For a Hong Kong in flux, a dual strategy for reinventing its economy
- The city must move on from the ‘front shop, back factory’ model built around low-cost production in China
- It should aim instead at becoming a base for mainland firms managing global operations, and also develop products targeting the mainland market
Hong Kong has been fortunate in its opportunities to reinvent itself in the last 70 years. In the 1950s, amid restrictions on trade with mainland China, Hong Kong built its manufacturing capability with capital and know-how from Shanghai industrialists, and exported its own industrial output to the world.
In the late 1970s, as it lost competitiveness due to rising production costs, Hong Kong moved factories northwards, creating the “front shop, back factory” model and transforming its economy into a centre of producer services, particularly finance, trade and related services.
Since the late 2000s, however, there have been some seismic changes in the global economy. One change is the slow growth in Hong Kong’s traditional markets (North America and Europe) after 2008. The other is the rising costs of production on the mainland.
Even if some of the mainland-based companies manage to keep their export competitiveness, they are increasingly exporting directly to the world, instead of indirectly via Hong Kong, which poses serious challenges to the city’s pillar industries such as trade and logistics.
This will help Hong Kong become the place for mainland firms to manage their global operations, which will be a step up from Hong Kong’s existing role as a centre for financial services. It requires our universities to equip our students with knowledge of Asian businesses and economies, an area where cities like Singapore are way ahead.
The other growth model is to focus on the mainland as a market instead of as a factory of the world. After some 40 years of economic growth, mainland China is generally the largest or second largest market in virtually every single product category. Yet Hong Kong plays a very small role in helping the mainland to import.
There seems to be some scepticism about Hong Kong’s role in innovation and hi-tech manufacturing. It is important to recall that, through relocating production northwards in the late 1980s and the associated transfer of capital and know-how (the reverse of what Shanghai industrialists did for Hong Kong in the 1950s), Hong Kong played an instrumental role in transforming the eastern part of Guangdong (including Shenzhen, Dongguan and Huizhou) into the world’s factory and then to a centre of hi-tech manufacturing.
More importantly, recent research by the HKU Business School finds that there is much more Hong Kong can contribute to the next phase of development of this region.
We find that the Pearl River Delta lags behind the Yangtze River Delta in both newly granted patents and the cumulative number of patents, one possible reason being that there are much fewer universities in the Pearl River Delta.
Moreover, the relatively fewer patents granted to the Pearl River Delta are concentrated in just two industries, electronics and telecommunications, and they are further held by just a few firms, with ZTE, Huawei and Foxconn among the top five patent assignees of the entire Pearl River Delta.
New Territories North has the advantage of being near the hi-tech centre of Shenzhen, which has increasingly high land costs. Through public-private partnerships, we can develop this area into a hi-tech zone with ample labs, linkages with world-class universities, state-of-the-art factories, and eco-friendly residential blocks.
It will also enhance Hong Kong’s role as the centre of financial services for hi-tech as well as traditional firms.
The world has changed, and so must Hong Kong. And with the various challenges and opportunities posed by the ever-changing geopolitical and economic situations within the Asia-Pacific region and across the globe, Hong Kong’s strategic importance to China’s rise cannot be overstated.
Hong Kong’s “front shop, back factory” model has run its course, which has dire consequence for its trade and logistics industries. While financial services will thrive in view of possible financial decoupling between China and the US, it is time for Hong Kong to find its role in the increasingly decoupled world by riding on China’s dual circulation strategy, whether it is helping mainland firms to manage their global operations (external circulation) or innovating to serve an increasingly important domestic market (internal circulation).
Benjamin Poon is a graduate from the University of Hong Kong’s Bachelor of Business Administration (Law) and Bachelor of Laws programme
Zhigang Tao is a professor of global economy and business strategy at HKU