each other.
Hercules is not only completely independent of DuPont, but has ac-
quired its own personality and its own position in the industrial
world quite unrelated to DuPont’s position. By 1956 it had 11,365 em-
ployees, 22 domestic plants, and total assets of $170 million, mak-
ing it the 165th largest industrial company in the United States mea-
sured by total assets.
29
She describes the creation of demand for CMC in similar terms, as
growing from within the company as a means to fi nd an outlet for their
internal resources.
30
Finally, concerning a company’s stronghold and
constraints on growth, she makes this suggestion:
Since a “technological base” consists not of buildings, kettles, and
tubes, but of experience and knowledge of personnel, the basic re-
striction comes down to the services available from existing person-
nel; the problem of entrepreneurial confi dence is fundamentally a
problem of building up an experienced managerial and technical
team in new fi elds of activity.
31
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.
Christos N. Pitelis / 72
The discussion so far concerns growth and, up to a certain point,
sustainable competitive advantage—fi rms are simply assumed to exist.
As established by Ronald Coase and, in the case of FDI and the MNE,
by Hymer, however, the theory of the fi rm requires a comparative gover-
nance perspective, namely, a comparison of the relative advantages and
costs of fi rms versus markets and/or interfi rm cooperation (see also Oli-
ver Williamson).
32
As Dunning generously acknowledged, Hymer could
be credited with being the originator of the theory of the MNE and FDI,
by virtue of the fact that he explained FDI versus licensing in such a
comparative fashion (despite having been preceded in the literature by
Penrose, Dunning, and many others, as shown by Peter Buckley).
33
Penrose did not attempt to explain why fi rms exist. In my view, the
nearest she got to doing so was in her discussion of the theory of FDI in
her 1956 article. For Penrose, FDI’s
advantages derive largely from the fact that behind the new foreign
fi rm are the resources and experience of the parent concern, in-
cluding not only managerial and technical personnel but also that
indefi nable advantage in its internal operations which an effi cient
going concern usually has over a new one. Consequently the receiv-
ing country, in addition to foreign capital, foreign technicians and
management, also obtains an unlimited drawing account, as it
were, on the intangible resources of the investing company.
The establishment of foreign subsidiaries or branches is, for the
parent company, not essentially different from the establishment of
subsidiaries or branches in its own country. To be sure, greater al-
lowance for risk must be made, and greater profi ts are expected if
the venture succeeds according to plan. But the new expansion is
still part of the process of growth of the parent company.
34
The fi rst observation to be made, based on this passage, refers to
Penrose’s belief that the MNE was, in effect, a natural cause of the very
32
Coase, “The Nature of the Firm”; Hymer, International Operations of National Firms;
and the following by Oliver E. Williamson: Markets and Hierarchies: Analysis and Antitrust
Implications—A Study in the Economics of Internal Organization (New York, 1975); Eco-
nomic 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
John H. Dunning and Christos N. Pitelis, “Stephen Hymer’s Contribution to Interna-
tional Business Scholarship: An Assessment and Extension,” Journal of International Busi-
ness Studies 39 (2008): 167–76; Penrose, “Foreign Investment and the Growth of the Firm”;
Penrose, Growth of Firms, Middle East Oil, 64–81; John H. Dunning, American Investment
in British Manufacturing Industry (London, 1958); Peter J. Buckley, “The Theory of Inter-
national 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.
The Work of Edith Penrose / 73
process of endogenous growth, and, as such, it required no special anal-
ysis. This is apparent in many of her extensive writings on the topic. For
example, in her 1987 entry on the MNE to the New Palgrave, she as-
serted that the distinctions between national and international fi rms
are not critical enough to require a “theoretical distinction.”
35
In the
foreword to the third edition of Theory of the Growth of the Firm, Pen-
rose made the additional observation that the international fi rm has
greater opportunities, as well as obstacles, compared to a national com-
pany, rather than being fundamentally different.
36
The emphasis changed a little in a 1996 paper (the last one pub-
lished while she was still alive). “International borders make enough
difference to justify separate treatment of international fi rms. The dif-
ferences arise from the additional obstacles (or advantages) relating to
culture, language and similar considerations.”
37
The second important observation to be drawn from Penrose’s writ-
ings, however, refers to the presence of an early theory of “advantages”
that subsequently became dominant in the writings of Hymer, Buckley
and Casson, Dunning, and Rugman, and Verbeke.
38
Much like Hymer,
Penrose attributed FDI to preexisting advantages of the parent company,
resulting from its operations in a home country. Unlike Hymer, how-
ever, these are not only monopolistic advantages, at least not in the fi rst
instance (a view much like Alfred Chandler’s; see also Mira Wilkins).
39
They are effi ciency-related advantages and include not just resources
and experience, but also the “indefi nable advantage” of the internal op-
erations of an ongoing concern.
It is arguable that subsequent important contributions by internal-
ization theories attempted to identify, and better defi ne, Penrose’s “in-
defi nable advantage.” For example, Hymer focused on the benefi ts of
internalization in terms of better leveraging ownership-monopolistic
advantages (but also in his 1968 article, in terms of, among others,
35
Penrose, “Multinational Corporations.”
36
Penrose, Theory of the Growth of the Firm, xv.
37
Edith T. Penrose, “Growth of the Firm and Networking,” in International Encyclopae-
dia of Business and Management (London, 1996), 1720.
38
Hymer, International Operations of National Firms; Peter J. Buckley and Mark Cas-
son, The Future of Multinational Enterprise (London, 1976); John H. Dunning, “Toward an
Eclectic Theory of International Production: Some Empirical Tests,” Journal of Interna-
tional Business Studies 11, no. 1 (1980): 9–31; Alan M. Rugman and Alain Verbeke, “Edith
Penrose’s Contribution to the Resource-Based View of Strategic Management,” Strategic
Management Journal 23 (2002): 769–80.
39
Alfred D. Chandler Jr., Strategy and Structure: Chapters in the History of the Indus-
trial Enterprise (Cambridge, Mass., 1962); Alfred D. Chandler Jr., “Organizational Capabili-
ties and the Economic History of the Industrial Enterprise,” Journal of Economic Perspec-
tives 6, no. 3 (1992): 79–100; Mira Wilkins, “Chandler and Global Business History,”
Business History Review 82, no. 2 (2008): 251–266.
Christos N. Pitelis / 74
savings in market-transaction costs).
40
Buckley and Casson emphasized
the transaction-costs benefi ts of intrafi rm use of “intangible assets.”
41
David Teece focused on the resource costs of technology transfer; Oli-
ver Williamson zeroed in on “post-contract hold-ups” in international
markets, leading to high transaction costs; Jean-François Hennart em-
phasized, among other points, MNE transaction costs–related advan-
tages in managing the employment contract cross-border; while Bruce
Kogut and Udo Zander stressed the superiority of transferring “tacit
knowledge” internally across borders.
42
More recently, Teece and I sug-
gested cross-border market and institution co-creation capabilities as a
defi ning feature of the MNE.
43
Penrose did not treat the advantages she identifi ed as a reason for
internalization. While it is both arguable and possible to develop a the-
ory of FDI and the MNE by applying Penrosean concepts to Dunning’s
theory of ownership, location, and internalization advantages, it is im-
portant to point out that Penrose herself did not do so, nor did she feel
it necessary to do so.
44
Indeed, she went as far as claiming, in an entry
in the New Palgrave on the MNE, that Coase- and Hymer-type theories
applied equally to the national and international levels, so they failed to
explain FDI and the MNE as such.
45
She adds that this issue had been
discussed in 1933 by Bertil Ohlin in a study of the difference between
international and interregional trade.
46
40
Hymer, The International Operations of National Firms; and the following also by
Stephen H. Hymer: “The Large Multinational ‘Corporation,’ ” in Multinational Corporations,
ed. Mark Casson (London, 1968), 6–31; “The Effi ciency (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.
J. N. Bhagwati (London, 1970), 113–40. See also Dunning and Pitelis, “Stephen Hymer’s
Contribution.”
41
Buckley and Casson, Future of Multinational Enterprise (London, 1976).
42
David J. Teece, The Multinational Corporation and the Resource Cost of International
Technology Transfer (Cambridge, Mass., 1976); David J. Teece, “Technology Transfer by
Multinational Firms: The Resource Cost of Transferring Technological Know-How,” Eco-
nomic Journal 87, no. 346 (1977): 242–61; Oliver E. Williamson, “The Modern Corporation:
Origins, Evolution, Attributes,” Journal of Economic Literature 19, no. 4 (1981): 1537–68;
Jean-Francois Hennart, A Theory of Multinational Enterprise (Ann Arbor, Mich., 1982);
Bruce Kogut and Udo Zander, “Knowledge of the Firm and the Evolutionary Theory of the
Multinational Corporation,” Journal of International Business Studies 24, no. 4 (1993):
625–45.
43
Christos N. Pitelis and David J. Teece, “Cross-Border Market Co-creation, Dynamic Ca-
pabilities and the Entrepreneurial Theory of the Multinational Enterprise,” Industrial and
Corporate Change 19, no. 4 (2010): 1247–70.
44
Christos N. Pitelis, “Edith Penrose and a Learning-Based Perspective on the MNE and
OLI,” Management International Review 47, no. 2 (2007): 207–19; Jan Johanson and Jan-
Erik Vahlne, “The Uppsala Internationalization Model Revisited: From Liability of Foreign-
ness to Liability of Outsidership,” Journal of International Business Studies 40 (2009):
1411–33.
45
Penrose, “Multinational Corporations,” 562.
46
Ibid., 563; Bertil Ohlin, Interregional and International Trade (Cambridge, U.K., 1933).
The Work of Edith Penrose / 75
In the 1956 article, Penrose also exhibited an early understanding
of what today we call “transactions cost” and “organizational costs.”
47
She
viewed them, however, not as a reason for internalization, but rather
as an addition to her own well-known “Penrose effect” (constraint to
growth attributed to managerial factors). In her words: “The cost of in-
vestigation, together with the cost of planning, organizing and actually
establishing the new fi rm must, other things being equal, obviously limit
the number and extent of such ventures undertaken.”
48
Penrose did not fail to notice that, in addition to the advantages
they derived from being part of a network, subsidiaries could gradually
develop their own advantages. This point, for example, is made clear in
her discussion of the case of General Motors Holden (GMH), an Austra-
lian subsidiary of GM. She notes, for example, that “effi ciency in meet-
ing market demand seems to be the chief reason for the predominance
of GMH—it is hard to trace any signifi cant monopolistic practices on the
part of GMH itself. Other companies have not produced a car as popu-
lar as Holden.”
49
As in the case of Hercules Powder, she chose to consider the sub-
sidiaries as independent entities. “Once established, however, a new
subsidiary has a life of its own and its growth will continue in response
to the development of its own internal resources and the opportuni-
ties presented in its new environment.”
50
This decision represented a
missed opportunity, as she not only failed to recognize the possibility of
“leverag[ing] subsidiary skills” but, as a result, she also failed to link
this (leveraging of subsidiary skills) back to the theory of FDI and the
MNE.
51
This is almost ironic, as in another paper Penrose observes, “A
large fi rm, national or international, is not a single corporation, but a
network, often of astonishing intricacy, of limited (or incorporated)
companies whose direction and ownership are closely interlocked.”
52
It is also ironic in that Penrose was one of the fi rst scholars to em-
ploy the concept of “transfer prices” as a major advantage of the MNE.
53
47
Coase, “The Nature of the Firm”; Harold Demsetz, 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
Marina Papanastassiou and Robert Pearce, The Strategic Development of Multination-
als: Subsidiaries and Innovation (Houndmills, Basingstoke, 2010).
52
Edith T. Penrose, “International Economic Relations and the Large International
Firm,” in New Orientations: Essays in International Relations, ed. E. F. Penrose, Peter Ly-
ons, and Edith T. Penrose (London, 1969). Reprinted in Penrose, Growth of Firms, Middle
East Oil, 91.
53
Edith T. Penrose, “Problems Associated with the Growth of International Firms,” Tijd-
schrift voor Vennootschappen, Vereinigingen en Stichtingen 9 (1968). Reprinted in Penrose,
Growth of Firms, Middle East Oil, 82–90.
Christos N. Pitelis / 76
She argued that, in the case of intrafi rm sale of products and services,
“international fi rms possess a very large amount of discretion with re-
spect to the prices at which they transfer products and services across
national frontiers between their subsidiaries. And governments have a
legitimate interest in these prices.”
54
As transfer prices involve internalization by defi nition, it could only
be a little step to develop a theory of FDI based on (the benefi ts of)
transfer prices.
Similar considerations apply for the case of Penrose’s (1970) dis-
cussion of the multidivisional form (M-form).
55
Penrose drew on Hymer
to discuss the M-form as arising naturally from the expansion of the
fi rm. She described it as a fl exible form of organization that allowed the
central offi ce the freedom to engage in long-term planning. She con-
cluded that such an organization would understandably want to expand
beyond its national borders:
Given the scope for profi table expansion abroad, the international
spread of U.S. corporations, as well as of corporations in similar po-
sitions in other countries is explicable. The chief older incentives to
direct foreign investment—the development of new sources of sup-
ply of raw materials or control over old ones—were increasingly
supplemented by the need to secure and control markets.
56
Despite explicitly addressing the issue of internal structure (thus
internalization), here too Penrose did not pursue the internalization-of-
advantages thesis, but instead focused on securing and controlling for-
eign markets.
Penrose only considered FDI vis-à-vis alternative market-type con-
tracting arrangements for the supply of crude oil in comparative costs
terms when she was looking at the case of cross-border vertical integra-
tion in the international oil industry.
57
Given the nature and structure
of this industry (notably, the high degree of vertical integration and its
control by the oil majors), Penrose mainly emphasized the market-
power advantages of large MNEs to explain the choice of vertical inte-
gration vis-à-vis market-based transactions in crude oil (see the discus-
sion below).
54
Ibid., 84.
55
Edith T. Penrose, “The State and the Multinational Enterprise in Less-Developed Coun-
tries,” paper read to a conference at the University of Reading, May 1970. Reprinted in Pen-
rose, Growth of Firms, Middle East Oil, 119–35.
56
Hymer, “The Effi ciency (Contradictions) of Multinational Corporations,” 441–48; Hy-
mer, “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.
The Work of Edith Penrose / 77
To summarize and conclude this section, although Penrose did come
close, on various occasions, she did not eventually develop a full-fl edged
theory of FDI and the MNE. Considering that she recognized that her
1956 paper on FDI and fi rm growth was an offshoot of Theory of the
Growth of the Firm, it is fair to say that she also did not leverage ade-
quately the links between her own book and the theory of FDI and the
MNE. As far as the theory of FDI and the MNE is concerned, Hymer
can be rightfully named the originator.
58
At the same time, it is fair to
say that Penrose did not claim to provide a theory of the MNE per se,
and that her resource-based view eventually became a major alternative
and complement to the transaction-costs theory of FDI and the MNE.
59
The State–MNE Nexus, Globalization, and Development
Penrose’s lasting interest was the relation between MNEs and
n ation states, particularly in developing countries. She was, and re-
mained, one of very few fi gures who could command respect, as well as
fear, from developing countries, MNEs, and international organizations
alike, and was asked to advise all three. She spent a large part of her life
in the Middle East advising numerous governments and MNEs, pub-
lished extensively on the international oil industry and its companies,
and provided expert advice on the topic in a United Nations Confer-
ence on Trade and Development (UNCTAD) panel, among others, with
Stephen Hymer and John Dunning.
60
Inevitably, her uncompromising,
objective account of the advantages and disadvantages of MNE activi-
ties in developing countries attracted criticism by leading academics
like Charles Kindleberger, her friends among Middle East economists,
58
It is important to emphasize that my statements here come from an international busi-
ness 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 James R. Markusen, Multinational Firms and the Theory of In-
ternational 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 Katheryn
N. Russ, “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 fi nal 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 intrafi rm trade” (p. 108).
59
David J. Teece, “Towards an Economic Theory of the Multiproduct Firm,” Journal of
Economic Behavior and Organization 3, no. 1 (1982): 39–63; Pitelis and Teece, “Cross-
Border Market Co-creation.”
60
For example Edith T. Penrose, The Large International Firm in Developing Countries:
The International Petroleum Industry (London, 1968); Penrose and Pitelis, “Edith Elura Til-
ton Penrose.”
Christos N. Pitelis / 78
and MNE offi cials (see, for example, her exchange with H. W. Page of
the Standard Oil Company [New Jersey]).
61
Penrose’s feelings about the advantages and disadvantages of MNE
activities were closely related to her beliefs about the ways in which
large fi rms acquired their dominant position to start with, as elaborated
in the history of the acquisition of advantages. She emphasized effi -
ciency, but also power and context:
The story of the rise of the great companies deals as much with fi -
nancial power, commercial and political negotiations and intrigue,
with cartel agreements, marketing alliances, price maintenance ar-
rangements, price wars and armistices, mergers and combination,
actions to avoid taxes, and the national and international political
interests of governments, as it does with the economics of produc-
tion and distribution.
62
In sum, effi ciency is critical, but it goes hand in hand with power (both
market and political), and is shaped by the overall environmental con-
ditions and the way things are done at a given time and place.
Clearly, her less-than-rosy picture of MNE advantages and activi-
ties has direct implications for the costs and benefi ts of their operations
in host, especially developing, countries. While she recognized that
there is a lot to be gained from FDI, she also felt that the objectives and
needs of developing countries, states, and peoples were quite different
from those of private MNEs, which was a reason why appropriate gov-
ernment policies and institutions (as well as requisite negotiation strat-
egies and tactics) were essential for enabling the governments of devel-
oping countries to receive the maximum possible net benefi ts from FDI.
Such negotiations should involve clear objectives and understanding.
They should be fi rm, but also amicable.
63
For Penrose, moreover, the
need for an “effi cient forum for cooperation and for the formulation of
common objectives” led to the establishment of OPEC.
64
Already in 1971 Penrose also considered the issue of “economic in-
tegration” (in today’s terms, “globalization”), as well as its impact on
61
Kindleberger, American Business Abroad; Edith T. Penrose, “Profi t Sharing between
Producing Countries and Oil Companies in the Middle East,” Economic Journal 69, no. 274
(1959): 238–54; H. W. Page, “Profi t Sharing between Producing Countries and Oil Compa-
nies in the Middle East: A Reply,” Economic Journal 70, no. 279 (1960): 622–26; Edith T.
Penrose, “Profi t-Sharing in Middle East Oil—Rejoinder,” Economic Journal 70, no. 279
(1960): 626.
62
Edith T. Penrose, “Monopoly and Competition in the International Petroleum Indus-
try,” 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
Edith T. Penrose, “The Development of Crisis,” in The Oil Crisis, ed. Raymond Vernon
(New York, 1976), 53.
The Work of Edith Penrose / 79
the nation-state, especially the view that its role and power would tend
to be reduced. This position was promulgated in Raymond Vernon’s
classic book Sovereignty at Bay, and has been extensively restated and
criticized ever since.
65
Penrose’s view on this topic was more nuanced,
and very interesting and modern. She believed that the needs of devel-
oping nations would perforce be different from those of the United
States. National governments had agendas that did not necessarily align
with the interests of multinationals, although large corporations often
provided nation-states with the know-how, and indeed the infrastruc-
ture, to pursue their national goals. She concluded, “The concern of a
government for the economic welfare of its country must inevitably en-
compass a variety of considerations which would not be important to a
great international enterprise. Indeed, I suspect that multinational en-
terprises as we know them today would fi nd their life intolerable if the
‘state as an economic unit’ really did disappear!”
66
Furthermore, in her talk to the UN Group of Eminent Persons, Pen-
rose questioned the ability of the MNEs to undermine the sovereignty
of nations (and also their ability to promote economic development).
67
She placed great emphasis on “knowledge” by observing that “there is a
great deal of power in knowledge . . . and . . . much of the fear is based
upon a generalised feeling about knowledge.”
68
She further went on to
observe that some of the costs of MNEs to developing countries “are
due fundamentally to the policies of the government themselves in giv-
ing excessive protection to multinational corporations.”
69
Penrose’s statements point both to a complementarity between the
private and the public domains and to the reasons for it. Notably, her
views point toward, and predate, my recent work with David Teece con-
cerning market co-creation, namely, that both fi rms and governments
help to create markets. Such market co-creation simultaneously justi-
fi es the complementarity of the private–public nexus and explains why
the state is both necessary and unlikely to disappear.
70
65
Raymond Vernon, Sovereignty at Bay (Harlow, U.K., 1971). Christos N. Pitelis, “Be-
yond the Nation State: The Transnational Firm and the Nation State,” Review of Radical
Political Economics 22, no. 1 (1990): 98–114; Christos N. Pitelis, 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
Edith T. Penrose, “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,
G eneva, 1973.
68
Ibid., 38.
69
Ibid., 39.
70
Pitelis and Teece, “Cross-Border Market Co-creation”; Joseph T. Mahoney, Anita M.
McGahan, and Christos N. Pitelis, “The Interdependence of Private and Public Interests,”
Organization Science 30, no. 10 (2009): 1115–39.
Christos N. Pitelis / 80
Penrose’s critical thoughts about the activities of MNEs and her
views on the role of the state are, so far, in line with those of Stephen
Hymer’s early emphasis on monopoly.
71
However, while Hymer chose
to advocate “central planning” as a solution to the perils of MNEs, Pen-
rose’s views were much more nuanced, and indeed prophetic.
72
In discussing developing planning and the role of enterprise, Penrose
observed, “An economy where the activities of enterprise are governed
entirely in accordance with ‘targets’ determined in advance by a central
plan will not itself be characterized by an endogenous or organic pro-
cess of growth.” She instead expressed her faith that the fi rm is the cen-
tral, and irreplaceable, engine of economic expansion. She resoundingly
rejected the notion of central planning, stating that it is “inimical to the
development of a dynamic industrial economy,”
and pointed to the ex-
ample of the experience of socialist countries to bolster her argument.
73
In the same context, the issue of development is discussed by Pen-
rose in another paper, “Economics and the Aspirations of Le Tiers
Monde.”
74
Her observations highlighted the complexity of development,
which included not simply the importation of technological skills but
also the development of institutions and social attitudes that would
allow the successful adaptation of these new technologies to a particu-
lar culture. “After all, it is not the machines in themselves, or even the
saving-cum-investment, that are responsible for the high living stan-
dards now attained by the developed countries—it is the ability, skills,
and economic behavior of the people that have made possible the devel-
opment and effi cient use of these machines.”
75
Statements like this led Richard Eckaus to attribute to Penrose the
invention of the term “absorptive capacity” (now well known through
the writings of Cohen and Levinthal).
76
Penrose applied this idea fi rst to
the fi rm and then to the nation.
77
She concluded her paper by making
71
Hymer, International Operations of National Firms.
72
Dunning and Pitelis, “Stephen Hymer’s Contribution.”
73
Edith T. Penrose, “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,
Memo no. 827, in Penrose, Growth of Firms, Middle East Oil, 304, 306, 315.
74
Edith T. Penrose, “Economics and the Aspirations of Le Tiers Monde,” inaugural lec-
ture, School of Oriental and African Studies, London, 10 Feb. 1965, in Penrose, Growth of
Firms, Middle East Oil, 319–36.
75
Ibid., 322.
76
Richard S. Eckhaus, “Absorptive Capacity,” in The New Palgrave: A Dictionary of Eco-
nomics, vol. 1, ed. John Eatwell, Murray Milgate, and Peter Newman (London, 1987), 7–8;
Wesley M. Cohen and Daniel A. Levinthal, “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 manu-
script 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).
The Work of Edith Penrose / 81
the point that the “third world’s” economic development requires quali-
fi ed leaders and offi cials.
78
In these writings, Penrose highlights the role of institutions and
policies, now a critical element of modern theory of development.
79
Much
like recent Nobel Prize laureate Elinor Ostrom’s Governing the Com-
mons, moreover, Penrose also focuses on unleashing the potential of all
resources.
80
Last, but not least, she points to the role and importance of
“political leadership” and, dare I say it, “political entrepreneurship.”
81
When it came to specifi c government policies, especially toward “in-
ternational trade,” Penrose’s analyses of transfer pricing, “dumping,”
and protectionism were anathema to mainstream neoclassical views,
yet very modern in the context of “new international trade” and related
theories.
82
To mention just a few points, Penrose suggested, in an arti-
cle written in 1962, that “restriction on the repatriation of profi ts under
some circumstances may be a useful means of ensuring, for a while,
continued foreign investment.”
83
In addition, in 1973 she suggested
that in “infant fi rms,” not just in infant industries, arguments be “ac-
cepted as an exception to the doctrine of ‘free investment.’ ”
84
Last but
not least, in 1990 she wrote that “dumping is endemic in the system,
an integral part of the competition among large, diversifi ed, research-
based, integrated companies.”
85
Critically, Penrose was an early advocate of “joint ventures”—
without, however, being oblivious to their limitations.
86
In a 1968 article,
78
Penrose, “Economics and the Aspirations of Le Tiers Monde,” in Penrose, Growth of
Firms, Middle East Oil, 333.
79
Amartya Sen, Development as Freedom (Oxford, U.K., 1999); Joseph E. Stiglitz, Global-
ization and its Discontents (London, 2002); Douglass C. North, Understanding the Process
of Economic Change (Princeton, N.J., 2005); Dani Rodrik, One Economics, Many Recipes:
Globalization, Institutions, and Economic Growth (Princeton, N.J., 2009); Daron Acemoglu,
Simon Johnson, and James A. Robinson, “The Colonial Origins of Comparative Development:
An Empirical Investigation,” American Economic Review 91, no. 5 (2001): 1369–1401.
80
Elinor Ostrom, Governing the Commons: The Evolution of Institutional Forms of Col-
lective Action (Cambridge, U.K., 1990).
81
Peter G. Klein, Joseph T. Mahoney, Anita M. McGahan, and Christos N. Pitelis, “Toward
a Theory of Public Entrepreneurship,” European Management Review 7, no. 1 (2010): 1–15.
82
See, for example, Paul Krugman, ed., Strategic Trade Policy and the New Interna-
tional Economics (Cambridge, Mass., 1986); Paul Krugman, Rethinking International Trade
(Cambridge, Mass., 1990); and Christos N. Pitelis, “The Sustainable Competitive Advantage
and Catching-up of Nations: FDI, Clusters, and the Liability (Asset) of Smallness,” Manage-
ment International Review 49, no. 1 (2009): 95–120.
83
Edith T. Penrose, “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
Edith T. Penrose, “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 “Interna-
tional Economic Relations and the Large International Firm,” both in Penrose, Growth of
Firms, Middle East Oil, 82–90, 91–118.
Christos N. Pitelis / 82
she noted that “partnerships, or ‘joint ventures,’ are nevertheless often
useful means of reducing local antagonisms and thus of facilitating the
growth of the international fi rm.”
87
The following year, she warned of
the potential problems inherent in joint ventures. “The role and struc-
ture of the large international fi rms would be drastically changed. No
longer could they be looked on as reasonably cohesive administrative
organizations operating in accordance with general policies laid down
by their central management . . . it might well be diffi cult to call the
international group an organization in any meaningful sense.”
88
Al-
though she conceded that an argument could be made in favor of such
decentralized partnerships, she nevertheless concludes in favor of
greater independence for MNEs from particular countries:
It may be, however, that the only way of maintaining these advan-
tages will lie in international arrangements which permit the fi rms
to become truly independent of any one country, more internation-
ally oriented in their policies, and more international in their per-
sonnel and capital structure, and thus more acceptable to countries
fearing that foreign control, especially from the larger and more
powerful countries, will undermine their independence.
89
In modern parlance, this would suggest that MNEs are becoming
r eally global, not just multinational, companies through the develop-
ment of an institutional structure that permits, or even fosters, their
globalization.
In summary, Penrose’s writings on the political economy of global-
ization and development proved to be prescient. Much of what is “state
of the art” today in the theory of MNE–state relations, globalization, and
economic development was recognized and subjected to her rigorous
critical analysis. By addressing the issue of long-term development,
Penrose anticipated Jones and Khanna’s call to expand the domain of
(what was to become) international business inquiry.
90
In this context,
it is arguable that her contribution on these issues is at least as impor-
tant as her work on the MNE, perhaps even more so.
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 interfi rm 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 interfi rm cooperation blurs the boundaries of the fi rm 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.”
The Work of Edith Penrose / 83
Concluding Observations
While there have been extensive discussions of Edith Penrose’s
contribution to the theory of the growth of the fi rm, and some commen-
tary on her work on the MNE and FDI, her views on the political econ-
omy of MNE–state relations and its impact on long-term economic de-
velopment in the context of the theory–history nexus has been given
scant attention. As her views on the MNE–state nexus and long-term
development were one of the two reasons for the decision by the Acad-
emy of International Business to honor her, and given existing calls to
expand the domain of international business in this direction, I revis-
ited her views on this issue and tried to provide an overall critical ac-
count of her work.
91
I showed that although Penrose came close in numerous cases to
providing a theory of internalization, compared FDI to market-type
contracting relations, and even discussed transaction costs–related ar-
guments, her writings on these topics cannot warrant her being called
the originator of the theory of the MNE (despite having written on FDI
before Hymer). However, her views on the political economy of global-
ization, MNE–state relations, and long-term economic development
have proved to be incisive, mostly accurate, and ahead of their time—
they are currently at the forefront of recent debates. There is much
more to be learned from reading Penrose’s works on these issues in
general, especially in the context of the recent global crisis. By high-
lighting the importance of thinking that promotes economic sustain-
ability, policies, and institutions, the latest crisis adds urgency to the
need to revisit ideas, like Penrose’s, that are refreshingly down to earth
and that combine pragmatism with analytical rigor and policy—toward
both business and government—and that are, moreover, compatible
and mutually reinforcing. Her ideas stand in refreshing contrast to the
ideological fundamentalism espoused by advocates of central planning
or unfettered markets.
I would also argue that, within the history–theory nexus, Penrose’s
work is good practice. Her resource-based view provides a conceptual
lens for analyzing FDI and the MNE that is arguably complementary to
the transaction-costs view.
92
In contrast, moreover, to the still rather
91
Ibid.
92
See Mira Wilkins, The Maturing of Multinational Enterprise: American Business
Abroad from 1914 to 1970 (Cambridge, Mass., 1974); Penrose, “Multinational Corpora-
tions”; Penrose, Theory of the Growth of the Firm; Chandler, “Organizational Capabilities
and the Economic History of the Industrial Enterprise”; Christos N. Pitelis, “Edith Penrose’s
‘The Theory of the Growth of the Firm’ Fifty Years Later,” in Edith T. Penrose, The Theory of
the Growth of the Firm, 4th ed. (Oxford, 2009).
Christos N. Pitelis / 84
static transaction-costs lens, Penrose’s version of the resource-based
view is more dynamic and based on path-dependence-change.
93
By
drawing on history-informed analysis to derive the sources of resources
and capabilities, and by leveraging them all in order to analyze long-
term development, Penrose provided a history-informed theory to ana-
lyze history. She simultaneously addressed Jones and Khanna’s four
calls for rendering history more useful to international business schol-
arship (and vice versa). This was no mean feat. It could be leveraged by
business history and international business scholars in order to enable
better appreciation of the current phase of globalization and develop-
ment. Business history, in turn, could be usefully leveraged by devel-
opment scholars toward the same purpose.
. . .
CHRISTOS N. PITELIS is director of the Centre for International Busi-
ness and Management at Judge Business School and a fellow in economics at
Queens’ College, both at the University of Cambridge. He has published arti-
cles in leading journals, including the Journal of International Business
Studies, and he is currently editing The Collected Papers of Edith Penrose.
93
Peter J. Buckley, “Business History and International Business,” Business History 51,
no. 3 (2009): 307–33; Williamson, “Transaction Cost Economics.”
