SWOT Analysis of Hong Kong as an International Business Hub: Future Challenges

Hong Kong may command comparative advantages in connectivity, infrastructure and market environment in the eyes of business leaders in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA). However, as it faces keener competition from other GBA cities, Hong Kong must strive to improve in other areas.

Areas for Improvement in Hong Kong

According to a recent survey, only 54% of respondents agree or strongly agree that Hong Kong has a pool of highly skilled labour that is readily available for their business¹. Moreover, only 51% agree or strongly agree that Hong Kong’s immigration schemes are effective in attracting and retaining overseas talent. Despite the advantages mentioned above, Hong Kong has ample room for improvement in this area.

According to IMD World Talent Ranking 2019, Hong Kong ranks 20^th globally in terms of the investment in and development of home-grown talent. Although that ranking has risen each year, its investment and expenditure on cultivating home-grown talent are still insufficient compared to other countries. Hong Kong also trails behind other places in terms of its appeal to overseas talent, its global ranking having slipped each year since 2016 to its current position of 18th. The report notes that while Hong Kong has an edge in remuneration, personal income tax rate and degree of fair administration of justice, it offers a relatively low quality of life owing to the high living costs.

This finding is consistent with results of the questionnaire survey and in-depth interviews. Unlike other GBA cities, Hong Kong finds it hard to retain talent because of its high living and housing costs. Some respondents pointed out that many other GBA cities have rolled out measures in recent years designed to draw in talent from elsewhere. A case in point is Shenzhen, which offers Hong Kong start-ups free accommodation and office space, personal income tax concessions and housing allowances. In contrast, Hong Kong’s policies to attract talent are few and far between. It is therefore important for Hong Kong to devise measures to relieve high living costs for overseas talent, in order to boost the city’s overall appeal.

Figure 2 shows that businesses which have established a presence in Hong Kong give a higher rating to statements across all areas than those which do not have such a presence. This suggests that the perception of Hong Kong’s various strengths is closely related to whether or not the relevant business has a presence in the city. Another interpretation of the findings is that enterprises which have higher opinions of Hong Kong’s strengths are more inclined to operate in Hong Kong. Despite the different ratings given by enterprises which have established a presence in Hong Kong and those which have not, both groups agree that the cost of doing business in Hong Kong is high compared with other GBA cities. The in-depth interviews also revealed that GBA enterprises may be deterred from setting up a branch office in Hong Kong by the difficulties in recruiting talent, and by the expense of office rental and other operating costs in the city.

The survey also found that Hong Kong’s performance in advancing and developing innovation and technology is not particularly impressive. Only half of the respondents agree or strongly agree that “Hong Kong has the R&D capability and sufficient technology infrastructure for technology advancement”, and that “the Hong Kong government offers adequate incentives in developing new types of business”. This clearly indicates that efforts by the Hong Kong government to support emerging businesses are considered relatively weak, and that this is a major area for improvement. It also aligns with views collected from in-depth interviews, in which respondents commented that the procedures for applying for government dedicated support funds are cumbersome, the approval time is lengthy and many documents are often required. The funds fail to provide assistance when it is needed to enterprises with genuine needs.

Opportunities for Hong Kong

Despite the constant fluctuations in the current political and economic macro-environments, there are plenty of future opportunities still available for Hong Kong. In the survey, respondents selected a number of emerging trends which they believe will strengthen Hong Kong’s role as an international business hub in the next five years, and ranked them in order of significance.

The results show that respondents consider the increasing application of emerging technology as the most significant trend strengthening Hong Kong’s role as an international business hub. The use of advanced technologies like fintech, artificial intelligence, automation and blockchain can help propel Hong Kong’s economic growth and transformation, boosting the city’s appeal to business. In recent years, Hong Kong has been very active in developing smart city projects and adopting emerging technology. Major initiatives include establishing the Smart Government Innovation LAB, building the Common Spatial Data Infrastructure and developing the commercial 5G network and services. These measures are in line with a key strategy in the Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area (GBA Development Plan) – that of turning the GBA into a global technology and innovation hub. A respondent in the financial services sector noted that the GBA Development Plan sets out the country’s vision of building the GBA into a scientific research centre for emerging technology and making it China’s “Silicon Valley”. The GBA is expected to spearhead efforts to accelerate the digitalisation and transformation of mainland cities into “new economies”, which will then have a wide impact across the nation. Other respondents thought that the upgrading and transformation of low-end manufacturing enterprises in the GBA will present more opportunities to Hong Kong.

Respondents noted that another significant trend is the integration of Hong Kong within the GBA. For the two places to achieve economic integration, improving the flow of capital is a prerequisite. Currently, restrictions on cross-border funds transactions are a major impediment to expanding the GBA’s capital market and commerce and trade. If restrictions on cross-border capital flow in designated locations or for designated groups of people were relaxed, links between the Hong Kong and GBA capital markets would be considerably enhanced. Some respondents commented that Hong Kong, with its market-driven free economy, is ideally placed to help GBA cities transform and gain more knowledge of the market economy model so they can align better with international practices. Respondents also generally believe that it is crucial for Hong Kong to integrate with other GBA cities in the areas of taxation, professional qualifications accreditation and the customs clearance regime.

Other macro trends identified by the survey as being significant in enhancing Hong Kong’s international business include “increasing cross-boundary transactions due to the Belt and Road Initiative”, “extending global value chains out of the GBA” and “industrial upgrade and transformation in the GBA”. These trends highlight the pivotal role of the Chinese economy in the global value chain, with the Belt and Road Initiative (BRI) and the GBA expected to drive the mainland’s industrial upgrade and opening up to even higher levels. Within this framework, Hong Kong can play a part by helping the development of infrastructure links between the GBA and the rest of the country. The city should look to become a hub for the flow of information, capital and people under the BRI, fostering economic and trade cooperation between China and BRI countries.

Respondents also assessed the importance of various ways in which Hong Kong can enhance its position as the GBA’s international business hub. Overall, respondents believe that the five most important courses of action in the next five years (see Figure 4) are “facilitating the free flow of capital in the GBA, e.g. cross-boundary use of RMB”, “improving protection of data privacy in the GBA”, “improving the R&D capability of HK, e.g. encouraging R&D activities and adopting emerging technology”, “promoting tax simplification/harmonisation in the GBA” and “promoting regulatory transparency in the GBA”.

Courses of action such as facilitating the free flow of capital in the GBA (e.g. cross-boundary use of RMB), promoting tax simplification/harmonisation in the GBA, promoting regulatory transparency in the GBA, encouraging coordination amongst public bodies/regulators in the GBA and improving physical connectivity with other mainland cities outside the GBA are all related to stepping up integration and connectivity between Hong Kong and the GBA. They are also important for promoting cross-border trade between the GBA and BRI countries.

The GBA Development Plan says that facilitating the free flow of capital is critical for developing the GBA. Respondents felt that if the free flow of capital within the GBA is made possible in the next five years, it would help GBA enterprises engage in cross-border trade and investment in overseas markets. This would in turn drive up demand among GBA enterprises for Hong Kong’s international financial, legal and professional services, further consolidating Hong Kong’s status as an international financial centre and offshore renminbi hub. Respondents generally believe that Hong Kong, with its free flow of capital, can play a critical function in fostering the free flow of capital in the GBA. Within the GBA, there are now three types of currencies and three approaches to managing capital flow. To achieve free circulation of funds, GBA authorities must reform their institutions in order to link up their financial systems.

The tax system in the GBA should also be simplified and harmonised to facilitate the flow of people and businesses. In the in-depth interviews, respondents said that it was important for Hong Kong to join hands with other GBA cities to simplify and harmonise their tax regimes.

Good progress has been made regarding the flow of talent since the GBA Development Plan came into effect. For instance, the Circular on Individual Income Tax Preferential Policies for the Guangdong-Hong Kong-Macao Greater Bay Area stipulates enhanced tax concessions to Hong Kong people working on the mainland. However, mainland cities, Hong Kong and Macao still differ substantially in terms of their enterprise income tax regime. Some respondents suggested that to help businesses expand in the GBA and increase their efficiency, the various authorities should look into launching more preferential tax policies for businesses.

Respondents also thought it was important for Hong Kong to work with other GBA cities to promote regulatory transparency in the next five years. While Guangdong, Hong Kong and Macao are three distinctly different legal jurisdictions, respondents in the in-depth interviews said that Hong Kong, with its special status under the “one country, two systems” policy, should share its market regulation experience with other GBA cities. Hong Kong can serve as a role model for other GBA cities looking to adopt a regulatory system compatible with stringent international investment and trade rules. It can help these cities use the free market for the distribution of resources, improve their supervision of the integrated market and establish a stable, fair, transparent and predictable business environment. Hong Kong’s financial institutions and legal and professional services firms can also use their knowledge and experience of international market regulatory regimes to help GBA enterprises adapt to systems and practices in the global market. Doing this will help Hong Kong further strengthen its status as an international business hub.

Improving the protection of data privacy in the GBA is another course of action that respondents considered important. The GBA Development Plan clearly stipulates that efforts be made to raise the level of information security protection and promote the use of advanced technology in Hong Kong, Macao, Guangzhou and Shenzhen. Hong Kong can play a vital role in establishing a robust early warning and information sharing mechanism for cyber and information security matters and building a comprehensive cybersecurity defence system in the GBA. Some respondents noted the lack of unified policies on data and information management across GBA cities. To transmit data to other parts of the world, many overseas companies now opt to set up their data centre in Hong Kong. Its information protection and management system is considered to be on a par with world standards. Some respondents in the information industry indicated that they have to establish a data centre in both the mainland and Hong Kong to engage in cross-border business, resulting in higher operating costs and lower operation efficiency. They said that the creation of a pilot scheme to standardise data security management systems in the GBA, enhancing the flow and security of data and information, would be a tremendous help to information service providers. Such a move would also increase demand from GBA enterprises for Hong Kong’s professional service providers, well-versed as they are in international information protection systems. This would again boost Hong Kong’s position as an international business hub.

In an age where the digital economy is flourishing, improving Hong Kong’s R&D capability and encouraging the adoption of emerging technology are of vital importance in developing the city’s innovation and technology industry and enhancing Hong Kong’s status as an international business hub. This view was expressed by many of those who took part in the survey. Respondents from various different sectors agreed that - compared to other mainland cities like Beijing, Shanghai and cities in the GBA - Hong Kong’s investment in the new-tech and hi-tech sectors is insufficient. While the mainland government offers a string of incentives to attract innovation and technology companies and talent, Hong Kong’s efforts in this area are grossly inadequate. Hong Kong’s R&D expenditure accounted for only 0.86%² of its GDP in 2018, much lower than the 2.19%³ figure for China (Beijing’s figure is 6.17%, Shenzhen’s is 4.80%⁴, Zhuhai’s 3.16%⁵, and Dongguan’s 2.85%⁶).

Hong Kong’s Future Development Direction: An Innovation and Technology Interchange will discuss further how Hong Kong is lagging behind other mainland cities in the adoption of emerging technology. If Hong Kong is to consolidate its status as an international business hub, it must raise its investment in scientific research and new technology as well as enhance its R&D capability and adoption of technology. Doing this would also provide strong support for advancing connectivity in the financial markets within the GBA, expanding the scale and scope of cross-border payments and facilitating the cross-border flow of capital.

Challenges Confronting Hong Kong

As GBA cities continue to develop, Hong Kong’s competitiveness is being challenged on all fronts. Meanwhile, the economy in the GBA is still beset with problems like excess capacity, an imbalanced supply and demand structure, and relatively weak internal drivers for economic growth. Under the “one country, two systems” policy, Guangdong, Hong Kong and Macao adopt different social and political systems and belong to different customs territories. Achieving connectivity among these systems presents a major challenge to the construction of the GBA. A further complication is the vastly different development status of different districts in the GBA, making it hard for them to be developed with synergy and compatibility. In some districts and sectors, problems of resource mismatch and homogenous competition still exist. Given such phenomena, Hong Kong, as a highly external-oriented economy, is facing very grave challenges. In addition, the China-US trade dispute is adding uncertainty to the global economy, while trade protectionism and unilateralism are also on the rise. Following the implementation of the latest US act on Hong Kong, the city’s status as a special customs territory will be subject to changes.

¹ For the background information about this report, please refer to the appendix in Hong Kong as the International Business Hub for the Greater Bay Area (Executive Summary).

² Hong Kong Innovation Activities Statistics 2019, Hong Kong Census and Statistics Department

³ Communiqué on National Expenditures on Science and Technology in 2018, National Bureau of Statistics

⁴ Communiqué on Expenditures on Science and Technology of Guangdong Province in 2018, Guangdong Bureau of Statistics

⁵ Communiqué on Expenditures on Science and Technology of Guangdong Province in 2018, Guangdong Bureau of Statistics

⁶ Communiqué on Expenditures on Science and Technology of Guangdong Province in 2018, Guangdong Bureau of Statistics

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