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RESEARCH NOTE

Capital Investment Practices: A Survey of


Large Corporations in Malaysia, Singapore
and Hong Kong
Wong Kie Ann, Edward J. Farragher and Rupert K.C. Leung*

ABSTRACT

This paper presents the results of a survey on the capital investment practices of large
corporations in Malaysia, Singapore and Hong Kong. Our findings are fairly consistent
with those from similar U.S. surveys. However, Malaysia, Singapore and Hong Kong
companies seem to use multiple techniques, both simple and sophisticated, in
evaluating investment projects, while U.S. companies appear to make great use of dis-
counted cash-flow rate of return. Although Malaysia, Singapore and Hong Kong com-
panies often make annual cash-flow forecasts over the life of a project, they do not
undertake much analysis Of risk involved in the project. Moreover, there is room for
improving the practice of project implementation, the post-audit of implemented
projects, and the use of post-audit data.

INTRODUCTION
Most large corporations normally have specific procedures and methods dealing
with capital investment decisions. Capital investment process essentially involves
the creative search for investment opportunities, classifying them according to
some scheme, collecting data and information on the viable alternatives, forecast-
ing the cash flows, differentiating acceptable from unacceptable alternatives ac-
cording to some established techniques, and monitoring the crucial aspects of
project implementation. However, finance literature appears to be concerned
mainly with accuracy of analysis and sophistication of methods, especially with
developing and refining quantitative return and risk evaluation techniques.
It is widely believed that more refined return and risk evaluation techniques can
contribute to the improvement of capital investment decision process. But whether
the techniques developed in the finance literature are used by corporations in
practice itself is an important topic for research. In the U.S. a number of resear-
chers have studied the practice of capital investment techniques by large corpo-
rations during the past 25 years (including Istvan (1961), Pflomn (1963), Mao
(1970), Fremgen (1973), Gitman and Forrester (1977), Schall, et al. (1978), Kim
and Farragher (1981), Hendricks (1983), and Kiammer and Walker (1984). These
U.S. studies on capital investment practices have indicated that discounted
cash-flow techniques are the most popular techniques for investment project
evaluation and have shown increasing popularity over time. However, the use of
subjective assessment and adjustment is still popular in risk evaluation.
Although a sizable body of literature evidences that the analytical techniques
employed by U.S. corporations in capital investment analysis are of increasing
sophistication, there are almost no studies of the practice of large corporations in
the Southeast Asian region. While corporations in this region may not be as well
* Dr Wong KieAnn is with the Schoolof Management,NationalUniversityof Singapore;Dr EdwardJ
Farragneris with the Departmentof Finance,DePaulUniversity,U.S.A.;and Mr RupertK.C.Leungis
with the Departmentof BusinessManagement,Hong Kong Baptist College.
112 Asia Pacific Journal of ManagementVol. 4 No. 2 January1987
managed as their U.S. counterparts, the ever increasing importance of the eco-
nomy of the region makes it worthwhile to learn whether the region's corpora-
tions are employing capital investment evaluation techniques of a level compara-
ble in sophistication with those used by U.S. corporations. In 1985 we surveyed a
sample of Malaysia-, Singapore- and Hong Kong-based large corporations to un-
cover their capital investment practices. We find that the practices of our sample
corporations seem appropriate and fairly consistent with those in the U.S.
This paper presents the results of the 1985 survey and allows a comparison of the
level of sophistication in capital ,investment practices among Malaysia, Singapore
and Hong Kong companies. The results will also be compared with those from
similar U.S. surveys where appropriate. In the following four sections, we will firstly
give a brief review of the previous U.S. studies in capital investment practices;
there being almost no significant studies in Malaysia, Singapore and Hong Kong.
Secondly, we describe the sample structure, data and methodology. Thirdly, we
present the analysis and comparison of results, and lastly offer a summary of the
main conclusions.

PREVIOUS STUDIES
Although capital investment process involves many phases, finance literature has
concentrated on the financial analysis and selection of investment proposals. The
other stages of the process are less well-structured and hence it is more difficult to
develop a theoretical framework for them. They are, however, important parts of
the whole process. Istvan (1961) and Petty et al. (1975) found that the majority of
capital investment proposals were originated at the operating levels, but major
proposals usually flowed from top management. Fremgen (1973) found domi-
nance of divisional and plant levels over the central office level in the proposal
screening process especially when the requests are related to the existing product
lines. The central office generally determines the funds to be allocated and the go-
no-go decisions. In a study of twelve large manufacturers, Ross (1986) found that
the decision-making processes of most of the firms are different for different pro-
ject sizes. Typical levels of approval authority are plant and divisional managers for
small projects, corporate investment committee for medium-sized projects, and
board of directors for large projects.
Theoretically, the net present value of cash flows is accepted as the best and the
discounted cash-flow rate of return as the second best capital investment evalua-
tion techniques that recognize the time value of money (Brigham, 1985)and Wes-
ton and Copeland (1986). These discounted cash-flow techniques are increas-
ingly used by large corporations in the U.S. Klammer (1972) reported that only
about 19% of the 1969 Compustat Large Industrials used discounted cash-flow
techniques as the primary project ranking device in 1959 compared with about
57% in 1970. Based on a survey of the Fortune 1000 lndustrials, Kim and Farragher
(1981) found that 63% of the responding firms were using discounted cash-flow
techniques in 1975 compared with 68% in 1979. These figures are consistent with
the findings reported by Gitman and Forrester (1977) who surveyed a sample of
Forbes 500 Companies and found that about 66% of the respondents were using
the techniques in 1976. A survey of 300 Fortune largest industrial firms by Hen-
dricks (1983) showed that the percentage had increased to 76% in t98t. Ktammer
and Walker (1984) also found over 70% of the respondents in their 1980 survey of
large firms used discounting techniques for evaluating expansion projects.
As reported by Klammer (1972), Kim and Farragher (1981) and Hendricks (1983),
the use of payback period as a primary device for investment project evaluation
has reduced from 34% in 1959 to 12% in 1979 and to 11% in 1981. But payback is
still important as a secondary tool. Gitman and Forrester (1977) reported that 44%
of the responding firms used payback as a secondary measure in 1976, while Kim
Asia Pacific Journal of Management,January 1987 113
and Farragher (1981) found that 39% were using it in 1979. The corresponding per-
centage in the 1981 survey by Hendricks (1983) was as high as 65%. Payback is
popular largely because it is easy to understand and compute and it can, to some
extent, serve as a surrogate for risk.
Risk, in the capital investment context, is largely the risk of errors in estimation of
the parameters which enter into the analysis. Mao (1970) and Petty and Bowlin
(1976) found that the majority of corporate executives perceived the risk as either
the probability of not achieving a target rate of return or the degree of downside de-
viation from the expected return. The risk of a small project is merely the chance of
not meeting the target return. For large investment projects, however, a degree of
insolvency exists and hence the emphasis is on the downside risk. Thus projects
requiring large investment outlays generally warrant more sophisticated
techniques for assessing and adjusting the risk involved.
Risk assessment has been predominantly subjective. Klammer (1972), Fremgen
(1972), Kim and Farragher (1981) and Klammer and Walker (1984) have, however,
found that large firms have been increasingly using sensitivity analysis, probabilis-
tic simulation, and comparative analysis (high-medium-low estimates) for evaluat-
ing the risk of investment projects. Schall, et al. (1978) found that 36% of the re-
sponding firms employed quantitative risk assessment techniques, 60% assessed
risk subjectively and the remaining 4% did not assess risk at all. About 25% of the
firms assessed a project's risk by probabitistic distribution of its cash flows, while
10% assessed by sensitivity analysis.
Klammer and Walker (1984) and Klammer (1972) reported that 58% of the respon-
dents used at least one formal method of risk adjustment in 1980 compared to
39% in 1970 and 19% in 1959, while Schall, et al. (1978) found 78% of the firms
participating in their study accounted for risk explicitly. More popular quantitative
risk accounting methods have been adjusting the minimum required rate of return
and shortening the acceptable payback period. According to Klammer and Walker
(1984), these two methods were used by 55% of the firms in their study in 1980
compared with 31% in 1970 and 21% in 1959. However, Kim and Farragher (1981)
found lower percentages in their study; the figures were 23% in 1975 and 33% in
1979. A survey of 190 large West European companies by Baker (1981) also
showed that about 55% of the respondents used these methods. Han (1986) sur-
veyed a sample of listed Malaysian companies in 1983 and found about 57% used
the same methods.
Monitoring project implementation may lead to reinforcement of the successful
projects and salvaging of the failing projects. Klammer and Walker (1984) found
that 67% of the respondents monitored the construction- installation phase of the
projects. Post audit of completed projects will lead to an improved capital invest-
ment analysis in the future by uncovering flaws and biases made in the past
(Fremgen, 1973). Klammer and Walker (1984) indicated that 90% of firms in their
study carried out the post-audit analysis of major completed projects in 1980, ver-
sus 67% in 1970 and 51% in 1960, while Hoskins and Dunn (1974) reported that
about half of the Canadian corporations participating in their study did not carry
out post-audit analysis. Often such an audit is not required because of doubt as to
its usefulness. Han (1986) found that about 85% of Malaysian companies carried
out post-completion audits but these exercises were largely financial reviews con-
ducted by accounting departments.
SAMPLE AND DATA COLLECTION
The sample companies used in this study are listed on the stock exchanges in
Malaysia, Singapore and Hong Kong. In 1985, there were about 250, 270, and 240
local companies listed on Kuala Lumpur, Singapore and Hong Kong stock ex-
changes respectively. For the local companies listed on the Kuala Lumpur and Sin-
gapore stock exchanges, about 210 were dually listed Malaysia or Singapore in-
114 Asia Pacific Journal of Management,January 1987
corporated companies on both exchanges. The 240 Hong Kong incorporated com-
panies were listed on all three major stock exchanges in Hong Kong, namely, Far
East, Hong Kong and Kam Ngan.
The sample companies were selected based on nature of business and net fixed
asset growth over the past five years. The listed companies in banking, finance, in-
vestment, hotel and mining industries were not selected since they usually did not
often have significant capital expenditures. Our final sample consists of 141, 63,
and 78 companies incorporated in Malaysia, Singapore, and Hong Kong respec-
tively.
A questionnaire survey was used to collect data for this study. The questionnaire
was addressed to either the company chairman or managing director and mailed in
May and September 1985 respectively for Malaysia/Singapore and Hong Kong
sample companies. As shown in TABLE 1, we received 57, 29, and 19 returned
questionnaires which were useful for analysis giving a response rate of 40%, 46%,
and 24% for Malaysia, Singapore, and Hong Kong companies respectively. The
respondents cover a wide range of commercial and industrial companies and in-
Clude plantation companies for Malaysia and utilities for Hong Kong. They are fairly
representative of each sample structure in regard to line of business and net fixed
asset size. Similar to the sample structure, TABLE 2 shows that the respondent
groups are biased toward companies with smaller amounts of net fixed assets.
Some researchers suggest that mail questionnaire surveys are potentially decep-
tive because they may be answered by an individual whose time is relatively unim-
portant and is not in a position to know well what is done by the company. In antici-
pation of this potential problem, all respondents were asked to identify their job
position. These responses are summarized in TABLE 3 and suggest that the ques-
tionnaires were answered by relatively well-informed management personnel.

TABLE 1
Sample Companies and Respondents by Country

Country Sample Respondents


companies No. %
Malaysia 141 57 40.4
Singapore 63 29 46.0
Hong Kong 78 19 24.4

TABLE 2
Net Fixed Assets Size of Respondents

Assets Size
(S$million) Malaysia Singapore Hong Kong

< 50 22 17 8
51-100 12 3 2
101-200 13 3 3
201-300 4 3 2
> 300 6 3 4
Total 57 29 t9

Asia Pacific Journal of Management, January 1987 115


TABLE 3
Designation of Respondents

Job Title Malaysia Singapore Hong Kong


Chairmanof the Board 2 2 1
Chief ExecutiveOfficer 13 4 4
ManagingDirector 9 1 3
Treasurer 11 3 2
Controller 12 12 6
Others 10 7 3
Total 57 29 19

ANALYSIS OF RESULTS
The questionnaire was designed to gather information regarding three aspects of a
company's capital investment process: management framework, evaluation
techniques, and post decision control. Moreover, Malaysia and Singapore respon-
dents were also asked to provide "value judgements" as to the degree of difficulty
and degree of importance of various phases of the capital investment decision pro-
cess. We define capital investment as expenditures for large size, long life assets.
As show in Table 4, Malaysia, Singapore and Hong Kong companies are much less
likely to prepare an annual capital investment budget, but probably are equally
likely to reward employees who suggest accepted investment projects as com-
pared with U.S. companies. Malaysia and Singapore companies are much more
likely to conduct continual search for investment opportunities than Hong Kong
companies. The percentage of Hong Kong respondents which have conducted
continual search for opportunities is about 42% compared with 70% for U.S. com-
panies. As to the use of a formal central committee in making capital investment
decisions, only 58% of the Hong Kong respondents indicated that they have cent-
ral review committees. The corresponding percentages for Malaysia and Singapore
respondents are 74% and 86% respectively which are similar to the 80% for U.S.
companies.
Responsibility for capital investment analysis is assigned to a diversity of functional
departments. Malaysia companies make greater use of planning departments,
while Singapore and Hong Kong companies make much greater use of accounting
departments. As detailed in Table 5, the respondents make less use of production/
engineering departments than U.S. companies. These results suggest that
Malaysia, Singapore, and Hong Kong companies put more emphasis on manage-
rial, non-technical aspects of capital investment planning than U.S. companies.
Data presented in Table 6 pertain to the usage of various quantitative evaluation
techniques as primary measures in capital investment analysis. The most popular
primary measure for Malaysia companies is payback (60%), followed by net pre-
sent value of cash flows (47%) and accounting rate of return (42%). For Singapore
and Hong Kong companies, payback and accounting rate of return are equally
popular (52% and 47%), followed by discounted cash-flow rate of return (52% and
32%) and net present value (31% and 37%). These results are significantly diffe-
rent from U.S. findings where the discounted cash-flow rate of return (49%) is strik-
ingly more popular than the other techniques, and payback and accounting rate of
return much less popular (12% and 8%). These results seem to indicate that
Malaysia, Singapore, and Hong Kong companies generally prefer to use several
techniques as primary measures in evaluating an investment project, while U.S.
companies appear to make great use of discounted cash-flow rate of return.
116 Asia Pacific Journal of Management,January 1987
TABLE 4
Management Framework For Capital Investments

Item Malaysia Singapore Hong Kong U.S.A.*


A. Prepare annual capital
investment budget
No. of companies 42 18 10 76
% of respondents 74 62 56 83
B. Continual search for
investment opportunities
No. of companies 36 21 8 64
% of respondents 63 72 42 70
C, Reward individuals for
suggesting accepted
proposals
No, of companies 1 4 1 5
% of respondents 2 14 5 5
[i), Use of formal committee
in decision making
No. of companies 42 25 11 73
% of respondents 74 86 58 80
* Derived from Farragher (1984) Exhibits 2 and 5 which were based on 91 respondents from a sample-of
250 utility, transportation, retailing, and diversified services companies included in the 1983 Fortune
Service 500 Directory.

TABLE 5
Responsibility for Capital Investment Analysis

Malaysia Singapore Hong Kong U.S.A.*


Functional Area
No. % No. % No. % %
Accounting 19 26 12 34 11 46
55
Finance 11 15 5 14 6 25
Production/Engineering 13 18 5 14 1 4 25
Planning 30 41 9 26 2 8 15
Others 0 0 4 12 4 17 5
Total 73 100 35 100 24 100 100
* Taken from Farragher (1984), Exhibit 4.

TABLE 6
Quantitative Evaluation Techniques Used As Primary Measures In Capital Investment Analysis
%

Technique Malaysia Singapore Hong Kong U.S.A.*


Payback 60 52 47 12
Discounted Payback 26 17 21 n.a.
Net Present Value
of Cash-Flows 47 31 37 19
Discounted Cash-Flow
Rate of Return 35 52 32 49
Accounting (Earnings)
Rate of Return 42 52 47 8
No. of respondents 57 29 19 200

Note: All percentages shown are percentages of total respondents.


* Taken from Kim and Farragher (1981), TABLE 4.

Asia Pacific Journal of Management, January 1987 117


TABLE 7
Quantitative Evaluation Techniques Used As Secondary Measures In Capital Investment Analysis
%

Technique Malaysia Singapore Hong Kong U.S.A.*


Payback 30 31 21 39
Discounted Payback 25 17 16 n,a.
Net Present Value
of Cash-Flows 18 31 16 8
Discounted Cash-Flow
Rate of Return 28 24 32 8
Accounting (Earnings)
Rate of Return 23 38 21 3
No. of respondents 57 29 19 200

Note: All percentages shown are percentages of total respondents.


* Taken from Kim and Farragher (1981), TABLE 4.

TABLE 8
Cash-Flow Forecasts and Risk Evaluation In Capital Investment Analysis
%

Technique Malaysia Singapore Hong Kong


A, Forecast annual cash-flows
over the life of a project 95 86 89
B. Risk Measurement:
(a) High/med/Iow forecasts 54 59 63
(b) Sensitivity analysis 68 69 53
(c) Probabilistic simulation 7 21 32
(d) Capital asset pricing model 23 21 37
C. Risk adjustment:
(a) Shorten acceptable payback period 44 55 63
(b) Adjust required rate of return 61 59 58
(c) Adjust expected cash-flows 65 66 74
No. of respondents 57 29 19

Note: All percentages shown are percentages of total respondents who have at least sometimes made
use of the techniques,

Although payback is a popular secondary measure in capital investment analysis


for Malaysia (30%), Singapore (31%) and Hong Kong (21%) companies, it is not as
popular as for U.S. companies (39%). In fact, the most popular secondary evalua-
tion measure for Singapore companies is accounting rate of return (38%), and for
Hong Kong companies it is discounted cash-flow rate of return (32%). As shown in
Table 7, Malaysia, Singapore and Hong Kong companies appear to place more em-
phasis on secondary evaluation that do U.S. companies. They are more likely to use
multiple techniques as secondary measures in evaluating their capital investment
projects.
Most finance theorists agree that net present value and discounted cash-flow rate
of return are better than other quantitative evaluation techniques in capital invest-
ment decisions. We find that these techniques are widely used by Malaysia, Singa-
pore and Hong Kong companies. They use them either as primary measures or as
secondary measures in capital investment analysis. In fact, the net present value
which is theoretically the best technique, is even more widely used than in the U.S.
I18 Asia Pacific Journal of Management, January 1987
TABLE 9
Cash-Flow Forecasts and Risk Evaluation In Capital Investment Analysis

Average Score*

Technique Malaysia Singapore Hong Kong


A. Forecast annual cash-flows
over the life of a project 3.13 2.64 2.95
B. Risk Measurement:
(a) High/med/Iow forecasts 1.92 1.83 1.69
(b) Sensitivity analysis 2.31 2.23 1.58
(c) Probabilistic simulation 0.20 0.35 0.79
(d) Capitalasset pricing model 0.73 0.44 0.95
C. Risk adjustment:
(a) Shorten acceptable payback period 1.53 1.36 1.89
(b) Adjust required rate of return 1.90 1.68 1.79
(c) Adjust expected cash-flows 2.00 1.81 2.48
No. of respondents 57 29 19

* On a scale of 0 (never) to 4 (always) with 4 being the most frequent use of a technique.

TABLE 10
Implementation and Post Audit of Capital Investment Projects

Items Malaysia Singapore Hong Kong USA***


A. Control of
Implementation:
(a) Monitor the time/
cost of 89 83 89 66
implementation (2.58)* (2.38) (2.53)
(b) Post-audit
implementea 82 90 69 71
projects (2.23) (2.21) (1.63)
B. Post-Audit Data
Made availableto:**
(a) Project idea
generators 77 65 65 58
(b) project analysts 53 58 33 60
(c) Decision makers 85 85 65 67
* The bracketed figures are the average scores on a scale of 0 (never) to 4 (always) with 4 being the
most frequent use of a controL procedure.
** The percentages shown here are percentages of those firms which post-audit implemented pro-
jects.
*** Taken from Farragher (1984), Exhibit 7.

However, our result has one weakness. We do not have the information about the
weight that management would place on each technique in making its final deci-
sions. This is particularly important when other traditional techniques, such as
payback and accounting rate of return are also popular in Malaysia, Singapore,
and Hong Kong.
While using discounted cash-flow techniques will provide a better ranking of alter-
native investment opportunities, their usage will lead to better selection of projects
only when management can forecast cash-flows and evaluate risk involved pro-
perly. TABLE 8 indicates that most Malaysia, Singapore and Hong Kong com-
panies make annual cash-flow forecasts over the life of a project. The high fre-
Asia Pacific Journal of Management, January 1987 119
quency of such forecasts is revealed in the average score shown in TABLE 9. How-
ever, as TABLE 8 indicates, they do not undertake very much evaluation of risk in-
volved in a project; neither attempting to measure risk nor adjusting evaluation
standards to reflect the perceived risk. These are particularly clear when we look at
the average scores of various techniques dealing with risk assessment in TABLE 9.
The most popular risk measurement technique is sensitivity analysis, followed by
high-medium-low forecasts. The modern techniques of probabilistic simulation
and capital asset pricing model are seldom used in practice. All the three risk
adjustment techniques have low degrees of usage with adjusting expected cash-
flows being slightly higher. These results are generally in line with survey results for
U.S. companies, although strict comparison is not possible due to the difference in
presentation.
A successful project does not end with the correct selection decision, it also de-
pends on the proper control of implementation. The data in TABLE 10 indicate that
similar to U.S. companies, Malaysia, Singapore, and Hong Kong companies do not
always monitor the time/cost to implement accepted investment proposals. This is
strongly supported by the tow average scores shown in the same table. In today's
inflationary economic environment, monitoring implementation of investment pro-
jects becomes more important in order to keep costs as budgeted. Moreover, the
low average scores in TABLE 10 show that Malaysia, Singapore, and Hong Kong
companies do not often post-audit implemented projects. Also, post-audit data
are not always distributed to all participants in the capital investment decision
process. These results are not much different from those for U.S. companies.
As a feedback to all participants in the decision process, post-audit data
should be made available to them to provide a guide to forecasting and evaluating
future investment proposals.
Lastly, the Malaysia and Singapore respondents were asked to elicit "value judge-
ments" as to the "degree of importance" and "degree of difficulty" of various
phases of the capital investment process. These data are presented in TABLES 11
and 12. Given some minor variation, the rankings of different phases by Malaysia
and Singapore executives are similar to those provided by U.S. executives. Deci-
sion making, forecasting cash-flows, project implementation, searching for invest-
ment opportunities, calculating rate of return/value and assessing potential risk are
considered as the six most important activities in the capital investment process in
Malaysia, Singapore and U.S.A. For Singapore companies, although the rankings
of forecasting cash-flows and forecasting risk is reversed, the average scores are
quite close. This result may be caused by the small sample of Singapore com-
panies. It is interesting to note that project implementation has a high ranking in im-
portance whereas TABLE 10 shows that the respondents do not always control the
process of implementation. Moreover, Malaysia and Singapore companies con-
sider calculating rate of return/value as relatively less important whereas U.S. firms
rank this activity fairly high in importance. Perhaps this discrepancy reflects that
Malaysia and Singapore executives feel that calculating rate of return/value is
merely a computing exercise given the estimates of cash-flows and cost of capital
for a project. This feeling is confirmed by its low ranking for the degree of difficulty
in TABLE 12.
As indicated in TABLE 12, Malaysia and Singapore companies rate the degree of
difficulty slightly different from the degree of importance. The average scores of
all activities for the degree of difficulty are generally lower than those for impor-
tance. As rated by U.S. companies, forecasting and adjusting for risk rise sub-
stantially in ranking for the degree of difficulty vis-a-vis the degree of importance.
Perhaps if company executives make greater use of quantitative risk measure-
ment and adjustment techniques and formalized the process with. computer
facilities, they would feel that such activities are not as difficult. Searching for in-
vestment opportunities in Malaysia and Singapore is more difficult than in the
120 Asia Pacific Journal of Management,January 1987
TABLE 11
Degree of Importance of Different Phases in the
Capital Investment Decision Process

Phase Malaysia Singapore USA**


Score* Ranking Score* Ranking Ranking
(a) Decision making 3,74 1 3.79 1 1
(selection)
(b) Forecasting
cash-flows 3,66 2 3.55 5 2
(c) Implementation 3.54 3 3.57 4 4
(d) Search for
investments 3.46 4 3.66 3 6
(e) Calculating
ROR/Value 3.40 5 3.38 6 3
(f) Forecasting risk 3.28 6 3.68 2 5
(g) Post audit 2,91 7 3.00 7 8
(h) Adjusting ROR/
value for risk 2.79 8 2.81 8 7
* On a scale of 1 to 4 with 4 being the highest
** Derived from Farragher (1984), Exhibit 8.

TABLE 12
Degree of Difficulty of Different
Phases in the Capital Investment Decision Process

Phase Malaysia Singapore USA**


Score* Ranking Score* Ranking Ranking
(a) Forecasting risk 3.37 1 3.39 1 1
(b) Search for
investments 3.00 2 3.38 2 4
(c) Adjusting ROR/
value for risk 2.91 3 2.81 4 2
(d) Decision making
(selection) 2,65 4 2.79 5 5
(e) Forecasting
cash flows 2.39 5 2.97 3 3
(f) Implementation 2.28 6 2.43 6 6
(g) Calculating
ROR/Value 2.06 7 2.41 7 8
(h) Post audit 2,00 8 2.32 8 7
* On a scale of 1 to 4 with 4 being the highest
** Derived from Farragher (1984), Exhibit 8.

U.S. Perhaps this is partly due to the smaller size of economies and markets of
Malaysia and Singapore. It is more difficult and thus it has a higher ranking in im-
portance than the ranking by U.S. companies (TABLE 11). Although implementa-
tion control and post-audit have low rankings in difficulty, Malaysia and Singapore
companies do not often spend time on these activities (TABLE 10).

CONCLUSIONS
This paper presents survey results on capital investment practices of large corpo-
rations in Malaysia, Singapore and Hong Kong. We find that Malaysia and Singa-
pore companies are more likely to conduct continual search for investment op-
portunities than Hong Kong companies. The popular primary evaluation
Asia Pacific Journal of Management, January 1987 121
techniques are still payback and accounting rate of return in Malaysia, Singapore
and Hong Kong, followed by discounted cash-flow techniques. These results are
just the reverse of U.S. practices where payback and accounting rate of return
are dramatically less popular. However, Malaysia, Singapore and Hong Kong
companies seem to use multiple techniques, both simple and sophisticated, in
evaluating investment projects, while U.S. companies appear to make great use
of discounted cash-flow rate of return.
Most Malaysia, Singapore and Hong Kong companies often make annual cash-
flow forecasts over the life of a project. However, they do not undertake much
analysis of risk involved in the project; neither attempting to measure risk nor ad-
justing evaluation criteria to reflect the perceived risk. The popular risk measure-
ment techniques are simple sensitivity analysis and high-medium-low forecasts.
Similar to U.S. companies, Malaysia, Singapore and Hong Kong companies do
not often monitor the implementation of accepted investment proposals and
post-audit implemented projects. Also, there is room to improve the distribution
of post-audit data to all participants in the capital investment process.
Given minor variations, the rankings of different phases in capital investment de-
cisions according to degrees of importance and difficulty by Malaysia and Singa-
pore executives are similar to those rated by U.S. executives. However, it is in-
teresting to note that although project implementation has a high ranking in impor-
tance and a low ranking in difficulty, Malaysia and Singapore companies do not
always monitor the schedule of implementation. Similarly, post audit of im-
plemented projects seems to have a low degree of difficulty and yet it is not often
done by Malaysia and Singapore companies. It is hoped that this study will
prompt these companies to review their capital investment decision process and
make improvement.

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