Agency Theory and Slack Resources: A Penrosean Analysis of Innovation Strategy

Ram Mudambi and Tim Swift

Strategic Management Review, 2024, vol. 5, issue 1-2, 75-90

Abstract: Starting from roots in the Austrian School of Economics, Edith Penrose's work rejected some of the key assumptions of neoclassical economics. She argued that firms are heterogenous and that they each rely on an idiosyncratic bundle of resources in order to invest and grow. Over the years, many scholars have traced the resource-based view of the firm to her work, while a significant number dispute the extent of this intellectual connection. Her work also raised many questions that remain core to this day. In this paper, we describe the precise nature of Penrose's unique contribution and how it has been modified and improved over time in the specific context of innovation strategy. We develop an analytical model integrating her insights with agency theory. In so doing, we demonstrate that agency theorists' advocacy of strong corporate governance (to curb managerial opportunism) and minimization of slack have opportunity costs. These costs arise as restrictions on managerial freedom of action and access to liquid resources may simultaneously inhibit innovation efforts.

Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:now:jnlsmr:111.00000062

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