Critically compare the theoretical perspective and practical implications of Coase (1937)
and Penrose (1959) in terms of their views on (i) the size of firms and (ii) the growth of firms
(max 3000)
Introduction
The main difference between Edith T. Penrose’s (1959) and Ronald Coase’s (1937) theories
is the concept of the fluidity of a firm. Penrose believes that a firm has no limit in size and it
is to be considered as a dynamic body, this is true except when a firm is unsuccessful in
exploiting its resources. On the other hand, Coase believes that a firm is static and there is an
optimum size where the firm will stop increasing in size. In this essay, the theoretical
perspective and practical implications of Coase (1937) and Penrose (1959) in terms of
their views on the size of firms and the growth of firms will be investigated, using various
resources, which will be including: Transection theory of the firm by Coase (1937), Theory
of the growth of the firm by Penrose (1959), Adverse selection by Akerlof (1970), Resources
and competitive advantage by Barney (1991), Agency theory by Eisenhardt (1989) and Force
analysis by Porter (1980) and other possibly related sources.
Managers as a factor in the growth of the firm
Theoretic perspective:
Coase’s (1937) argues that firms could not grow indefinitely, he gave two main reasons to
explain why this would not be the case; “First, as a firm gets larger, there may be decreasing
returns to the entrepreneur function, that is, the costs of organising additional transactions
within the firm may rise… Secondly, as the transactions which are organised increase, the
entrepreneur fails to make the best use of the factors of production. Thirdly, the greater in
lowering (or the less the rise) in the supply price of factors of production to firms of larger
size” Coase (1937) In the second point, Coase (1937) argues that as the firm gets larger there
will be a higher chance that the entrepreneurs will fail to give the best and thus leading to the
limitation of a firm in growing indefinitely because of the workload and pressure given to the
managers. This is the opposite of what Penrose (1959) suggests, which she argues that the
limitation on the firm’s growth rate is determined from the limited capacity of its current
management. In other means that managers of the firms are not a limiting factor of a
company’s growth, but in fact, a catalyst for growth of the firm.
According to Penrose (1959), the companies managers’ experiences is their correlation with
the firm’s resource affect the overall image of the whole company, giving the company a
valuable asset; the unique productive chances. Resources of the company are not merely as
valuable if there are no mangers to transform them into new products and new firm skills
under the collective experiences of managers. So how does will the new skills and products
lead to in terms of growth of the firm? These new combinations of the allocation of resources
will lead to innovation and in the shape of dynamic capacity, this will lead to the ultimate
creation of economic value. Penrose’s (1959) ideology was that the combination of different
resources will spark relationships between one and other. Resources does not merely just
exist in the firm, but they will be able to transform into new resources that would be very
valuable to the firm. All the different types of resources hold a very intimate relationship
between each other, the collective knowledge and experience can have an impact on not just
the resource available competitive services, but as well as the demand of a certain company.
Leaving unused resources will lead to ultimately threat to the opportunity to grow and
develop.
1
and Penrose (1959) in terms of their views on (i) the size of firms and (ii) the growth of firms
(max 3000)
Introduction
The main difference between Edith T. Penrose’s (1959) and Ronald Coase’s (1937) theories
is the concept of the fluidity of a firm. Penrose believes that a firm has no limit in size and it
is to be considered as a dynamic body, this is true except when a firm is unsuccessful in
exploiting its resources. On the other hand, Coase believes that a firm is static and there is an
optimum size where the firm will stop increasing in size. In this essay, the theoretical
perspective and practical implications of Coase (1937) and Penrose (1959) in terms of
their views on the size of firms and the growth of firms will be investigated, using various
resources, which will be including: Transection theory of the firm by Coase (1937), Theory
of the growth of the firm by Penrose (1959), Adverse selection by Akerlof (1970), Resources
and competitive advantage by Barney (1991), Agency theory by Eisenhardt (1989) and Force
analysis by Porter (1980) and other possibly related sources.
Managers as a factor in the growth of the firm
Theoretic perspective:
Coase’s (1937) argues that firms could not grow indefinitely, he gave two main reasons to
explain why this would not be the case; “First, as a firm gets larger, there may be decreasing
returns to the entrepreneur function, that is, the costs of organising additional transactions
within the firm may rise… Secondly, as the transactions which are organised increase, the
entrepreneur fails to make the best use of the factors of production. Thirdly, the greater in
lowering (or the less the rise) in the supply price of factors of production to firms of larger
size” Coase (1937) In the second point, Coase (1937) argues that as the firm gets larger there
will be a higher chance that the entrepreneurs will fail to give the best and thus leading to the
limitation of a firm in growing indefinitely because of the workload and pressure given to the
managers. This is the opposite of what Penrose (1959) suggests, which she argues that the
limitation on the firm’s growth rate is determined from the limited capacity of its current
management. In other means that managers of the firms are not a limiting factor of a
company’s growth, but in fact, a catalyst for growth of the firm.
According to Penrose (1959), the companies managers’ experiences is their correlation with
the firm’s resource affect the overall image of the whole company, giving the company a
valuable asset; the unique productive chances. Resources of the company are not merely as
valuable if there are no mangers to transform them into new products and new firm skills
under the collective experiences of managers. So how does will the new skills and products
lead to in terms of growth of the firm? These new combinations of the allocation of resources
will lead to innovation and in the shape of dynamic capacity, this will lead to the ultimate
creation of economic value. Penrose’s (1959) ideology was that the combination of different
resources will spark relationships between one and other. Resources does not merely just
exist in the firm, but they will be able to transform into new resources that would be very
valuable to the firm. All the different types of resources hold a very intimate relationship
between each other, the collective knowledge and experience can have an impact on not just
the resource available competitive services, but as well as the demand of a certain company.
Leaving unused resources will lead to ultimately threat to the opportunity to grow and
develop.
1
