Chapter 4: Entrepreneurship and the Growth of the Firm: An Extension of Penrose’s Theory with Peter J. Buckley
Edith Penrose is one of the most important figures in the development of the modern theory of the firm. Entrepreneurship played an important role in her thinking. Penrose believed that entrepreneurship provided a continuous dynamic that sustained the growth of successful firms. She argued that many of the factors that the Edwardian economist Alfred Marshall believed influenced the size of firms actually influenced their rate of growth instead. Behind Edith Penrose’s Theory of the Growth of the Firm lies a formal model that guarantees the internal consistency of her theory. This model – set out below – illuminates many issues in the theory of the firm including not only growth, but also the composition of the management team, the degree of decentralization and the size distribution of firms. The model also facilitates a detailed examination of the different dimensions of corporate diversification. The results of this model call into question some of the recent interpretations of Penrose’s thought. Contrary to recent claims, her approach to economics was not overtly heterodox – rather, she applied traditional economic techniques in a novel way. This novelty was inspired by her emphasis on entrepreneurship as the driving force in the growth of the firm. 4.1 INTRODUCTION Edith T. Penrose (1914–96) published the first ever theory of the growth of the firm in the May 1955 issue of the AER, Papers and Proceedings (Penrose, 1955). The theory built upon her previous controversy in the AER with Armen A. Alchian, which had been stimulated by her critique of...
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