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Keynote Address on "Adding Value to Hong Kong's Competitiveness" by Dr Victor Fung Chairman, Hong Kong Trade Development Council at The Central Policy Unit Seminar 22nd April, 1998

Good afternoon, ladies and gentlemen. It is a great honour to be invited to address such a distinguished group, and on such an important subject.

Our task today is to take a clear-eyed, practical and realistic look at Hong Kong's economy. How it has changed, where it is going, and what we should be doing to help prepare for the future.

Manufacturing v Services

In this respect, I know you all share my keen interest in global economic trends, particularly in terms of what they may mean for Hong Kong. One of the most important of these trends - and one which has attracted much discussion in relation to Hong Kong's situation - is the structural shift from manufacturing activities to services that is taking place in many developed economies around the world.

This shift often gets a bad press. In some developed economies it has often been characterised as a process whereby former factory workers are laid off from their manufacturing jobs, and end up in fast food outlets - " flipping hamburgers" - at rates of pay that are a fraction of their former hourly wage.

Economic pundits warn us that these "hamburger flipping" jobs won't "grow" an economy, because people will just be selling services back and forth to each other. These jobs, they say, won't bring prosperity because they don't generate the kind of economic growth a city needs to support a high standard of living.

But the question is...is this really an accurate picture of what is happening in Hong Kong? I would say very firmly "no". I would also say that the "hamburger flipping" scenario, while colourful and dramatic, is a very serious mis-interpretation of what a services based economy means; and it's this point that I want to expand on.

Certainly, if we look inside the boundaries of the SAR, we see over the past fifteen years a decline in manufacturing as a percentage of employment. As of September 1997 only 13.3 percent of Hong Kong's workers were employed in the manufacturing sector. That compares with 42% in 1980. A very high percentage of Hong Kong's economy is now in services of one kind or another – in fact, the highest in the world, according to the World Competitiveness Yearbook 1997. These statistics show us that Hong Kong is a very different city from what it was fifteen years ago; and indeed, a very different economy.

Creating a new economic model for Hong Kong

Once we begin to focus on this, the next stage - I would propose - is to decide on a new framework for understanding Hong Kong and its economy. We need a model that helps us appreciate the system's dynamics; how fast it is moving, in what direction, and how far we can expect it to go if we all put our minds to it. This last point is of course, the most important one for this conference today.

Hong Kong is one of the world's great economies. All the leading economic indicators agree on that. As you may have heard on the news this morning, we have maintained our position as the world's third most competitive economy, as ranked by the International Institute for Management Development - the IMD. We are rated the world's freest economy by the Heritage Foundation in Washington, and we are also the 8th largest global trading entity. In 1995 our per capita GNP, on the basis of purchasing power parity, was the fourth highest in the world - after Luxembourg, the USA and Switzerland.

But if we adopt a purely geographic perspective, then we see that Hong Kong is a tiny place. The total land area is only 1,078 square kilometres. To put this in perspective, all of Hong Kong's Central District (from Connaught Road to Conduit Road and from Garden Road to Aberdeen Street) would fit inside the Imperial Palace in Tokyo.

This is a helpful comparison because it helps to drive home an important point. To understand Hong Kong as an economy, we must look beyond its physical boundaries. We must look at where Hong Kong-controlled business activities are taking place throughout the region and, indeed, the world. We must look at business interactions that cross boundaries, in every direction.

Hong Kong's economy is profoundly international. Nowhere is this more apparent than in some important phenomena that are among the distinguishing marks of Hong Kong's economy: offshore trade and offshore investment.

By offshore trade I am referring to goods made by Hong Kong companies outside Hong Kong and delivered direct to customers overseas, never passing through Hong Kong's customs. By offshore investment, I mean foreign direct investment (more commonly known as FDI) made by Hong Kong companies beyond Hong Kong's actual borders - on the mainland, throughout Asia and in the West. This FDI covers all economic sectors - from property to manufacturing to services.

The importance of offshore activities

By any standards of accounting, the value of Hong Kong's offshore trade is immense, and it is growing. The Hong Kong Trade Development Council recently estimated Hong Kong's overall offshore trade in 1997 to be US$136 billion. That is equivalent to 72 percent of Hong Kong's total domestic exports and re-exports - or around 80% of GDP.

Hong Kong's FDI is also immense. At the end of 1996 its estimated accumulated value was US$112 billion according to the UN's World Investment Report. And in 1997 - according to UNCTAD - the SAR was the world's fourth largest source of foreign direct investment.

The offshore trade statistics are a telling indicator of the international orientation of Hong Kong's economy. This trend is strengthening, not weakening. Although you may have heard recent reports that the rate of growth of Hong Kong's merchandise exports is slowing, such reports don't take into account Hong Kong's offshore trade, which is equal to nearly three-quarters of total exports and re-exports. In fact, the offshore trade figures show healthy growth - up 62 percent in just three years, from US$84 billion in 1994 to US$136 Billion in 1997.

No one knows just how much offshore income all this activity generates for Hong Kong. The total investment and labour income earned by Hong Kong firms and people overseas in 1995 has been put at US $50 billion. That's equal to 35 percent of GNP for that year.

But these figures are only estimates and partial ones at that. The simple fact is that no one knows exactly how much offshore income all this activity generates for our economy, because the official statistics don't include capital flows. Nor is income generated offshore included in the local income tax base.

But we know enough to understand that offshore income is real and its contribution to our economic activity is significant.

The domestic impact of offshore trade

Offshore trade increases the demand for support services which are based inside Hong Kong itself. This offshore activity therefore has a very significant impact on the economy.

In 1995 it generated nearly US$ 7 billion-dollars worth of business, in services sectors directly supporting offshore trade. That's around 5 percent of Hong Kong's GDP.

Cargo sea transport and cargo forwarding associated with offshore trade generated another 3.8 percent of GDP.

In the financial sector - one of our most important services industries - no one has even estimated the amount of income in our investment banking and private banking sectors generated by offshore trade. It is not captured by the official statistics. But we do know from the survey that Hong Kong companies involved in offshore trade prefer to get their related trade finance and insurance products in the SAR. And this is true even if these companies' goods are shipped directly from the Chinese mainland or third countries to their export markets.

This is highly significant. It means that Hong Kong's service sectors are gaining business from trade in goods, even when those goods don't even touch Hong Kong.

The firms involved in these trade flows also prefer to locate their controlling headquarters in Hong Kong. The HKTDC study revealed that nearly 95 percent intended to maintain their regional headquarters or offices in Hong Kong. Moreover, they expect their activities in Hong Kong to remain steady or grow during the next 5 years. Between 30 and 50 percent of the companies surveyed by the HKTDC intend to increase their use of Hong Kong's business services - such as marketing, promotion, research, trade financing, quality control, and so on.

Offshore trade creates jobs

This means that offshore trade creates and will continue to create new jobs inside Hong Kong - directly, through the headquarters operations, and indirectly, through demand for supporting services.

I hear some of you saying "creating jobs is important, but it's the kind of jobs you create that really matters". That is true. And when the HKTDC asked thousands of Hong Kong firms active in offshore trade what types of new jobs they expect to create in Hong Kong to support their offshore operations, their answers were very informative. They replied that the new jobs will be mainly in management, marketing, and other professional, skilled areas.

This is good and important news. These are precisely the types of jobs Hong Kong needs: high paying, high-value jobs.

So, offshore trade creates top quality, skills-intensive jobs in Hong Kong. This is an extremely important finding. It proves that our services sector jobs are not relying only on "local" economic activity - with our citizens buying and selling to and from each other - but on much greater, multi-national economic flows. One in five of our workforce is employed in import/export trading alone. More than 5 percent are employed in transportation and storage services.

In other words, there is no question of our economy relying on low grade "flipping hamburger" jobs to create it's growth.

Hong Kong as a "metropolitan economy"

What else can we deduce from this look at Hong Kong's offshore trade?

Clearly, that the old ways of analysing our economy don't work anymore. Simply counting the number of manufacturing jobs inside Hong Kong misses the much bigger picture - of how Hong Kong now ticks and where it is heading.

So I would like to suggest a new paradigm, through which we can get a more accurate picture of our situation. I would suggest that we view Hong Kong as a "metropolitan economy".

Let me define in a little more detail what I mean by a "metropolitan economy".

A "metropolitan economy" is not just a fancy term. Such economies have distinctive characteristics that make them a "cut above" the rest.

A "metropolitan economy" is externally oriented. Most of its economic activity is directed beyond its geographical boundaries. It is highly integrated, and involved in international business transactions. The services, or tertiary sector dominates the economy. This can be seen not only in Hong Kong but in the other key "metropolitan economies" of the world, such as London and New York.

And metropolitan economies tend to feature a clustering of various business services, such as finance, which facilitate not only local trade and manufacturing, but global business activities too.

Hong Kong today has all of these characteristics. We sell an extraordinarily high percentage of our output to buyers outside our geographical boundaries. - just as cities such as London and New York do. In 1996, Hong Kong's total export of goods and services was nearly one-and-a-half times its total GDP. Nearly one-fifth of our GDP is generated by import/export trade services. And this external trade generates a significant share of the demand for services within Hong Kong - things like finance, insurance, transportation - but no figures are available, as this contribution has never been measured.

Hong Kong's economy also derives considerable strength from a network of dynamic business clusters that reinforce each others' competitive positions by interacting and building on each others' strengths. This is particularly true in industries or activities that use a wide variety of high-value skills and inputs.

For example, Hong Kong's financial and business services cluster is, on its own, the best-developed in Asia. It also gains competitive strength because it is backed up by an extensive transport and logistics cluster, comprising air and sea cargo, freight forwarding, and co-ordination services.

Putting together these clusters mean that Hong Kong has the largest and one of the world's most technologically sophisticated communities of sourcing companies, freight forwarders, and trade financiers. These companies marshal resources and people, and provide co-ordination, management, finance, marketing, design, and logistical expertise. This is what the other great cities or "metropolitan economies" of the world also do.

The move away from manufacturing

Once Hong Kong is placed in its proper context, as a "metropolitan economy" it ceases to be surprising that most of the workforce within the narrow confines of the SAR is employed in non-manufacturing sectors. The same process of evolution away from manufacturing can be seen in the other great cities of the world. As I've already mentioned, in September of last year 13.3 percent of Hong Kong's workers were in the manufacturing sector. While this may seem low to some, compare it with the New York metropolitan area - which has approximately the same population as Hong Kong - where only 12 percent of the workforce are doing manufacturing jobs.

Instead, New York, like Hong Kong , London and other "metropolitan economies" supports a network of related manufacturing facilities which are generally located outside the official boundaries of the city itself.

Moving to the next stage

In fact, I would suggest that in many ways Hong Kong has already moved beyond London or New York, in terms of the strategies its companies have developed to capture value from international operations.

Hong Kong's private sector is involved in trans-national business to a degree matched by few, if any other economies in the world. This is true at all levels and in all sectors of economic activity. Hong Kong has some 300,000 small and medium-sized enterprises. An extraordinarily high percentage – more than 40 percent – have operations in two or more economies outside Hong Kong.

To give you just one example, in Hong Kong's soft goods industry well over one third of the sector's 33,000 firms, employ the majority of their staff outside Hong Kong. This means they are applying their expertise to utilise the best and most competitive labour and materials available.

Our companies have become uniquely skilled at this; identifying far-flung sources of supply and demand, conceptualising new products, organising their production, and bringing them to market.

These abilities have given Hong Kong-based companies a leadership role across a broad spectrum of manufacturing and service sectors - from light consumer goods to financial services to infrastructure development. Hong Kong itself is the nerve centre or control base, while different aspects of production are situated in optimal locations, creating a value-added, dispersed manufacturing network that extends far into the Chinese mainland, across the rest of Asia and beyond.

Hong Kong is unique among the world's leading metropolitan economies because it has a vast manufacturing hinterland in southern China. This gives us access to vast supplies of labour, suitable for almost any level of commercial activity. In Southern China alone, Hong Kong firms already employ an estimated 5 million workers. This ability gives Hong Kong companies and their foreign business partners a powerful cost advantage.

In the area of services, we provide a complete business service centre for the Chinese mainland, and the logistics centre for much of south China. But in addition to that, Hong Kong firms are investing in the mainland's own service sectors, in banking and finance, hotels and resorts, transport, and many other areas. By the end of 1995, Hong Kong's cumulative investment in services in Guangdong alone was more than US $13.1 billion. By mid-1997 Hong Kong services providers had invested an estimated US$5 billion in Pudong. More than 80 Hong Kong-based financial institutions have established a presence in the Mainland.

The potential for future growth

So we are a services economy, in the broadest and most sophisticated sense. And when we look at the potential upside for Hong Kong as it pursues this path of economic growth, we can see that this is a positive development, not a negative one.

A new role for Hong Kong

Let us consider in more detail two of the other great metropolitan economies of the world, London and New York. Both play important roles as major international financial hubs and as control centres for manufacturing outside their city limits. They combine those financial and manufacturing capabilities with transport and logistics skills.

I would suggest that, like these two, Hong Kong also has the potential to bring these disparate roles together in an even more significant way than it does currently.

It can be one of the handful of financial centres of global importance, the brain of a manufacturing heartland of one billion people or more, and a regional centre for multinationals in Asia, as well as a major transportation and logistics hub. We need to focus on how to make Hong Kong the major metropolitan economy in the Asia Pacific.

Becoming Asia's leading metropolitan economy

This vision of Hong Kong is achievable, but to do so we need to have one thing very clear in our minds. No other regional centre is as well-positioned as Hong Kong to assume the role of the leading metropolitan economy in the Asia Pacific. If we project our vision ahead, along the path that is now open to Hong Kong, I see truly historic opportunities.

What does this mean for what we do in Hong Kong? Does it mean that we should try to take every type of economic activity and bring it inside our boundaries? Inside the tiny geographic area I described earlier?

No. It means that we should make room inside Hong Kong for select activities. We should focus on Hong Kong's role as a management centre, a financial centre, and a centre for the headquarters of multinational firms doing business in the region, among others.

We do not need to have every element of the value chain inside Hong Kong's borders. We need only the most important parts here, while at the same time extending Hong Kong's reach so that our companies can continue to benefit from markets and resources throughout the region.

In achieving this goal we face challenges. Challenges are a part of any great undertaking. In my opinion, the challenges involved in building Hong Kong into the region's leading metropolitan economy are two-fold: upgrading the technological capacities of Hong Kong's firms, and upgrading the skills of the workforce. And, as a result of the revolution in information technology, and the way it is transforming the way business is done, these two challenges are more inter-linked than ever before.

The role of new technology

It's clear this means that inside Hong Kong's borders we must build a first-class technological environment for our companies. They must be supremely well-adapted to absorb new product and process technologies. They must be expert at implementing new developments in information technology in ways that meet the evolving requirements of business.

How do we build a first-class technological environment? We must invest in the hard infrastructure - of course. But in my view that is not where the biggest challenge lies. Our hardest task will be to equip Hong Kong's workforce with the sophisticated skills necessary to create and extract the greatest value from the new technologies we have available.

Let us consider where we stand today in terms of Hong Kong's technological environment and the technological sophistication of the workforce - compared to the world's best. Are we among the world leaders?

The answer is....not yet. The indicators that we have show that we stand in the middle of the pack. This analysis is backed up by authorities like the IMD and the World Economic Forum. We are at the front of the second division - but that's not enough. We need to aim for the very top.

We reach the same conclusion when the look at the basic indicators used to measure usage levels of technology, such as the number of Internet hosts per thousand people, or computer power per capita. According to the IMD, Hong Kong ranks 15th among the world's leading economies on both these counts. This shows that we still have some way to go. More positively - it also indicates the great potential that lies ahead.

It's well known that Hong Kong has one of the hardest working, most motivated, adaptable, and flexible workforces in the world. Once we add to this advantage, the intensive use of world-class technology, and the position Hong Kong already holds in the international markets, I believe that the result will be unbeatable.

That's because this technology has a transcendent effect. Like railways in the 19th Century and electricity in the 20th, it permeates throughout the entire economy, changing the way things are done.

Hong Kong is already the nerve centre of a vast trading and manufacturing network that encompasses the Chinese mainland and Asia. It is the home of powerful, inter-related clusters of skills, that span business services, finance, transportation, and construction.

Our companies are already uniquely positioned as packagers and integrators of products and services for world and regional markets. Hong Kong firms already are full and independent business partners in bringing Mainland goods to market.

If we inject a new ingredient, a world-class technological environment, we give a new and potent charge to all these networks. This is essential if we are to meet the goal of becoming not just the leading metropolitan economy in the Asia Pacific, but one of the top metropolitan economies in the world in terms of per capita GDP.

This is not a strategy of trying to compete in the same industries and activities as our neighbours, of trying to take a bigger slice of the same economic pie as everyone else. One thing that the current economic crisis in Asia should teach us is that all of the economies in the region cannot follow the same strategies and be prosperous. Hong Kong's prosperity has always rested on the uniqueness of what it offers, that's why it has weathered the current regional crisis better than its neighbours.

Conclusion

What I am suggesting to you is a strategy for adding value to Hong Kong in a way that will secure a rising standard of living for Hong Kong's people, as well as Hong Kong's leadership role within the region. It will also create closer partnerships with the Chinese mainland and with our neighbours in ways that benefit all parties. It is a way for Hong Kong to contribute to its own prosperity, the prosperity of our compatriots and the prosperity of the rest of the region.

Hong Kong is uniquely positioned to achieve this leadership and it is up to all of us to help make it happen.

Thank you.

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