In this paper, our summer intern Alexander Li seeks to explore the issues that plague Hong Kong with regard to R&D and the steps that can be taken to mend them.

Introduction

Hong Kong is a strange example of a developed economy. Despite many of the qualities attributed to the city, including being ‘the world’s freest economy’[1] and having a strong service sector (which accounts for 93% of HK’s GDP as of 2010[2]), a large budget surplus and a highly educated workforce, Hong Kong seems unwilling or unable to innovate and conduct research and development like many other developed and developing countries. This poses a great risk to the future of Hong Kong, for if we do not keep pace with the advancement of our neighbors and competitors, we risk becoming increasingly uncompetitive and even irrelevant with the growth of cities such as Shanghai and Shenzhen.

This paper will present three sections. The first section will introduce the concept of Research and Development (R&D) and how it is generally promoted in the world. The second will address Hong Kong’s potential strengths and weaknesses in R&D through comparison with other countries, especially our neighbors; attempt to demonstrate and explain why Hong Kong (despite all its advantages) is rapidly falling behind in R&D; and outline general improvements that could be made to amend the situation. Finally, the paper will outline some potential focus areas for Hong Kong’s R&D. I hope that by the end of the paper, I can demonstrate why the current situation in Hong Kong is so unfriendly towards R&D and hopefully outline how Hong Kong can be directed towards future development.

Section 1: How is R&D promoted？

Research and Development is not only about basic scientific research. It can also refer to efforts to develop brand new goods, processes and services, or to improve the design of an existing good, process or service to further increase their effective use. R&D is different for every sector of the economy, ranging from new kinds of fabric in the clothing industry, to new software in the information technology sector.

R&D activities may vary per sector, but some qualities remain the same. As noted by a senior manager at China Light and Power, R&D requires three key components, namely capital (financial and physical), time and a clear objective. Since R&D has a relatively high failure rate and often requires years to complete, it is considered a risky venture that is only conducted by bigger companies with the financial capital and infrastructure to stay ahead in the competition, although there are times when they are in collaboration with either other private related industries or the public sector.

In order to encourage R&D in their respective boundaries, different countries utilize different methods such as tax breaks and subsidies. Furthermore, nations are often driven to specialize in selected R&D areas due to their national situation. For example, Israel and the United States are often driven by the national strategic needs, their R&D activities are often pushed by the Defense and Military sector, and hence their support measures are often focused on government contracts, attracting expertise, and co-operation with trustworthy allies. In contrast, countries like Singapore and Japan feel that R&D is crucial to their economic growth due to their lack of natural resources; thus they tend to jumpstart their research and development with specialization in sectors with economic potential (for example, biomedicine in Singapore and electronics in Japan) and with the use of MNCs and technology transfers from foreign sources until their own local industries are able to innovate independently. In many cases, universities often become focal points for upcoming research and development, as noted in Making IT - The Rise of Asia in High Tech (2007) through examples such as the Silicon Valley and Boston in the United States, Daeduk in Korea, Hsinchu in Taiwan and Zongguancun Science Park in Beijing[3].

Many countries have developed national frameworks for driving R&D based on the notion of national innovation system. Whether it be collaboration between the public and private sectors, joint research projects between a government and a multinational corporation, informal connections, or indirect spillovers and technological diffusion by infrastructural development; they all form the structure of the national innovation system.

Now that the basics of how R&D is made possible, how it can be channeled and why it might be channeled in a certain direction have been explained, we will move on to the second part: Hong Kong’s traits and its position with regard to R&D.

Section 2: Hong Kong and R&D

Hong Kong is in a relatively special position in the international economy. It has many advantages that make it attractive to investors and businesses around the world such as a low tax rate (capped at 16-17%), a clean and transparent bureaucracy and the rule of law developed under the British system. It also possesses a multinational and multicultural population, as well as the access to both mainland and international markets thanks to its former position as a British colony and its current Special Administrative Region status (SAR) under China’s ‘One Country, Two Systems’ model. Added to these strengths are an increasingly highly-educated workforce and regionally renowned universities. Hong Kong ought to be a R&D powerhouse, yet the results are surprisingly disappointing. Despite the fact that Hong Kong is ranked in the top twenty in the World Bank’s KI (Knowledge Index) and KEI (Knowledge and Knowledge Economic Index)[4] with strong performance under the categories “Economic Incentive Regime” (ranked 5th) and ICT (ranked 10th ), Hong Kong government’s documents show that Hong Kong only spends about 0.79% of its GDP annually on R&D, compared to 1.6% on the Mainland, 3.48% in Japan, 2.65% in Singapore, 3.45% in South Korea and a staggering 4.2% of Israel.[5] Furthermore, government support for R&D is immensely insufficient, with the Innovative Technology Commission (ITC) receiving an annual budget of 515 million HKD, in comparison to Singapore National Research Foundation’s budget of 1 billion SGD (roughly equivalent to 6 billion HKD) which does not include other forms of assistance such as capital reimbursement, tax breaks and subsidies. Hong Kong also possesses a disappointing number of individuals undertaking R&D, with 8.86 R&D personnel per thousand labour force as of 2009[6], far fewer than the countries such as Singapore (15.34), South Korea (19.51) and Japan (17.48). It is probably safe to say that we are eclipsed in the sheer number of the R&D expertise.

Challenges for promoting R&D in Hong Kong

One obvious restriction on R&D in Hong Kong is the city’s economic structure. An ITC official that I interviewed pointed out that the government of Hong Kong does not require an army or military industrial complex, which impacts R&D spending, as indicated by the cases of South Korea and the United States, whose military R&D accounted for 17% and 51% of their total research spending in 2009. She also points out that the manufacturing sector often drives R&D spending in the private sector, which is extremely relevant when you consider that Hong Kong’s manufacturing contributes less than 2% of GDP compared to 22% in Singapore and 30% in South Korea, demonstrating the lack of a manufacturing industry in Hong Kong. Hong Kong’s relatively small size simply underlies the Government’s argument: that Hong Kong simply does not possess the necessary prerequisites to stimulate large amounts of R&D.

Another factor that restricts R&D in Hong Kong but is not fully quantifiable is the culture of the city. According to an interviewee from Invest Hong Kong, Hong Kong’s workforce was always rigid, it got the skills it needed from immigrants, who simply took their original professions from abroad and continued them in Hong Kong. This was clearly seen in the 1950s when China Communist Party came to power, forcing many capitalists to flee the country to the safe haven of Hong Kong, and allowing it to flourish as a city of manufacturing. Bluntly put, Hong Kong is simply unused to research because it had never been put in a position where it was forced to innovate. This apathy is reflected very much in the two meetings that I attended which discussed the likelihood of R&D. The general consensus of the room after nearly 4 hours of deliberation was that the private sector was simply unwilling or unready to support or provide a market for such research. The general comments by professors and individuals trained in various fields of high tech industries were that there was no market or opportunity for advancement in these fields and that the positions many engineering graduates could get were in lowly support services such as computer repair and the like, not cutting edge research or development as seen in many other countries. In the meetings, I observed that many ideas were often simply shot down as ‘unfeasible’ and discussants focused on why these ideas could not be achieved rather than providing constructive debate or discussion, demonstrating clearly that even within a group of individuals dedicated to the advancement of R&D, there was a general unwillingness to adapt or change their own settled viewpoints, which only perpetuated the feeling of disillusionment. Unfortunately, this attitude is reflected not only inside meeting rooms, but also in the general public, as reflected by the reluctance of people to invest in R&D activities.

R&D funding often comes from the public sector, venture capitalists and angel investors. Hong Kong’s conservative culture makes the latter two groups less willing to invest in long term R&D projects. As one investor explained, they question why they should invest in a long-term, high-cost and high-risk R&D project when you can put money in something extremely short-term with large profits such as stock or land speculation. Furthermore, as noted by Au and White (2010)[7], these sources of funding are often only available to those with the connections to willing investors, who are mainly related by familial ties or ties of friendship. Many innovators are hence cut off from these sources of non-public R&D funding as investors are unwilling to lend money to ‘strangers’. Even supposing there were investors willing, they often attach with their loans unacceptable conditions such as a large collateral, the signing over of invented rights and short (3-5 year) timeframes. Because of the difficulties in acquiring private financing, many potential innovators often give up before they start.

While the private sector can be seen as insufficient with regard to supporting R&D, the effort in the public sector to advocate or encourage collaboration was equally inadequate. This was pointed out by a senior manager at China Light and Power, who noted that they receive absolutely no assistance from the government, and often rely on their own internal R&D department and collaboration with those within the industry. The lack of communication between the public and private sectors strongly illustrates the missed opportunities with regard to R&D in Hong Kong, as governments have often been noted to help diffuse research findings through formalized networking and help commercialize products that, while useful to society as a whole, would not be profitable enough to a private company. I can only imagine the number of potentially useful projects (such as the electric car in the CLP energy efficiency center) that were delayed or even abandoned simply due to lack of governmental support.

The conclusion that can be drawn from all this is the fact that Hong Kong faces significant challenges for R&D. The laissez-faire government that is so often praised in Hong Kong is its shortfall. R&D projects experience market failure in Hong Kong (market failure is what happens when a good or service is undersupplied by the free market despite the demand). Because the government is so often non-interventionist, it is unable or unwilling to provide the impetus necessary to promote R&D in Hong Kong. Students in Hong Kong have also been noted to be steered towards the business and professional services sector, particularly the financial sector. That has been observed by various science professors from local universities through the low admission standards of their respective faculties and the general inability of the society to present great future career advancement in pertinent fields. Science and engineering graduates also note that despite their education and work experience (ranging from 4 years of experience in the Silicon Valley to working for companies such as Google and Microsoft), they often become underemployed and even end up switching careers simply because there are no jobs in their trained professions.

Ways to develop Hong Kong’s R&D potential

Despite all the criticisms leveled at R&D performance in Hong Kong thus far, there are many factors that if utilized effectively could help propel Hong Kong towards a long-term R&D strategy. The first is the fact that several of our universities do have technology transfer offices that collaborate with interested companies in helping research and develop technologies. If the government could enhance support for these technological transfer efforts by helping link or attract potential interested parties (either investors or inventors), it would help advance the rate of these transfers immensely.

Second is the ability of Hong Kong to attract foreign talent and investment. An interviewee from Invest Hong Kong has noted that they often aid companies to get listed and invest in Hong Kong , suggesting a lot of untapped capital potential. Steps taken to be more attractive than our immediate neighbors such as Mainland China, Singapore, Japan, Korea and Taiwan especially for potentially high tech industries must be advocated. In addition, it has been noted in the 2003 Report of the Task Force on Population Policy and the subsequent 2012 Report by the Steering Committee on Population Policy that not only are we experiencing an swiftly aging population, but also many of our emigrants are often in the highly-educated and -skilled portion of our population. Hence, loosening policies regarding skilled expertise and immigrants (including those from the mainland who are often discriminated against[8]) under existing schemes must be encouraged.

Third, our strong trade relations ought to be further utilized to form research agreements or co-operation agreements with foreign countries. While the interviewee from the ITC has noted that their organization has promoted the idea of technology transfers via the signing of Memoranda of Understanding (MoU) with several renowned universities and research institutes such as University of California (Berkeley and Los Angeles), University College of London, Tsinghua University, Sun Yat-Sen University, National ICT Australia, Danish Agency for Science, Technology and Innovation and the Department of Advanced Education and Technology of the Government of the Province of Alberta, much more can be done. I point to Canada, which currently has a research co-operative agreement with China but not Hong Kong (which is surprising considering that the largest amount of Canadians living abroad reside in Hong Kong, according to the Canadian Trade Commissioner Service and a Canadian diplomat who has spent a long time in the Greater China), as an indicator of how much more the ITC or Hong Kong’s universities are capable of doing. These trade relations can also be utilized to help attract foreign investment and acquire foreign technologies more easily than other countries, further spurring R&D activities.

Fourth, co-operation or integration of the various agencies within the government can also be extremely helpful in formulating a solid, clear and concise innovation strategy. This is important because currently the government agencies often do not co-ordinate well or seem to have much liaison with one another. For example, basic research is managed by the Education Bureau and the University Grants Committee (UGC) while applied research activities fall under the support and purview of the ITC. This means that research may not necessarily move smoothly from one stage to another due to the bureaucracy involved. An example of a potentially useful connection resulting from inter-bureau mergers or collaboration would be the Innovation and Technology Commission working in co-operation with the Trade Development Council (TDC), Intellectual Property Department and Invest Hong Kong. The TDC helps gather companies in one particular sector or industry, Invest Hong Kong helps promote investment in R&D, the ITC helps encourage and commercialize R&D and the Intellectual Property Department ensures that IP registration or filing process can be streamlined and rights over R&D results be protected under HK law, providing a contrast to Mainland China, of which the IP regime is seen as not strong enough.

Finally, additional government support for R&D would be greatly appreciated. Certainly, the public sector share in R&D spending is certainly high, comprising in 57% of the total R&D spending, but the government cannot solve the problem simply by throwing more money. The case of Hong Kong Science Park project and its continual expansion, which currently has about three million square feet of space and thirty buildings allocated towards technological development, presents a good example of positive government intervention beyond simply funding. The criteria for tenancy in Hong Kong Science Park is quite stringent; the tenant must have at least 50% of their workforce dedicated to research and development and at least 50% of the area rented must be committed to technology or technological development. Currently, there is an oversubscription by many qualifying firms, meaning the Park can choose companies that best suit Hong Kong’s R&D direction. However, steps must be taken to continually expand the Park. Otherwise, these companies will eventually give up and offer their services elsewhere.

In this section, we have discussed how Hong Kong, despite its many advantages, is unable to utilize them to promote R&D due to the existing cultural and social barriers, as well as suggesting ways in which the government can help develop our general R&D potential. The next section will focus on research areas that I believe Hong Kong can specialize in and has an advantage in.

Section 3: Hong Kong’s Potential Areas

In the previous section, this paper covered the advantages Hong Kong possesses in promoting R&D. This section will attempt to explore sectors which I believe would best complement Hong Kong’s natural strengths. The areas are: Chinese medicine, logistics/infrastructure and software design.

Traditional Chinese medicine

Traditional Chinese medicine (TCM) has long been considered at best an ‘alternative’ medicine and at worst superstition by the West. It has only recently started to make a comeback after the Chinese government decided that Chinese medicine represented a way to spread Chinese culture and influence, as well as a potential growth area in their economy. Chinese medicine is often viewed with scepticism by foreigners due to several factors.

One is the fact that Chinese medicine needs to be taken over a long period of time and requires constant ingestion, compared to the medicine offered in the West. These two factors along with the relatively strong taste, smell and unappetizing look of Chinese medicines, which provide a stark contrast to the simple pills of modern medicine, often discourage Westerners from seeking Chinese medicinal cures.

The second factor is the way that a TCM practitioner explains symptoms. Sickness according to the Western medicine is explained by bacteria, viruses and the like. However, sickness according to Chinese medicine is expressed as an imbalance of Yin and Yang in your body, and the Five Elements (i.e. Metal, Wood, Water, Fire and Earth). To a Westerner, things like Chi have no scientific backdrop and hence are treated as superstitious trickery.

Thirdly, Chinese medicine recipes and cures are often handed down generation by generation, with doctors having their own specialized formulas. In addition, many of these cures are attributed to legendary tales, and the names of the ingredients that translate as ‘Heavenly Grass’ and the like sound outright ludicrous. From the standpoint of Western medicine, which operates by chemical formula and clinical trials[9], the fable-like and non-standard application of Chinese medicine seems unsafe and untrustworthy.

Despite these primary obstacles and the cultural bias against Chinese medicine by the West, Chinese medicine has seems to be making headway in the medical world. The most prominent examples are the existence of a Chinese Medicine research facility at Harvard, the successful registration of the first Chinese herbal medicine (Diao Xin Xue Kang) in the EU[10], several Chinese medicines currently at the final stage of the FDA clinical approval stage (e.g. HMPl-004 and Danshen dropping pills).[11] However, there is still a long way to go before Chinese medicine is able to reach its full potential.

In this area, Hong Kong can help propel the ideas of Chinese medicine and reap benefits from such. While China does possess the necessary resources and expertise to conduct such research, what they lack is the branding support that Hong Kong could provide. No matter the actual quality of a product, Chinese goods are often scorned or associated with as low quality, cheap, defective and dangerous goods. This would make Chinese medicine harder to push through into foreign markets. Furthermore, often people’s unfamiliarity with of distrust of China’s institutions further affects perceptions about research results from its institutes. Hong Kong, on the other hand, is known for its strong rule of law and transparency as well as its Westernization. If Chinese medical research was successfully conducted here, it would more likely be recognized in the international market. We already have three Chinese medical research institutes at the University of Hong Kong, Baptist University and Chinese University, as well as the eleven accredited laboratories for testing TCM and Phase 3 of Science Park, which is dedicated to biotechnology. In addition, a committee was set up last December (Committee on the Research and Development of Chinese Medicines) to promote collaboration between representatives and experts in the respective fields. There was also a recent exhibition on Chinese medicines featuring many medical professors including one from Harvard University discussing the viability of Chinese medicine[12], demonstrating again Hong Kong’s potential as a link between the international medical community and that of traditional Chinese medicine. I suggest collaboration with a renowned pharmaceutical company such as Pfizer, which undoubtedly does related research on its own.

If Chinese medicine-related business is to be developed, however, it must be done quickly before China is able to overcome the international bias against it. Delay in securing rights to medical ingredients or attracting expertise within the next five to ten years will set back most gains from advancing in this direction, as we simply will not be able to compete with China on an equal footing.

Logistics and infrastructure

The idea of logistics and infrastructure is a simple one. Hong Kong is a city well known for its efficient transportation systems. To keep Hong Kong vibrant and competitive, continuous improvement must be made to its systems. The plan for expansion of our airport demonstrate the understanding that if our transport capacity falters, Hong Kong will also suffer as a result. There are still areas that could be improved via application of technologies, such as broadband penetration and high-speed access to the internet, or the upgrading of our buildings to be more energy efficient (as seen in CLP’s energy efficiency museums). The application of RFID technology in tracking shipping containers is also extremely useful in ensuring the location of all products in transit. The ability to continually update, upgrade and maintain our infrastructure to remain competitive is important. The most important, however, is the application of our technological expertise in other areas. By offering our professional services and acquiring contracts for design, construction and management, we not only could acquire a steady source of revenue, but could potentially attract people to undertake these professions and hence diversify Hong Kong’s economy beyond its financial sector.

Software design

The third area is software design. This is because while Hong Kong has great limitations regarding land for developing hardware, we can utilize our inherent advantages in developing software. A good example is the app industry. The Hong Kong Science & Technology Parks Corporation (HKSTPC) has noted that the app industry has been growing exponentially, with mobile data usage in apps doubling in the past year and the average of apps on a Hong Kong person’s smartphone being 30[13]. There is a potentially huge market to exploit and develop. Of course, the public sector is beginning to support this, as exemplified by the HKSTPC’s launch of an incubation program with a funding package of up to HKD 300,000 per applicant over an 18-month period for app ideas. However, this industry is far under the radar. The government must encourage interest in these areas amongst students through publicity, education and even competitions. In that way, we can potentially acquire a crop of talented software developers and designers which, when coupled with our annually hosted conventions[14], could propel information technology R&D.

Conclusion

The entire essay has covered the basics of R&D, its situation in Hong Kong, Hong Kong’s failure in pursuing R&D and several recommendations regarding Hong Kong’s potential R&D directions. While the essay has left many other potential areas unexplored, I genuinely believe that the three industries of software designs, logistics and infrastructure and traditional Chinese medicine are most practical and present the largest potential to incentivize R&D in Hong Kong.

In my humble judgment, the primary obstacle towards R&D is actually the inflexibility of our social system. Many people of the older generation are often too cautious and refuse to take risks in attempting to innovate, and even those who are more willing often become set in their own points of view regarding what kind of R&D is commercializable and hence are too narrow minded. On the other hand, many of the younger generation are often forced to abandon their interest in science and directed towards professions such as law, medicine and finance in order to attain a successful life. If this is to change, we must teach the younger generation to take risks and innovate, to become entrepreneurs and cultivate their interest. I would recommend following the North American system of higher education, which allows you to switch faculties and not have to declare a major until 2nd year, so as to avoid pressuring students into making the wrong decision, and to allow more flexibility in their decision making. I also recommend the development of programs such as the one arranged by Junior Achievement, which teaches entrepreneurship and hosts competitions between schools on these lessons.

I hope that readers of this paper find it useful in achieving a basic understanding of the issues that plague Hong Kong with regard to R&D and the steps that can be taken to mend them. I hope such steps will be taken out to help promote long-term growth and development in Hong Kong.

Written by Alexander Li, 2012 summer intern

[1] Heritage Foundation. 2012 Index of Economic Freedom- Hong Kong. http://www.heritage.org/index/country/hongkong (accessed September 2012)

[2] Hong Kong Information Service Department. Hong Kong as a Service Economy. http://www.gov.hk/en/about/abouthk/factsheets/docs/service_economy.pdf (accessed September 2012)

[3] Rowen, H. S., Hancock, M.G, and Miller, W.F. (eds). (2007) Making IT- The Rise of Asia in High Tech. (Stanford: Stanford University Press)

[4] The World Bank. KEI and KI Indexes (KAM 2012). http://info.worldbank.org/etools/kam2/KAM_page5.asp

[5] Data taken from UNESCO Institute for Statistics (UIS) www.uis.unesco.org

[6] Data taken from UNESCO Institute for Statistics (UIS) www.uis.unesco.org

[7] Au, K. and White, S. (2010) “Hong Kong’s Venture Capital System and the Commercialization of New Technology” In Fuller, D.B. (ed.) Innovation Policy and the Limits and Laissez-faire. (Basingstoke, UK ; New York, NY : Palgrave Macmillan): 145-180

[8] See Hong Kong’s 2002 Population Policy Report- ‘New Arrivals from the Mainland’ (http://www.info.gov.hk/info/population/eng/pdf/report_eng.pdf) and the 2012 Steering Committee’s report (http://www.admwing.gov.hk/pdf/SCPP%20Progress%20Report%202012%20%28Eng%29.pdf )

[9] See USA’s Food Drug Administration (FDA) approval process http://www.fda.gov/drugs/resourcesforyou/consumers/ucm143534.htm http://www.fda.gov/Drugs/ResourcesForYou/Consumers/ucm289601.htm

[10] BONTV. ‘TCM comes to Europe-Media Watch’. 20 April 2012.

http://www.youtube.com/watch？v=DTqpMWV-eZ8

[11] Lindsay Stafford. ‘Chinese Herbal Medicine Clears US FDA Phase II Trials’. HerbalEGram: Volume 7, Number 10, October 2010 http://cms.herbalgram.org/heg/volume7/10October/TCMproductinFDAIIItrials.html？t=1285951198,

Hutchison Medi Pharma. ‘HMPL-004’ http://www.hmplglobal.com/en/product.asp？id=15

[12] Trade Development Council. ‘International Conference & Exhibition of the Modernization of Chinese Medicine & Health Products’ http://www.hktdc.com/fair/icmcm-en/ , ‘ICMCM Conference 2012’ http://icmcm.hktdc.com/pdf/2012/ICMCM_Conference_v20.pdf

[13]HKSTPC. ‘HKSTPC Introduces Incu-App Technology Business Incubation Programme Newest Initiative to Spur Hong Kong’s Technology Evolution’ 16 February 2012. http://www.hkstp.org/HKSTPC/news.jsp？lan=en&id=NW_0000734&typeId=NT_03

[14] See related electronics and computer industries exhibitions and conventions: www.chinasourcingfair.com, www.koreasourcingfair.com, http://www.hkccfexpo.com/index.aspx