Kahaner Report: Hong Kong Tech Center

[David Farber <farber () central cis upenn edu>]

From:
 Dr. David K. Kahaner
 US Office of Naval Research Asia
 (From outside US):  23-17, 7-chome, Roppongi, Minato-ku, Tokyo 106 Japan
 (From within  US):  Unit 45002, APO AP 96337-0007
  Tel: +81 3 3401-8924, Fax: +81 3 3403-9670
  Email: kahaner () cs titech ac jp
Re: Hong Kong Tech Center
05/24/94 (MM/DD/YY)
This file is named "hk-tc.94"


ABSTRACT. Hong Kong's Industrial Technology Center as a incubation for
technology start-ups.


Conceived in 1988 by the Hong Kong government, the Hong Kong Industrial
Technology Center, (HKITCC, but usually referred to at the HK Tech
Center) was designed to facilitate the promotion of technology
innovation in Hong Kong by nurturing, building and championing of
tech-based businesses. Hong Kong feels that it can achieve success in
high tech, it also recognizes that the approach must be different from
other Asian countries such as Singapore or Taiwan. It is clear that Hong
Kongers believe that their own talents in capital investment,
commercialization and design and development of marketable products will
be complemented by human skill from China as a manufacturing base, and
that China now holds the key to Hong Kong's success as a broker of
relevant technologies.


The tech center is planned to ultimately accommodate up to 30 startups;
five are operating currently; one, Sintek Semiconductors has the only
semi-automatic micromanipulating probing station capable of supporting
8inch wafers, in Hong Kong.  Special rental rates of 50%, 75%, and 87.5%
of market rental rates are provided for a startup's first three years.
There are also established companies that are encouraged to situate in
and around the Tech Center, which is adjacent to the Hong Kong
Productivity Council and City Polytechnic. Silicon Graphics will become
the Tech Center's first multinational tenant when it arrives in October,
leasing 13,000 square feet. Another tenant is Centro, a successful Hong
Kong firm that specializes in multi media and computer generated visuals
with a staff of 100. Centro produced a strikingly beautiful computer
animation of Hong Kong's planned new airport (Flight Path to the
Future). This was awarded the 1993 Gold Mercury Award for outstanding
achievement in professional communications by the International Academy
of Commercial Arts and Sciences.


Further information on the HK Tech Center can be obtained from the following.


         Hong Kong Industrial Technology Center Corporation
         4 D01., HKPC Building
         78 Tat Chee Avenue
         Kowloon, Hong Kong
          Tel: +852 788=5400; Fax: +852 788-5584




Relevant to the future of Hong Kong, Dr R.Ch'ien recently gave a speech
at the Hong Kong Economic Association's annual dinner. Ch'ien is on the
Hong Kong Governor's Executive Council, and is also the CEO of the Tech
Center Corporation.  His remarks are presented below.


             Do We Still Love Laissez Faire?
     Hong Kong's New Industrial Policy in the 90's
             Speech by Dr. Raymond Ch'ien
            Hong Kong Economic Association
             Annual Dinner  8 March 1994


I did not do any research for this talk. So I cannot pin point when, how
and why the phrase "laissez faire" or its rather inane latter day
successor "positive non-interventionism" entered Hong Kong's public
affairs vocabulary. I can say with conviction however, that for as far
as I can remember, Hong Kong has not practiced "laissez faire".


More than half of our population live in government provided housing and
the Hong Kong dollar is pegged to the US dollar. To a Hong Konger, there
are few things more important than housing and money, which are by no
means public goods. The government has chosen to intervene massively in
these markets. Why is it then the myth of "laissez faire" persists? It
is because Hong Kong government, to its credit, has always interpreted
market failure conservatively.


In other words, the government does not intervene unless there is a clear
demonstration of market failure with unfavorably wide spread and long
term ramifications. If I remember correctly, the Hong Kong government got
into the housing business in the 1950s in response to a rapid swelling
of refugee population, which, with few savings, was living in hazardous
squalor. It would have taken years for these people to accumulate enough
savings to obtain passable housing under the market system. In the
meantime, repeats of accidents such as the Shek Kip Mei fire threatened
to turn thousands into the streets, jeopardizing social stability. The
government intervened in a timely and massive manner. Thirty years on,
the fact that we are debating the "affluent tenant" or double rent
policy shows, given time, Hong Kong's free market system is indeed
effective in helping people generate wealth. However, back then, if the
government had not intervened, chaos could have ensued.


The story of the peg [HK to US $] is more fresh in our memory. At the
time of its implementation in 1984, political factors overwhelmed
economic factors in the exchange market. Holders of Hong Kong dollars
required excessive risk premiums and the market had ceased to function
normally. As an aside, the market mechanism, efficient and powerful
though it may be, is in some respects quite fragile.  It goes awry under
excessive environmental volatility. Regardless of one's political
leaning, one must agree that stability is a necessary condition for
prosperity, but I hasten to add, not a sufficient condition.


Now that I have made the argument that Hong Kong Government's economic
policy is not so much guided by the principle of "laissez faire" as by
the health of the market mechanism, the question becomes, to what extent
does the government need to intervene to ensure a robust future for Hong
Kong's industrial sector?


Some of you may ask, does Hong Kong need an industrial future?  After
all, manufacturing employment has declined steadily since 1980 from over
1.5 million to just over half a million and manufacturing as a percentage
of GDP has declined from around 24 percent to 13 percent during the same
period. To surmise from these statistics that industrial activity is
losing its relative importance to Hong Kong is akin to treating a three
dimensional object as being two dimensional.


Lets take a look at the third dimension. Hong Kong's unified stock
exchange came into being in 1986. Between the end of 1986 and 1992, the
last year for which compiled statistics are available, the market
capitalization of industrial stocks grew by some 300 percent, that is
fourfold. In comparison, the capitalization of all stocks grew by about
200 percent. Stock market statistics do not show a complete picture of
general economic performance. Nonetheless, as a rough approximation, I
would venture that the rate of growth of industrial activity generated
wealth has significantly outpaced that of other sectors, roughly 15
percent versus 10 percent, on an annualized basis after adjusting for
inflation, the preponderance of property related wealth in Hong Kong
notwithstanding.


I am quite sure future historians of China's late 20th century economic
take off will attribute a leading role to Hong Kong industrialists who
started the whole process by setting up manufacturing plants in the
Pearl River Delta, beginning in the early 1980s. Will Hong Kong
industrialists continue to enjoy a seat at the head of the table in the
21st century? That, I think, will depend to a large extent on how
successfully they can embody technology in their activities.


There is a wide and well established body of economic literature
examining sources of economic growth. In general, the three key factors
of growth are enhanced capital, labor and technical progress. One does
not have to be an econometrician to conclude that from the time South
China opened its gates to Hong Kong capital and entrepreneurial acumen,
labor accretion has been our main source of growth. At the latest count
there were more than four million mainlanders working across the border
for Hong Kong companies. While this may continue for a number of years,
there are other large, cheaper sources of labor now flowing into the
global labor pool. Due to reasons such as cultural differences and
language barriers, the costs of accessing these labor sources for Hong
Kong industrialists can be significantly higher than tapping the South
China pool.


Most time series studies of post second world war economic growth in
advanced countries identify technical progress as by quite a wide margin
the main source of economic growth, followed by capital and then labor.


Ask any bright technocrat in Guangdong, Shanghai or Tianjin to describe
his vision of his region's economic future, and you can bet technology
will be mentioned within the first minute. Which brings us finally to
the topical question: can we count on market forces alone to make Hong
Kong industrialists invest sufficiently in technology?


I have served on the board of the Hong Kong Industrial Technology Centre
Corporation for some time. It is a government owned enterprise set up to
incubate infant companies adopting either new or innovative technology
and to provide rental space to more financially mature but nonetheless
small- to medium sized "high-technology" companies. Before I became
involved with the Tech Centre, I had thought Hong Kong's long term
economic destiny rested mainly with financial services, marketing and
distribution.


Today, I strongly believe that in the next few decades, Hong Kong stands
a better chance than any other place in the world of repeating the
Silicon Valley story.


All the right ingredients are in place. There has been  a mushrooming
of  knowledge-  or  technology-based entrepreneurial initiatives in Hong
Kong. We see more and more well educated young Hong Kong people leaving
teaching and research posts at universities and technology oriented jobs
in large firms to start up their own businesses. Typically, they are
armed with limited personal savings and one bright idea. Importantly,
many of them have good knowledge of the talents available in the various
pockets of scientific and engineering excellence in China, where their
bright ideas can be complemented or leveraged at a relatively low price.
If a bright idea indeed gets to the manufacturing stage, manufacturing
overheads, the bane of young companies elsewhere, are low in China.


Through the efforts of organizations such as the Tech Centre and its
more established cousin the Hong Kong Productivity Council, the Hong
Kong community or tax payers are in fact creating a sub-environment that
is nurturing to technology-based entrepreneurial endeavors. This
doesn't mean we are necessarily picking sure winners. Probably, most
of these start-ups won't make it. However, even the efforts of those
that fail will have generated meaningful external economies by enhancing
the body of knowledge and skill level in society.


In general, there are a few factors which may inhibit the supply of
private goods in an otherwise normally functioning market economy.  They
are: very large scale capital requirements relative to the financial
resources available to the person who possesses the enabling technology
or know-how; long pay-back horizon; and high risk premium.


Our new airport is a good example. Theoretically, it could be built with
private capital, but it would require a watertight government guarantee.
In this case, it is better for the government to foot the bill and for
the community to enjoy the substantial future economic rents, rather
than private investors who would have borne no commercial risk.


New technology based firms face similar difficulties albeit to a lesser
degree. I am not advocating that the Hong Kong Government should follow
the Taiwan example and fund the start-Up of a US$500 million wafer
fabrication plant, even though I was informed by the management of
Taiwan Semi Conductor Manufacturing Corporation on a recent visit to its
futuristic plant in Hsinchu Science Based Industrial Park that they had
just paid all their employees a 20-month bonus. I wish I could make that
much profit to pay my staff a 20-month bonus.


Hong Kong has not been completely faithful to "laissez faire" but it is
a principle we still love and so we should. It has served us well and
will continue to do so. It has often been said that one reason for Hong
Kong's success is that the government has over the years, provided a
friendly macro environment conducive to the pursuit and accumulation of
wealth. In the future more attention has to be given to micro management
of sub-environments. Which is quite a far cry from picking winners.




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