Managerial Constraints, Absorptive Capabilities and Firm Growth: A Re-Examination of the "Penrose Effect"

Best known as the Penrose effect, the concept perceives managerial capability as the main limitation on firm growth rate. As a firm grows to a size where managerial tasks are growing and increasingly complex, the Penrose effect exists within firms suffering managerial limitations. Such limitations can result from insufficient managerial capabilities, and can cause firm failure in resource and capability accumulation. However, this study predicts that firm absorptive capability increases managerial capability accumulation by effective learning, helping reduce the impact of managerial limitations on firm growth. This study thus examines how absorptive capability affects the Penrose effect by using firm-level data for 591 electronics firms. The results show the growth pattern of Taiwan's electronics firms is identified Penrose effect. Additionally, the managerial constraints curbs firm growth in the case of firms engaged in M&A, and firm diversification exhibits a U-shaped relationship with the Penrose effect. Finally, increasing firm internationalization will contribute to growth, thus reducing the Penrose effect.