Enterprise & Society

Enterprise and Society 4.1 (2003) 99-138

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Jardine Matheson & Company:
The Role of External Organization in a Nineteenth-Century Trading Firm

Carol Matheson Connell

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Abstract: Jardine Matheson & Company, a Hong Kong conglomerate founded in 1832, has survived political upheaval and global and regional economic crises, transforming itself several times. From their beginnings in the commission business, William Jardine and James Matheson developed a reputation for sound financial management that furthered their trading relationships and supported their firm's expansion from agency house to managing agent to investment house between 1832 and 1885. Fundamental to Jardine Matheson's success was the strategic decision to eschew speculation and to concentrate on building a pattern of relationships within and outside the business that would foster the flow of information, the knowledge with which to interpret it, the ability to influence others, and a reputation for probity that would attract and retain trading partners.

 

Through the mid-twentieth century, all trade with the Pacific went through brokers like Jardine Matheson, the biggest and best known of the region's trading companies. Such firms provided a single source for the shipping, insuring, warehousing, marketing, and selling of goods produced in Europe and the United States to Asian markets. I focus on the early history of Jardine Matheson & Company at the beginning of private trade with India and the Far East, when the need for capabilities and market institutions far exceeded their existence. I examine the emerging industry environment, the capabilities important to the market and to Jardine Matheson's early resource and services choices, Jardine Matheson's development of an external [End Page 99] organization to facilitate the functioning of the various markets that the firm was helping to establish, and the transformation of that external organization as Jardine Matheson's business model evolved from commission-based to investment-based.

In 2002 longstanding, dense networks of relationships with buyers and suppliers, as well as informal financial credits, continued to underlie Jardine Matheson's business model and its Internet-based virtual trading network. The firm is a leader in transportation, insurance, hotels, and financial services. Jardine Matheson's entry into the global franchise business in the 1990s is an acknowledgment of the capacity for replication of positive relationships and reputations and hence of their ability to support the firm's continued growth.

The descent of Jardine Matheson can be traced through an unbroken line of partnerships that began with the earliest private traders, Cox & Reid, in 1782 (see Figure 1). The diagram also depicts the evolving relationship between Jardine Matheson & Company (the trading firm formally constituted in 1832), and Matheson & Company, constituted in 1848 when James Matheson returned to London from Hong Kong and took over the London partnership of Magniac Jardine. ¹ Matheson & Company evolved from being the London agent for Jardine Matheson and a ship charterer into an investment house and merchant banker, applying available slack resources (including the social capital and experience of retired partners, the unused capacity of Jardine's vessels, and Jardine Matheson's reputation for financial probity) to grow and transform the firm between 1832 and 1885. It was the tradition at Jardine Matheson for retiring partners to return to London and sit as directors of Matheson & Company and to play an active role in the British Parliament and on government select committees. Jardine Skinner, an agency in Calcutta founded by David Jardine (a cousin of William Jardine) and selling on behalf of Jardine Matheson, combined with Jardine Matheson to buy out the Matheson interest in Jardine Matheson & Company in 1912. ²

Theory and Literature:
Penrose and Her Legacy

I draw heavily on the work of Edith Penrose, including her 1959 Theory of the Growth of the Firm and her 1960 case study of the [End Page 100] [Begin Page 102] Hercules Powder Company. ³ Penrose's firm is both an administrative organization and a pool of productive resources, including the firm's own previously acquired or inherited resources and those it must obtain from the market in order to carry out its programs. Jardine Matheson demonstrates a close relationship between the various kinds of resources with which the firm worked and the development of the ideas, experience, and knowledge of the trading company's founders. Over time the changing experience and knowledge of James Matheson, William Jardine, and their successors affected not only the productive services available from banking and financial services, marine insurance, and shipping, but also the "demand" the firm considered relevant for its activities, leading the firm into capital and risk management, reinsurance, and shipping services in the Pacific and investment broking in London.

The story of Jardine Matheson's early growth supports a Penrosean view in which expansion must draw on the productive services, including the entrepreneurial services, of a firm's existing management. Consequently, the services available from such management set a fundamental limit to the amount of planned or executed expansion, even if all other resources are obtainable in the market. This is as true for growth by acquisition as for internal growth (although growth by acquisition will be faster and often facilitates diversification). ⁴

Essential to Penrose's theory of the growth of the firm is that there exist within every firm pools of unused productive services; these, together with the changing knowledge of management, create a productive opportunity unique for each firm. Unused productive services represent, for the enterprising firm, a challenge to innovate, an incentive to expand, and a source of competitive advantage. In a sense, the final "products" at any given time constitute just one of several ways that a firm could be using its resources. ⁵

Not only is the actual expansion of a firm related to its resources, experience, and knowledge, but also a firm's productive opportunity is shaped and limited by the ability to use resources it already has [End Page 102] and by the kinds of opportunity the firm investigates when considering expansion. Once a firm has embarked on an expansion program, events may not confirm expectations. We can also explain the reactions of the firm to disappointment—alterations in its plans and activities and the way in which it adapts (or fails to adapt)—with reference to its resources. ⁶

Uncertainty and incomplete knowledge underlie managerial decision making. ⁷ Uncertainty limits expansion to the extent that managerial resources are limited. Each new activity undertaken by the firm requires an increased input of managerial services, not only to obtain sufficient information but also to develop plans to reduce risk. The greater the risk or uncertainty, the greater the managerial task. In order to focus attention on the crucial role of a firm's inherited resources, Penrose treats the environment as an "image" in the entrepreneur's mind of the possibilities and restrictions with which he or she is confronted. Such an "image" determines behavior; whether experience confirms expectations is another story, but entrepreneurial vision or "image" forms the basis of the firm's continuous but limited growth. ⁸

Penrose illustrated her theory of the growth of the firm in a case study of the Hercules Powder Company, a spin-off of DuPont and a predecessor of Alliant Powder, a subsidiary of Alliant Techsystems. For Penrose, Hercules' creation of consumer demand was a consequence of the entrepreneurial desire to find a use for available productive resources. ⁹ The company's efforts to develop new products and to create new markets derived from its "extensive knowledge of cellulose chemistry . . . [which] has provided a continuous inducement to the firm to search for new ways of using it." ¹⁰ Hercules' technically trained sales representatives were "expected to take an active interest in the production and market problems of their customers": "This permits them to acquire an intimate knowledge of the customers' businesses and not only to demonstrate the uses of their own products and to suggest new ways of doing things, but also to adapt their products to customers' requirements and learn what kind of new products can be used." ¹¹ Among the new products developed by Hercules Powder were nitrocellulose-derived lacquers for the rapidly growing automobile industry. The company was so effective in [End Page 103] quickly meeting customer requirements that competitors acknowledged Hercules' superior business model and withdrew.

Jardine Matheson & Company's evolution from agency house to investment house to multinational, building on a core group of "agency services," provides an interesting example of Penrose's concepts of receding managerial limits, evolutionary growth of knowledge, importance of enterprise and entrepreneurial vision, respective importance of the firm and the environment, possibility of failure, and persistence of uncertainty and risk. ¹²

Capabilities

We can trace Penrose's idea of capabilities as the basis of deliberate strategic product or market choice to Adam Smith's belief that economic progress is the result of the division of labor, which progressively improves skill, dexterity, judgment, and productive capabilities of all kinds, as well as increases specialization. ¹³ George Richardson, inspired by Penrose, replaced her "resources" and "services" terminology with "capabilities" and produced an analytical framework to explain which activities are likely to be collected within a single organization, which coordinated by market transactions, and which coordinated by otherwise independent businesses. According to Richardson, cooperative relationships are set apart from market transactions by the parties' acceptance of some degree of obligation—and therefore some degree of assurance—with respect to their future conduct. Coordination is accomplished through cooperation when two or more independent organizations agree to match their related plans in advance. ¹⁴

Alfred D. Chandler, Jr., emphasized creation, maintenance, and expansion of resources and organizational capabilities as keys to competitive advantage and the continued growth of the enterprise. Highly product-specific and process-specific, these organizational [End Page 104] capabilities affected and often determined the direction and pace of small numbers of first-movers and challengers, as well as the direction and pace of the industries and national economies in which they operated. ¹⁵ Just as Penrose's theme was the interrelatedness of resources and mental models as two sources of firm distinctiveness, Chandler illustrated how resources and mental models of managers interact. ¹⁶ The accumulation of resources and the need for change demand new mental models for coping with diversification. The accumulation of resources, therefore, creates a base for organizational learning.

More recently William Lazonick cited the Penrosean firm as an example of an innovative enterprise:

Each move into a new product market not only enables the firm to utilize unused productive services but also requires investments in the creation of new productive services that are the basis for the continuing growth of the firm. These unused productive services can enable a firm to grow not only through diversification of its products but also through the acquisition and absorption of other firms that have developed complementary productive services. Key to the determination of which product opportunities the firm pursues and, in the case of merger and acquisition, which firm absorbs which, is the possession of what Penrose calls "entrepreneurial services" by the growing firm. ¹⁷

Lazonick argued that in a growing enterprise entrepreneurial services will not yield success if the firm's managers do not administer the firm's productive resources in an integrated way. Hence, administrative integration is critical to growth and to embedding innovative capability into the ongoing operations of the firm. Over time the firm uses its unique pool of resources to generate new products for competitive advantage and, more important, new unique capabilities for continued innovation. ¹⁸

The Role of the Environment

In the Penrosean firm, managers' perceptions of the opportunities resident in the business, social, and political environment of the firm [End Page 105] explain the choice of resources and services for development and growth. Although Penrose acknowledged the firm's conjectural ability to shape its "image" of the environment, she added:

There can be no question that for any particular firm the environment "determines" its opportunities, for it must take its resources as given. . . and must look to the opportunities it can find for using them for the source of its power to grow. Whether we should treat the resources of the firm or its environment as the more important factor explaining growth depends on the question we ask: if we want to explain why some firms see the environment differently, why some grow and some do not. . . or why the environment is different for every firm, we must take the "resources" approach; if we want to explain why a particular firm or group of firms with specified resources grows in the way it does, we must examine the opportunities for the use of those resources. ¹⁹

Alfred Marshall and later George Richardson provided insights into how a firm might simultaneously build a pattern of relationships and shape its environment by coordinating its activities with other firms through an external organization—that is, a network of social, technical, and commercial arrangements that link a business with its customers, suppliers, and rivals. ²⁰ According to Brian Loasby, "In developing its own organization and its particular market, each business draws on the institutions of the society within which it operates, and then develops, through a mixture of deliberate decisions and the consequences of day-to-day interactions, rules and conventions which serve to coordinate its activities and to align them with the activities of its suppliers and customers." ²¹

Lazonick acknowledged that, though "the main theoretical strength of Penrose's work is that she placed organizational learning at the center of the analysis," the "main weakness of the Penrosean 'theory of the growth of the firm' for building a theory of innovative enterprise is its implicit assumption that, in all times and places, all organizational learning is managerial learning." Penrose's theory lacks a means for integrating a learning role for the administrative, technical, and professional personnel into the managerial structure of the corporation. ²² [End Page 106]

Architecture and Organizational Learning

The Penrosean firm creates an "architecture" or "administrative framework" for learning and collaboration. This framework includes both interorganizational linkages and internal processes for learning, for the development of capabilities, for the exploitation of productive opportunities, and for the development of consistent routines important for trustworthiness, consistent patterns of behavior, and effective forms of governance.

Again, the ideas central to the "architecture" of the firm derive from Adam Smith. Reinterpreted by Penrose in The Theory of the Growth of the Firm, the division of labor both within and between firms leads to the development of skills and the perception of possibilities; even firms within a similar line of business will develop somewhat different skills and perceptions. Firms are learning organizations, continually changing to align their increasing knowledge with their productive opportunity.

Richardson extended the internal growth dynamic of the firm as Penrose described it to account for interfirm relations. Firms specialize in activities that use a similar capability and affiliate with other enterprises that specialize in complementary activities. Hence, economic activities are no longer coordinated by hierarchy within the vertically integrated enterprise or spontaneously by price in the market; they are coordinated by affiliated or networked groups of cooperating firms. Instead of isolated islands of firms, Richardson's image of industry is a "dense network of cooperation and affiliation by which firms are interrelated." ²³

Using the network as an example of administrative coordination, Penrose credited Joseph D'Cruz and Alan Rugman for their view of a network as a "governance structure for organizing exchange through cooperative, non-equity relationships among firms and non-business institutions," and Benjamin Gomes-Casseres for his understanding of a network as "groups of companies joined together in a larger overarching relationship . . . each company fulfilling a specific role within the group." ²⁴

Regarding the network as a vehicle for knowledge creation, Ikojiro Nonaka wrote of the spiral of knowledge creation, whereby individuals, then groups, and then organizations as a whole convert tacit [End Page 107] knowledge into explicit knowledge. ²⁵ Brian Loasby characterized such knowledge as coping strategies, the strict observance of routines and decision rules, the building of reserves, the generation of alternative institutions, and recordkeeping, among other artifacts, on which future decision making will be based. ²⁶

Ranjay Gulati, Nitin Nohria, and Akbar Zaheer extend firm knowledge and learning to the networks of relationships in which firms are embedded, which provide the firm with access to information, resources, markets, and technologies and with advantages from learning and scale and scope economies, while sharing risks and outsourcing value chain stages and organizational functions. In their strategic network model, industries, strategic groups, and value chain partners are seen as embedded networks of resources and capabilities extending well beyond the formal boundaries of the firm. Gulati, Nohria, and Zaheer argue that knowledge embedded in relationships can serve as a source of sustainable competitive advantage, providing valuable information that in turn provides strategic advantage by allowing the firm to act more quickly than rivals. ²⁷

The Explanation of Failure

Like capabilities, the concept of failure owes much to Adam Smith's account of the growth of knowledge through the invention and application of fallible connecting principles. Thus, according to Loasby, "a theory of economic development that respects both human abilities and the historical record must rest on conjecture and exposure to refutation rather than rational expectations." ²⁸ In a Penrosean firm failure can be attributed to the firm's misunderstanding of its own capabilities or of the capabilities required in a new market. Loasby argues that "Penrose's most significant analytical innovation"—that is, the distinction between resources and the inputs into production, which she called productive services—"inserts fallible conjecture into the firm's understanding of its capabilities, its environment, and its opportunities." ²⁹ [End Page 108]

Knowledge and learning often come at the expense of failure, one of the outcomes of uncertainty. Elaborating on the uncertainty that underlies business decisions, Frank Knight writes, "The business man himself not merely forms the best estimate he can of the outcome of his actions but he is likely to estimate the probability that his estimate is correct." In a world of change and uncertainty, "The essence of the situation is action according to opinion, of greater or less foundation and value, neither entire ignorance nor complete and perfect information, but partial knowledge." ³⁰

Competitive advantage aside, the knowledge of the individual and that of the firm serve a supremely practical purpose: they are the best defense individuals and firms have against uncertainty. I base my study on the notion that auditing the past can provide insight and lead to a better understanding of current knowledge. Knight provides support for this approach when he says that "in order to live intelligently in our world. . . we must use the principle that things similar in some respects will behave similarly in certain other respects even when they are very different in still other respects." ³¹ Lazonick, too, would appear to provide support for such an undertaking:

To make use of history to understand the process of economic development, it is not enough to say, as have proponents of "path dependency," that "history matters." Depending on the configuration of industrial, organizational, and institutional conditions, path dependency can either promote or constrain the innovation process, and for the analysis of economic development, it is of central importance to identify what social conditions have which impact. For a particular business enterprise or national industry, a set of social conditions that yielded innovation and economic development in the past may now become obstacles to change. ³²

This study of Jardine Matheson & Company contributes to the Penrosean literature an empirical analysis of a nineteenth-century trading services firm that grew to become an investment house and later a multinational conglomerate by offering a core set of "agency services" to upstream and downstream value chain partners in a dozen or more industries. These industries sat in a maritime version of the Marshallian industrial district—the deep-water ports of the Pacific, Indian, and South Atlantic oceans—related to the firm through its minority investments. Such a definition of an industrial [End Page 109] district reflects Jardine Matheson's "image" of its trading environment and potential productive opportunity. Without a land-based trading district in its early history, the firm's innovative and visionary founders thought in terms of oceans and ports rather than of bricks and mortar; in that context, it is not surprising that James Matheson ran the business for three years on board the ship Hercules after Jardine Matheson was expelled from China during the First Opium War.

The dense network of Richardsonian affiliative and cooperative relationships allowed Jardine Matheson to exert administrative coordination over a vast trading empire that was held together through two hundred years of correspondence delivered from principal to agent by slaver, by clipper, and by steamship, as Jardine Matheson sought faster vessels for communication. By the mid-twentieth century, these relationships were blended together through minority investments that provided a balance of administrative control and autonomy for associated firms. ³³

I examine the industry environment and Jardine Matheson's perception of productive opportunities between 1832, the year the firm was formally constituted, and 1885, the year the firm's accounts begin to show significant investments in manufacturing, mines, and railroads. The opening and closing years find the firm in a different industry, with different competitors. The resulting maps reveal the extent to which business models changed, geographic boundaries moved or disappeared, new competitors emerged, and new relationships transformed competitors into collaborators for survival and advantage in Hong Kong and among the Southeast Asian nations.

Environment and Industry, 1832-1885

There were two strategic groups in the early years covered by this study: the East India Company and the growing private trade. In [End Page 110] 1832 trading in commodities was still carried on primarily by the British East India Company, which had dominated trade for two centuries. It was the operational arm of Britain in China, Australia, India, the American colonies, and the West Indies, even raising armies and minting money. The East India Company's monopoly on the India trade ended in 1813, though the company continued to operate through 1858. ³⁴ Trade within the Pacific, among India, the states of the Eastern Archipelago, and China—as opposed to trade inward to and outward from that area—was known from the end of the seventeenth century until the middle of the nineteenth century as "the country trade." Originally also carried on by the British East India Company, such trade increasingly was left to private merchants—hence the term "private trade." The relationship between the British East India Company and the private trade was symbiotic: a portion of the cash raised by the private trade financed the East India Company's China tea purchases. ³⁵

The private trade was characterized by independent merchants who, for low working capital, could earn commissions of up to 45 percent of every transaction by absorbing the risks of their customers. The wealthier of these merchants, through investment or partnerships, integrated forward into shipping, finance, and insurance to appropriate more of the transactions' value. In 1832 the largest of the private traders in the Canton trading district, with large teams of agents working on their behalf, were Jardine Matheson & Company and Dent & Company. ³⁶

The principal trends in the industry in 1832 were the emergence of the agency house, with many associated private merchants, and the institutionalization of the group of services that became known [End Page 111] as "agency services." Although the agency house was primarily a trading firm, through its agency services it also acted as banker, bill broker, ship owner, freighter, insurance agent, and purveyor, maintaining a growing network of branch houses and agents. The agency house reduced the entry barriers for would-be traders with low working capital by allowing them to become associated agents. The agency house also reduced the risks for buyers and sellers, offering credit or insurance at each stage of a transaction for a commission. The environment for trade in 1832 was volatile, because Chinese government pursuit of private traders intermittently suspended business activities and because piracy was an everyday threat.

By 1885 the strategic groups had changed; the trading firm with associated investment house was now in competition with banks and investment houses, located not in the Far East but in London. The major members of the strategic group were Jardine Matheson & Company and Butterfield & Swire—still competing in the Far East with a hundred other agency houses—and the London investment offices of Matheson & Company, John Swire & Sons, and the Hongkong & Shanghai Bank.

The principal trends in the 1885 industry were the development of the "free-standing companies" associated with a Pacific or otherwise [End Page 112] distant trading firm and the investment in infrastructure (railroads) and manufactures, raw materials, and mines in the Far East, South Africa, and even parts of Southern Europe. Knowledge of investment opportunities and operational management of the mining, manufacturing, and railroad projects were the roles that fell to the Far East trading company. ³⁷ The associated investment house lined up the investors and offered an "independent" evaluation of the merits of the investment. The Treaty Port system opened markets to direct and dependable trade at fixed tariffs, reducing trading risk and encouraging commerce and investment.

Demand and Markets, 1832-1885

In 1832 the long list of commodities offered for sale could be reduced to four staples: tea and silk from China (sold to Great Britain and Europe), cotton textiles from Great Britain and India (sold to China), and opium from India (sold to China). The legitimate trading frontier was limited to a thin sliver of Canton. Merchants were allowed to trade only indirectly with the Chinese through the intermediacy of the Co-Hong merchants. The opium trade was conducted offshore, along the China Coast. Hong Kong did not become available to trade until after the First Opium War, when it was ceded to Britain under the Treaty of Nanking in 1842. In 1844 Jardine Matheson & Company became the first trading firm to buy a plot of land in Hong Kong and to move its head office there.

All of this trade was characterized by high risk. Product quality affected demand in the case of tea, silk, and cotton. Local weather and transport could affect the quality of tea, and certain higher grades were sometimes unavailable. Tea had to be kept dry and suffered if it was at sea too long, resulting in lower prices paid by London tea buyers. Weather and disease affected silk culture; high- quality varieties of silk were not always obtainable and lesser quality silk did not sell. British cottons had limited appeal in China, but were required to off-load excess manufactures. Private traders had more success selling Madras cotton to the Chinese. Opium was illegal, and its sale suffered when the Opium Commissioner enforced antismoking laws.

In attempts to offset these risks in 1832, buyers and sellers learned about prices, quantities, and commodity shipments from trade papers like the Canton Register, James Matheson's biweekly publication, [End Page 113] produced from 1827 to 1843. The first English-language newspaper in China, the Canton Register also provided complete information from its broad trading network on social and political events in the Americas, Europe, and Asia. Communications among the private traders, their suppliers, and major customers, as well as other trade papers like the Straits Times, also added to information. The Co-Hong merchants in China communicated with their native clientele.

By 1885, in contrast, the Treaty Port System guaranteed a minimum purchase of British cotton, although the rich agency houses formed joint ventures for textile manufacture in China, as well as for cotton and silk factories in Japan. By this time the agency houses brokered all of the tea and silk sales; the East India Company was long out of the picture.

Costs and Value, 1832-1885

The value chain of the trading firm in 1832 began with suppliers in India, loading goods onto a ship bound for Canton. The merchant's bank made payment by a letter of credit. Goods were sold to Co-Hong merchants in Canton (on financing terms). In return, teas and silks were purchased on behalf of merchants in London, Glasgow, and the West Indies (involving finance credit or insurance). Goods transported by ship were sold in the West Indies, London, and Manchester, where tin, steel, textiles, and other goods were picked up for sale on consignment. Each stage of the value chain had associated risks: from India to Canton, price volatility, piracy or shipwreck; at Canton, loan default on the part of Co-Hong merchants, and Chinese government restrictions on trade; from Canton to London, weather that could slow arrival or damage goods and price volatility. In 1832 firms with a reputation for strong financial management as well as a proven architecture (a long-lasting network of local relationships) achieved competitive advantage and appropriated more value than their peers.

The value chain looked different in 1885 because the Treaty Ports had created new markets for supply and demand. Suppliers in India, Japan, Singapore, and Malaysia loaded their goods onto merchant steamers bound for one of fifteen Treaty Ports in China. The merchant's bank continued to pay by a letter of credit. Goods were sold to merchants in the Treaty Ports (on financing terms); tea and silks were purchased for sale or resale in London (for finance credit and insurance). At London, steel and textiles were purchased for resale at the Treaty Ports (on consignment). The transaction opportunities [End Page 114] (and credit financing opportunities) increased as the number of supplier and purchaser markets increased.

In 1885 an insufficient supply of goods from India and Japan influenced value, resulting in higher prices. At the Treaty Ports, tariff regulation was an issue. In London, angry merchants pushed the [End Page 115] agency houses to sell more textiles for China. Four firms established before 1885 were thriving and adding value, as evidenced in their ability to undertake investments (see Table 1). ³⁸

Distinctive Capabilities and Strategic Assets, 1832-1885

In 1832 only the British East India Company enjoyed strategic assets (advantages external to the capabilities of the firm). Innovations in speed, routes, financing, and communications were important to competitive advantage. Architecture was essential to what was essentially an interfirm market; strong architecture provided the information flow that communicated information about supply, demand, and risk conditions. A trading firm's ability to broker risks depended on a reputation for sound financial judgment. There were a very few firms in the industry that could charge higher prices because of this reputation.

By 1885 the business model had changed, from pure trading house to trading house with associated investment house. Innovation was critical to respond to new opportunities to benefit from investment in fixed assets and from license and contract arrangements. Trading firms put their architecture to work on identifying investment opportunities in the supply and demand markets. The reputations of a trading house and an investment house were separate; [End Page 116] hence, trading firms moved to establish independent free-standing companies with veto power over investment proposals. Members of the trading firms who had gone home to London and who had constituencies there became the heads of the investment houses. Relationships with the Chinese government as an investment partner were critical.

By 1885 it is evident that firms were looking for fixed, external advantages, evidenced by the development of the Treaty Port System, railway contracts, licensed shipping routes, and investments in fixed assets like gold and tin mines. A reliable return through the rule of law was the common, underlying motivation for this search for strategic assets: treaties guaranteed trade and line-of-sight duties; railway contracts were supported by the Chinese government; and what became known as the Far East Shipping Conferences amounted to industry self-regulation. It is obvious from the behavior of firms in 1885 that the acquisition of strategic assets was seen by participants as a guarantee of sustainability and appropriability beyond that afforded by distinctive capabilities alone.

Sources of Competitive Advantage

In 1832 competitive advantage depended on architecture, reputation, and innovation. Firms strong in these distinctive capabilities attracted more agents and more business-to-business trade, as participants in the trade sought to reduce their own risk. The advantages provided by architecture and reputation were sustainable, because they were built on a self-selected business behavior that was also very important to the China market, where long-term relationships were favored over spot contracts.

In 1832 the marginal firm (an individual merchant or a private partnership) could appropriate 35 percent of earnings; of the remaining 65 percent, 10 percent covered a meager office, a warehouse, and staff, and 55 percent went to cost of goods sold. Competitive advantage was not necessarily reflected in added value, because it was the practice of many early firms for partners to remove all of their accumulated capital when they retired from the business. Therefore, available financials give an incomplete view of the money available to the business.

By 1885 architecture and innovation remained as important as they had been in 1832, but reputation became far more important as a capability and as a drawing-card to attract strategic assets, such as government contracts, licenses, and concessions, as well as London investors for raw materials and mining projects. The advantage derived from distinctive capabilities was sustainable, so long as firms [End Page 117] continued to grow and evolve those capabilities to address changes in the business model.

Jardine Matheson & Company, Firm Response and Strategy, 1832-1885

Business-to-Business on Commission

From 1832 and for a hundred years thereafter, Jardine Matheson's business was risk brokering for buyers and sellers of goods to and from Europe and Asia, based entirely on commissions. The firm extracted commissions on sixteen separate agency services: sales, returns, cost and freight, guarantees of bills, ship's disbursement, insurance, chartering ships, receiving inbound freight, obtaining outbound freight, settling insurance losses, negotiating bills of exchange, arbitration of debts, debt settlement, managing estates, executors of estates, and transshipping goods. Jardine Matheson could charge for these "agency" services because the China trade was very risky and because participants in the business (usually smaller businesses with low working capital, operating at a distance from the trade, from Latin America or Europe, for example) were less knowledgeable and lacked the clout of a big operator like Jardine Matheson. Hence, they preferred to have business risk managed by a firm with market knowledge, reputation, influence, and strong financial management skills.

The competitive environment was highly unstable; only the intervention of the British government could have increased stability. Speculation and reliance on credit meant that firms were only as strong as their decisions were sound; access to information was critical and an important differentiator. Market segmentation was very rudimentary, and in China the trading frontier before 1842 was limited to Canton.

Reputation as Capability

In 1832 a firm's reputation was a distinctive capability. Absent an unstable environment, Jardine Matheson might have begun extending its capability into Europe and the Americas, because the Canton trading environment was filled with Spanish, Portuguese, and North American traders who had come to know and trust Jardine Matheson. In fact, Jardine Matheson had extended its capability to London, where partners served as Members of Parliament and sat on the Select Committee for Trade. In many respects the firm's reputation was [End Page 118] a lightning rod for suppliers, agents, and customers, as well as for private individuals who used the trading firm as a deposit bank, earning returns of 8 percent or more. Jardine Matheson's practice of resorting to American bills on London limited the firm's exposure during what became known as the "Calcutta Credit Crisis" of 1829-1834, when many other trading firms, who exchanged each other's bills, were bankrupted, including the richest merchant of them all, Palmer & Company. Jardine Matheson's bills of credit were trustworthy, and banks in London and the United States backed them. The Jardine Matheson archives confirm the firm's use of its agents to keep an eye on the credit-worthiness of the banks with which it did business. Hence, Jardine Matheson enjoyed an advantage over firms that did not have its superior reputation or its routines for effective financial management.

From Canton in 1832 James Matheson wrote about Jardine Matheson's financial policy to his nephew Hugh, then a partner in Lyall Matheson & Company, Calcutta:

Of the bills which we endorse, those on Baring Brothers & Co. are always drawn under credits either from themselves or their attorney [End Page 119] at New York, Mr. T. W. Ward, who has authority for the purpose. Other bills are drawn under credits from a known capitalist John Jacob Astor of New York, who owns lands almost equal to a principality in the United States. Bills on Gledstone [sic], Drysdale & Co. are either drawn under credits from them or on the security of bills of lading for goods. . . . Thomas Wyatt on whom we also pass bills is a still greater capitalist 'tho only an oilman. . . . On the whole, we feel that we are now committing ourselves with people of far greater solidity than those whose bills are vaunted forth at 7/10 -1/2 at Calcutta. And if any disappointment should occur to us, divided as our risk is among various parties, it cannot but prove comparatively insignificant. ³⁹

In 1835 Hollingworth Magniac, with John Abel Smith, MP, and Oswald Smith, established the firm of Magniac Smith & Company. William Jardine, who claimed to be "fully aware of the wealth, respectability and high character of the parties," agreed to make them London agents with this reservation:

At no time shall it be expedient that we should give up the option of carrying on transactions with other London houses. . . . The principal advantage we look to from our house connection is the certainty of our Bills being protected to whatever extent we may have occasion to draw in the course of any one season, without reference to immediately available assets to meet them. ⁴⁰

On the strength of its reputation and relationships, Jardine Matheson & Company was thus able to build a banking business, finance shipments, open credit, and offer general merchant banking facilities. Repeatedly, Jardine Matheson correspondents inveigh against speculation and advise its agents and affiliates to adhere to a strict commission basis, under which competitive advantage was fully appropriable to the trading firm. Given the importance of reputation—a time- and location-based capability—Jardine Matheson could expect to sustain its advantage until the requirements of the market changed.

Building Market Institutions to Insure against High Risk

In addition to banking, another major aspect of the agency business that sprang from the China trade was marine insurance, indispensable [End Page 120] in a trade of rich cargo and high risk. In 1801 no public insurance office of any kind existed in Canton; instead, several individuals combined in temporary associations to underwrite a ship and its cargo. The Canton Insurance Society, founded in 1805, lasted thirty years, managed alternately every five years by the Davidson-Dent house and the Beale-Magniac-Jardine firm. In 1832 Jardine Matheson & Company, as managers of the 10th Canton Insurance Company, bestowed the Calcutta agency on their protégé, Lyall Matheson & Company. A list published in the February 1829 Canton Register shows Magniac & Company as agents of six insurance companies (including the 8th Canton Insurance Company), and Dent & Company as agents of four. In 1829 Jardine started a private underwriting account "J. M. and Friends," with the firm holding twenty of the thirty-six shares (each worth $1,000 per annum). As the volume of the China trade increased, insurance revenue increased. In 1835, when the 10th Canton office closed, Dent decided to set up the China Insurance Company on its own, leaving Canton Insurance in the hands of Jardine Matheson & Company. The Canton Insurance Company laid the foundation for Jardine Matheson's large interest in many forms of insurance services. The increased cash flow from insurance services enabled the firm to invest in new businesses, particularly in shipping.

Building Dominance in Shipping

The firm's shipping business was inseparable from its trading activities. For Jardine Matheson's London agents (Magniac Smith, Magniac Jardine, and later Matheson & Company), canvassing for ship consignments was important in order to maximize capacity utilization on incoming and outgoing ships. This activity led to close relationships with shipowners and extended outward cargoes—for example, into coal with the introduction of steamships in the Far East. Investment in technology for rapid transport and communication was important to competitive advantage, particularly in tea sales.

Jardine Matheson also invested in the shipping interests of other firms—for example, in Russell & Company's shipping operations on the Yangtze River in 1860 and in the China Coast Steam Navigation Company in 1872. The China Coast Company was the precursor to Jardine Matheson's Indo-China Steam Navigation Company, formed in London in 1881, which brought together all the ships and operations on the Yangtze. From an initial twelve ships, the Indo-China Steam Navigation Company expanded to twenty ships at 100,000 tons by 1905. From 1864 to 1912 the bulk of the coasting trade was in the hands of the Indo-China Steamship Company (Jardine Matheson's [End Page 121] subsidiary) and the China Navigation Company (owned by Butterfield & Swire).

External Organization: Administrative Coordination at a Distance

Its inherited network of agents from past partnerships (the inherited managerial resources important to growth in the Penrosean firm) allowed Jardine Matheson to build on a foundation of known routines and trusted business behaviors, avoiding both the learning curve and the expense of building a business organization from scratch. Jardine Matheson inherited from Magniac & Company its relationship with Jamsetjee Jeejeebhoy, the largest supplier of opium and cotton in India, and a group of some fifty agents in Bombay, Madras, and Calcutta. The relationship was close and based on trust; the firm provided Jamsetjee with frequent information about political conditions and market prices in China. Such networks provided regular information on the prices and availability of commodities that informed James Matheson's Canton Register and the regular dispatches Jardine Matheson sent to its agents, suppliers, and buyers by ship.

Correspondence was the principal means of setting rules, sharing market information, building relationships with suppliers and agents, communicating strategy to partners, training and disciplining agents, organizing industry support, and communicating with and influencing the British government. The firm's major markets in 1832 (those in which its distinctive capabilities were most valuable) were Canton and Macau (a Portuguese colony near Hong Kong), for the purchase of tea and silk financed by cash and opium; India, from which opium was purchased with bills of credit; and Great Britain, where the firm bought cotton, paid for with bills of credit, and sold tea and silk. Spain, Portugal, and the Americas sought trade opportunities in Canton and Macau; access to those nationals extended Jardine Matheson's market and information reach well beyond the Far East. In addition, the Jardine Matheson archives include a rich correspondence between the firm and its contacts in areas linked to the firm's major markets by scale and scope economies: the East Indies, the source of many commodities; Ceylon, becoming a tea-producing nation; and Australia, becoming a source of wool and other commodities (the latter two with Chinese labor).

Simple Decision Rules for Managing Uncertainty

With competitors seesawing from stability to near bankruptcy, Jardine Matheson offered a safe haven to customers and suppliers who [End Page 122] banked, borrowed, insured, and shipped with the firm. It was important to Jardine's reputation and to the firm's own stability that associated agents and staff follow closely the firm's prohibition against speculation on their own account, particularly speculation in commodities. As James Matheson explained to Charles Thomas of Singapore, who was urging a coffee investment on Matheson:

While you speculate in the face of a high exchange and at your own risk, your neighbors do so at the risk of their constituents and often for the sake of effecting sales at anything likely to pay an indifferent exchange. Hence, it generally happens that those who are first in the market on these occasions, whether from priority of information or superior discernment in foreseeing a use, make handsome profits, while those who follow experience a very different fate. It is not, however, because of these views that we feel an insuperable objection to incur the risk of such speculation. They are foreign to the line of our business, and we have neither the time nor inclination for acquiring the requisite information to give us a fair chance of avoiding the most serious errors. ⁴¹

Inculcating sound financial judgment in its agents was the most pressing management issue Jardine Matheson & Company faced in the firm's early years. Matheson sharply reprimanded the firm of E. de Otadui (a Portuguese agent working in Manila) and his American partner, John Shillaber, for "the injudiciousness of the speculative views, which you have allowed yourselves to be led away by, as much to the injury of your friends. You will probably accuse your bad fortune, but if this has been the case during a large portion of your life, is it not high time, at length to avoid exposing yourself to a choice which has proved so uniformly ruinous." ⁴² Again, to Otadui:

Sincerely desirous as we are of the prosperity of your house, and of contributing to it by every means in our power, it is a service of great regret to us that our wishes should to all appearance have been hitherto thwarted in this respect. And we are anxious that a better system should, if possible, be adopted to insure you enjoying the full advantage of the extensive agency business which you have the means of commanding. I have written strongly to Mr. Shillaber my opinion of the injudicious magnitude and seemingly wild character of his speculative views. ⁴³ [End Page 123]

In addition to speculation, the state of advances was a common concern. Indeed, the topics were interrelated, since speculation led to the requests for advances and loans so anathema to the firm. In a letter of May 1, 1838, to John Purvis in London, James Matheson wrote the following: "We must confess however it is with some reluctance we agree to this, experiences here show that such advances in place of benefiting the receivers are too apt to accumulate with a still larger debt. It will be a source of much satisfaction to us, should your case prove to be an exception to the general rule." ⁴⁴ James Matheson chides the firm's Bombay agent De Vitre & Company: "Excuse my mentioning to you that it would be some satisfaction to me if you could manage to square up your account with us about once a year, if not putting you to much inconvenience. Your balance would thus be really what it ought to be, say, a series of temporary advances in anticipation of your remittances and not a permanent loan forming a part of your trading capital." ⁴⁵

Discipline at a distance was not limited to correspondence. Jardine Matheson sometimes sent one of its agents to oversee the finances of a fractious firm, as in the case of Otadui & Company. In the early twentieth century Jardine Matheson shut down representatives' offices if the agents engaged in speculation on their own account. ⁴⁶

Building a Reputation for Regular and Candid Information

A network of correspondents in East Asia, Europe, South America, and Africa, including the commanders of Jardine Matheson's vessels, supplied information on prices, markets, exchange rates, and political events, some of which was communicated to a larger audience by the Canton Register, and some of which was withheld for Jardine Matheson's own benefit. Beginning in 1848 through 1870, each commander of a Jardine vessel was required to submit this information in a formal monthly report. Jardine Matheson & Company depended on Jamsetjee Jeejeebhoy and others for their knowledge of the Malwa crop and Bombay market trends to prepare instructions for commanders on the coast. Jardine, Skinner in Calcutta also informed Jardine Matheson about the monthly auctions, watched market trends, and forwarded the official reports of the opium agencies. [End Page 124]

Developing a Relationship with the Government in China

The East India Company had acted on the authority of the Crown as an arm of the British government with a militia of its own, whereas the private trade in China had no authority and no protection. The object of its on-again, off-again relationships with government, British Parliamentary or Chinese, was trade. The relationship went through three phases: first, a campaign to engage with guns or diplomacy all British traders and suppliers in China and India in support of the British government's intervention in trade; second, a campaign to enlist all foreign traders in pursuit of the establishment of free trade at negotiated Treaty Ports; and third, a campaign to provide loans to the Chinese government for armaments and infrastructure, often involving the collaboration of peer companies and competitors.

Jardine Matheson held no strategic assets in 1832 but tried successfully to build influence by entertaining Her Majesty's Superintendent of Trade in Canton and in London seeking election of owner family members to Parliament. Elected as the Liberal Member at Ashburton in the general election of 1841, James Matheson succeeded William Jardine after Jardine's death in 1843. The firm's Parliamentary influence continued until disenfranchisement of the seat in 1868.

James Matheson campaigned for British government protection of the right of free trade where there was an established precedent of such trade. In 1828 he delivered an address on the subject to Parliament, subsequently published in 1836. Matheson directed his Present Position and Prospects of the British Trade with China to the House of Commons to argue that, the historical precedents of trade between China and Great Britain having been established "for a couple of centuries," the merchants of Canton now

deny their [China's] right to expel us from China; or equally effectually to attain that object, by imposing ruinous exactions, and inflicting such insults and degradations as would render it impossible for us, with a due regard either to individual or national honour, to continue our intercourse. It is a sound and settled principle of law, applicable equally to nations and individuals that no one shall be permitted to do that indirectly, which it would be unlawful to do directly. ⁴⁷

Upon joining Magniac & Company, James Matheson solicited the Bombay and Canton merchants to sign a petition to Parliament supporting [End Page 125] his treatise. In a letter to Jamsetjee Jeejeebhoy, typical of many of the period, he argued:

As you must feel interested in whatever tends to the improvement of our commercial relations with China, I take this opportunity of enclosing a copy of a Petition calling the attention of the House of Commons to the subject signed by every British subject here, out of the Company's employ, except Mr. L. Dent and Capt. Glover. Much good has already been done by the energetic measures adopted. ⁴⁸

In 1841 the firm persuaded the British Foreign Secretary Lord Palmerston to send warships to China to arrange for reparations to be made for 20,000 chests of opium that the Chinese authorities had seized. After losing the ensuing hostilities (known as the First Opium War), China was forced to sign the Treaty of Nanking in 1842, which awarded reparations to the British traders. The treaty also opened the ports of Canton, Amoy, Foochow, Ningpo, and Shanghai and ceded the island of Hong Kong to Britain. The second phase of the relationship with the Chinese government had begun.

After continued hostilities a Second Opium War broke out in 1860. As victors, the British won virtually unrestricted commercial rights to conduct business in China, but so did other trading nations, including France, Germany, and the United States. The firm was substantively involved in the development of the Treaty Port structure, which established a system of customs duties at the ports to replace the old tribute system under which gifts and respect had been paid to the Imperial throne for the privilege of conducting trade. The firm had developed and maintained close relations with both Chinese and British leaders, always attempting to find the most mutually beneficial instruments of influence.

After many years of seeking Parliamentary assistance on behalf of the merchants of Canton (and after many years of making minor loans at interest to officials and Chinese merchants), Jardine Matheson was involved in the first sizable loan to the Imperial government (Þbp400,000 at 15 percent in April 1867, guaranteed by the customs revenue) for China's campaign against the Moslem rebels. Jardine Matheson was asked for Þbp200,000. Peking did not authorize further provincial loans until 1874 when Þbp600,000 was needed, also to finance military operations. The firm declined the whole amount but offered Þbp150,000, if customs security were again provided. ⁴⁹ [End Page 126]

The opening of the Yangtze River, the third phase of the firm's relationship with the Chinese government, raised Jardine Matheson & Company's confidence in a Chinese government-directed program of economic development for China. Nevertheless, the participation of foreigners in China's external trade, as owners or agents in the exchange of goods, was still restricted at all open ports except Shanghai and Hong Kong, and the auxiliary services of trade remained vital to the prosperity of foreigners in China. Jardine Matheson & Company reacted to these developments with an increased emphasis on agency services (finance, insurance, and shipping), as well as facilitation of Chinese government loans and industrial projects and the pursuit of cooperation and joint investment with the emerging Chinese merchant community.

From 1885 Jardine Matheson was primarily interested in railway contracts. Loans, however large and profitable, were regarded as a means of obtaining leverage with the Chinese officials responsible for the award of these contracts. Moreover, China was not alone; Japan, Siam, Singapore, and other Southeast Asian nations welcomed foreign investment. This was the beginning of significant foreign direct investment by British entrepreneurs.

Jardine Matheson had financial strength; the firm's sustainability in the Far East depended on its ability to lend funds and generate investment capital. But Jardine Matheson was increasingly in competition with banks, as well as with other trading firms, for the privilege. The acquisition of strategic assets such as railway contracts involved a formidable capital investment, often pursued with a partner. In the case of the railroads, the firm's partner was its former shipping competitor, Butterfield & Swire.

By 1885 Jardine Matheson's relevant markets were the fifteen Treaty Ports of China and the newer Treaty Ports in Japan. Through Matheson & Company, London, the firm was engaged in joint ventures in treaty territories such as Singapore, the Straits, Malaysia, Siam, and Borneo for tin, rubber, petroleum, and gold.

The Evolving External Organization:
From Trading House to Investment House

The three agency services derived from trading (banking, shipping, and insurance) dominated the Hong Kong investment market and reflected the commercial character of the Treaty Port system. From the 1870s forward Jardine Matheson and its competitors made substantial investments in joint-stock enterprises in the service of trade.

By 1885 Jardine Matheson had investments in wharf property, [End Page 127] piers, and godowns (warehouses), the expansion of insurance services, shipping, and sugar refining (see Table 2). Funded with the retained earnings of trading profits, Jardine Matheson & Company opened Ewo Silk Filature in 1895 and Ewo Cotton Spinning and Weaving Company in 1897 to meet the incipient Japanese competition and to internalize the supply chain. ⁵⁰

After a period of opposition, during which Jardine Matheson and its founders perceived the Hongkong and Shanghai Bank as a direct competitor for banking services, Jardine Matheson taipan William Keswick, a great-nephew of William Jardine, joined the bank's board of directors in 1877 and later became its chairman. Although the firm had early reservations about board membership because of the bank's direct access to member firm finances, Jardine Matheson was soon joined on the board by representatives of collaborator-competitors such as Butterfield & Swire and Sassoon. The advantages of board membership were access to investment and shared financing opportunities, not only in China and Hong Kong but also in the bank's branch markets. Early in 1898 the Hongkong and Shanghai Banking Corporation and Jardine Matheson & Company jointly created the British and Chinese Corporation, linking the Yangtze River to the interior by rail to facilitate the transportation of goods. There was intense competition, and eventual collaboration, with German, American, and French interests in the construction of railways. The combined contribution of Jardine Matheson and the Hongkong and [End Page 128] Shanghai Bank (operating as the British and Chinese Corporation) to railway development was Þbp26 million (see Table 3). ⁵¹

New Opportunities for Exploration

Jardine Matheson's shipping business and management communications brought the existence of new investment opportunities to the attention of the firm and its network. Because the cash contribution necessary to fund massive infrastructure or mining projects was beyond the means of a single firm, collaboration was necessary to allow participation and eventual gain from such investments.

Natural resources were being developed at a dramatic pace throughout Asia from the 1860s through 1914. Investment in these regions was made more attractive to nominally British, Asia-based investors and their investment groups in London because of the relationship between Britain and countries under treaty or protection. These countries included the Crown Colony of the Straits Settlements (comprising Singapore, Penang, Malacca, Province Wellesley, and the Dindings), the four Malay States of Perak (Selangor, Negri, Sembilan, and Pahang), and the five Federated Malay States (Johore, Terengganu, Kelantan, Kedah, and Perlis).

Singapore refined tin not only from Malaya but also from Siam, Indo-China, Burma, Australia, China, and Central and South Africa. [End Page 129] Railways, necessary for transporting tin from the mining center of Larut to Singapore's Port Weld (8 miles distant on a deep-water inlet of the Larut River) were constructed in 1884. In the same year a railway 22 miles long was built from Kuala Lumpur to Klang. In 1895 a railway was completed from the port of Teluk Anson to Ipoh. The western Coast Railway was completed, linking Singapore with Bangkok through Kedah. There were 1,909 miles of road and 805 miles of railways on the Malay Peninsula by 1914. ⁵²

Drilling for oil in Burma began in 1887. North Borneo began petroleum production in 1910, when the first well was sunk in Sarawak. To transport the oil, railways were built to link Rangoon to Prome in 1877 and to Mandalay in 1889; a branch line from Thazi to Myingyan was completed in November 1899. ⁵³ All of these enterprises attracted British investment and offered new opportunities for firms like Jardine Matheson.

Trade with Japan, initiated after the first Treaty Ports there were opened in 1854, involved exportation of raw materials (cotton from India; rubber, iron ore, tin, and spices from Malaya, the Netherlands, East Indies, Siam, Indo-China, Burma and Borneo—largely through Singapore, which had become a great entrepôt for the Western Pacific [End Page 130] trade—as well as wool from Australia and timber and pulp from Canada). Like China and the other Pacific markets, Japan needed foreign capital. The first foreign loan, which was for railway construction, was floated in London in 1870 and secured on customs duties and railway earnings. ⁵⁴

After 1870 Jardine Matheson & Company placed emphasis on Japan and began to explore new business opportunities in Southeast Asia, including tin mines at Selangor, Malaya, railways and mines in northwest Korea, and copper ore on the Yangtze. The company began selling small amounts of Russian oil (carried via Suez) at Shanghai in the early 1870s, and by 1884 imports had risen to 839,000 gallons. Jardine Matheson began to import American oil in 1881 and handled smaller consignments of Sumatran oil from 1883; the firm also acted as the agent for Tide Water Oil Company, a Standard Oil associate. ⁵⁵

Jardine Matheson and Early Foreign Direct Investment

Companies like Jardine Matheson (or Matheson & Company, its investment arm) made substantial direct foreign investments in Asian development. The firm actively sought other investment opportunities in Europe, the United States, and Latin America. Matheson & Company provided stock or investment promotion and legal services; but, even more important, the existence of a British company, traded on British markets, with securities denominated in sterling, encouraged the investment of British individuals and financial intermediaries. Matheson & Company connected the overseas projects to potential investors. The skills acquired in completing one venture enabled the promoter to repeat its successes many times and to develop a reputation for experience and access to resources.

Jardine Matheson was increasingly an investment company in search of strategic assets on which to build sustainable advantage and added value. The firm's Far East trade changed dramatically from 1832 to 1885. Interfirm credits were a continuing fact of merchant life—but they now were offered by E. D. Sassoon & Company to the opium producers in India, at the far upstream end of the value chain, an innovation that gained the Bombay firm advantage over the former opium leader, Jardine Matheson & Company. Another of Jardine Matheson's competitors, Butterfield & Swire, established in Shanghai in 1848, bought the American shipbuilding firm Russell & [End Page 131] Company and became the largest shipper in the region. Jardine Matheson sought to establish its own advantage in investment, through joint ventures in sugar, silk, textiles, cold storage, warehousing, and docks in Hong Kong and Japan. Through Matheson & Company, its London investment house, by 1885 it was well diversified in mining, manufacturing, and railway investments.

Dynamics of the Growth of Jardine Matheson and the Theory of the Growth of the Firm

These research findings support a Penrosean interpretation, basing the growth of Jardine Matheson & Company on the firm's initial resources and capabilities, with an evolving strategy to take advantage of manager-perceived opportunities to capture value. The resource and services choices made by Jardine Matheson were necessitated by the trading environment, including distance, risk, and the cultural divide between Chinese and Indian and private English participants, as well as the piracy that prevailed on the high seas and coastal waters. The desire for security was paramount among participants in the burgeoning private trade. Trading credits, loans, and insurance on every facet of the trade reduced risk for buyers and sellers; hence, financial management, insurance, banking, shipping, and trading became the cluster of capabilities known as "agency services." The security of buyers and sellers depended largely on the financial probity and judgment of the agency house, intangible factors ascertainable largely through reputation if not actual experience. Realizing how business continuity depended on favorable word of mouth, Jardine Matheson jealously guarded its own financial reputation and that of the firms on which its activities depended.

Jardine Matheson's External Organization

A central theme of this work is the Richardsonian view that Jardine Matheson's development of a pattern of external relationships would foster the flow of information, the knowledge with which to interpret it, the ability to influence others, and the reputation to attract and retain trading partners. Long before the establishment of Hong Kong and the Treaty Ports made the Far Eastern trade more consistent and reliable, a volatile trading environment and the distance between buyers and sellers made partnerships and alliances both necessary and attractive to Jardine Matheson and its peer firms. When Magniac and Jardine brought the young James Matheson into the firm as partner, the firm inherited a European and South American client list [End Page 132] from Matheson's earlier partnerships. Similarly, an early inherited asset to the firm were the fifty agents from the previous partnership of Magniac & Jardine, on the foundation of which Jardine Matheson went on to build a network of some 150 agents in the Pacific.

Jardine Matheson & Company and the other early private traders created the market institutions necessary to regularize trade and reduce risk, putting buyers and sellers in such free interaction that the prices of the same goods tended toward equality easily and quickly. Among the first steps the firm took to create an informed community among the European traders, their suppliers, and their customers was the publication of the Canton Register, which included commodity prices, market conditions, and social and political developments, as well as routine news of impending shipments. When Jardine Matheson needed support for its appeal to Parliament to protect the trade, the trading community signed a petition that James Matheson read in the House of Commons.

Although working capital requirements were generally low for private traders, the more prosperous trading firms like Jardine Matheson sought to own the ships they employed. But, given the capital-intensive nature of shipping, it was a costly endeavor for a single firm to attempt to expand market penetration. Jardine Matheson's range and flexibility increased dramatically when partnerships were created that linked Hong Kong and Calcutta, Hong Kong and Singapore, and Hong Kong and London. Relationships with American and British manufacturers increased the firm's access to capital and investments. Even when the Chinese government forced British traders out of Canton, Jardine Matheson & Company continued its trade by using competitive American firms as intermediaries. The captains or supercargoes of foreign merchant ships were useful partners, strengthening shipping interests, increasing international contacts, and introducing associates who knew another aspect of the import-export trade into the firm. Collaboration with competitors was also a means of survival in the insurance business. Jardine Matheson and Dent & Company shared management responsibility for the Canton Insurance Company and pooled their resources to manage the risks of piracy, storms at sea, spoilage, and the other potential hazards to which they and their customers were exposed.

Evolution from Trading House to Investment House

A Richardsonian interpretation would argue that the external or networked organization of Jardine Matheson & Company created an environment in which information was shared and new opportunities uncovered, allowing the firm and its network to learn and adapt according [End Page 133] to their perception of and response to productive opportunity. Preemption and ownership, however, would have been inadequate responses to new opportunity. In the early Jardine Matheson & Company, with its external network of suppliers, buyers, agents, ship's captains, British and Chinese government emissaries, competitors, and partners, we find the creative and dynamic interaction between the firm's unused productive resources and its perceived market opportunities governing the direction of growth of the Penrosean firm. Between 1832 and 1885 value was beginning to migrate from trading activities to investment, as new opportunities to build infrastructure, extract natural resources, or develop agricultural and forest resources in the Treaty Ports offered shared risk and protection from seesawing demand for British manufactures. Even as China and the treaty countries were opening major projects for private investment and co-management by foreign firms, excess trading profit made cash available for investment in railways, mines, and manufactures. The lure of wealth with limited risk appealed to London and European investors.

By 1885 Jardine Matheson had responded to changes in the competitive environment by setting up its own investment house, Matheson & Company, soliciting investments in mines, railways, shipping, manufactures, and finance and insurance businesses; by joining its potential competitor, the Hongkong and Shanghai Bank as a member of the bank's board and as an investment partner in Chinese railway projects; and by partnering with competitor Butterfield & Swire on a number of joint ventures in China.

Impact of Stasis on the Growth of the Firm

Some things did not change. Between 1832 and 1885 the customer for Jardine Matheson's products and services was more often a business than a private individual and located at a significant distance from the market for supply or demand. For example, the customers in 1832 were Chinese merchants buying opium for domestic distribution and London merchants buying silk, tea, and other commodities. By 1885 Asian and London merchants were transporting, financing, and insuring goods carried by third-party ships. Investors in manufacturing plants, railways, and mines were infrequently wealthy individuals and far more often firms. In 1832 and 1885, business customers had a single goal: to grow rich through trade. However, by 1885 the emphasis had moved to growing rich with less effort through investment.

Another element did not change between 1832 and 1885: at both times it was of highest value to the business customer to achieve [End Page 134] wealth while lowering risk through the agency services of a trusted partner, like Jardine Matheson. The basis of trust remained reputation, built on financial probity and the ability of the firm to absorb trading risk while profiting from the experience. To absorb the risk of others, Jardine Matheson continued to require long-term internal and external relationships built on high trust and the avoidance of speculation in commodities or in other business interests about which information was incomplete. Though change brought on by competition, globalization, variations in the regulatory environment (and other aspects of the external environment) make it unlikely that any capability will remain valuable independent of the scenario in which a firm is operating, there has been great stability in the value of Jardine Matheson's capabilities and the resources underlying them, the firm's trading relationships, market knowledge, and investment capital. Risk brokerage, supply chain expertise, and financial and capital management were early capabilities or competencies on which the firm continued to build.

The Evolution of Resources and Capabilities

Figure 2 depicts the evolving relationship among resources, the use and development of capabilities, and their contribution to the growth of Jardine Matheson & Company from 1832 through 1996. In "Jardine Matheson & Company: A Framework for Growth, 1832-1885" (see Figure 2, left panel), the firm's trading relationships are a source of market knowledge and vice versa. In 1832 the firm leveraged [End Page 135] these intangible resources to become a risk broker and supply chain expert, the basis for its strategic position at that time. Through risk brokerage, a source of strategic control, the firm came to own the relationship between customers, agents, and suppliers (that is, the architecture or external organization of interfirm relationships) and to develop a reputation for financing and capital management. Managing risk and stretching capital required innovation, which further increased the firm's financial returns and freed up some of the company's financial capacity for further investments. By 1885 Jardine Matheson had applied its trading relationships, market knowledge, and financial investment to the creation of a free-standing investment house, Matheson & Company. In 1885, while still engaged in the Pacific trade, the firm leveraged these resources to become an investment manager and financier. The firm earned a reputation for financial management, risk management, capital management, and deal structuring, competencies that are transferable across many markets and businesses. The firm's reputation was a source of added value for continued growth.

In "Jardine Matheson & Company: A Framework for Growth, 1977-2002" (see Figure 2, right panel), new resources are acquired that draw on existing skills and require the short-term development of new skills. The opportunity to capture greater value from trading relationships, market knowledge, and investment capital in 1977 created a new class of resources—equity relationships—which have required the engagement of Jardine Matheson's existing financial management, risk management, capital management, and deal structuring skills, as well as the short- and medium-term development of new competencies, such as acquisition and postmerger management skills and marketing skills.

Such skills added to Jardine Matheson's reputation and architecture, while requiring heavy financial investment capital (and reducing the added value available to new opportunities). Strategic divestment in 1977-1978 and again in 1981-1983 reduced the burden of equity relationships. By 1996 another class of resources had developed: privileged franchises built on trading relationships and market knowledge. This class of resources put less drag on investment capital, used existing financial management and marketing skills, and required the short-term development or acquisition of retailing skills. Between 1996 and 2002 Jardine Matheson focused on retail investments, believing that reputation, long-term experience in the region, and customer knowledge will afford the firm significant advantage as American, European, and other firms choose to outsource customer relationships rather than devote the management and financial resources necessary to cultivate them. [End Page 136]

Jardine Matheson's ability to develop or acquire new skills, or to put existing skills to new uses, is a source of a third distinctive capability, namely, innovation. In 2002, despite the economic downturn, Jardine Matheson & Company continued to acquire significant added value for future growth.

 

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Carol Matheson Connell received her Ph.D. in Strategic Management from the University of Glasgow in 2001 and is a senior strategy consultant for IBM. Contact information: IBM Corporate Strategy, New Orchard Road, Armonk, NY 10504, USA. E-mail: connellc@us.ibm.com.

Bibliography of Works Cited

Books

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Chandler, Alfred D., Jr. Scale and Scope: The Dynamics of Industrial Capitalism. Cambridge, Mass., 1990.

Chapman, Stanley D. Merchant Enterprise in Britain: From the Industrial Revolution to World War I. Cambridge, U.K., 1992.

Greenberg, Michael. British Trade and the Opening of China, 1800-42. Cambridge, U.K., 1951.

Gull, E. M. British Economic Interests in the Far East. New York, 1943.

Jones, Geoffrey. Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Centuries. New York, 2000.

Keswick, Maggie, ed. The Thistle and the Jade. Hong Kong, 1982.

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-----. "Market Institutions and Economic Evolution." Journal of Evolutionary Economics 10, no. 3 (2000): 297-309.

-----. "Marshall's Economics of Progress." Journal of Economics Studies 13, no. 5 (1986): 16-26.

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Notes

1. Magniac Jardine was renamed when William Jardine joined the firm of Magniac Smith after retiring from Canton in 1839.

2. Jardine Matheson & Company became a limited liability company in 1906. In 1908 Matheson & Company incorporated to become a limited liability company, and in 1912 Jardine Matheson & Company and the Keswick family bought out the Matheson family's remaining interest in Matheson & Company.

3. Originally published in 1959, The Theory of the Growth of the Firm (1959; 3d ed., New York, 1995) includes an introductory essay by Edith Penrose in which she acknowledged some of her major influences and a few theorists who had influenced the evolution of her thinking about the growth of firms. Penrose's 1960 article, "The Growth of the Firm—A Case Study: The Hercules Powder Company," Business History Review 34 (Spring 1960): 1-24, originally was to be included in The Theory of the Growth of the Firm, but was excluded by the publisher because of space constraints.

4. Penrose, "Hercules Powder Company," 3.

5. Ibid.

6. Ibid.

7. Penrose, Theory of the Growth of the Firm, 59.

8. Ibid., 5.

9. Penrose, "Hercules Powder Company," 9.

10. Ibid., 8.

11. Ibid., 13.

12. Penrose left a rich legacy that her admirers, including Loasby and Richardson, Lazonick, and other contributors to Christos Pitelis's recent volume have amply acknowledged. Christos Pitelis, The Theory of the Growth of the Firm: Edith Penrose and Her Legacy (New York, 2002). While recognizing Penrose's inventiveness, one would be thoughtless not to credit the foresight of her influences, and the extensions to theory by her followers, particularly to capabilities, the role of the environment, architecture and learning, and the explanation and role of failure in innovation and knowledge.

13. Brian J. Loasby, "Edith T. Penrose's Place in the Filiation of Economic Ideas," Oeconomia 29 (1999): 104.

14. George B. Richardson, "The Organisation of Industry," The Economic Journal 82 (Sept. 1972): 891.

15. Alfred D. Chandler, Jr., Scale and Scope: The Dynamics of Industrial Capitalism (Boston, 1990), 496.

16. Ibid., 186.

17. William Lazonick, "Innovative Enterprise in Historical Transformation," Enterprise & Society 3 (March 2002): 22.

18. Ibid., 22-23.

19. Penrose, Theory of the Firm, 217, referring to Boulding's "Image" of the firm.

20. Alfred Marshall, Principles of Economics (London, 1920), 266. See also Brian J. Loasby, "Marshall's Economics of Progress," Journal of Economic Studies 13, no. 5 (1986): 20; Richardson, "Organisation of Industry," 891.

21. Brian J. Loasby, "Market Institutions and Economic Evolution," Journal of Evolutionary Economics 10, no. 3 (2000): 302.

22. Lazonick, "Innovative Enterprise," 25.

23. Richardson, "Organisation of Industry," 883.

24. Joseph D'Cruz and Alan Rugman, "A Theory of Business Networks," in Multinationals in North America, ed. Lorraine Eden (Calgary, 1994), 276; Benjamin Gomes-Casseres, "Group versus Group: How Alliance Networks Compete," Harvard Business Review 72 (July-Aug. 1994): 4.

25. Ikujiro Nonaka, "A Dynamic Theory of Organizational Knowledge Creation," Organization Science 5, no. 1 (Feb. 1994): 14-37.

26. Brian J. Loasby, "The Evolution of Knowledge," paper presented to the DRUID (Danish Research Unit for Industrial Research) Conference (Denmark, May 11, 2001), 4, 6.

27. Ranjay Gulati, Nitin Nohria, and Akbar Zaheer, "Strategic Networks," Strategic Management Journal 21 (March 2000): 203-15.

28. Brian J. Loasby, "The Significance of Penrose's Theory for the Development of Economics," Contributions to Political Economy 18 (1999): 38.

29. Brian J. Loasby, "Organizations as Interpretive Systems," paper presented to the DRUID (Danish Research Unit for Industrial Research) Conference (16 June 2000), Denmark, 10.

30. Frank H. Knight, Risk, Uncertainty, and Profit (Boston, 1921), 188, 230.

31. Ibid., 206.

32. Lazonick, "Theory of Innovative Enterprise," 39.

33. We know the early history of Jardine Matheson & Company from some 173,000 letters sent to and from the firm to suppliers and agents, as well as from account books, ledgers, telegrams, and memoranda. The letters are an underlying resource of this firm, because all firm activity (including management, discipline, market information, and training, as well as order fulfillment) was based on written correspondence, copies of which were faithfully and more or less carefully preserved. The collection, housed in the Jardine Matheson Archives, Cambridge University Library, includes 31,000 letters from 1810 to 1850, and 142,000 from 1850 to 1906. Some 3,114 letters signed by the partners form the basis of the analysis in this article, although only a few letters are extracted here.

The story of Jardine Matheson has been told by the firm itself on several occasions, including The Thistle and the Jade, edited by the late Maggie Keswick, descendant of William Keswick, great-nephew of William Jardine, and published in 1982 on the firm's 150th anniversary, and more recently in Jardine Matheson: Traders of the Far East, by Robert Blake. See Maggie Keswick, ed., The Thistle and the Jade (Hong Kong, 1982); and Robert Blake, Jardine Matheson: Traders of the Far East (London, 1999).

34. The Charter Act of 1813 documents the end of the East India Company's monopoly on the India trade—or "country trade." The East India Company continued to hold a partial monopoly on the China trade through 1842. Remnants of the East India Company continued to operate through the 1950s. The company's letters are preserved in the British Library Oriental and India Office Collections, A/2/24, London.

35. Michael C. Greenberg, British Trade and the Opening of China, 1800-42 (Cambridge, U.K., 1951), 10-17.

36. Geoffrey Jones, Merchants to Multinationals: British Trading Companies in the Nineteenth and Twentieth Centuries (New York, 2002), 33. Jones confirms, "Jardine, Matheson and Dent's were by far the largest of the British traders of the period." Dent & Company went bankrupt in 1867. Palmer & Company had been the leading competitor until 1830, when that firm was bankrupted in a speculation crisis.

37. Mira Wilkins, "The Free-Standing Company, 1870-1914: An Important Type of British Foreign Direct Investment," Economic History Review 41, no. 2 (1988): 263.

38. Stanley D. Chapman, Merchant Enterprise in Britain: From the Industrial Revolution to World War I (Cambridge, U.K., 1992), 313.

39. James Matheson, Canton, 25 April 1832, to Hugh Matheson, Calcutta, Jardine Matheson Archives, Cambridge University Library, Cambridge, U.K., Private Letter Books [hereafter JMA PLB] C5/1.

40. William Jardine, Canton, 9 Feb. 1835, to Hollingworth Magniac, London; JMA PLB C5/3.

41. James Matheson, Canton, 30 Sept. 1832, to Charles Thomas, Singapore, JMA PLB C4/2.

42. James Matheson, Canton, 26 April 1838, to E. de Otadui, Manila, JMA PLB C5/3.

43. James Matheson, Canton, 30 April 1838, to E. de Otadui, Manila, JMA PLB C5/3.

44. James Matheson, Canton, 1 May 1838, to John Purvis, London, JMA PLB C5/3.

45. James Matheson, Canton, 24 July 1832, to M. DeVitre, Bombay, JMA PLB C4/1.

46. Jones, Merchants to Multinationals, 217.

47. James Matheson, Present Position and Prospects of the British Trade with China (London, 1831), 39-40.

48. James Matheson, Canton, 31 Jan. 1831, to Jamsetjee Jeejeebhoy, Bombay, JMA PLB C4/1.

49. Edward LeFevour, Western Enterprise in Late Ch'ing China (Cambridge, Mass., 1968), 65-66.

50. By 1885, the firm (through Matheson & Company, its investment house) invested Þbp7,514,790 in Hong Kong and China, not including railway loans of Þbp26 million with investment partners Hongkong and Shanghai Bank.

51. Frank H. H. King, The History of the Hongkong and Shanghai Banking Corporation: The Hongkong Bank in Late Imperial China, 1864-1902 (New York, 1988).

52. E. M. Gull, British Economic Interests in the Far East (New York, 1943), 89-90.

53. Ibid., 92.

54. Ibid., 88.

55. Lefevour, Western Enterprise, 141, 144-45.