Invest Hong Kong and its objectives

 In Economic Development & Economy
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A speech delivered at a speaker luncheon of Hong Kong Democratic Foundation on 18 December 2001

 

The work of Invest Hong Kong, said Mr Rowse, should be viewed in the context of the Hong Kong economy. The “big story” for Hong Kong – Mr Rowse acknowledged that as a former journalist he looked for the story – began in 1978 with the decision of the National People’s Congress to open China up under the Open Door policy. This was followed by the creation of the first Special Economic Zone the following year in Shenzhen. What had happened in the 20 years that followed was extraordinary. 200 million people were lifted out of poverty – more people, at a faster rate, than had happened anywhere before in human history.

 

Hong Kong’s economic role

This momentous development had had major consequences for the Hong Kong economy. At that time, in the late 1970s, Hong Kong was a major manufacturer, with 25% of its GDP and just under a million of its workforce attributable to this activity. Singapore was in a comparable position. But at this point the strategies of the two cities diverged. The Singapore Government made a conscious decision to stay in manufacturing, and today roughly the same proportion of its GDP comes from that sector. However, the Hong Kong Government made no such decision. And today, only 5% of Hong Kong’s GDP and two hundred thousand or so of its workforce are in manufacturing.

 

Hong Kong is a provider of international services to the whole of the Mainland.

 

Hong Kong’s manufacturing had moved to the Mainland. Now Hong Kong-owned factories employed five million or perhaps even six million people in the Pearl River Delta. So Hong Kong was still involved in manufacturing, acting as a service centre for industrial processes carried out across the border. And Hong Kong was a provider of international services to the whole of the Mainland.

 

Regional headquarters

Two statistics were particularly telling of Hong Kong’s new role, said Mr Rowse. The first was the number of regional headquarters and regional offices set up in the territory. The Census and Statistics Department (CSD) collected the data, but would not provide the raw data to him to enable him to build up a database on the companies concerned. This would be contrary to the law, and although this was inconvenient to him, the Government’s adherence to the rule of law was a much greater benefit to him, being one of the key attractions of Hong Kong to the international business community. As at 1 June 2000, there were 3001 regional headquarters and offices in Hong Kong, 20% more than the preceding year. And the figure for 1 June 2001 was 3,237, a rise of 8%. This showed a tremendous vote of confidence in Hong Kong from the international business community.

 

The business press were not very kind to Hong Kong – especially the Hong Kong business press. Yet this same press had been reporting an average of one new regional office a week being set up in the territory since 1 June. In the absence of the detailed statistics from the CSD, this was his main source of data, said Mr Rowse. And the numbers that would be announced by the CSD late next year would probably show an increase in excess of this rate. For example, he had recently attended the opening ceremony for the regional office of Eli Lily, a Fortune 500 company, and had sent a press release to several newspapers, but the editors had binned the story and no reports appeared. There were probably many more cases like that that he did not hear about.

 

Foreign direct investment

The other key statistic was foreign direct investment (FDI) in Hong Kong. Here the statistics were compiled by the CSD on a calendar year basis and in accordance with the International Monetary Fund (IMF)’s guidelines for developed countries. The figures had been rising rapidly in recent years, from US$14 billion in 1998 to US$24 billion in 1999 and US$64 billion in 2000. The 2000 figure included a single transaction of US$23 billion, representing a transfer of assets from the Mainland parent to its Hong Kong listed subsidiary which was settled by issuance of shares in the subsidiary. Under IMF guidelines, this counted as FDI.

 

Mr Rowse admitted that there were difficulties in interpretation of Hong Kong’s FDI statistics. Some of the transactions caught by the statistics were in fact routine corporate transactions such as retention of earnings by the Hong Kong subsidiary. And much of the money went into Hong Kong and out again almost immediately: outward FDI by Hong Kong businesses in 2000 was around US$63 billion. To some extent this was artificial. If you drew a line around New York, and counted flows between it and the rest of the US as foreign investment, the figure would also be very large. But what the statistics revealed was that Hong Kong was performing its role admirably. That was what a financial centre was supposed to do – act as an entrepot for money transactions between third parties. Hong Kong was one of the major global centres for such activity.

 

Invest Hong Kong’s activities

What did Invest Hong Kong do? It had needed a complete revamp, said Mr Rowse. Its activities had been oriented to attracting manufacturers to the territory. But this was no use now, given our high costs and limited resources. Now Invest Hong Kong identified nine priority sectors, mainly services. And it had four activities.

 

  1. If companies approached them, said Mr Rowse, they would respond and assist them in any way practical. For example, they would provide companies with information, assist with visa applications and school places. Their approach was proactive, for example, if a company asked five questions but had overlooked a related sixth question, they would supply the missing answer as well.
  2. Invest Hong Kong would proactively approach overseas companies in the nine priority sectors which were not represented in Hong Kong to invite them over here.
  3. Then there was aftercare. Although people tended to focus on new companies setting up in the territory, in fact experience in some economies was that up to 90% of inward FDI came from existing companies deepening their investment. For example, if Exxon Mobil built a new power plant with China Light and Power this would be a huge inward investment, but people would take it for granted. In terms of aftercare, Invest Hong Kong took care to cover not only company representatives in Hong Kong but also those in headquarters overseas. There was usually no need to extol Hong Kong’s advantages to overseas executives already here. They were on our side. It was the people overseas who would look at the costs, the salary levels, and have doubts about Hong Kong. Those were the people that we had to reach.
  4. Lastly, Invest Hong Kong ran a proactive marketing campaign, keeping the message in front of people that Hong Kong was good for business and that Invest Hong Kong was working for them. This reassured companies already here that they had made the right decision. And it prepared the ground for approaches to overseas companies.

 

China’s WTO entry?

What would happen to Hong Kong following China’s entry into the World Trade Organisation (WTO)? asked Mr Rowse. It was not what would happen, it was what had happened, he said. Hong Kong and the international business community had already started adjusting. Businessmen did not wait until a thing had happened before they started acting. Civil servants were like that, always looking backward to what had happened, because in government foresight was punished. But businessmen were forward-looking. They had looked at China’s imminent WTO entry and many of them had decided, “We want to go to Hong Kong and be ready.”

 

This was particularly true for overseas small and medium enterprises. Very large companies like General Motors had the resources to go directly into the Mainland, and accept several years of initial losses as the price of their investment – as had in fact happened to GM. But smaller enterprises could not afford this. They had to break even in the first year, and make profits thereafter. The only way they could do this was to partner with a Hong Kong enterprise, or by employing a Hong Kong manager.

 

Businessmen have looked at China’s imminent WTO entry and many of them have decided, “We want to go to Hong Kong and be ready”.

 

Hong Kong’s transition was still continuing. A lot of companies had been relocating their back office operations into the Mainland to take advantage of the lower costs. For example, Directory Enquiries English answering service centre had been in Guangdong for 10 years. This transition would continue: lower value-added activities moving to the Mainland and being replaced by higher-valued added. It was positive for Hong Kong. For in the longer run, China would need, not one international service centre to serve its continental economy, but several.

 

Did Invest Hong Kong target Mainland companies? Absolutely, said Mr Rowse. He had identified three target audiences.

 

  • Firstly, Mainland companies already in Hong Kong. They needed aftercare, both their representatives in Hong Kong and especially their headquarters in Beijing or Shanghai.
  • The second target was Mainland companies not already in Hong Kong. For example, the private sector now contributed an enormous share of the economy. Surely many of them would want to come to Hong Kong to raise funds and expand internationally. To reach companies like these, one needed a Mainland presence. And Mr Rowse was pleased to say that he would soon have one: there would be three investment promotion staff in the new government Economic & Trade Office to be established in 2002 in Guangzhou. So he had one staff, he said, for each 400 million of China’s population! But he hoped to work more closely with the TDC in future. The TDC had offices in many Chinese cities – although he was not quite clear what they all did – and surely there was potential to work together.
  • Thirdly, there was joint promotion of Hong Kong and the Pearl River Delta. This was rational: the message to foreign manufacturers would be, set up your regional office and design and marketing functions in Hong Kong, and your factory in Dongguan. But consider the political difficulties that would involve, said Mr Rowse. His own legislators would say, well done, you got the headquarters, but you gave away the factory to Dongguan. And the Dongguan officials would receive complaints from their people – why did you let Hong Kong get the regional office?

 

If your people can only read, even on the Internet, what the Government permits them to read, you cannot be an international financial centre.

 

Would RMB convertibility hurt Hong Kong’s value proposition? Mr Rowse felt that this would have only a superficial effect. A convertible currency was only one of the factors that made you an international financial centre, you needed the rule of law, professional services, regulatory know-how and many other things. The legal system and the free flow of information were especially important. If your people could only read, even on the Internet, what the Government permitted them to read, you could not be an international financial centre, said Mr Rowse. You just could not be a player.

 

Perhaps when the RMB was convertible, Shanghai would be a major centre for international RMB transactions. But even there, Hong Kong could play too, said Mr Rowse. We had everything ready: the laws, the experience, the professional services, the whole soft infrastructure. We would take some of the RMB business when it became lawful. But that might not be for some years in any case.

 

Hong Kong future

What about Hong Kong’s future? Here there were three things that the Hong Kong Government had to do, said Mr Rowse.

 

  1. It had to preserve the quality of the product, the legal system, the free flow of information and so on.
  2. Secondly, Hong Kong had to upgrade its skill levels. The education system was inadequate. It was not hopeless – witness the numbers of Hong Kong students who went to leading overseas universities such as Yale and excelled there – but it was not good enough. Retraining was also important.
  3. Thirdly, Hong Kong had to be open to the best and brightest from the Mainland. You could not be the New York of China relying exclusively on people born on the equivalent of Manhattan Island. You had to admit talent from the whole nation. The existing scheme for admission of talent, now three years old, was hopeless. The scheme recently announced was better, but restricted to the IT and financial services sectors. It was not that admitting one Mainland worker displaced one Hong Kong worker from a job. Rather, if companies were denied the right to recruit from the Mainland they might not come to Hong Kong at all, and you would lose many jobs.

 

Singapore and Taiwan?

Was Singapore a threat? Mr Rowse said that his concern was that Singapore was not enough of a threat. The city state was in deep trouble. The authorities had been unable to follow Hong Kong in developing a symbiotic relationship with their hinterland. Indonesia and Malaysia were too protectionist. Ideally, as in Hong Kong’s case, manufacturing would be relocated to lower cost areas in these countries and Singapore would take over the supporting services. But Malaysia would not cooperate in such a strategy. It had tried to keep the services within Malaysia itself, promoting Labuan as an international financial centre, developing the Multimedia Corridor, and stopping trading in Malaysian company shares on the Singapore stock exchange. All these decisions were counter-rational, and hurt everyone’s interests. So Singapore was forced to compensate by subsidizing manufacturing to retain it. This was again economically non-rational. Although the inefficiencies inherent in such an approach had been masked during the years of high growth, they were now being revealed. One consequence of this was that Singapore might, in its desperation, spoil the market by throwing incentives at multinationals to relocate there.

 

What if Taiwan opened direct links with China? In such scenario, what would be lost? asked Mr Rowse. Taiwan businesses had a great deal of investment in East China, and up to half a million Taiwanese reportedly lived on the Mainland. What would change? These people and businesses would still be there, they would still need services, and the best place to source their services would continue to be Hong Kong.

 

 

Mike Rowse (盧維思)

Director General of Investment Promotion Invest Hong Kong (署署長)

18 December 2001

 

 

 

 

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