To study the financial performance of individual companies is often problematic, as publicly reported figures on company profits might be misleading for several reasons. For example, the company might have an interest in showing smaller profits for tax-reasons, the board might prioritize re-investment and growth before profits and the leading owner’s might have reasons to minimize profits in order to strengthen their own position vis a vis the financial market.
In recent years, several studies in the field of financial history have therefore opted for studying the return on investment—i.e. to analyse financial performance from the perspective of the investors in the companies rather than from company declared profits (Edelstein 1970, 1976, 1982; Dimson et al. 2002; Buelens and Marysse 2009; Buelens and Frankema 2015; Grossman 2015; Rönnbäck and Broberg 2019). By studying the return on investment, we implicitly assume that contemporary agents on the financial market were reasonably well informed about the company’s activities over the long run, and therefore in a position to judge the value of the company. This would thus translate into changes in the market price of the company’s shares. Such changes constitute, however, only one part of the total return on investing in the company. Another part is dividends to shareholders. Hence, if investors were reasonably well informed about the company’s activities, the total return on investment ought to be a reasonable proxy for a company’s performance, at least over the long run.
The present study examines the return on investments in British Malaya channelled via the London Stock Exchange from 1889 to 1969. The territory we analyse includes the Straits Settlement, the Federated and Unfederated Malay States, and North Borneo. For the sake of simplicity, we will henceforth call this whole region ‘Malaya’, as a shorthand for the territories that composed the Federation of Malaya, later re-named Malaysia.
During the nineteenth century, London was the leading financial centre of the world, and most capital exports went through the London Stock Exchange. It was only by the early twentieth century that other financial centres, most importantly New York, challenged London’s primacy in the financial sector. Still, London remained one of the most important financial centres of the world throughout the period under examination in this article (Michie 2006; Cassis 2010). Furthermore, most of the capital invested in Malaya during the period under study originated in Britain (Latham 1978, 55–56; van Helten and Jones 1989, 163–64; Rasiah 1995, 50; Lindblad 1997, 64; Drabble 2000, 54; Twomey 2000, 139), while only a minor share came from other parts of the world, including, for example, Australia, USA, China and Japan (Leng 1974; Birch 1976; Lindblad 1998, 22;64; Hillman 2005; Yacob 2009; Latham 1978, 55–56; Jelenkovic et al. 2016, 163–64; Rasiah 1995, 50; Drabble 2000, 54; Twomey 2000, 139). Previous research has shown that the degree of international integration of financial markets for ventures that were operating internationally was high already in the nineteenth century (Campbell and Rogers 2017). If the capital invested in Malaya coming from other places than London targeted other (types of) ventures than that channelled via London, it could potentially have experienced a different return on investment than the one estimated in the present study. Whether that was the case may be topic for future research. Nevertheless, it seems plausible to assume that the return on investment that London investors faced when investing in Malaya would be a reasonable proxy for a weighted average of all investments in the colony.
In order to study the total return on investment, data on the price of the equity of companies operating in Malaya and data on dividends paid out to the shareholders in the same companies are required. Our measurement of risk—volatility—follows practice in financial history and it is derived from these data as the standard deviation of the annual return (Dimson et al. 2002, 54–55). Data on the price of shares can be found in publications such as the Investors’ Monthly Manual (IMM), a publication aimed at informing investors about what was happening on the London Stock Exchange since 1864, and The Times of London. Data from these sources have been digitized by the company Global Financial Data (GFD). For the purpose of this article, data on all companies registered as operating in Malaya or Singapore were acquired from GFD. In terms of reliability, previous research shows that GFD’s data are highly reliable when it comes to share prices. The frequency of the data is either daily or monthly (varying between companies and sometimes over time); we have here consistently used monthly data (i.e. for series where there are daily data, we have used data from the last trading day of each month). GFD’s database also contains data on other variables, but these show lower level of reliability, for example, due to missing data (see Rönnbäck and Broberg 2019, chap. 5). For the purpose of this article, data on these additional variables have therefore been assembled directly from a primary source, namely the London Stock Exchange Yearbooks, published annually since 1890 and providing key information on all the companies listed on the exchange, including data on the number of shares outstanding, gross dividends paid out to the shareholders, and any capital operations (such as splits).
Table 1 summarizes the number of companies in the sample and the number of observations (company-months) per sectoral portfolio as well as for the whole sample under study.
The category of “other” companies operates in various sectors, including real estate, commercial services, consumer products and plantations (other than rubber). The most important of these, in terms of market capitalization, were operating plantations (other than rubber) on Borneo. Both common and preferred stocks have been included in the sample. Preferred stock only make up a small fraction (seven data-series) of the sample, and at most constitute a few percentage points in terms of share of total market capitalization. The sample size varies over time, peaking in 1916 at 148 companies (see Appendix Fig. 5). An increase in the number of ventures meant that the concentration of the portfolio decreased over time. At the outset of the study, three companies—with the British North Borneo Company being the leading one—accounted for the whole sample in terms of market capitalization. By 1916, the three largest companies only accounted for ten per cent of the total market capitalization of the whole portfolio (see Appendix Fig. 6). In 1929–1930, there is a break in the series when the number of companies in the sample suddenly drops. This is largely attributable to a shift in the primary sources employed by Global Financial Data when constructing their database. Nonetheless, all major companies in terms of market capitalization remain in the sample, so the change is deemed to have comparatively limited effect upon market capitalization- weighted estimate of the total return on investment. Nominal return on investment have, finally, been calculated using data on historical inflation based on a consumer price index (O’Donoghue et al. 2004).
Malaysian stocks continued to be traded on the London Stock Exchange throughout the Japanese occupation of Malaya, from the end of 1941 to 1945. As the British boards and investors during this time would have had little influence over the company’s operations in occupied Malaya, trading would reflect anticipation of future earnings from the stocks.
Figure 1 shows the market capitalization (in constant prices) of the 246 companies in our sample. During the nineteenth century, companies in ‘other’ sectors dominate the sample. This includes most notably the British North Borneo Company, chartered to colonize and administer North Borneo (Tregonning 1958; Griffiths 1974, chap. 16). There are, furthermore, a few tobacco and sugar estates as well as some other companies, several operating in North Borneo. After a long period of decline, companies operating in ‘other’ sectors saw their market capitalization increase at the end of the period under study, driven by a few companies involved in construction, real estate, and chemicals.
Our data confirm the boom-and-bust-pattern of the rubber sector put forth by previous scholars (see most importantly Drabble 1972; 1973). The pattern is clearly visible in Fig. 1, from the early booms in 1905–1910 to the slumps in in the interwar period and during the Japanese invasion.
Compared to rubber, tin mining experienced considerably less variation and strong secular growth. By the end of the period, the market capitalization of the mining companies was twice as big as the market capitalization of the rubber plantations.
Figure 2 shows an index of the total accumulated return on investment, by sector and for the whole sample of companies, over the period under examination. Averages by decade, again by sector and for the whole sample, are available in Table 2 (yearly data are reported in Appendix Table 4).
The return on investment in Malaya was high on average over the whole period under study. This was particularly the case in the tin mining sector, but also in the rubber plantations-sector. In order to understand this high return, we must look at the major changes over time.
One factor that has been suggested in previous research as driving a high return on investment in colonies was the presence of exploitative colonial institutions. In their article on the return on investment in the Netherlands Indies, Frans Buelens and Ewout Frankema interpret their findings of comparatively high return on investment as the effect of systematic labour repression in the colony (Buelens and Frankema 2015)Footnote 2, yet they do not test this hypothesis directly. Klas Rönnbäck and Oskar Broberg, in their study of the return on investments in colonial Africa, discuss whether what they call exploitative labour institutions might have affected the return on investments in the British colonies. They find some evidence tentatively supporting this interpretation in the form of a higher return on investments in settler colonies, generally described as being characterized by a higher degree of exploitative labour institutions, than in non-settler colonies (Rönnbäck and Broberg 2019, Fig. 13.5). Several scholars have noted that repressive or exploitative measures against labourers were in place also in British Malaya. Indentured servitude, for example, was continually in use in the early phase of this study, with “coolies” being imported from China or India legally until 1910, when the practice was abolished (Parmer 1960, 6–7; van Helten and Jones 1989, 171–74; Ramasamy 1992, 89–90; Lindblad 1998, 43). Colonial authorities were also active in repressing trade unions, and attempts by the labourers to collectively organize were still opposed in the 1940s (Ramasamy 1992). Previous literature in the field, however, tends to suggest that the measures grew less repressive over the period under examination, with unions, for example, starting to be officially recognized by the colonial authorities after the Second World War. If coercive labour institutions were the key explanatory factor driving the return on investments, the return then ought to have been at its highest during the early colonial period of Malayan history, when previous scholars agree that the colonial labour market institutions were the most repressive. This does not seem to have been the case. During the first decades for which data are available, the average investor in Malaya experienced quite substantial losses. Losses were the greatest in the mining sector. The claims made in the specialist literature on Malayan economic history that numerous of the early European tin mining ventures in Malaya failed economically thus find support in our analysis of the total return on investments (Fig. 2). British investments in the Malayan mining sector on average experienced astounding losses of 28.7 per cent per year in real terms in the 1890s, and 20.4 per cent per year in the 1900s (Table 2). At the outbreak of the First World War, the total return on investments index had dropped from 100 to 0.5. Investors in several other companies, including the British North Borneo Company, also experienced losses during this early period, but not as drastic as in the case of the mining sector (Table 2). As for investments in rubber plantations, these did certainly yield a very high return during the first years for which we have data (from 1906 onwards). This very high return does, however, in the main not seem to be attributable to the exploitative colonial institutions in general, but rather to the great international booms on the international rubber market in 1905–1906 and 1909–10, emphasized in much of the previous literature (Allen and Donnithorne 1957, 111–12; Lim 1969, 75; Stillson 1971; Drabble 1972; 1973, 30–34, 106–7). As rubber companies only start to appear in our sample in 1906, our data miss out the direct effect of the rubber boom in 1905. The following rubber boom in 1909–10 is, however, clearly visible in our data: the rubber portfolio of investments experienced an average real rate of return of 105 per cent per year during these two years. This boom was then followed by a stagnation that lasted several years. Although the losses that many Malayan companies faced might have been even greater in the absence of repressive labour institutions that kept labour costs low during the early years of colonialism in Malaya, the high average rate of return on investments that we find over the period under study cannot be attributed to such institutions per se, we believe.
The interwar years exhibit several important changes. Firstly, the portfolio of mining investments, which had hit its lowest point just before the outbreak of the war, gradually recovered. The sector’s performance was particularly strong in the first half of the 1920s and again in the second half of the 1930s, when the International Tin Cartel was in operation (Fig. 2). This finding supports the claim that European tin mining enterprises grew more competitive vis a vis Chinese entrepreneurs, who now lacked capital and labour to survive (Wong 1965, 203–30; Lim 1969, 50; Hennart 1986, 135–37; van Helten and Jones 1989, 165; Drabble 2000, 56). With an average real return on investments of 21.5 per cent per year in the 1920s, and 22.4 per cent per year in the 1930s, the mining portfolio had recovered from the losses experienced prior to the First World War. In contrast, investments in the rubber sector stagnated in terms of the return on investments. After the boom in 1909–10, the rubber sector fluctuated substantially. Our findings confirm that the performance of the rubber sector was very poor 1920–1921, and again during the Great Depression in the early 1930s (Fig. 2). Over the whole interwar period, investors in a rubber portfolio experienced a small loss (Table 2). Investments in other sectors than mining and rubber experienced a healthier return during the interwar period, particularly in the 1930s. However, by this time the market capitalization of these companies had been dwarfed by the vast amount of investments going into rubber and tin mining, as visible in Fig. 1.
As was noted above, Malayan stocks continued to be traded on the London Stock Exchange during the Japanese occupation of Malaya. The immediate occupation impacted British investors heavily. The “scorched earth” policy pursued by the British government, most certainly in combination with the uncertainty over whether the companies ever would be able to regain any Malayan assets, led to share prices dropping drastically for the vast majority of the Malayan ventures in our sample. As a consequence, investors faced major losses at the end of 1941 (with a return on investment of − 44.5 per cent this year for the whole Malayan portfolio), with tin mining being the most negatively impacted. As the war progressed, however, share prices of Malayan stocks started to recover, possibly reflecting regained investor confidence, thus leading to positive return on investment, particularly from 1943 onwards.
The post-war period brought about some further changes. Tin mining, on the one hand, continued its climb, experiencing a fabulous average return on investment, particularly in the 1950s with an estimated return on investment of 55.1 per cent per year. This extremely high average return on investment cannot be explained as risk premia. On the contrary, the tin mining companies were well established after 1914 and the volatility of return came down to levels that were relatively “normal” among colonial investments (Buelens and Frankema 2015; Buelens and Marysse 2009). One key factor to take into account was the process of decolonization of British Malaya. Previous research from Africa suggests that the process of decolonization occasionally could have severe negative effects upon the return on investments in that colony. Buelens and Marysse, for instance, have argued that the decolonization of Belgian Congo caused major losses for investors, reducing the average rate of return in the colony substantially (Buelens and Marysse 2009). Rönnbäck and Broberg have also suggested that this happened at least in the case of Egypt, with the effect of total return on investing in the country being negative as share prices fell. Decolonization was, however, not always associated with losses for foreign investors. In several African colonies, such as Nigeria or Ghana, the process of decolonization did not lead to any nationalization of foreign-held assets. The British investors hence lost little or no capital as a consequence of decolonization of these colonies (Rönnbäck and Broberg 2019, 329–30). As noted above, the process of decolonization of British Malaya was far from peaceful. It is thus possible that the armed insurgency which arose in 1948 could be an important factor in explaining the great losses experienced by several companies this very year, although our data would seem to suggest that investors in rubber companies actually were the ones experiencing losses (see Appendix Table 4), in contrast to previous research which has argued that the insurgency primarily impacted tin mining. From the perspective of the investors, the armed insurgency was essentially crushed during “the Emergency”, by the early 1950s, and the continued process of decolonization did not challenge the foreign investors’ ownership of assets in Malaya. As emphasized in previous research, the first independent government instead decided not to interfere with foreign ownership of assets (Lindblad 1998, 106–8; White 1994, 251; 2004, 2).
This non-intervention thus meant continued security for the companies’ ownership of assets in Malaya. The figures on the return on investment in late colonial and early post-colonial Malaya not only show no major losses on average during this period of decolonization, but they record extraordinarily high return on investment. While Nicholas White has stressed that British businesses operating in Malaya often expressed discontent with both the late colonial and early-independent political regimes (White 1994, 1997, 2000, 2004), this does not seem to have dissuaded them from holding on to, and profiting enormously from, their Malayan investments at this time. Besides the comparatively smooth process of decolonization, the high returns in this phase can be explained by looking at the three “pushes” that Chong-Yah Lim identified as important for the development of the modern Malayan economy (Lim 1969, 8–18). All these “three pushes” can be traced in our data. The years of the Korean War were particularly lucrative for the investors, as were the years of the first International Tin Agreement. The portfolio of investments in rubber ventures did also experience a very high return on investment during the post-war period, with the return on investments being particularly high in the 1950s (Table 2). Rubber ventures appear to have experienced similar patterns to that of tin-ventures, with very high total return in particular years—for example, during the Korean War—but generally at lower levels than tin. The year 1959 seems to have been especially profitable for the investors in both rubber and tin, with a total return on investment exceeding 100 per cent in both sectors, as shares prices boomed. It does not seem possible to isolate which specific factors would have driven the high return this particular year with any certainty, as the investors’ expectations in the first years of political independence (without nationalizations) no doubt interacted with other factors, such as the establishment of the International Tin Agreement. It is noteworthy that British investments in other sectors of the Malayan economy continued to have little impact upon the portfolio of companies in the sample, as it was the case in previous decades.
Over the whole period, colonial institutions and global and local political processes (e.g. the Japanese occupation, the “Emergency” and later decolonization) interacted with global market forces for the output from the Malayan mines and plantations. The price of the output remained one of the key factors influencing the return on investments over the long run. The correlation between the price of the output and the return on investment in a sector was, however, far from perfect, as shown in Figs. 3 and 4.
In both the cases of tin mining and rubber plantations, there seems to exist a relationship, albeit weak, between the price of the output (tin and rubber, respectively) on the international market, and the return on investments in companies involved in these sectors. The relationship is seemingly stronger in the case of tin, where both series exhibit a positive trend over time, and several of the years of particular peaks in the price also correspond to years of higher return on investment in tin mining companies. The market for rubber experienced a major boom between 1909 and 1910, which drove up the international price of rubber to extraordinarily high levels. This peak in the price of rubber is also associated with a very high return on investment, particularly in 1909. After a downfall in the 1920s, the price of rubber remained comparatively stable. The price movements that occurred did, however, to some extent also correlate with the return on investments in Malayan rubber production. In neither case is the correlation very strong, but this could be attributable to a time-lag, so that the return on investment might have responded to price changes over a slightly longer period of time.
Putting our estimates into internationally comparative perspective, the Malayan performance was very strong. Investments in Malaya exhibited a premium return of 2.7 percentage points per year above what investors could earn from investing elsewhere throughout the period under study, and 3.6 percentage points higher than what could be earned from investing in African colonies (Table 3). Compared to investments in the Netherlands Indies, the Malayan portfolio of (rubber) plantations ventures performed substantially better from the perspective of the investors over the whole period for which data are comparable (Table 3). The high return on investment can partly be explained in terms of the risk-return relationship. The average volatility of the total Malayan portfolio was 35.7 per cent for the entire period. This figure is higher than for a portfolio covering the same time and made up of colonial investments in Africa (Rönnbäck and Broberg 2019, 127), but lower than it has been reported for the Netherlands Indies (Buelens and Frankema 2015, 213). An important aspect of the relative high volatility of the Malayan portfolio was that it was so heavily dependent on tin and rubber. From an investor point of view, the high return was tempting, but the Malayan portfolio alone offered very limited opportunities for diversification.