The Financing of Malayan Rubber, 1905-23: Reply

Abstract

T HE primary objectives of my article 'The Financing of Malayan Rubber, I905-I923' were to develop two hypotheses concerning the role of international financial intermediaries involved in a capital flow from developed to less-developed countries; also, to illustrate that these hypotheses can help explain some aspects of the early financing of the Malayan rubber industry. The first hypothesis is that an important component of financial services is information provided by financial institutions concerning the capital market and alternative investments. If this is correct, it would imply that the outcome of the competition among institutions depends on the comparative advantage of different institutions in providing the currently most valuable type of information. The second hypothesis is that the operations of financial intermediaries operating in large foreign capital markets provide indirect liquidity benefits to local longterm assets which would otherwise be very illiquid in a local capital market. These hypotheses have important policy implications for less-developed countries. The effects of capital markets and financial institutions in less-developed countries have recently been stressed in some studies on economic development.' The attempt to illustrate the first hypothesis in the context of the early financing of the Malayan rubber industry required information on the history of the institutional arrangements concerning this financing as well as an estimate of the magnitude of financial services provided by different types of financial institutions. To provide this estimate, I constructed a table on the authorized capital of sterling rubber estate companies listed in the Stock Exchange Official Intelligence from I904 to I922 disaggregated by type of institution listed as the secretarial firm on the prospectus. The types of institutions considered were agency houses, firms which had commercial and/or managerial interests in Malaya and presumably had a comparative advantage in supplying information about individual Malayan rubber estates, and issuing houses, which did not have commercial or managerial interests in Malaya but presumably had other types of expertise concerning the London Stock Exchange. I also stated that this series on authorized capital was an estimate of the capital flow from Britain to Malaya. Mr Drabble and Mr Drake dispute some historical statements and interpretations made in the article, many of which do not directly involve testing the significance of either hypothesis in the Malayan case. The most important of their comments concerns my interpretation of the series on authorized capital as an estimate of the capital flow to Malaya. They are correct in pointing out possible