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Asian Education and Development Studies
Emerald Article: Hong Kong and the knowledge-based economy: developments
and prospects
Alan Lung Ka-Lun



Article information:
To cite this document: Alan Lung Ka-Lun, (2012),"Hong Kong and the knowledge-based economy: developments and prospects", Asian
Education and Development Studies, Vol. 1 Iss: 3 pp. 294 - 300
Permanent link to this document:
http://dx.doi.org/10.1108/20463161211270509
Downloaded on: 23-10-2012
References: This document contains references to 6 other documents
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AEDS
1,3
                                        Hong Kong and the knowledge-
                                        based economy: developments
                                                and prospects
294                                                                        Alan Lung Ka-Lun
                                              Asia Pacific Intellectual Capital Centre, Hong Kong SAR, China

                                     Abstract
                                     Purpose – The purpose of this paper is to examine Hong Kong’s future economic diversification
                                     prospects to become a high value-added knowledge-based economy.
                                     Design/methodology/approach – This paper is a view of the knowledge-based economic
                                     development of Hong Kong and its potential future prospects since its re-unification with China. It is
                                     important to have a good understanding of the past before trying to predict the future.
                                     Findings – The key message is that Hong Kong now needs a “horizontal” support structure, a good
                                     understanding of how things work in a globalized knowledge economy, continuation of the “free
                                     market” structure and a lightweight facilitation system that supports all high-value added economic
                                     activities in Hong Kong.
                                     Originality/value – The papers provides an original viewpoint on the potential for Hong Kong’s
                                     knowledge-based economic development, in line with the rise of China as a global economic power.
                                     Keywords Hong Kong, Innovation, Economic growth, Globalization, Knowledge-based economy,
                                     Research and development
                                     Paper type Viewpoint


                                     Introduction
                                     As the current HKSAR administration comes to the end of its term, this is probably
                                     a good time to catch a glimpse of our past, so that we could have a better
                                     understanding of our future. This paper is about Hong Kong’s future economic
                                     diversification prospects to become a high value-added knowledge-based economy. It is
                                     not a dissertation about science and technology, nor is it an account of what Captain
                                     Charles Elliot (the first colonial administrator of Hong Kong) and the 28 colonial
                                     governors did in Hong Kong from 1842 to 1997. One of the strategies Hong Kong could
                                     consider to achieving such a goal is to make best use of our traditional strengths to find
                                     a unique “market niche” in the new opportunity provided by China’s rise and in a
                                     global economy driven by innovation and technology. However, we need to have a good
                                     understanding of the past before we try to predict the future. So perhaps we should
                                     start the story from the early 1900s when Hong Kong began building up its modern
                                     economic capacity.

                                     Hong Kong has always been about free trade
                                     Hong Kong was still a young colony at the time the University of Hong Kong was built
                                     in 1912. Shanghai was the centre of trade in China and was very much the focus of
                                     attention throughout the roaring 1920s and 1930s. Hong Kong has always been about
Asian Education and Development      free trade and has been innovative in trade. Probably because of this “trader
Studies
Vol. 1 No. 3, 2012
                                     mentality”, we do not see the need in investing in the long term or in research and
pp. 294-300                          development as an economic development capacity. Hong Kong’s rapid rise to become
r Emerald Group Publishing Limited
2046-3162
                                     the trade and financial centre of Asia started at the end of the Second World War.
DOI 10.1108/20463161211270509        Triggered by the founding of Communist China, there was a flight of capital,
entrepreneur skills and cheap labour from the Mainland in the late 1940s and                 Hong Kong:
throughout the 1950s and 1960s. Hong Kong continued to thrive in the 1970s under           developments
British rule: experienced colonial administrators had provided the basic infrastructure
as well as the legal and administration system that enabled trade and business to          and prospects
thrive in Hong Kong. During the same period, China continued to make economic
mistakes and had remained an inward-looking country isolated from the world’s
economic development. It was not until the end of the Cultural Revolution (1966-1976)              295
and the beginning of Deng Xiao-ping’s “Reform and Opening” that China started its
modernization programme.
   By that time, Hong Kong had already become one of the four “Asian Dragons”,
along with South Korea, Singapore and Taiwan, between the early 1960s and 1980s.
The beginning of the transfer of Hong Kong’s manufacturing industries into the Pearl
River Delta coincides with Mainland China’s “Reform and Opening” in the early 1980s.
Hong Kong provided a third of China’s foreign investment in the early days of China’s
“Reform and Opening”. Today’s China is the second largest economy of the world,
accounting for more than 10 per cent share of the world’s GDP. China is still at the
“Stage 2” of economic development where the main driver for growth is “efficiency”.
Hong Kong, however, has developed economic status to the “Stage 3” of economic
development (World Economic Forum, 2010). Over 90 per cent of today’s Hong Kong
GDP comes from the “service” sector and the main driver for this type of economy is
“innovation” – not the more basic things such as “infrastructure”, “institution” and the
overall efficiency of the economy which Mainland China is trying to achieve.
   Along with Japan, Singapore and South Korea, Hong Kong is listed amongst the
“OECD Countries” of Asia. Hong Kong is an economic miracle that took a different
route from Japan and the other “Asian Dragons”. Japan’s technological capacities
were built since the Meiji period of late nineteenth century. South Korea, Singapore
and Taiwan have all developed strong scientific and technological capacities out of
necessity or an economic survival instinct. Even up to 2012, Hong Kong has largely
been run under the economic philosophy of “positive non-intervention” of John
Cowperthwaite (Hong Kong Financial Secretary from 1961-1971). Hong Kong is about
free trade. Cowperthwaite believes in the free market – he explained that the aggregate
decision of businessmen is more likely to be right than the centralized decisions of a
government when he made his first budget speech in 1961.
   Today’s Hong Kong has all the necessary conditions to become a “knowledge-based
economy”. We are probably better placed that any other cities in China to start the
journey for Hong Kong and for China as a whole. However, unlike Mainland China,
Hong Kong has almost no experience in building up research and development (R&D)
capacity or related economic activities that require a longer-term view into the future.
Yes, there was a short departure from this “proven” Cowperthwaite strategy under
Tung Chee Hwa, the first Chief Executive of HKSAR, who coined the “four pillar
industries” – “financial services”, “trade and logistics”, “tourism” and “professional
service”. Against traditional wisdom of “free trade” and “positive non-intervention”,
Tung took Berkeley Professor Tien Chang-lin’s advice and pushed ahead with building
the Hong Kong Science and Technology Park and started funding initiatives under
the Innovation and Technology Commission. Tung resigned in March 2005 but he
should be given the credit for having the foresight to build up the innovation and
technology capacity Hong Kong now has today.
   It is probably fair to say that Donald Tsang, the second Chief Executive, who led the
HKSAR Government since April 2005 has largely reverted back to the Cowperthwaite’s
AEDS   economic philosophy, except in developing the financial industries quite aggressively.
1,3    In September 2006, Donald Tsang explained that he was certain that citizens in
       Hong Kong would endorse his policy of “big market, small government” and that there
       was consensus in the community that the government’s basic role was to provide
       a framework for the market to operate effectively. Donald Tsang, who was
       Hong Kong Financial Secretary from 1995 to 2001, has remained a good student of
296    Cowperthwaite and other financial secretaries of Hong Kong who preceded himself. Yet
       after the Global Financial Crisis of 2008, Tsang launched the “six new economic
       pillars” (“education services”, “cultural and creative industries”, “inspection and
       certification”, “medical services”, “environmental protection industry” and “innovative
       science and technology”) alongside the “four pillar industries” of Tung Chee-hwa.
       The conflict between these two opposite economic philosophies of “free market” v.
       “picking winners” was never resolved during Tsang’s regime. Probably because of this
       unresolved conflict at the philosophical level, the “six new economic pillars” were not
       executed fully in the three years since it was announced in 2008.
           Its seems to me that Hong Kong does not understand that more advanced
       OECD countries tend to deploy a “horizontal” industry-support strategy and offers
       support to all knowledge-intensive industries and not the “vertical” support approach
       of picking winning industrial sectors in centrally planned economies. John
       Cowperthawaite’s instinct was probably correct. In a free market economy,
       government cannot predict the winning industries and where the next burst of
       economic growth might come from. However, Hong Kong does seem to fully
       understand Cowperthawaite’s philosophy as one of the requirements of “positive
       non-intervention” is the “positive” part – that government must not stand still and
       must do as well as it possibly could.

       What the World Economic Forum’s “Global Competitiveness Report” tells us?
       Publicity churned out by the HKSAR Government always highlights Hong Kong’s
       “freest economy” rating and Hong Kong’s global competitiveness ranking. It seems
       that the Government genuinely cares about those ratings but is less interested
       in publicizing that the World Economic Forum acknowledges that growth of the
       advanced economies of the world come from “innovation” not “infrastructure” and
       “efficiency factors” alone.
           The World Economic Forum’s Global Competitiveness Report 2010-2011 lists Hong
       Kong amongst the OECD countries at “Stage 3 development” – where “innovation” –
       not “basic requirements” and “efficiency enhancers” – are the key driving force for
       further economic growth. Out of 139 countries and territories surveyed, Hong Kong
       has an overall ranking of 11th, ahead of Mainland China (27th), South Korea (22nd), UK
       (12th) and Taiwan (13th) but behind Singapore (third) and Japan (sixth).
           Hong Kong ranks first in the world in terms of meeting the overall “basic
       requirements” category of economic development pillars – particularly achieving the
       world Number 1 position in the second pillar of “Infrastructure”. Hong Kong is also
       Number 2 in the world in terms of meeting the overall “efficiency enhancers”
       requirements – in particular achieving the world Number 1 ranking in our sixth pillar
       of “financial market development”. Hong Kong is now ahead of New York and London
       in this particular economic development pillar. However, Hong Kong ranks number
       24 in terms of overall “innovation and sophistication factors” – doing poorly in the
       11th pillar of “business sophistication” (17th) and 12th pillar of “innovation” (29th).
       The Report also shows that Hong Kong is under-performing in terms of the fifth
pillar of “high education and training” when compared to the average amongst the            Hong Kong:
OECD countries.                                                                           developments
Hong Kong must find its own market niche                                                  and prospects
From the figures, it seems that further economic growth in Hong Kong cannot
come from further investment in hard infrastructure alone. Such investment will
deliver diminishing economic returns and does not necessarily create the driving forces           297
now needed by Hong Kong as an advanced “OECD economy”. Investing in massive
construction projects does not create the high-quality employment opportunities
expected by the younger generation either. In the “efficiency enhancement” area, Hong
Kong is already at the top of the world rankings in terms of its “financial market
development”. Yes, Hong Kong should try to consolidate this Number 1 position, but a
narrow focus in the financial industry cannot bring the economic diversification
needed. Letting Hong Kong be at the mercy of a turbulent global financial market
cannot be the only answer for economic growth either.
    As a developed and high-cost territory, Hong Kong does not have many choices
but to follow the examples of the OECD countries, become innovative and support all
high-value-added industries, regardless of whether they are “R&D”, “service” or
“manufacturing” industries. As part of China under “one countries, two system” and
yet seamlessly connected to the economies of the world, Hong Kong is an extremely
good position to connect Mainland China to the world and extract extremely
high-economic value from it. Such economic activities could include assisting
Mainland enterprises to “go out” or to assist international companies to use Hong Kong
to “go into” China. Particularly, Hong Kong should make best use of some of its
traditional strengths that include a separate legal and administrative systems and
further developing Hong Kong professional service capacity into an economic
development capacity that can handle “commercialization” of scientific output from
Mainland China and around the world.
    In this future process of economic transformation, Hong Kong cannot be completely
ignorant of “R&D” and technology. Hong Kong should not repeat what Mainland
China and the world are already doing either. One of the strategies Hong Kong could
consider is to focus on the last 10 per cent of the process that leads to
commercialization of products. Such an approach will involve broad upgrading
of our knowledge-based economy capacity, including R&D, industrial and professional
service capacities. This is not a narrow “picking winners” approach to economic
development as described by the opponents of “innovation and technology”.
    Coordinated economic diversification strategy and policy measures need to be
identified by the incoming HKSAR Government and implemented properly in the next
five to ten years (see Lung, 2011b). To begin with, Hong Kong should recognize that
China is now rich and money from Hong Kong will be of less relative valued when
compared to the early days of “Reform and Opening”. Hong Kong’s intangible
competitive advantages are often referred to as Hong Kong’s “soft power” – rule of law,
efficient institutions, the freest economy in the world, corruption free government,
freedom of speech and free flow of information, 1 July 2012 is the beginning of a five
(or ten) year period. This presents an opportunity for change and for Hong Kong to
think hard about what we ought to be doing to achieve sustainable economic growth in
the next ten year.
    Hong Kong is well placed to transform itself from a traditional “trading hub” to
become as well a “knowledge hub” and a key player in the globalized knowledge
AEDS   economy. The key concept behind the proposed “market niche” is that Hong Kong
1,3    already has all of the “soft power” which Mainland China is still trying to develop.
       With the small addition of a strategy, more coordinated government policies,
       and cooperation from the regional economies in Europe and around the world that wish
       to work with China, Hong Kong has everything it needs to turn itself into a world class
       knowledge-based economy. In this transformation process, Hong Kong can reap very
298    substantial economic benefit by positioning itself as the centre of excellence for
       technology commercialization for China as a whole.

       Hong Kong’s innovation and technology role in China’s 12th Five-Year Plan
       Hong Kong must not write off the National 12th Five-Year Plan idea as nothing more
       than central planning. Despite conflicting views about central economic planning,
       Hong Kong cannot afford not to try to find a footing (positioning) and a more active
       role in China’s 12th Five-Year Plan. Insisting on “laissez-faire” is not a feasible
       alternative. At the very least, Hong Kong must not miss out on China’s rapid economic
       development and run the risk of becoming totally irrelevant to the second largest
       economy in the world (Lung, 2011a).
           Hong Kong should not look at the exercise from a pure mercantile viewpoint
       and an opportunity to grab more commercial interests either. No one should believe
       that Shanghai – or any city or province in China – would stop developing because
       of successful jockeying of certain narrow economic benefits for Hong Kong from the
       Central Government through the 12th Five-Year Plan. We should, therefore, take a
       wider social and economic development view on Hong Kong. At the same time, we
       should examine what specific strategy Hong Kong might undertake to help China’s
       national development objectives, and how Hong Kong might make use of this
       opportunity for our own economic transformation.
           As stated in the National 12th Five-Year Plan, economic planners at the Central
       Government level would support Hong Kong’s: consolidation and advancement in its
       roles as international finance, trading and logistics centres; innovation capacity in
       business and industries; coordinated economic and social development; and regional
       economic cooperation between Guangdong, Hong Kong and Macau. For the purpose of
       finding a useful role for Hong Kong, we should treat these objectives as some of the
       desirable goals and not as unmovable directives from above.
           Specific factors which give Hong Kong distinct advantages over Mainland China in
       the area of “innovation and technology” include: a free press, freedom of information,
       rule of law, a corruption free and professional civil service and a very liberal and free
       thinking environment. Hong Kong is a territory of China that has done most of the
       important things right and a territory Mainland China could continue to look at when
       faced with confusion regarding policy choices. Hong Kong does have some advantages
       in terms of rule of law and societal freedom. This is the main reason why Google
       decided to “shut down” Google-Beijing and China Telecom made up its mind to set up
       its “International Headquarters” in the HKSAR where data can be protected far more
       easily than the Mainland. As of 2012, about ten major data centres, such as Google,
       HSBC and China Telecom, are being built in Hong Kong. These Hong Kong advantages
       have also been described as the essential “first-level business conditions” which enable
       Hong Kong to develop all the “second-level business conditions” – the essential
       ingredients to turn into a world-class innovation and technology centre and incubation
       and commercialization hub to service R&D outputs from Hong Kong, Mainland China
       and from the world (Hong Kong Bauhinia Research Foundation, 2006, 2007). However,
compared to the size, scale and experience in commercialization that the Mainland             Hong Kong:
universities have already possessed, Hong Kong does not really have any advantage           developments
over the Mainland. The Hong Kong higher education does not really invest heavily in
research and technology, compared to the Mainland counterpart.                              and prospects
Lessons from OECD countries
The knowledge-based economy is not just about creating or pushing back the frontier                 299
of knowledge. It is also about the creation of wealth through commercialization
of knowledge. The OECD defined “knowledge-based economies” as economies that are
directly based on the production, distribution and use of knowledge and information. It
was estimated that more than 50 per cent of GDP in the major OECD economies is
“knowledge-based” (OECD, 1996). There is a higher demand for highly skilled workers
in knowledge economies and correspondingly higher unemployment rate for those
with lower-secondary education. While OECD countries have been losing jobs in the
manufacturing industries, employment is growing in the high-technology, high-skilled
sectors such as computers and pharmaceuticals.
    Facilitation from HKSAR Government is probably necessary. Such a move should
not be equated to Hong Kong abandoning the “free market” principle. A coordinated
policy and some facilitation would support creative and scientific start-ups, and the
R&D outputs from Mainland China and Hong Kong, and would absorb the supply
of young university graduates effectively. Hong Kong, however, has been applying its
knowledge and strength in a rather piecemeal fashion. The “intellectual argument”
behind Hong Kong’s economic development is an on-going issue amongst detractors
(and therefore the general public) who might see any sort of government “facilitation”
as economic “intervention”.
    In fact, this is just only one of the many “intellectual arguments” amongst many
social, economic and political issues faced by Hong Kong. Hong Kong is the part of
China that has been doing all the important things right: now the British are gone,
we must think for ourselves. Based on its own unique history and political position as
part of China under “one country, two systems”, we must find our own irreplaceable
role in the context of Hong Kong as a city of China. The need to avoid failures also
needs to be balanced against the opportunities of success, national goals and the social
and economic well-being of Hong Kong’s own population. Hong Kong has always been
pragmatic. We have always faced difficulties with optimism and found solutions. We
have always done it through hard work – not lingering inactivity.
    Practically, we have much to learn from some OECD countries. For example, the
Finland model is relatively unrivaled as its “old money” (i.e. funded by very wealthy
industrialists, the so-called “grateful entrepreneurs” who have made billions from
the production of pulp and timber) is used to help technology start-up through a very
specific incubation programme at some Finnish universities. The Finnish model
demonstrates how universities engage in technology-related investment – a
phenomenon found in Mainland China but not really in the case of the HKSAR.
Besides, there are also other models for the HKSAR government and higher education
to consider. In Canada, almost half of the universities are now following the “University
of Waterloo (UW) Model” in which university researchers can develop and possess
their own patents – precious products of their innovation and creativity. However,
according to the Chairman-Designate of the Canadian Association of University
Technology Manager, who is actually a Canadian scholar from the University of
Ottawa whom I met in Beijing in 2012, said that there is no evidence showing those
AEDS   Canadian universities that follow the UW model are working better and more
1,3    successfully than the other universities. In short, Hong Kong may need to experiment
       with everything that can contribute to technological innovation and also economic
       profits – not an easy task amidst the need to change business culture and to build
       territory-wide community consensus.
          It has been 15 years since Hong Kong’s reunification with China but the big
300    hurdle to Hong Kong’s successful development into a world class knowledge economy
       is still an unsolved intellectual argument. This paper does not advocate a “vertical”,
       sector-by-sector approach to economic facilitation. The key message is Hong Kong
       now needs a “horizontal” support structure, a good understanding of how things
       work in a globalize knowledge economy, continuation of the “free market” structure
       and a light weight facilitation system that supports all high-value added economic
       activities in Hong Kong. In Beijing, our national leaders have kept the promise and
       have been relying on Hong Kong people running Hong Kong under “one country, two
       systems”. The world is now watching. It is now up to us to find our own way to develop
       Hong Kong into a world class knowledge-based economy.
       References
       Hong Kong Bauhinia Research Foundation (2006), “Hong Kong competitiveness: a
            multidimensional approach, phase I report: international views of Hong Kong’s
            competitiveness”, available at: www.bauhinia.org/ESA-Bauhinia-Part1-Report-2006-09-
            26-A.pdf (accessed 24 May 2012).
       Hong Kong Bauhinia Research Foundation (2007), “Hong Kong competitiveness: a
            multidimensional approach, phase II report: industry level competitiveness”, available
            at: www.bauhinia.org/index_en.php
       Lung, A. (2011a), “Hong Kong’s innovation and technology role in Mainland China’s 12th five
            year plan”, available at: www.apicc.asia/wp-content/uploads/2011/03/HKs-Inno-Tech-Role-
            in-12-5.pdf (accessed 24 May 2012).
       Lung, A. (2011b), “Policies and practices for Hong Kong as a knowledge economy and the
            proposed innovation and technology bureau”, available at: www.apicc.asia/wp-content/
            uploads/2011/11/Inno-Tech-Bureau-English-25-7-2011.pdf (accessed 24 May 2012).
       Organization for Economic Co-operation and Development (1996), The Knowledge-Based
            Economy, OECD, Paris.
       World Economic Forum (2010), The Global Competitiveness Report 2010-2011, World Economic
            Forum, Geneva.
       About the author
       Alan Lung Ka-Lun was born and educated in Hong Kong. He was also educated at the University
       of Wisconsin in the USA and Wilfrid Laurier University in Canada. He chairs the Hong Kong
       Democratic Foundation (www.hkdf.org), a political and public policy think tank founded in 1989.
       He is skilled in converting his knowledge of governments and public policies into practical steps
       to move forward “Knowledge Economy” initiatives. He is a member of the Innovation and
       Technology Advisory Committee of the Hong Kong Trade Development Council (HKTDC) and
       he has been promoting innovation and technology practices in Hong Kong, Guangzhou and
       Beijing through the Asia Pacific Intellectual Capital Centre (www.apicc.asia) (where he is
       Director and General Manager), since 2006. Alan Lung Ka-Lun can be contacted at:
       alanlung@apicc.asia

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Developments & Prospects of HK as a Knowledge-based Economy (Oct 2012)

  • 1. Asian Education and Development Studies Emerald Article: Hong Kong and the knowledge-based economy: developments and prospects Alan Lung Ka-Lun Article information: To cite this document: Alan Lung Ka-Lun, (2012),"Hong Kong and the knowledge-based economy: developments and prospects", Asian Education and Development Studies, Vol. 1 Iss: 3 pp. 294 - 300 Permanent link to this document: http://dx.doi.org/10.1108/20463161211270509 Downloaded on: 23-10-2012 References: This document contains references to 6 other documents To copy this document: permissions@emeraldinsight.com Access to this document was granted through an Emerald subscription provided by Emerald Author Access For Authors: If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service. Information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.com With over forty years' experience, Emerald Group Publishing is a leading independent publisher of global research with impact in business, society, public policy and education. In total, Emerald publishes over 275 journals and more than 130 book series, as well as an extensive range of online products and services. Emerald is both COUNTER 3 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Related content and download information correct at time of download.
  • 2. The current issue and full text archive of this journal is available at www.emeraldinsight.com/2046-3162.htm AEDS 1,3 Hong Kong and the knowledge- based economy: developments and prospects 294 Alan Lung Ka-Lun Asia Pacific Intellectual Capital Centre, Hong Kong SAR, China Abstract Purpose – The purpose of this paper is to examine Hong Kong’s future economic diversification prospects to become a high value-added knowledge-based economy. Design/methodology/approach – This paper is a view of the knowledge-based economic development of Hong Kong and its potential future prospects since its re-unification with China. It is important to have a good understanding of the past before trying to predict the future. Findings – The key message is that Hong Kong now needs a “horizontal” support structure, a good understanding of how things work in a globalized knowledge economy, continuation of the “free market” structure and a lightweight facilitation system that supports all high-value added economic activities in Hong Kong. Originality/value – The papers provides an original viewpoint on the potential for Hong Kong’s knowledge-based economic development, in line with the rise of China as a global economic power. Keywords Hong Kong, Innovation, Economic growth, Globalization, Knowledge-based economy, Research and development Paper type Viewpoint Introduction As the current HKSAR administration comes to the end of its term, this is probably a good time to catch a glimpse of our past, so that we could have a better understanding of our future. This paper is about Hong Kong’s future economic diversification prospects to become a high value-added knowledge-based economy. It is not a dissertation about science and technology, nor is it an account of what Captain Charles Elliot (the first colonial administrator of Hong Kong) and the 28 colonial governors did in Hong Kong from 1842 to 1997. One of the strategies Hong Kong could consider to achieving such a goal is to make best use of our traditional strengths to find a unique “market niche” in the new opportunity provided by China’s rise and in a global economy driven by innovation and technology. However, we need to have a good understanding of the past before we try to predict the future. So perhaps we should start the story from the early 1900s when Hong Kong began building up its modern economic capacity. Hong Kong has always been about free trade Hong Kong was still a young colony at the time the University of Hong Kong was built in 1912. Shanghai was the centre of trade in China and was very much the focus of attention throughout the roaring 1920s and 1930s. Hong Kong has always been about Asian Education and Development free trade and has been innovative in trade. Probably because of this “trader Studies Vol. 1 No. 3, 2012 mentality”, we do not see the need in investing in the long term or in research and pp. 294-300 development as an economic development capacity. Hong Kong’s rapid rise to become r Emerald Group Publishing Limited 2046-3162 the trade and financial centre of Asia started at the end of the Second World War. DOI 10.1108/20463161211270509 Triggered by the founding of Communist China, there was a flight of capital,
  • 3. entrepreneur skills and cheap labour from the Mainland in the late 1940s and Hong Kong: throughout the 1950s and 1960s. Hong Kong continued to thrive in the 1970s under developments British rule: experienced colonial administrators had provided the basic infrastructure as well as the legal and administration system that enabled trade and business to and prospects thrive in Hong Kong. During the same period, China continued to make economic mistakes and had remained an inward-looking country isolated from the world’s economic development. It was not until the end of the Cultural Revolution (1966-1976) 295 and the beginning of Deng Xiao-ping’s “Reform and Opening” that China started its modernization programme. By that time, Hong Kong had already become one of the four “Asian Dragons”, along with South Korea, Singapore and Taiwan, between the early 1960s and 1980s. The beginning of the transfer of Hong Kong’s manufacturing industries into the Pearl River Delta coincides with Mainland China’s “Reform and Opening” in the early 1980s. Hong Kong provided a third of China’s foreign investment in the early days of China’s “Reform and Opening”. Today’s China is the second largest economy of the world, accounting for more than 10 per cent share of the world’s GDP. China is still at the “Stage 2” of economic development where the main driver for growth is “efficiency”. Hong Kong, however, has developed economic status to the “Stage 3” of economic development (World Economic Forum, 2010). Over 90 per cent of today’s Hong Kong GDP comes from the “service” sector and the main driver for this type of economy is “innovation” – not the more basic things such as “infrastructure”, “institution” and the overall efficiency of the economy which Mainland China is trying to achieve. Along with Japan, Singapore and South Korea, Hong Kong is listed amongst the “OECD Countries” of Asia. Hong Kong is an economic miracle that took a different route from Japan and the other “Asian Dragons”. Japan’s technological capacities were built since the Meiji period of late nineteenth century. South Korea, Singapore and Taiwan have all developed strong scientific and technological capacities out of necessity or an economic survival instinct. Even up to 2012, Hong Kong has largely been run under the economic philosophy of “positive non-intervention” of John Cowperthwaite (Hong Kong Financial Secretary from 1961-1971). Hong Kong is about free trade. Cowperthwaite believes in the free market – he explained that the aggregate decision of businessmen is more likely to be right than the centralized decisions of a government when he made his first budget speech in 1961. Today’s Hong Kong has all the necessary conditions to become a “knowledge-based economy”. We are probably better placed that any other cities in China to start the journey for Hong Kong and for China as a whole. However, unlike Mainland China, Hong Kong has almost no experience in building up research and development (R&D) capacity or related economic activities that require a longer-term view into the future. Yes, there was a short departure from this “proven” Cowperthwaite strategy under Tung Chee Hwa, the first Chief Executive of HKSAR, who coined the “four pillar industries” – “financial services”, “trade and logistics”, “tourism” and “professional service”. Against traditional wisdom of “free trade” and “positive non-intervention”, Tung took Berkeley Professor Tien Chang-lin’s advice and pushed ahead with building the Hong Kong Science and Technology Park and started funding initiatives under the Innovation and Technology Commission. Tung resigned in March 2005 but he should be given the credit for having the foresight to build up the innovation and technology capacity Hong Kong now has today. It is probably fair to say that Donald Tsang, the second Chief Executive, who led the HKSAR Government since April 2005 has largely reverted back to the Cowperthwaite’s
  • 4. AEDS economic philosophy, except in developing the financial industries quite aggressively. 1,3 In September 2006, Donald Tsang explained that he was certain that citizens in Hong Kong would endorse his policy of “big market, small government” and that there was consensus in the community that the government’s basic role was to provide a framework for the market to operate effectively. Donald Tsang, who was Hong Kong Financial Secretary from 1995 to 2001, has remained a good student of 296 Cowperthwaite and other financial secretaries of Hong Kong who preceded himself. Yet after the Global Financial Crisis of 2008, Tsang launched the “six new economic pillars” (“education services”, “cultural and creative industries”, “inspection and certification”, “medical services”, “environmental protection industry” and “innovative science and technology”) alongside the “four pillar industries” of Tung Chee-hwa. The conflict between these two opposite economic philosophies of “free market” v. “picking winners” was never resolved during Tsang’s regime. Probably because of this unresolved conflict at the philosophical level, the “six new economic pillars” were not executed fully in the three years since it was announced in 2008. Its seems to me that Hong Kong does not understand that more advanced OECD countries tend to deploy a “horizontal” industry-support strategy and offers support to all knowledge-intensive industries and not the “vertical” support approach of picking winning industrial sectors in centrally planned economies. John Cowperthawaite’s instinct was probably correct. In a free market economy, government cannot predict the winning industries and where the next burst of economic growth might come from. However, Hong Kong does seem to fully understand Cowperthawaite’s philosophy as one of the requirements of “positive non-intervention” is the “positive” part – that government must not stand still and must do as well as it possibly could. What the World Economic Forum’s “Global Competitiveness Report” tells us? Publicity churned out by the HKSAR Government always highlights Hong Kong’s “freest economy” rating and Hong Kong’s global competitiveness ranking. It seems that the Government genuinely cares about those ratings but is less interested in publicizing that the World Economic Forum acknowledges that growth of the advanced economies of the world come from “innovation” not “infrastructure” and “efficiency factors” alone. The World Economic Forum’s Global Competitiveness Report 2010-2011 lists Hong Kong amongst the OECD countries at “Stage 3 development” – where “innovation” – not “basic requirements” and “efficiency enhancers” – are the key driving force for further economic growth. Out of 139 countries and territories surveyed, Hong Kong has an overall ranking of 11th, ahead of Mainland China (27th), South Korea (22nd), UK (12th) and Taiwan (13th) but behind Singapore (third) and Japan (sixth). Hong Kong ranks first in the world in terms of meeting the overall “basic requirements” category of economic development pillars – particularly achieving the world Number 1 position in the second pillar of “Infrastructure”. Hong Kong is also Number 2 in the world in terms of meeting the overall “efficiency enhancers” requirements – in particular achieving the world Number 1 ranking in our sixth pillar of “financial market development”. Hong Kong is now ahead of New York and London in this particular economic development pillar. However, Hong Kong ranks number 24 in terms of overall “innovation and sophistication factors” – doing poorly in the 11th pillar of “business sophistication” (17th) and 12th pillar of “innovation” (29th). The Report also shows that Hong Kong is under-performing in terms of the fifth
  • 5. pillar of “high education and training” when compared to the average amongst the Hong Kong: OECD countries. developments Hong Kong must find its own market niche and prospects From the figures, it seems that further economic growth in Hong Kong cannot come from further investment in hard infrastructure alone. Such investment will deliver diminishing economic returns and does not necessarily create the driving forces 297 now needed by Hong Kong as an advanced “OECD economy”. Investing in massive construction projects does not create the high-quality employment opportunities expected by the younger generation either. In the “efficiency enhancement” area, Hong Kong is already at the top of the world rankings in terms of its “financial market development”. Yes, Hong Kong should try to consolidate this Number 1 position, but a narrow focus in the financial industry cannot bring the economic diversification needed. Letting Hong Kong be at the mercy of a turbulent global financial market cannot be the only answer for economic growth either. As a developed and high-cost territory, Hong Kong does not have many choices but to follow the examples of the OECD countries, become innovative and support all high-value-added industries, regardless of whether they are “R&D”, “service” or “manufacturing” industries. As part of China under “one countries, two system” and yet seamlessly connected to the economies of the world, Hong Kong is an extremely good position to connect Mainland China to the world and extract extremely high-economic value from it. Such economic activities could include assisting Mainland enterprises to “go out” or to assist international companies to use Hong Kong to “go into” China. Particularly, Hong Kong should make best use of some of its traditional strengths that include a separate legal and administrative systems and further developing Hong Kong professional service capacity into an economic development capacity that can handle “commercialization” of scientific output from Mainland China and around the world. In this future process of economic transformation, Hong Kong cannot be completely ignorant of “R&D” and technology. Hong Kong should not repeat what Mainland China and the world are already doing either. One of the strategies Hong Kong could consider is to focus on the last 10 per cent of the process that leads to commercialization of products. Such an approach will involve broad upgrading of our knowledge-based economy capacity, including R&D, industrial and professional service capacities. This is not a narrow “picking winners” approach to economic development as described by the opponents of “innovation and technology”. Coordinated economic diversification strategy and policy measures need to be identified by the incoming HKSAR Government and implemented properly in the next five to ten years (see Lung, 2011b). To begin with, Hong Kong should recognize that China is now rich and money from Hong Kong will be of less relative valued when compared to the early days of “Reform and Opening”. Hong Kong’s intangible competitive advantages are often referred to as Hong Kong’s “soft power” – rule of law, efficient institutions, the freest economy in the world, corruption free government, freedom of speech and free flow of information, 1 July 2012 is the beginning of a five (or ten) year period. This presents an opportunity for change and for Hong Kong to think hard about what we ought to be doing to achieve sustainable economic growth in the next ten year. Hong Kong is well placed to transform itself from a traditional “trading hub” to become as well a “knowledge hub” and a key player in the globalized knowledge
  • 6. AEDS economy. The key concept behind the proposed “market niche” is that Hong Kong 1,3 already has all of the “soft power” which Mainland China is still trying to develop. With the small addition of a strategy, more coordinated government policies, and cooperation from the regional economies in Europe and around the world that wish to work with China, Hong Kong has everything it needs to turn itself into a world class knowledge-based economy. In this transformation process, Hong Kong can reap very 298 substantial economic benefit by positioning itself as the centre of excellence for technology commercialization for China as a whole. Hong Kong’s innovation and technology role in China’s 12th Five-Year Plan Hong Kong must not write off the National 12th Five-Year Plan idea as nothing more than central planning. Despite conflicting views about central economic planning, Hong Kong cannot afford not to try to find a footing (positioning) and a more active role in China’s 12th Five-Year Plan. Insisting on “laissez-faire” is not a feasible alternative. At the very least, Hong Kong must not miss out on China’s rapid economic development and run the risk of becoming totally irrelevant to the second largest economy in the world (Lung, 2011a). Hong Kong should not look at the exercise from a pure mercantile viewpoint and an opportunity to grab more commercial interests either. No one should believe that Shanghai – or any city or province in China – would stop developing because of successful jockeying of certain narrow economic benefits for Hong Kong from the Central Government through the 12th Five-Year Plan. We should, therefore, take a wider social and economic development view on Hong Kong. At the same time, we should examine what specific strategy Hong Kong might undertake to help China’s national development objectives, and how Hong Kong might make use of this opportunity for our own economic transformation. As stated in the National 12th Five-Year Plan, economic planners at the Central Government level would support Hong Kong’s: consolidation and advancement in its roles as international finance, trading and logistics centres; innovation capacity in business and industries; coordinated economic and social development; and regional economic cooperation between Guangdong, Hong Kong and Macau. For the purpose of finding a useful role for Hong Kong, we should treat these objectives as some of the desirable goals and not as unmovable directives from above. Specific factors which give Hong Kong distinct advantages over Mainland China in the area of “innovation and technology” include: a free press, freedom of information, rule of law, a corruption free and professional civil service and a very liberal and free thinking environment. Hong Kong is a territory of China that has done most of the important things right and a territory Mainland China could continue to look at when faced with confusion regarding policy choices. Hong Kong does have some advantages in terms of rule of law and societal freedom. This is the main reason why Google decided to “shut down” Google-Beijing and China Telecom made up its mind to set up its “International Headquarters” in the HKSAR where data can be protected far more easily than the Mainland. As of 2012, about ten major data centres, such as Google, HSBC and China Telecom, are being built in Hong Kong. These Hong Kong advantages have also been described as the essential “first-level business conditions” which enable Hong Kong to develop all the “second-level business conditions” – the essential ingredients to turn into a world-class innovation and technology centre and incubation and commercialization hub to service R&D outputs from Hong Kong, Mainland China and from the world (Hong Kong Bauhinia Research Foundation, 2006, 2007). However,
  • 7. compared to the size, scale and experience in commercialization that the Mainland Hong Kong: universities have already possessed, Hong Kong does not really have any advantage developments over the Mainland. The Hong Kong higher education does not really invest heavily in research and technology, compared to the Mainland counterpart. and prospects Lessons from OECD countries The knowledge-based economy is not just about creating or pushing back the frontier 299 of knowledge. It is also about the creation of wealth through commercialization of knowledge. The OECD defined “knowledge-based economies” as economies that are directly based on the production, distribution and use of knowledge and information. It was estimated that more than 50 per cent of GDP in the major OECD economies is “knowledge-based” (OECD, 1996). There is a higher demand for highly skilled workers in knowledge economies and correspondingly higher unemployment rate for those with lower-secondary education. While OECD countries have been losing jobs in the manufacturing industries, employment is growing in the high-technology, high-skilled sectors such as computers and pharmaceuticals. Facilitation from HKSAR Government is probably necessary. Such a move should not be equated to Hong Kong abandoning the “free market” principle. A coordinated policy and some facilitation would support creative and scientific start-ups, and the R&D outputs from Mainland China and Hong Kong, and would absorb the supply of young university graduates effectively. Hong Kong, however, has been applying its knowledge and strength in a rather piecemeal fashion. The “intellectual argument” behind Hong Kong’s economic development is an on-going issue amongst detractors (and therefore the general public) who might see any sort of government “facilitation” as economic “intervention”. In fact, this is just only one of the many “intellectual arguments” amongst many social, economic and political issues faced by Hong Kong. Hong Kong is the part of China that has been doing all the important things right: now the British are gone, we must think for ourselves. Based on its own unique history and political position as part of China under “one country, two systems”, we must find our own irreplaceable role in the context of Hong Kong as a city of China. The need to avoid failures also needs to be balanced against the opportunities of success, national goals and the social and economic well-being of Hong Kong’s own population. Hong Kong has always been pragmatic. We have always faced difficulties with optimism and found solutions. We have always done it through hard work – not lingering inactivity. Practically, we have much to learn from some OECD countries. For example, the Finland model is relatively unrivaled as its “old money” (i.e. funded by very wealthy industrialists, the so-called “grateful entrepreneurs” who have made billions from the production of pulp and timber) is used to help technology start-up through a very specific incubation programme at some Finnish universities. The Finnish model demonstrates how universities engage in technology-related investment – a phenomenon found in Mainland China but not really in the case of the HKSAR. Besides, there are also other models for the HKSAR government and higher education to consider. In Canada, almost half of the universities are now following the “University of Waterloo (UW) Model” in which university researchers can develop and possess their own patents – precious products of their innovation and creativity. However, according to the Chairman-Designate of the Canadian Association of University Technology Manager, who is actually a Canadian scholar from the University of Ottawa whom I met in Beijing in 2012, said that there is no evidence showing those
  • 8. AEDS Canadian universities that follow the UW model are working better and more 1,3 successfully than the other universities. In short, Hong Kong may need to experiment with everything that can contribute to technological innovation and also economic profits – not an easy task amidst the need to change business culture and to build territory-wide community consensus. It has been 15 years since Hong Kong’s reunification with China but the big 300 hurdle to Hong Kong’s successful development into a world class knowledge economy is still an unsolved intellectual argument. This paper does not advocate a “vertical”, sector-by-sector approach to economic facilitation. The key message is Hong Kong now needs a “horizontal” support structure, a good understanding of how things work in a globalize knowledge economy, continuation of the “free market” structure and a light weight facilitation system that supports all high-value added economic activities in Hong Kong. In Beijing, our national leaders have kept the promise and have been relying on Hong Kong people running Hong Kong under “one country, two systems”. The world is now watching. It is now up to us to find our own way to develop Hong Kong into a world class knowledge-based economy. References Hong Kong Bauhinia Research Foundation (2006), “Hong Kong competitiveness: a multidimensional approach, phase I report: international views of Hong Kong’s competitiveness”, available at: www.bauhinia.org/ESA-Bauhinia-Part1-Report-2006-09- 26-A.pdf (accessed 24 May 2012). Hong Kong Bauhinia Research Foundation (2007), “Hong Kong competitiveness: a multidimensional approach, phase II report: industry level competitiveness”, available at: www.bauhinia.org/index_en.php Lung, A. (2011a), “Hong Kong’s innovation and technology role in Mainland China’s 12th five year plan”, available at: www.apicc.asia/wp-content/uploads/2011/03/HKs-Inno-Tech-Role- in-12-5.pdf (accessed 24 May 2012). Lung, A. (2011b), “Policies and practices for Hong Kong as a knowledge economy and the proposed innovation and technology bureau”, available at: www.apicc.asia/wp-content/ uploads/2011/11/Inno-Tech-Bureau-English-25-7-2011.pdf (accessed 24 May 2012). Organization for Economic Co-operation and Development (1996), The Knowledge-Based Economy, OECD, Paris. World Economic Forum (2010), The Global Competitiveness Report 2010-2011, World Economic Forum, Geneva. About the author Alan Lung Ka-Lun was born and educated in Hong Kong. He was also educated at the University of Wisconsin in the USA and Wilfrid Laurier University in Canada. He chairs the Hong Kong Democratic Foundation (www.hkdf.org), a political and public policy think tank founded in 1989. He is skilled in converting his knowledge of governments and public policies into practical steps to move forward “Knowledge Economy” initiatives. He is a member of the Innovation and Technology Advisory Committee of the Hong Kong Trade Development Council (HKTDC) and he has been promoting innovation and technology practices in Hong Kong, Guangzhou and Beijing through the Asia Pacific Intellectual Capital Centre (www.apicc.asia) (where he is Director and General Manager), since 2006. Alan Lung Ka-Lun can be contacted at: alanlung@apicc.asia To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints