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RESOURCE CENTER

Press Release

Re-establishing Hong Kong’s Competitive Advantage by Refocusing on Value: Executive Summary

2003.08.06

An overall and sustained decline in Hong Kong’s economy has been exacerbated by the SARS crisis, which took a severe toll on many sectors of the economy already suffering the effects of recession.  The objective of our effort was to help develop a view on how SARS had affected Hong Kong’s economy in both positive and negative ways and to chart a course of action for its revival.

We started our effort by gathering the views of Hong Kong’s opinion leaders on the opportunities and challenges in the post-SARS economy.  This drew out a clear concern: Hong Kong needs to address fundamental structural problems in its economy including rising unemployment and competition for investment form Mainland China.  It also needs to encourage growth by developing new sectors of the economy.

We agree that Hong Kong faces these and other severe problems.  But we also feel that, in the general debate, these problems have been parlayed into a number of myths about the challenges facing Hong Kong, Obscuring the true danger: Hong Kong is losing its competitive advantage over other economies in the region.  At least three myths have arisen:

1.             Hong Kong’s role as an intermediary for trade and investment between China and the rest of the world is shrinking, creating high unemployment.

2.             Hong Kong is not competitive because its costs are too high and so it needs to further bring cost down.

3.             Hong Kong’s economic decline is irreversible.

Our task is to dispel these myths and focus instead on the following realities:

1.             Reality 1: Hong Kong must deal with the challenges of a maturing economy like many other similar economies:  While the threat does exist, a substantial reduction in Hong Kong’s intermediary role (disintermediation) has yet to materialize.  Also, while high unemployment is often associated with disintermediation, in reality it is not driven primarily by competition from China.  Much of the unemployment in Hong Kong is caused by structural and cyclical changes as Hong Kong matures into a high-value services economy.  In fact, Hong Kong’s experience is consistent with that of many other mature service economies.

2.             Reality 2: Hong Kong must focus on delivering value as its true source of advantage: Hong Kong can never compete with China on cost factors.  Its distinctiveness lies in delivering value.  Hong Kong should work to maintain its quality premium over competitors.

3.             Reality 3: Hong Kong can reverse its fortunes: The challenges Hong Kong faces are not insurmountable or unique to our economy.  Hong Kong can revive its economy through determined action to address its problems.

We therefore believe that a series of actions are needed to restore our competitive advantage.  Hong Kong must focus on delivering value to businesses- its true source of distinctiveness.  In this report, we offer a direction for efforts to restore and strengthen competitive advantage.

Fulfilling World-Class City Aspirations

We benchmarked Hong Kong against four other international cities: London, New York, Singapore and Shanghai.  We also assessed it against 30 different economic and social indicators, developed from local city and some international survey data, for instance, from The Heritage Foundation and the International Institute for Management Development.  In doing so, we focused on two dimensions of attractiveness: “hardware” and “software”.  The analysis showed that a world-class metro meets certain conditions in terms of “hardware” components and “software” elements.  Hong Kong scores well on some of these and less well on others.

The two hardware components are:

1.            Business: A world-class city has a world-standard financial and business centre, and internationally competitive services industry, a logistics hub for international trade and commerce, a free-trade economy and a research and development sector.

2.            Non-business: A world-class city has private and public healthcare of high standards.  It is an unrivalled gateway to particular region.  It has an excellent transportation and communications system and is committed to urban planning.

Software elements are:

1.            Education: The city has a highly skilled workforce and an education system of a high standard.

2.            Environment: The city is safe and has a low crime rate.  The environment is clean and housing quality is high.  The living environment is attractive, offering an international lifestyle in terms of nightlife, shopping and other leisure elements.

3.            Social infrastructure: The population is ethnically and culturally diverse.  The city has vibrant arts centre.  It is committed to the rule of law, and offers free flow of information, freedom of expression, a level playing field and a corruption-free government.

Hong Kong first needs a wholesale change in mindset. To succeed in a large number of economic sectors, it should focus on a shortlist of specialized areas around which to drive efforts.  In addition, Hong Kong should increase physical integration with China while also differentiating itself on the following factors: rule of law, corporate governance, economic freedom, and a vibrant culture and arts scene.  We suggest actions in three broad directions:

1.             Developing deep rather than broad economic sectors: Hong Kong should select areas in which it can sustain or create a competitive advantage and build critical mass around selected clusters of economic activity.

2.             Attracting talent, not money: To succeed, the clusters will need the right kind of talent.  Hong Kong should focus on attracting three types of outside talent: Mainland Chinese, Asia-Pacific’s best and brightest, and Overseas Chinese.

3.             Fulfilling world-class city aspirations:  For the clusters to thrive and for talent to come to Hong Kong and stay here, Hong Kong also needs to become a truly world-class city.  This requires more than stating the aspiration; Hong Kong must also fill current gaps with other world-class cities in the areas of the environment, education and culture/arts.  In parallel, it should strengthen and protect existing areas of distinctiveness: the legal system, financial institutions and capital markets, economic freedom, and transportation infrastructure.

Concluding Remarks

Economic performance may have weakened since 1998 but Hong Kong’s fundamentals are still strong.  The increasing economic pressures the city faces, particularly following the SARS crisis, should be recognized for what they are:  a wake-up call to rebuild Hong Kong’s competitive advantage. The way forward is to focus on economic success in selected areas where Hong Kong can truly differentiate itself.  Finally, success will require determined action by committed and well-supported leadership.  Without this, no initiative to improve Hong Kong’s economy will succeed.

For enquiries, please contact Mr. Kim Wan of The Better Hong Kong Foundation at 2861-2622 or by fax at 2861-3361.

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The Better Hong Kong Foundation is a privately funded, non-profit, non-political organization, formed by leading Hong Kong business people to reinforce Hong Kong’s role as the leading regional, financial, shipping, trading, communication and technology center. The Foundation also serves to enhance greater international understanding between East and West by facilitating communications between Hong Kong, China and the international community.