The Penrose Effect in Resource Investment for Innovation: Evidence From Information Technology and Human Capital

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Provided by: Hong Kong University of Science and Technology
Topic: Software
Format: PDF
Resource-based theory views the firm as a bundle of resources administrated and coordinated by managers. The authors introduce the theoretical lens of Penrose effect to IS research, which refers to the fact that finite managerial capacities will suffer if the complexity of resource coordination is high. Therefore, although investment in knowledge-related assets, such as Information Technology (IT) and human capital, is associated with better innovation performance on the one hand, too much capital investment is likely to induce diminishing return on the investment because of Penrose effect. Accordingly, they take a curvilinear approach and propose that the relationships between IT/human capital investments and innovation performance are likely to be inverted U-shaped.
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