Cooperative Technological Innovation Opportunities in the Guangdong-Hong Kong-Macau Bay Area
22 October 2018
Industries in Guangdong have undergone a gradual modernisation in recent years, and the province has evolved into one of the world’s key industrial production bases. Its development, however, has been affected by the global spread of rapid technological change and the growth of intense competition both among industry players and on international markets. This has been further aggravated by the increasingly complicated external investment environment and by trade barriers imposed by certain foreign countries on Chinese exports.
As a result, many industry players are actively pursuing a course of transformation and upgrading. They are investing in automation and adjusting their supply chain strategies, while also ramping up their technology research and development (R&D). This has encouraged some technology and innovation companies to focus on advanced technology areas, such as Internet of Things (IoT) applications, big data analytics, new-generation communications, and artificial intelligence (AI) and robotics applications. They are looking to develop higher value-added business and, through Hong Kong or other places, find technology partners and services within the region and beyond with whom they can upgrade their overall technology and enhance competitiveness.
Guangdong, Hong Kong and Macau – the three territories that make up the Greater Bay Area – are stepping up cooperation in the field of economic development, including technology and innovation. The aim is to establish the Bay Area as an international technology and innovation centre by co-ordinating the use of global resources and maximising cross-regional cooperation in innovation development. The three territories are expected to introduce further measures and mechanisms designed to increase cooperation. Hong Kong technology and services companies can capitalise on this development opportunity by using Hong Kong’s existing advantages – in particular, the free flow of information and capital – to attract technology partners in the Bay Area. They can also make use of Hong Kong as a business platform, to help their partners acquire what they need in terms of international technology resources, intellectual property (IP) rights, finance and other professional services.
Towards High-Tech Business Development
Companies in the Bay Area are actively trying to transform or upgrade in order to create higher technology or higher value-added businesses. This is a response to challenges brought about by changes in the external business environment, such as rising production costs, labour shortages on the mainland and the slowdown of the global market. They are also negatively affected by the various tariff and non-tariff trade barriers erected against Chinese goods in some overseas markets. Many manufacturers have already adopted various strategies to deal with this issue, including diversifying production or sourcing activities to lower-cost areas, or strengthening their technology R&D and product design capabilities so as to improve their competitiveness.
The rate of industrial growth in Guangdong has already dropped from the double-digit figures of previous years to 7.2% in 2017. However, the overall size of the industrial sector is still expanding at a steady pace. This is thanks to many better performing enterprises raising their production capacities and improving quality management through investments in factory automation, while also adjusting their supply chain strategies and optimising their business operations. Furthermore, a growing number of enterprises are employing technological innovation strategies, hoping to increase revenues and their competitive advantages by stepping up their technology R&D and diversifying into higher value-added business. The value-added contribution from high-tech manufacturing to the overall value of Guangdong’s industrial sector has increased from around 20% in 2000 to 29% in 2017.
Source: Guangdong statistical yearbooks; Statistical Communiqué on Guangdong’s 2017 National Economic and Social Development
The average pre-tax profit margin of Guangdong’s manufacturing enterprises has risen steadily from around 8% in 2000 to around 10% in 2016, which would suggest that their efforts to transform and upgrade have initially been successful. However, even though the profit margins of high-tech manufacturers have also been rising, they are somewhat lower than the overall industry average. One reason for this is that market competition in the technology-related sectors is just as fierce as it is in the traditional manufacturing sectors. Furthermore, some businesses are only engaging in original equipment manufacturing (OEM) or in lower value-added operations such as processing and assembly, which means they are at the lower end of the industry operation of the overall technological sector, where there is limited room for growth in business value-added and profits. Thus, they are worse off than those engaging in technology R&D and product design upstream, as well as marketing and distribution downstream of the industry.
The expansion of industrial activity in Guangdong is also propelling the growth of foreign trade. In 2017, the total value of Guangdong’s imports and exports was RMB6.8tn (about US$1tn), accounting for 24.5% of the total value of the mainland’s imports and exports. The share of Guangdong’s total exports made up of high-tech products has also risen, from less than 20% in 2000 to 36% in 2016; while the share of total imports accounted for these products has shot up to more than 50%.
Some 90% of high-tech import and export products are electronic products such as computers and communications products. But most of the exports are finished or semi-finished products, while most of the imports are production inputs such as electronic parts and components. This is because the Pearl River Delta (PRD) region is a key global production base in end-products such as computers, communications products and consumer electronics. It also shows that the region has closely-knit supply chain relationships and substantial intra-industry trade with overseas electronics sectors. Yet, because the production of the finished products depends so greatly on the importation of key parts and components such as various types of chipsets and semi-conductor items, the processing or assembly fees earned by many businesses are so low that profits tend to be small.
Source: Guangdong statistical yearbooks
Fostering R&D Activities
Because of this, many businesses in the Bay Area and elsewhere in Guangdong have adopted technological innovation as a key development strategy when transforming and upgrading, hoping that they can engage in higher value-added business by climbing up the value chain. Guangdong’s technology R&D activities have been increasing rapidly in recent years. In 2016, internal spending on R&D in Guangdong was higher than in any other mainland province, reaching RMB203.5bn – 13% of the country’s total. Guangdong’s R&D spending accounted for 2.56% of the province’s GDP, significantly higher than the national average of 2.11%. It is worth noting that Guangdong’s R&D activities are mostly concentrated in the nine cities of the PRD/Bay Area - in particular, Shenzhen, Guangzhou, Foshan and Dongguan. In 2016, the R&D spending of these four cities accounted for 82% of that of the whole province, an indication of their strength in technology research.
Internal R&D Spending in 2016, By Province/City
|RMB billion||Share of National Total|
Source: Guangdong statistical yearbooks; China statistical yearbooks on science and technology
Source: Guangdong statistical yearbooks
One measure of the growth in technology research is the increase in the number of domestic patent applications from Guangdong accepted, and the number of domestic patents which have been granted. In 2016, for example, the number of domestic patent applications from Guangdong accepted constituted 15.3% of the nation’s total, second behind only Jiangsu which accounted for 15.5%. The increase in domestic patent applications accepted is also a sign that industry players are paying increasing attention to protecting their IP rights to safeguard the achievements of their technology research.
Nevertheless, it should be noted that Guangdong’s patent applications accepted are mainly for utility models and designs, related to manufacturing business such as production processes and aesthetic design of products. Domestic patent applications accepted concerning invention patents, which are closely related to leading-edge technology R&D, made up only 30% of the total. Worse still, those that were granted or approved accounted for just 15% of all Guangdong’s patents granted. Looking at it another way, in 2016 domestic invention patents granted to Guangdong applicants amounted to about 74.9 for every 1,000 researchers. For the whole of the Chinese mainland, the equivalent number was 77.9, for the US it was 114, while Japan and South Korea reached 184. However, the figure remains significantly higher than that for European countries like Germany and France, where it languishes at around 45.
It is clear from the figures that Guangdong’s technology research activities are more related to manufacturing operations than they are to inventions. When it comes to leading-edge R&D that could fetch higher value, Guangdong’s achievement rate is comparable to the average national level but pales in comparison with the performance of advanced countries such as the US and Japan. This has a direct impact on attempts to develop high-tech industries in Guangdong.
Source: Guangdong statistical yearbooks
To boost the development of the technology sector, Guangdong promulgated its Guangzhou-Shenzhen Technology and Innovation Corridor Planning at the end of last year. Its long-term goal is to complete the establishment of a technology and innovation corridor by 2050 that will have global influence, providing strong support to Guangdong’s position as one of the world’s leading innovative regions and fostering the development of the Bay Area as a leading global technology and innovation centre. The planned corridor begins in the north at the Guangzhou-Foshan border, runs through Guangzhou’s main urban area, Dongguan’s Songshan Lake, and Shenzhen’s main urban area, and ends up in Shenzhen’s Dapeng New District in the south. Planning will focus on innovation clusters along the Guangzhou-Shenzhen High-speed Railway, the Guangzhou-Shenzhen Highway along Pearl River, the Guangzhou-Dongguan-Shenzhen Intercity Railway and the Canton-Kowloon Railway. The corridor is approximately 180 km long. The scheme is expected to meet some medium-term targets including:
- By 2020: Key indicators on innovation levels should attain or exceed the levels of leading innovative countries/regions; total investments in R&D should account for more than 3.5% of GDP; the value-added of high-tech manufacturing should make up more than 45% of the total value-added of industries above designated scales; several key industries should have moved to the high end of the global value chain to support the establishment of a national high-tech industry innovation centre in Guangdong and an international technology and innovation centre in the Bay Area.
- By 2030: the creation of China’s “Silicon Valley”, a state-of-the-art innovative platform comparable to Silicon Valley and the Boston Innovation District in the US; total investment on R&D should account for more than 4% of GDP; the value-added of high-tech manufacturing should constitute 60% of total value-added of industries above designated scales; and the Bay Area should by this date have become a world-class innovative hub.
In August 2018, Guangdong also promulgated the Implementation Opinions on Strengthening the Implementation of the Innovation-driven Development Strategy to Further Promote the In-depth Development of Mass Entrepreneurship and Innovation. In this document, 15 ideas for optimising the innovation and start-up ecosystem were raised, including:
- Establishing a PRD demonstration zone for the transfer and commercialisation of national technology achievements to bolster cooperation in technology and innovation, as well as the transfer and commercialisation of achievements in the Bay Area; encouraging the establishment of commercialisation platforms jointly with Hong Kong and Macau, including a national incubation base for technology achievements and a youth innovation and start-up base.
- Establishing an IP protection and operation centre to foster the integrated development of IP and industry.
- Promoting the sharing of business start-up resources among universities and research institutes; strengthening technology cooperation with Hong Kong and Macau and carrying out joint programmes for tackling key problems in basic research in core technologies in the Bay Area.
- Carrying out innovation in financing service models such as investment linkages; supporting banking institutions’ exploration of investment linkage business.
- Building an international venture capital and entrepreneurship centre; providing guidance so that venture capital can get involved at earlier stages of the development of start-ups.
It is worth noting that all these emphasise the pooling of domestic and overseas talents; the use of domestic and foreign advanced technology achievements; the promotion of IP trading; the use of international resources in venture capital and start-up investment to make it easier to commercialise technology achievements; the creation of a multi-level innovation platform; and improving and expanding laboratory systems and new R&D institutions.
They also highlight the need to improve the mechanisms for cooperation between Guangdong, Hong Kong and Macau on technology to create first-rate innovation conditions and establish an international technological innovation cooperation system in Guangdong and the Bay Area. Undoubtedly, when it comes to international technology resources, talent pool or related service systems, Hong Kong is well poised to meet these planning and development needs.
Hong Kong’s Role in Technological Development of the Bay Area
As an important Asian business platform and technology trading hub, Hong Kong has an existing cluster comprising local and overseas players engaging in technological innovation activities. Industry players and services providers in Hong Kong can also meet the needs of enterprises in the region in developing their technology business. It is worth noting that Hong Kong has recently signed the Arrangement on Enhancing Innovation and Technology Cooperation between the Mainland and Hong Kong (the Arrangement) and the Agreement on Commencing Jointly Funded Projects between the Ministry of Science and Technology (MOST) and the Innovation and Technology Bureau of Hong Kong Special Administrative Region (HKSAR) Government (the Agreement). Both the Arrangement and the Agreement will serve as a guide for Hong Kong as it implements various innovation and technology cooperation initiatives in the next few years. Cooperation will mainly revolve around the six areas of scientific research, development of platforms and bases, nurturing of talents, transfer and translation of research results and incubation of innovation and technology industries, integration into national development strategies and cultivation of an innovation and technology atmosphere. A framework for the funding and the modus operandi of the schemes involved has also been set up, providing much-needed support for increasing collaboration between Hong Kong and various mainland R&D research institutions.
In August 2018, the leading group for the development of the Guangdong-Hong Kong-Macau Bay Area held its first plenary meeting. This meeting affirmed the Central Government’s support for the construction of an international technology and innovation centre in the Bay Area. Hong Kong has already been fully involved in related construction projects. For example, it has invested HK$78bn in various innovation and technology measures for last couple of years, pushed forward the development of the Hong Kong and Shenzhen Innovation and Technology Park in Lok Ma Chau Loop, and set up two world-class technology and innovation platforms in Hong Kong Science Park focusing on medical technology and AI and robotics technology.
Hong Kong is therefore in a strong position to help foster the development of technology industries in the Bay Area, especially in areas such as international cooperation. Guangdong enterprises may be stepping up their efforts to develop standard solutions for IoT applications, big data analytics, new-generation communications and AI and robotics, but some are limited in these areas by a lack of user experience. Hong Kong industry players, in contrast, are familiar with the development of advanced technologies overseas and are adept in leveraging standards and technology frameworks commonly used internationally. They can provide technology and management system applications and solutions, and help their Bay Area counterparts with the commercialisation of technology projects.
One particular advantage that Hong Kong enjoys internationally is the good reputation of its legal system and its compliance with international legal practices. Hong Kong industry players are known to treat IP such as trade secrets and information on design and technology seriously and respectfully. As a technology trading platform, Hong Kong is trusted by foreign players in the technology sector and has already set up arrangements with the mainland regarding the mutual recognition and enforcement of judgments from arbitration and civil and commercial cases. Foreign companies can use Hong Kong’s judicial system to enforce arbitration awards or court judgments and to protect their IP in Hong Kong and the mainland. Hong Kong can also provide a wide array of professional services in IP management, maintenance and audit. As such, it can facilitate technology cooperation between the mainland and overseas technology companies.
A survey commissioned by HKTDC Research made it clear that, when “going out” to develop Belt and Road and other international business, mainland enterprises need various kinds of professional services support. As well as looking for services in marketing strategies and participation in overseas marketing activities, many also need support in product development and design. Half of those businesses in south China that were surveyed said Hong Kong was their preferred choice when looking for professional services to help them develop their international business.
Source: HKTDC Survey (For details, please refer to: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China
Notably, Hong Kong benefits from several significant advantages, including the free flow of capital and information and its extensive international market network. Being an international financial centre, Hong Kong can provide the loans and financing services needed for technology cooperation projects and help the businesses involved to obtain cost-effective capital and lower their financing costs.
As the Bay Area develops, the governments in the three territories are expected to strengthen cooperation between them and offer more support to industry players in order to increase the benefits of technology cooperation in the Bay Area. Sustained improvements in the transportation network will also help to boost the flow of talent and technology resources within the region. It is therefore imperative that Hong Kong industry players keep abreast of these developments so that they can capture the opportunities surrounding technology cooperation in the region ahead of others.
 Profit margin is calculated as the percentage of pre-tax profit to main business revenue. Source: Guangdong statistical yearbooks
 Source: Guangdong Bureau of Statistics
 1,000 researchers = The full-time equivalent of 1,000 researchers
 (i) French and American figures are estimates; (ii) The figures concerned are based on calculations on information gleaned from a number of databanks, including China statistical yearbooks, UNESCO Institute for Statistics, and the WIPO databank.
 The Arrangement and Agreement were signed between Hong Kong and the mainland on 20 September 2018. For details, please see: http://www.news.gov.hk/eng/2018/09/20180920/20180920_150442_108.html
 For details, please see: http://www.info.gov.hk/gia/general/201809/20/P2018092000978p.htm and https://www.itb.gov.hk/zh-cn/publications/InnovationHK.pdf
 For details, please refer to: Chinese Enterprises Capturing Belt and Road Opportunities via Hong Kong: Findings of Surveys in South China