On the Theory of Expansion of the Firm

Abstract

Economists who have spent time observing the operations of business enterprises come away impressed with the extent of management’s occupation with growth. Expansion is a theme which (with some variations) is dinned into the ears of stockholders, is constantly reported in the financial pages and in the journals devoted to business affairs. Indeed, in talking to business executives one may easily come to believe that growth of the firm is the main preoccupation of top management. A stationary optimum would doubtless be abhorrent to the captains of industry, whose main concern is surely not at what size their enterprises should finally settle down (except where sheer size endangers their standing with the administrators of the antitrust laws) but rather, how rapidly to grow.²

This paper owes much to the growing literature of the dynamics of the firm. Particularly, I am indebted to Robin Marris for permitting me to read his unpublished manuscript [5] and to Herbert Frazer who wrote his doctoral dissertation on the subject. Highly relevant and stimulating is Edith Penrose [7]. In addition I owe much to the work of Richard E. Quandt ([8] esp. pp. 156–66). I am also very grateful for their comments to A. Heertje, Fritz Machlup, Burton Malkiel, Richard Quandt, Harold Shapiro, and John Williamson. Finally, I must express my great appreciation to the National Science Foundation whose grant helped materially in the completion of this manuscript.