Management competence, firm growth and economic progress

Abstract

Starting from the empirical observation of a positive correlation between the prosperity of an economy and the relative role of large firms operating in that economy, we propose that this correlation is an artifact of the positive influence of 'management competence' on both these variables. Drawing on Penrose's The Theory of the Growth of the Firm, we develop a theoretical framework that distinguishes between two aspects of management competence, i.e., entrepreneurial judgment and organisational capability. Both aspects relate to the process of value creation through the combination and exchange of economic resources. Whereas entrepreneurial judgement refers to the cognitive aspects of perceiving potential new resource combinations and exchanges, organisational capability is the ability to actually carry them out. As we show, the interplay of these two factors affects the speed at which firms expand their operations, the kind of expansion, and the process through which firms create value, not just for themselves, but for society as a whole.

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