This study investigates whether the Penrose effect operates in knowledge-intensive professional service firms, specifically whether growth in one period constrains growth in subsequent periods. It also examines firm size and age to identify boundary conditions of this relationship.
This study uses fixed-effects regression models on unbalanced panel data from 86 Japanese patent law firms over 1998–2008 (analytical years: 1999–2007, 759–761 firm-year observations depending on the growth measure) to examine the relationship between pre- and post- period growth across sales, attorney headcount and patent application volume. In addition, the authors conducted subgroup analyses by firm size and age to identify boundary conditions.
The results support the Penrose Effect across all three growth dimensions, indicating that periods of expansion are followed by temporary slowdowns. Subgroup analyses show significant heterogeneity by firm size for patent applications growth: small firms exhibit substantially stronger Penrose constraints than large firms (coefficient difference = 0.263 percentage points, p = 0.003), while the effect virtually disappears in large organisations. The authors observed directionally but not statistically significant age-based patterns.
This study extends Penrose’s theory beyond manufacturing to knowledge-intensive professional service firms, a theoretically compatible yet relatively underexplored context. Furthermore, a multidimensional approach in three growth measurements and identification of boundary conditions relative to firm size allows for a more nuanced understanding of growth dynamics in professional service firms.
