The Dynamics of Japanese Firm Growth in U.S. Industries: The Penrose EffectDANCHI TAN/JOSEPH T. MAHONEYPRESENTED BY JOSHUA DOWNS 9/30/14

Overview Studies the impact of constraints on managerial resources on firm growth after international expansion

Submits that fast growth saps capacity that would be used on sustainable resource growth activities, resulting in reduced subsequent growth

Tests hypotheses on Japanese manufacturing firm expansion in the United States

Penrose’s Theory of the Growth of the Firm

Manager Influence◦ Input for operation and limiting factor for growth rate, team dynamic◦ Managerial development as an inducement for growth, firm-specific

experience for new managerial resources, economization through routine development and codification

◦ Using resources profitably: Excess managerial capacity beyond current operations can be used for growth

◦ Firms that grow faster than existing managerial resources can bear develop inefficiencies in organizational processes and mentorship (PENROSE EFFECT)◦ Mentorship: Tacit knowledge transfer to new managerial resources requires existing managerial

resource capacity◦ Faster growing firms thus further hamper their expansion by failing to grow and refresh

managerial resources

International Expansion and Penrose Effect

Entry Decisio

ns

•Locations•Entry modes•FinancingPost-

Entry

•Information collection and evaluation•Sub-Unit Coordination•Knowledge and Practice Transfer to Sub-Units

Hypothesis 1 Expats have accumulated internal experience and socialization and are thus better equipped to convey corporate culture and policies in the recruitment and training of local personnel, including new managerial resources

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.

Hypothesis 2 Firm procedures that have been tested and codified into routines over time economize managerial attention by:

◦ Suppressing deliberate choices◦ Reducing internal conflicts◦ Mitigating searches for optimal solutions◦ Accelerating recruitment and training of new personnel

The longer a firm has existed (domestically) the greater the diversity of the scenarios they have encountered and developed routines to address

Multinational firms with greater home experience prior to the entry into a foreign market are more likely to achieve growth in successive time periods in the market.

Hypothesis 3 Routines developed domestically aren’t always sufficient for international expansion due to divides in culture, infrastructure, and institutions

Firms with international experience have faced the challenges of adapting domestically developed routines to international markets and will be better prepared to adapt further to requirements of future markets

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.

Hypothesis 4 International experience can help in the adaptation of routines to local markets, but the level of complexity and uncertainty associated with a new market will require greater managerial capacity to decipher optimal solutions

This reduces capacity available to develop new, locally sourced managerial resources

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.

Methodology Population: Japanese manufacturing affiliates in the United States meeting these criteria:

◦ Japanese parent firm is listed in the first or second section of the Japanese Stock Exchange

◦ The parent firm entered the particular U.S. industry between 1978 and 1990

Reasons:◦ Japanese companies tend to pursue long-term growth over short-term

profitability◦ Exclusion of non-majority owned investments due to lack of control◦ Data Available on: year of establishment, mode of entry, # of expats &

employees, and equity % of affiliates◦ Line of business less variable than parent corporation

Methodology Dependent variable: % change in a Japanese firm’s total employment in given U.S. industry between 4th and 7th years after entry (GROWTH)

Explanatory variable: % change of employment between 1st and 4th years (PREGROW)

Variables of interest:◦ EXPAT: Ratio of expatriate to total employees in first affiliate◦ HomeExp: Proxy for a firm’s home experience by years between founding and entry◦ InternationalExp: Proxy for a firm’s international experience by years between first overseas

operation and US entry◦ UNCERTAINTY: Proxy for uncertainty in US market by Levy’s measure (1985)

Control for:◦ Acquisition strategies & Joint ventures, diversification of portfolio◦ R & D, Marketing, Financial Support, size at time of observation, and overall industry

growth

Results Empirical support for H1.

Empirical support for H2.

H2 not significantly supported◦ While having international presence may facilitate the dynamic supply of

managerial resources, demand may also increase.

Empirical support for H4

Empirical support for combined effect of all 4

SIZE and DIVER controls associated with negative growth

Results

Results

Results

Results

Results

Discussion Expatriation is helpful in developing managers, justifying investment in human capital. What elements of expat managers contribute to efficient absorption of new managerial resources? (duration of domestic service, international experience, exposure to multiple corporate cultures)

Routines developed from long years of domestic firm experience should always serve as a basis for absorption of new managerial resources, regardless of the uncertainty of cultural divide of new markets. Agree/disagree?

HypothesesMultinational 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.

Hypothesis 1

Multinational firms with greater home experience prior to the entry into a foreign market are more likely to achieve growth in successive time periods in the market.

Hypothesis 2

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.

Hypothesis 3

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.

Hypothesis 4