Wonjoon Chung School of Labor and Employment Relations (LER) October 3 rd 2012 The dynamics of Japanese firm growth in U.S. industries: The Penrose effect Danchi Tan & Joseph T. Mahoney, 2007 Published in Management International Review 1

Introduction The theory of the growth of the firm (Penrose, 1959) Managerial capability – constraint that limit the rate of growth of the firm: “Penrose effect” Excess capacity of resource is a source of firm-level growth Not strong empirical evidence from current literature Few empirical studies examined whether the Penrose effect exists : Thompson, 1994; Shane, 1996; Tan and Mahoney, 2005, etc. Demand of managerial resources Focus on Supply of managerial resources and “When” question 2

Research purpose To explore the conditions under which the Penrose effect is more likely to be prevalent Using the perspective of the supply of managerial resources To examine the conditions in a international business context 3

Penrose’s theory of the growth of the firm What influences the growth of the firm? Influences from internally experiences managers (Managerial capacities) Set a limit to the rate of the growth of the firm Provide an inducement to firm-level growth Influence the development of new managerial resources Capacities of internally experienced managers matters on the rate of growth of firms Different organizational capabilities 4

Expansion of Penrose’s theory MNE may experience the Penrose effect differently due to difference in developing new managerial resources 4 factors considered: Expatriates: influence the development of newly recruited local personnel in the foreign operation Routines: domestic experiences & international experiences Uncertainty: the complexity of the local environment 5

Hypotheses H1: Multinational firms that send a greater number of expatriates to their overseas operations upon entry into a foreign market are more likely to achieve high growth rates in successive time periods in the market. H2: Multinational firms with greater home experiences prior to the entry into a foreign market are more likely to achieve growth in successive time periods in the market. H3: Multinational firms with greater international experience prior to the entry into a foreign market are more likely to achieve growth in successive time periods in the market. H4: Multinational firms are less likely to achieve high growth rates in successive time periods in a foreign market that is characterized by a high level of uncertainty. 6

Data: Japanese manufacturing affiliates in the U.S. (Excluded non-majority-owned investments with 2 criteria) The Japanese parent firm is listed in the first of second section of the JSE. The parent firm entered the particular U.S. industries between 1978~1990 Level of analysis: the line of business (due to various nature of industries) Sample size: 118 investment (92 firms in 79 industries) Analyses using regression models (interaction terms included) 7 Methodology (1)

Variables GROWTH (DV) – The percentage change in a Japanese firm’s total employment after 4 th and 7 th years after entry PREGROW - The percentage change of the employment in the preceding period EXPAT – Ratio of expatriate employees HomeExp – The firm’s foundation year and 1 st operation in the U.S industry (in years and logarithmic form) InternationalExp – 1 st overseas operation and 1 st operation in the U.S (in years and logarithmic form) UNCERTAINTY – The variance of error term adapted from Levy (1985) 8 control variables including SIZE 8 Methodology (2)

Results 9

Conclusions and Future research Explored the conditions under which a firm is more/less likely to experience the Penrose effect Firms that are more capable in developing new managerial resources are less exposed to the Penrose effect Japanese firms were more likely to achieve growth When they sent more expatriates When they had greater domestic experiences When they entered local markets with a lower level of uncertainty Generalizability issue Difficulty to access international data Impact of the expatriates’ characteristics Firm and local market characteristics 10