Int. Journal of Business Science and Applied Management, Volume 3, Issue 2, 2008

Transnational corporations from Asian developing

countries: The internationalisation characteristics and

business strategies of Sime Darby Berhad

Syed Zamberi Ahmad

Policy and Business Strategy Department, University of Malaya

50360 Kuala Lumpur, Malaysia

Tel: +603 7967 3836

Fax: +603 7967 3810

Email: szamberi@um.edu.my

Philip J. Kitchen

The Business School, Hull University,

Hull, HU6 7RX, United Kingdom

Tel: +44 1482 463532

Fax: +44 1482 463689

Email: p.j.kitchen@hull.ac.uk

Abstract

There is limited empirical research on the internationalisation processes, strategies and operations of

Asian multinational corporations (MNCs), particularly MNC’s based in Malaysia. The emergence and

development of an MNC from this developing country represents a significant addition to the literature

on this topic which augments and supplements the information already available with regard to nascent

MNCs from Asian Newly Industrialised Countries (NIC’s). Drawing on primary data from in-depth

interviews with 12 key executives from Sime Darby Berhad (SDB), a developing Malaysian-based

MNC, this paper will examine and investigate the firm’s internationalisation process, its characteristics

and strategies, including motivations, patterns, and sources of competitive advantage. The empirical

findings, limitations and areas for further research are discussed.

Keywords: internationalisation, Malaysia multinational corporations, business strategies, Sime Darby

Berhad

Acknowledgements: We gratefully acknowledge the generous participation of senior executives from

Sime Darby Berhad (SDB) which allowed this case to be developed and cited here.

Syed Zamberi Ahmad and Philip J. Kitchen

1 INTRODUCTION

Theories and research on the internationalisation of firms (or their expansion across national

borders) have received significant attention from many scholars and researchers within the areas of

international business, international marketing, and business strategy (Anderson, 1993; Calof and

Beamish, 1994; Blomstermo and Sharma, 2003a and 2003b; Ramamurti, 2004, Sim, 2005, and

UNCTAD, 2005). To some key authors, internationalisation is the process by which firms gradually

increase their involvement in international business activities, and establish and conduct transactions in

other countries beyond their national jurisdiction (Welch and Luostarinen, 1988; Beamish, 1990;

Pananond and Zeithaml, 1998; Luo, 1999; Sim and Pandian, 2003, Kitchen and Ahmad, 2007). In spite

of the importance of understanding the dynamism of the internationalisation process however, most

studies have been confined to firms operating in well-established developed countries namely, North

America, the European Union, and Japan. Therefore, these early studies exhibit – perhaps of necessity -

a distinct Western perspective on the process of international expansion of firms to create competitive

advantage, and advance a view that takes into account the development of MNC’s from the most

advanced and successful economies in the world (Erramilli et al., 1999). However, few studies have

investigated the internationalisation process of developing country MNCs and specifically those based

in Malaysian.

This paper will analyse and describe the internationalisation process of a leading Malaysian-based

MNC, namely Sime Darby Berhad (SDB), through an historical approach. The paper will identify the

form and behaviour of this corporation in streamlining its expansion processes including the

motivations for international investment, competitive strategies, and selection for foreign entry modes.

Although results from a single case study of a Malaysia multinational corporation cannot be

generalised as representative of all developing-country multinationals, the case does offer interesting

insights which can contribute to the literature of developing-country MNCs.

2 THEORETICAL PERSPECTIVES ON DEVELOPING COUNTRY MNCS

Theories on the internationalisation of firms are largely based on Western multinational

corporations. Starting from Vernon’s product life cycle theory (1966, 1971) through the Uppsala

international expansion stage model (Johanson and Weidersheim-Paul, 1975; Johanson and Vahlne,

1977) and the more recent works of Dunning on his eclectic paradigm theory (Dunning, 1993, 1995)

and Investment Development Path (Dunning, 1981, 1986) - predominantly concerned multinational

firms from industrialised developed countries. Dunning’s work on electic paradigm sometimes referred

to as ‘OLI theory’ links coherently ownership, location, and internationalisation advantages all of

which are pertinent in the following case study. However, while the model does appear to be relevant

in the early stages of internationalisation, the model is purely static, and unreflective on issues

concerning strategic ele ments, situational contingency, and competitive forces. Moreover, as the trend

of outward investments from developing countries began to accelerate in the 1990s (United Nation,

1988, 1993) the body of literature concerning these latter investments and entry modes has been

augmented and developed significantly. Recent studies of these emergent or nascent MNC’s include

papers by Cantwell (1997), van Hoesel (1997a, 1997b, 1999), Dunning et al., (1997), Yeung (1997,

1998a, 1998b, 1998c ), Mirza (2000), Mathews (2000), Tolentino (1999, 2000), Adrian (2002), Sim and

Pandian (2003), Ibeh et al., (2004), Sim (2005) and Kitchen and Ahmad (2007). Most of these studies

focus upon the challenges faced by developing country corporations in becoming respected

international players in the global market.

According to the scholars on developing country MNCs, ownership advantages of these

corporations differ, and there are two separate “waves” of development: differing as regards historical

background, nature of business, extent of the role of government in operations and transactions,

geographical direction, and mode of internationalisation activity. Scholars characterised developing

country MNCs in the 1980s as those more concerned with cost competitiveness vis -à-vis their

competitors (van Hoesel, 1999). Developing country MNCs in the 1990s, on the other hand, placed

greater emphasis on the development and/or redirection of business strategies in response to the

changing patterns of world business structure brought about by trade liberalisation and economic

globalisation (Dunning et al., 1997). In addition, they placed more emphasis on technological

competence as the source of competitive advantage (Pananond and Zeithmal, 1998). The sources of

ownership advantages for developing-country MNCs have grown through a gradual accumulation of

skills, information and technological effort.

Int. Journal of Business Science and Applied Management / Business-and-Management.com

Such views are consistent with the internationalisation process literature (Johanson and

Wiedersheim-Paul, 1975). Known now as the ‘Uppsala Internationalisation Model’, this literature

stresses the importance of internationalisation knowledge and experience accumulation process

throughout a firm’s internationalisation expansion. The model states that lack of knowledge of foreign

markets and operations creates an obstacle to internationalisation, and that this knowledge can only be

acquired by operating in, and experience of international markets. Admittedly, firms may lack

knowledge of the internationalisation process, institutional knowledge or business knowledge (Eriksson

et al., 1997). The Uppsala school extended the idea of incremental international development to the

entire process of a firm’s internationalisation from exporting to foreign direct investment (FDI). Given

the fact that Malaysian MNCs are new and nascent to the international arena, particularly in terms of

outward investment, internationalisation theory is of value in explaining the emergence of these

corporations.

3 METHODOLOGY

Given the evident gap or paucity of studies on the area of an internationalisation process

undergone by Malaysian-based multinational corporations, this study employs a case study research

method to examine a single firm’s learning and internationalisation process. The research design

requires an exploratory case study drawing upon multiple units of analysis (Yin, 1994). The main data

collection method was a series of in-depth interviews with 12 key senior executives in Sime Darby to

develop the case study as relying on a single source of information would be inappropriate. Thus, semi-

structured open-ended interviews were conducted. All executives including the following titles:

Directors, Executives, Senior Managers, and Managers), interviewed claimed to have an in-depth

knowledge of their firm’s international operation and investment and there seemed no reason to doubt

their veracity. Each interview took between one to one and a half hours, and were digitally recorded,

carefully listened to, and transcribed verbatim. A second listening accompanied by the typed

transcription was performed to ensure full correspondence between the recorded and transcribed data.

Complete case reports were sent back to interviewees to ensure validity and authenticity of the

collected data. In addition, telephone and email interviews were used to collect further information

from the interviewees. In order to give a clearer description of a case study, multiple sources of

evidence, including both primary and secondary data, including internal unpublished documentation,

internal brochures, archival records, internet web sites, company annual reports, company newsletters,

newspaper clippings, magazines and other sources (published and unpublished materials) (Punch,

1998; Yin, 1994) were also collected in order to construct the case and to increase validity.

4 CASE COMPANY: SIME DARBY BERHAD (SDB)

Sime Darby was chosen as a case sample, based for the following main reasons:

a) it was the first Malaysian multinational conglomerate and is one of Southeast Asia’s leading

and largest corporations;

b) it is among the most internationally-oriented corporations with a long history of international

business and trading activities;

c) the company has been a Malaysian multinational from its inception as it became a Malaysian

entity through acquisition by the Malaysian Government in 1977, which has focused attention

on how the management acquired internationalisation knowledge and experience when

operating the organisation; and finally

d) the group is aggressively and widely diversified with interests in almost all economic sectors

including plantations, energy, heavy equipment, motor vehicle distribution, travel and tourism,

healthcare, and property development, both domestically and internationally.

SDB thus represented the country’s dominant business organisation as a diversified conglomerate.

Syed Zamberi Ahmad and Philip J. Kitchen

5 BUSINESS DEVELOPMENT OF THE COMPANY

The group structure

, product and geographical diversification is a complex and overlapping

process, but it falls into four chronological periods: its early development: fro m a plantation-based to a

trading-based business (1910-1929), followed by domestic expansion (1929-1950s), conglomerate

diversification (1950s-present), and international expansion (1970s-present). It is important to

understand the group’s history, as this offers knowledge about organisational progression and is

expected to provide insights that might act as a basis for decisions about the future (Eisenhardt, 1989;

Gummesson, 1991).

Early Development: from Plantation-based to Trading -based business (1910 - 1929)

Sime Darby was founded in 1910, when two British planters, William Middleton Sime, a Scottish

gentleman, and Henry Darby, teamed up to form a company to manage 500 acres of Radell Rubber

estates in the state of Malacca with a capital of US$20,000. The company was known as Messrs Sime

Darby & Co Limited (Malaysian Business, 1 September 2003). Acting as managing agent for a number

of plantation companies, it then moved into general trading as demand for goods and services from the

rubber estates grew. In 1915, a branch office was set up in Singapore. With increasing volume of trade,

it became an agency house which undertook many general trading activities including acting as selling

agents for various firms and manufacturers, import and export businesses, in supplying a wide range of

consumer and other products domestically and internationally. A London office was set up as a

network branch to market the company’s rubber. Profits from the rubber were literally ploughed back

to buying more plantation land. In 1926, it bought a British competitor, R.G. Shaw & Co and ventured

into discounting, money brokering and insurance brokering (Utrecht, 1981).

Domestic Expansion (1929 - 1950s)

The group’s first wave of expansion was concentrated in the plantation-based business,

particularly in rubber, palm oil and cocoa plantations. An important milestone in the company’s growth

was in 1929, when it acquired the Sarawak Trading Company which held a franchise of Caterpillar

equipment (now known as Tractors Malaysia) (Cheong, 1989). As SD invested in more land,

acquisitions were needed for heavy earth-moving equipment for developing these. After the Second

World War, in 1952, SD started to enter other lucrative business areas, such as engineering, electronics

and management services (Allen and Donnithorne, 1957). Over the years, its activities grew to include

supply, finance, sales and shipping of products for many plantations, and by 1954 it was managing

some 80,000 acres of rubber land with a total of 18 branch offices in Malaysia, Singapore, Brunei, and

British North Borneo (ibid). The development continued when the company acquired Ewart & Co. in

1946, which was later, renamed Sime Singapore.

Conglomerate Diversification (1950s - present)

By the late 1950s, the company had grown large enough to establish a holding company, Sime

Darby Holding Limited, in London. The company then naturally extended its activities from trading

and management to manufacture in the late 1960s. In 1971, Sime Darby established itself as a major

force in the plantation industry through the acquisition of Seafield Amalgamated Co. and the

establishment of Consolidated Plantations. The rapid growth and extensive diversification of Sime

Darby gave the company multinational status even prior to Malaysian independence (Ragayah, 1999).

Because of this strategic importance as an MNC, and to protect the national interest whereby many

critics viewed the largely British management of the company as a sore reminder of colonial

exploitation, the Malaysian Government through its trust agency Pernas or National Corporation

acquired the company in the mid-1970s. According to Utrecht (1981):

“The SD take -over is a clear sign that the Malaysian government wants a greater say in

producing and marketing its resources”

Some of the literature refers to multinationals from third-world countries (see Wells, 1983;

Tolentino, 1993; Dunning, van Hoesel and Narula, 1997; Sim and Pandian 2003; Ramamurti, 2004). It

refers to domestic firms with head-quarters in developing nations, which control assets and/or exert

influence in the decision-making process of one or more cross-border subsidiaries and/or affiliates in

another country (Yeung, 1994).

Int. Journal of Business Science and Applied Management / Business-and-Management.com

Through this process, SD became among the first Malaysian multinationals in the country.

SD initially expanded within plantations. The group’s desire to grow further into non-core

activities led to major diversifications in many industries, starting in the early 1980s. To name a few,

these included motor vehicles, paint and tyre manufacturing in 1981, oil and gas in 1983, property and

insurance in 1984, health and hospitality in 1990, travel and tourism in 1991, power generation in 1994,

finance in 1996, hypermarkets in 2000, and retail petroleum in 2001. Through its own subsidiaries,

Sime Darby diversified into a variety of projects including hospitals, housing development,

manufacturing, gasoline and motor fuel distribution, shipping operations, shop lots, golf courses and

many others.

In brief, Sime Darby’s domestic growth was made up of three major waves. The first wave of

expansion was focused in the plantations sector. The second wave was based on geographical

expansion of its trading business, and finally, the third wave covered a range of diversified business

strategies both upstream and downstream, such as oil and gas, financial services, property

development, energy, and motor vehicle distribution. It can be seen that the group’s diversification

strategies were incremental, rather than revolutionary within each specific industry. The group has used

a market segment strategy to expand its business operations both domestically and internationally.

Following this account of the domestic development of the group, the international activities are

discussed in the next part of this paper.

International Expansion (1970s - present)

Sime Darby’s international exposure began through international trading activities particularly

exports of commodity products, as Malaya during that period was the biggest rubber and cocoa

producer in the world (Allen and Donnithorne, 1957). It was in the early 1970s that the company

experienced phenomenal expansion both geographically and sectorally. The expansion began with the

purchase of China Engineers (Holdings) Limited, Harpers International Limited, and Amoy Canning

Corporation (Hong Kong) Limited, all based in Hong Kong (United Nations, 1985). With Amoy

Canning came the production of canned food, and with China Engineers came engineering,

manufacturing, insurance and shipping activities. Harpers provided SD with the franchise for the

distribution of Ford, BMW, and Mitsubishi automobiles (ibid).

In the United Kingdom, SD acquired Shaw and Co., a company engaged in investment, shipping,

and trading with considerable investments in South Asia. SD also moved into discounting, broking and

insurance with the acquisition of Clive Holding Ltd., Guy Butler and Robt Bradford and Co. Limited

(United Nations, 1985). In Singapore, having been a market player since 1928, and the sole Caterpillar

dealer in Malaysia for more than 70 years, SD, via Tractors, managed to penetrate the Singapore

market. In fact, 95% of Sime’s business in Singapore’s heavy equipment sector comes from the sale of

Caterpillar products. Nearer home, the company ventured into downstream processing activities with

the purchase of Edible Products Ltd., a major vegetable oil refinery in Singapore.

Administratively, the group’s international expansion can be divided into four main regions.

Priority was given to neighbouring Asian countries with a similar culture. Like its domestic business

activities, SD’s international operations involved the group’s five core areas: plantations, motors, heavy

equipment, property and energy. Figure 1 lists the geographical locations of the group’s international

activities by region. SD acted on the assumption that the diversification of business based on

geographical area would work well in reducing its business risks (Ragayah, 1997, 1999,; Kitchen and

Ahmad, 2007).

Syed Zamberi Ahmad and Philip J. Kitchen

Figure 1: Sime Darby Major Business Regions for International Activities

Source: Sime Darby

At the time of the study, the group had 185 subsidiaries and associated companies involved in

various business activities in the Malaysian market. In its international operations, the group had 46

companies in Hong Kong, 72 in Singapore, 9 in the Philippines, 11 in Australia, 5 in Indonesia and 19

in other developing countries. In the developed countries, the group had 12 companies in the United

Kingdom, 2 in the United States, and 15 in New Zealand (Sime, 2006). Sime Darby’s major strength

lies within the Southeast Asia region, with only limited coverage in other parts of Asia. Overseas

operations accounted for about 60% and 35% respectively of the group’s gross revenue and pre-tax

profits for the past four years - with Malaysia, Hong Kong, Singapore and Australia collectively,

holding the prize in posting revenues in excess of RM1 billion. By virtue of the fact that SD has

operations in 20 countries, international business is one of the key sources of growth for the group. The

next section explains how SD has built up its ownership advantages and business strategy.

6 OWNERSHIP ADVANTAGES

Strong Brand Name and Extensive Distribution Channels

With more than 95 years of corporate history and being involved in many avenues of diversified

business, the group has built a strong reputation in trading domestically and internationally from

recognisable brand products through its franchises and dealership agreements with various foreign

parties. For instance, in the group’s motor business, brands such as BMW, Ford, Land-Rover, Peugeot,

Caterpillar and Kawasaki, to name but a few, are among the well-renowned brands to which the group

holds primary distribution rights in several countries Through these and other recognisable brand

names, SD has gained a reputation for the high level of quality and higher standards in its products

typology.

The broad range of quality products offered by the group, has not only enhanced SD’s market

power but would also compensate for any declining revenues in specific highly competitive industries.

For instance, in the automotive industry, the group suffered a setback when it lost its exclusive BMW

automobile distribution franchise which was expected to have a significant effect on revenue. In June

2003, the German-based Bayerische Motoren Werke (BMW) group formed a 51:49 joint-venture

company with Sime to take over wholesale distribution of BMW vehicles in the country. BMW

invested about RM93 million in the venture (Malaysian Business, 1 September 2003). Losing its

exclusive distributorship will have an impact on SD, as it was considered Sime’s largest revenue

contributor - at approximately 35-40% every year. It remains to be seen, however, as the group’s

diverse range of automotive brands seeks to minimise its investment risks.

Sime Darby

Hong Kong Singapore Philippines Australia

Manufacturing

- Construction

Equipment

- Car Financing

- Insurance

- Travel Services

Engineering

- Heavy

Equipment

- Property &

Hospitality

- Motor

Dealership

- Packaging

- Consumer

Services

Trading

- Property

Development

- Manufacturing

Motor vehicle

- Operation of

Service

Apartment

- Travel and Tour

Agency

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SD has employed an acquisition strategy since its early establishment, with the purchase in 1929

of Sarawak Trading, which held the Caterpillar franchise. Benefiting from this acquisition until now,

the group has the sole distribution rights for Caterpillar and this has contributed towards the growth of

the group’s business operations. As a result, SD enjoyed substantial advantages over newcomers, and

consequently their industries became and remained oligopolistic.

In order to facilitate its marketing activities, the group continues to invest in the expansion of its

distribution network and services facilities. With access to the group’s marketing networks both

domestically and internationally, customers do have confidence in accepting SD’s products. In

addition, recruiting its own staff to oversee day-to-day operations in all of its marketing networks

ensures that quality meets international standards. This strategy has enabled the group to distinguish

itself from other competitors in the same industry.

It would be too simplistic, however, to claim that the group’s ownership advantage derived from

its reputation in selecting quality brands and extensive distribution marketing channels alone. The SD

group’s competitive advantages domestically and internationally were also derived from several other

sources which will be discussed next.

Strong Management-orientation and Financial Standing

Relying on brand name alone is no longer sufficient in the today highly competitive business

environments. The group’s competitive advantages in the domestic market were also derived from its

strong management-orientation, sound financial standing and adoption of a conservative business

strategy. Having the Malaysian government via its state agencies and trust funds such as Skim Amanah

Saham Bumiputera, Employees Provident Fund, Permodalan Nasional Berhad (PNB), and Lembaga

Tabung Haji (Pilgrims Fund Board) as its major shareholder made Sime Darby rather exclusive in the

corporate scene. One expert expressed the opinion that “by virtue of its status as a Government-

controlled Company, Sime is a professionally and well managed company that is transparent in its

ways” (Quoted in Malaysian Business, 1 September 2003). A similar view was also acknowledged by

its former CEO who stressed:

“In any organisation, you will find codes of conduct and procedures, but such rules and

regulations cannot really be substitutes for basic honesty, integrity and common sense. Sime

Darby could not have become the corporate giant it is today without being professional in

whatever it does.” (Nik Mohamed Yaacob, 1996)

Sime Darby’s corporate strategy and management professionalism were guided by strong

company values and its code of conduct. Hard work, honesty, integrity, professionalism, and

entrepreneurship are some of the company’s key principles, adopted by all levels of staff. The group’s

mission statement demonstrates attempts to the seriousness of its professionalism and commitment

toward its image as a reputable Malaysian Corporation.

As well as its management orientation, Sime Darby’s excellent financial standing was another

source of advantage for group expansion. SD has been seen as among the wealthiest domestic

corporation. The links of SD with the country’s major trust funds and state agencies have contributed

towards its domestic and international expansion. PNB, for instance, is among the country’s leading

investment institutions with total funds of more than RM49 billion and having a 40.82% interest in the

group. This is followed by Employee Provident Funds (EPF) with 12.99% interest and Pilgrims Fund

Board with 2.13%.

This has given the group an image and reputation for credibility that not many other Malaysian

corporations have enjoyed. This privileged status made the group a preferred choice for foreign firms

seeking a joint venture partner in the domestic market. Furthermore, SD’s credibility also enhanced the

group’s relationships with financial institutions. SD has never had much difficulty in getting support to

finance its operations and expansion.

However, links with the Permodalan National Berhad (PNB) do not necessarily bring benefits,

especially for the group’s business strategy; which is considered conservative and too methodical

(Malaysian Business, 1 September 2003). The group’s investment strategy is often described as

‘conservative’, focusing on exploiting incremental investment opportunities under the guidance of the

holding company and its major shareholder. As an example, evidence of this was seen when the group

took on a smaller player, IOI Corporation Berhad, in its bid to acquire Palmco Holdings Berhad in

2003, and lost its bid. For the record, Sime ended up with a 22% stake in Palmco and two board

representatives, while IOI went to buy Loders Croklaan BV in the Netherlands (Malaysian Business, 1

September 2003). Many have suggested that with its huge cash pile, the group could have made better

use of its money by acquiring Loders instead (ibid).

Syed Zamberi Ahmad and Philip J. Kitchen

With regard to this, Nik Yaacob, a former group CEO, admitted in an interview that:

“I think it is true that people have the perception that we are conservative. But I would like to

mention for the last six years or so, we have achieved very consistent growth.” (Malaysian

Business, 16 July 1993)

Despite attracting criticism, the ‘conservative’ business strategy adopted by the group, however,

proved to be an advantage and helpful in minimising the impact from the Asian financial crisis in

1996/97. Like most Malaysian firms, SD was burdened with the problem of its foreign debts and losses

on its financial account. The group were in the red with a loss before taxation of RM70.7 million in

1998. However, in 1999 and 2000, the group made profits of RM1,018.2 and RM1,199.1 respectively

(Annual Report, 2000), thanks to its ‘conservative’ investment strategy. The next paragraphs discuss

how internationalisation knowledge and experience became another source of the group’s advantages.

International Knowledge and Experience

The group’s ownership advantages were not only based on its management skills in managing the

organisation, but also on its knowledge and experience in international trade, and knowledge about the

regional market. The ability to understand how developing country markets work was another

important advantage of SD. The group’s past experience in dealing and managing an international

project and trading business in the region provided a useful advantage for the group’s international

expansion. By focusing its business operations on the Asian market, segmenting its business operation

into several product groups, and geographically spreading into five main regions, SD was able to take

full advantage of its management know-how in plantations and other businesses to tap those markets

without much competition from either local or foreign competitors. The group’s skills and strength in

plantations contributed to other business operations.

Although SD is known for its international investment in 20 countries worldwide, including Hong

Kong, Singapore, Australia, New Zealand, Macau, China, Qatar, the Philippines, Papua New Guinea,

Thailand, the United Kingdom, Egypt, Indonesia, Solomon Islands, and New Caledonia, the focus of its

business is on exports and international trading activity. Sime Darby’s interest in foreign direct

investment only began in 1990s, when the domestic market was becoming saturated and

internationalisation was another way to expand. Although the group’s export markets were spreading to

various developed countries such as the United Kingdom, European countries, and the United States,

the group’s destinations for foreign direct investment were still mainly concentrated in nearby Asean

member countries and the Pacific Basin region.

Business Networking and Technological Capabilities

To cope with a diversified business activity, business networking is an important mechanism for a

firm’s growth (Chow et al., 1997). Networking with partners and other players in the industry may help

a firm to acquire resources, market information and accessibility or business opportunity, domestically

or internationally. Most businesses now rely on business alliances and networking as a strategy, and

Sime Darby is no exception to this. With the group’s diverse range of business activities, it was

unlikely that the group could succeed without having assistance from other players.

With regard to this, close ties with PNB and (Employee Provision Fund) EPF certainly benefited

the group’s expansion. The group’s close links with government trust agencies have been a source of

its ownership advantage. Widely known as the first multinational in the country, the fact that Sime

Darby enjoyed close links with the government cannot be denied. Because of its strategic value and

status as a national company, it was given access to the right places, since any failure could have

negative implications for the economy and government (Malaysian Business, 1 September 2003). Links

with the PNB gave Sime Darby a remarkable advantage, in accessing investment opportunities to

which other industrialists did not have access. In addition to these connections, SD’s close links with

the government can be seen since its early establishment, inviting top-management officials in the civil

service with extensive experience to join the group as advisors or even as full-time employees. These

included a former Minister of Finance (1959-1974), Tun Tan Siew Sin, as the first SD chairman from

1976-1988; a former Bank Negara governor (1962-1980), Tun Ismail Mohamed Ali as the second

chairman from 1988-1998; and a former Chief Secretary to the Government as the third chairman

(1998-present) (Malaysian Business, 16 October 2002; Annual Report, 2005).

Links with the government alone were not enough for the group’s development, however. The

second necessary sources of the group’s connections were joint ventures with domestic and foreign

partners. Because the technological sophistication of developing country MNCs tends to be

insufficiently advanced, a developing country’s firms need to accumulate technological capabilities

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from suitable foreign partners (Bell and Pavitt, 1997). In the case of SD, the group was able to form

joint ventures and learn from its established partners in their respective industries in order to

accumulate technological competencies. For instance, when the group decided to embark on entry into

the petroleum industry, SD made an acquisition of 60% of C. E Crest Engineering (M) Comp any,

which provided engineering and construction services to the petroleum industry. The group’s

expansion into agro-genetic engineering is another example where it decided to team up with a

California -based company, International Plant Research Institute, which specialised in the research

application of genetic technology to tropical crops (United Nations, 1985). A similar case was the

group’s decision to diversify into petroleum retailing, when it formed a joint partnership with the

Houston-based Conoco Corporation (Business Times, 6 December 2001). Table 1 shows some of the

group’s current technological partners.

Table 1: Some of Sime Darby’s Technology Partners

Foreign Partners Country of

Origin

Activity Form of

Contract

1. Aero-Green Technology Singapore Aeroponic

Farming

Joint venture

1. Caterpillar USA Heavy Equipment

Distribution

Joint venture

1. Caterpillar Financial

Services Corporation

2. Diamond Lease and The

Bank of Tokyo-Mitsubishi

USA

Japan

Hire Purchase and

Leasing

Joint venture

1. Sembcorp Engineering Singapore Oil and Gas Joint venture

1. BMW

2. Ford

3. Mitsubishi

4. Alfa Romeo

5. Suzuki

6. Land-Rover

Germany

USA

Japan

Italy

Japan

United Kingdom

Motor Franchises

Joint venture

1. Rengo Japan Packaging Joint venture

1. Kansai Paints Co Ltd

2. W & J Leigh Co

Japan

United Kingdom

Paint

Joint venture

1. Inax Japan Sanitaryware Joint venture

1. B.F. Goodrich Philippines Philippines Rubber Acquisition

1. Amston Equipment Pte Ltd Singapore Filter Presses Acquisition

1. National Oil Services

Company of Vietnam

Vietnam Bituminous

products and

electrical control

panels

Joint venture

1. Tesco Limited United Kingdom Retailing Joint venture

Source: Sime Darby

As observed from the SD case, forming joint partnership with established foreign counterparts

enabled the group to learn and accumulate technological skills. The group then made the effort to add

more value and modify acquired technologies and needs. SD interviewees claimed that gaining

technological competence enabled the group to expand its operations in foreign countries.

In sum, the domestic and international growth of SD was achieved through a mixture of the factors

discussed above. With a strong business reputation and track record, the company has managed to grow

from a company offering a single product and service in one country into a strong and dynamic

international group with a comprehensive range of business activities domestically and internationally.

The business networks of the group come not only from its early and ongoing connections with the

government, but also from joint ventures and alliances with foreign partners. The limitations of its

internationalisation knowledge were compensated for by its relationship with various parties for the

group’s expansion. The next section analyses the group’s internationalisation pattern and process and

entry mode strategy.

Syed Zamberi Ahmad and Philip J. Kitchen

7 DISCUSSION: AN ANALYSIS OF SIME DARBY INTERNATIONAL EXPANSIO N

Conventionally, a firm becomes multinational by going through three stages: it begins as a

domestic firm and through the normal process of development acquires technological, management and

marketing capabilities to become a domestic leader. Limitation of the domestic market forces motivates

the firm to begin to export abroad in order to increase revenue. Finally, when exports are threatened by

tariff protection or competition, it uses its competitive advantage to produce products abroad and is

then involved in direct investment (United Nations, 1985; Johanson and Vahlne, 2003).

Following this view, a closer look at the development of SD as a national MNC, reveals that the

company was internationalised prior to its emergence as a Malaysian conglomerate. The group became

a Malaysian MNC overnight through the acquisition of a British firm operating in the country. Sime

Darby was a British-controlled corporation until the company’s domicile was transferred from the

United Kingdom to Malaysia in 1979. In line with the New Economic Policy (NEP) to increase Malay

equity, the Malaysian government, after consulting investment bankers Rothschild and through its state

trading arm Pernas, bought a number of Sime shares on the London Stock Market.

Through the efforts of Tradewinds (M) Sendirian Berhad, a Pernas subsidiary, Sime’s equity

became Malaysian-owned in 1977. Prior to its establishment as a Malaysian MNC, SD had

international business in several foreign countries, and this included having offices in London and

Singapore to support its international trading operations.

The argument proposed here is that the techniques employed by the Malaysian government

through its state agencies, which allowed a massive acquisition drive, signified a new era in the method

of internationalisation and thus went well beyond traditional theories of FDI as suggested by most

scholars. However, it could be argued that the company possessed significant internal and ownership

advantages created by nationalisation and favourable treatment by the Malaysian government as had

been noted by Dunning’s OLI theory (Dunning, 1993, 1995). Nonetheless such advantages had to be

accompanied by strategic initiatives within the context initially of a regionally located competitive

scenario. Nonetheless, the experience of SD presents an interesting and appealing alternative to

companies attempting to become international by acquiring an existing MNC. Government intervention

and nationalisation are, however, unlikely to happen in all situations, but sometimes government can

augment or underpin MNC development in different ways as in the case in companies arising from the

ex-Comecon countries. Further, the emergence of SD as a Malaysian MNC, however, supports the

theory raised by Oviatt and McDougall that the firm can be internationalised from its inception. Oviatt

and McDougall (1994) argued – for example – that firms need not to follow slavishly well-established

steps to internationalisation. They may, instead, begin their international involvement directly from

inception. Nonetheless, this theory stresses that such firms have ownership advantages prior to their

establishment.

In its international expansion programme, although the group’s expansion seemed to commence as

an international trading company, especially in its commodity products, those trading businesses were

expanded through the acquisition of firms in domestic and international markets. For instance, about

two years after the coming home of the firm, SD acquired BF Goodrich Pilipinas in 1981, and started

its tyre business with the setting up of Sime Darby International Tyre Company (SIDITCO), which also

invested in rubber, coconut, cocoa and coffee plantations. SIDITCO in 1988 changed its name to Sime

Darby Pilipinas Incorporated to reflect the company’s growth from a pure tyre and tube manufacturing

concern to a diversified company with tyre manufacturing, agriculture and agri-equipment businesses

(United Nations, 1985). In the United Kingdom, the group bought Carboxyl Chemical Ltd, which

manufactures metallic stearates, wires, lubricants and defoaments.

Evidently, the international expansion of the SD group poses issues and challenges to the

internationalisation literature, which suggests that firms may minimise the risk of involvement when

they first enter the international market and that, as the firm acquires more internationalisation

knowledge and experience, it will assume a higher degree of involvement and resource commitment.

However, the group’s frequent use of equity participation through acquisition of firms operating in the

country and abroad seems contradictory to that proposition. This contradiction may result fro m narrow

assumptions about developing country firms which have been portrayed as small, having limited

resources and lacking in management capabilities (Yeung, 1994).

Joint venture with foreign partners is another alternative arrangement available for SD’s

participation in international expansion. In some countries, the group chose to set up joint ventures with

local partners in the host countries, to the mutual benefit of both parties. There are many reasons for SD

to expand internationally and choose a particular country to be the recipient of its investments. In

general, these may be classified as ‘push’ or ‘pull’ factors such as finding new markets, diversifying

risks, home government disincentives, higher returns on investment, cheap and abundant resources,

overcoming import restrictions, competition to enter new markets and to exploit technological

Int. Journal of Business Science and Applied Management / Business-and-Management.com

innovations and the production process better. As with these views, SD’s international expansion was

driven by its goal to seek growth constantly through entry into new markets abroad and to facilitate the

export of products to another country, especially in other developing countries. This was the reason for

the group setting up regional divisions in countries like Hong Kong, Singapore, the Philippines and

Australia, to support its business. This is because the developing countries not only offered

opportunities for growth but also shared some similar features with which the group were familiar.

Specifically, from the interviews of key executives in the comp any, three primary reasons appear

to be important reasons for SD to invest abroad. The first is to take advantage of market opportunities,

that is, regionalising to key markets and access growing consumer demand in the region. The second is

to diversify risks. And, the third is related to motivations which invariably revolve around

diversification to escape high costs, labour, and other resource constraints in Malaysia. An equally

important factor is the familiarity of the countries where the investment is directed, in the sense of

common or shared experiences in history, culture, economics and even politics. From the point of view

of location strategy, familiarity with the country and closeness to Malaysia will be the main criteria.

Diversifying risk is also an important determinant of the choice of overseas location. SD

emphasises that the very nature of its organisation is to diversify risk by having a spread of products or

geographically located businesses. The diversification strategy has worked for the group, since it may

be that one business is declining but that it will be compensated for by the other businesses. The

group’s strategy in its investment is to be a long term player and try to make business work in every

economic condition. In some countries, the group’s business strategy was to start in trading; this then

provided a window on opportunities, enabling SD to identify both new businesses and partners for

establishing joint ventures.

With regard to its long-term strategy, SD wants to strengthen its position in the Asian regional

market, and then the next logical step for SD is to be truly global. For this, it has to aim at inclusion in

the Fortune 500 companies and thus must strengthen its presence in the European Community and the

North American markets. Although it has set up subsidiaries, joint ventures and acquisitions in the

United Kingdom and the United States, these are still inadequate. Moreover, it needs to be rather more

aggressive about growing the business that it already has, as well as establishing new ones (ibid).

Managerially, there are many lessons to be drawn from the case analysis. They include the

following:

a) managers need to avoid narrow or parochial views with regard to potential MNC

development. There are many and diverse routes to such.

b) strategic initiatives – such as joint venture – are not purely dependent on cultural criteria, but

on competitive circumstances, government support or lack of it, technological innovation,

capitalisation, and managerial skills and know-how.

c) the rationale for ‘going abroad’ relies on opportunism, risk aversion, and managerial

motivation.

d) strategies for entry will vary based on individual country criteria coupled with the three items

mentioned above.

With regard to relevance and transferability to other Asian, national, company or cultural contexts,

undoubtedly, new and old business models and modelling processes for FDI and internationalisation

processes abound. Few, however, have concerned Malaysian-owned, Malaysian-managed MNC’s.

While SDB represents a somewhat unique case, several elements have been identified as relevant to the

future development of nascent MNC’s in Malaysia, other developing economies, and indeed emergent

MNC’s from developed economies. Thus, while there is no one straight road or approved path for this

process, lessons learned from this case, may facilitate more strategic thinking than would otherwise be

the case.

8 CONCLUSION

This paper has discussed the domestic and international expansion of the Sime Darby group, one

of the largest Malaysian multinational conglomerates. Being internationalised from its inception

through the reverse takeover of foreign companies operating in the country, SD can be viewed as a new

model for the internationalisation process. The group’s growth was achieved through a combination of

its expanding its capacity as a diversified corporation. Its ownership advantages were derived from

various internal and external sources, such as strong brand names, extensive marketing and support

networks, strong financial standing, good management capabilities, international knowledge and

experience, and business networks with various parties. SD’s unique ties with the Malaysian

government through its trust and state agencies helped the development of the group, and gave the

Syed Zamberi Ahmad and Philip J. Kitchen

group a formidable image of credibility and reliability. Its relationships with foreign partners in

developing its technological capabilities also played a significant part in its domestic and international

expansion.

SD is at the vanguard of Malaysia’s thrust into the international arena as one of Asia’s leading

conglomerates. The Asia Pacific region is SD’s stamping ground and its energy has largely been

directed to this area, but ventures have also been made further afield for some of its investment, notably

in the United States, the United Kingdom, South Africa and Egypt. To Sime Darby’s way of thinking,

it has grown beyond the boundaries of the region and will continue to broaden its horizons in future

FDI. The group plans to grow using internal resources as well as to expand via acquisitions.

Having recognised the need to adapt to the challenges of globalisation, the group has outlined the

broad strategies that it believes are vital for it to compete effectively in the international arena. Among

these are:

a) a renewed focus on core competencies. This extends beyond the rationalisation of business

units to leveraging the group’s underlying strengths to build market leadership,

b) aiming for continuous growth in synergistic, related businesses through horizontal and vertical

integration

c) fostering a learning culture which encourages the sharing of knowledge across organisational

boundaries and geographical divides.

d) SD’s overall strategy is to maintain its reputation as Malaysia’s leading and most

geographically diverse conglomerate, focusing primarily on the growth of the Asia Pacific

region through products and services of impeccable quality.

From the experience of Sime Darby, three primary insights can be drawn. First, the acquisition

method used by the Malaysian Government to acquire MNCs seems to portray a new dynamic in the

extant patterns or modes of internationalisation. Second, although Sime Darby can now be considered

as an established and successful MNC, without the proper investment strategy and skills required for its

diverse activities, SD would have faced difficulties in expansion and this would ultimately have led to

potential losses in their investments at home and abroad. Finally, in terms of international expansion,

the group can now further capitalise upon its knowledge on international business in order to further

augment its international prominence in the future.

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