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Chapter Two: Hong Kong's Unique Combinations

Some of the most interesting features of the Hong Kong economy are its "unique combinations". The Hong Kong economy is unique in its balance between government and business, between local and overseas firms, between entrepreneurship and management, and between strategies of "commitment" and "hustle". The components of each combination have mutual respect, equality of stature, and dynamic interaction. The presence of these almost counter-intuitive combinations indicates that Hong Kong is able to provide a supportive environment for many types of firms and firm strategies. The combinations, in turn, have contributed to the development of a vibrant, robust economic system.

Government and Business

Hong Kong is a place where government works well, sets clear and equitable rules of the game, and leaves firms free to do business. In the absence of overriding social considerations, business decisions are generally left to the private sector, just as the allocation of economic resources is generally left to market forces. Hong Kong officials do not play any material role in business. There is no government holding company with stakes in leading firms in the economy. There are few government-owned companies and government does not engage in directing or planning the economy at the industry or firm level. The government has franchised monopolies or oligopolies for the provision of various services--like electricity, the mass transit railway system, the container port and the airport--but only in a few instances does the government have a financial interest in their performance. Instead, its predominant role is that of referee. It lays the ground rules and sets the terms of the schemes of control under which utilities operate. Private companies are left to generate electricity, operate the port, or run the ferries, trams, and buses. Many infrastructure projects are left to the private sector to develop, finance, build, and operate.

The government has largely resisted calls to pick winners, target industries, or protect or subsidize manufacturers. It shies away from micromanaging the structure of industry through regulations or tax policies. When it does regulate, it tends to do so with a comparatively light hand. The philosophy has been one that the government should set the rules, but then leave the private sector to make its own way without government inhibitions. Hong Kong also is free of serious corruption, the result of more than two decades of strong anti-corruption efforts. Government maintains an open trading environment, allows the free entry and exit of capital, and keeps the tax rate low for corporations and individuals. The result has been a system of "positive non-intervention", in which Hong Kong companies and individuals have been free to succeed or fail based on their own skills and capabilities.

The clear separation in Hong Kong between the role of government as referee, and the role of private companies as active players in the economy, is unique in Asia, and rare worldwide. It is the anomalous by-product of British colonial arrangements which kept colonial officials aloof from commerce and firmly focused on administration and then on a gentlemanly retirement in England's home counties. Obviously, the Hong Kong Civil Service of today is quite different, largely staffed by locally born ethnic Chinese. But it has retained this distinctive separation between government and business, providing the source of a number of competitive advantages which have over time encouraged a dynamic economy, nurtured the territory's enterprise culture, and limited the scope for corrupt business activity.

This is in sharp contrast with government roles elsewhere in the Asia-Pacific region. Singapore's government directs economic development with a firm hand. Its principal holding company, Temasek, has substantial or controlling stakes in dozens of leading companies in the economy, including Singapore Airlines, Singapore Telecommunications, Keppel Shipyards, Neptune Orient Shipping, and Singapore Technologies. In Malaysia, where the ruling United Malays National Organization (UMNO) holds stakes in leading local companies, the line between government as referee and government as player in the economy is also often difficult to draw. In both economies, government officials can find themselves holding office in local enterprises. In China, the giant state trading corporations and the thousands of highly entrepreneurial "township and village enterprises" (TVEs) that have sprung up over the past decade are commonly led by current or former government officials. The Korean government has funnelled rationed capital to the chaebol by state-controlled banks and has maintained protected markets to ensure their profits and domestic development. For many years in Japan, the Ministry of International Trade and Industry (MITI) developed and orchestrated market-sharing plans and the Ministry of Finance engaged in foreign exchange rationing to preferred companies and industries. It is interesting to note that in recent years there are indications that economic policy in Japan, Korea, Singapore, and other Asian nations may be moving away from selective state interventionism towards increased reliance on the market mechanism to foster economic growth, more in line with Hong Kong's traditional approach.

Although government philosophy toward the economy in Hong Kong is often described by external observers as "laissezfaire capitalism", this characterization misses the mark. Hong Kong has evolved its own brand of government policy which is distinct from that of other economies in the region. The truth is that some significant local enterprises thrive today, as they have in the past, on the basis of protected oligopolies or monopolies. Similarly, government has intervened quite extensively in some areas of the economy, principally education, property (where government owns all land and sells leases to gain revenue), housing (half of the population lives in government housing), and medical services. The government intervenes for the social purposes of ensuring good minimum standards of service in these key areas, and ensuring that they are available to the entire relevant population. Despite the areas of intervention, the prevailing ethos can be seen in the fact that significant infrastructure projects in the territory are developed, financed, built, and operated by the private sector and by the fact that the Hong Kong government does not even issue its own currency. Instead it leaves that task to three note-issuing banks (the Hongkong and Shanghai Bank, the Standard Chartered Bank, and the Bank of China) which issue notes against reserve accounts kept with the Hong Kong Monetary Authority.

Tax policies are an important source of advantage for local and overseas firms operating in Hong Kong. Hong Kong maintains a simple tax structure with low corporate and personal rates to promote productive labour and investment. Tax policies are business-friendly to a degree matched by few other nations. According to the 1996 IMD World Competitiveness Yearbook, Hong Kong's fiscal policy is the most favourable to entrepreneurial activity of any fiscal policy in the world, and Hong Kong's personal taxes rank first in the world in encouraging individual work initiative. The clarity of Hong Kong's tax policy translates into very substantial savings to local firms which often are able to meet tax reporting and record keeping requirements by the use of part-time bookkeepers instead of the full-time auditing staff often required elsewhere.

The result of the various policy elements is that Hong Kong's private sector has taken the leadership role in business and economic development. The territory's open economy exposes its traders and industrial producers to intense international competition, which forces Hong Kong industry to innovate and improve its products or exit. The lack of protectionist barriers in the traded sector also fosters the formation of new firms. Hong Kong's investment regime also is open and transparent, and inward and outward capital flows are free from special regulation and restriction. Hong Kong does not have a capital gains tax or an interest tax. It provides a level playing field for foreign and local investors in most sectors, encouraging entry and entrepreneurship on the part of locals and foreigners alike.

The Hong Kong system has ensured a separation of interests of public servants and business people, but a dynamic interaction in terms of communication and ongoing consultation. Traditionally, the heads of several leading firms have been members of the Executive Council, the Governor's advisory body that is Hong Kong's equivalent of Britain's Cabinet. Industry constituencies have representation in the Legislative Council (Legco), Hong Kong's legislative body. This system, in which business people can simultaneously serve as corporate managers and as legislators, and in which some specifically represent industry groups in legislative proceedings, stands in sharp contrast to the systems in place in Washington, Westminster, and elsewhere. Historically, the relationship between business and government has been close, and has been characterized by consultation rather than confrontation. In recent years, an increase in the number of Legco members elected through universal suffrage in geographic constituencies, and shifts in government priorities in the run-up to the assumption of administration by China, have somewhat reduced the influence of business interests on government decisions. Business influence remains strong, however, and business people make up a large contingent of the members of the 400 committees that advise the Hong Kong government on various issues and policies.

The unique combination of separation and interaction has fostered an environment in which businesses are free to make strategic decisions without having to take officialdom into account. It has allowed local Hong Kong Chinese to make their way in business without having to worry about the colonial administrators and it has allowed British entrepreneurs to profit handsomely alongside local businesses once they had paid their dues--in the form of fees for licenses or franchises. Separation of interests and ongoing interaction have fostered mutual respect. According to one Hong Kong executive, "We respect government, but we do not fear it." Where else in Asia could executives make such a statement truthfully?

Local and Overseas Firms

While Hong Kong has a large and vibrant local business community, with over 470,000 locally registered companies, it is also home to the largest community of multinational firms in Asia. This is in part due to the territory's colonial roots, which have for the past 150 years made it the natural hub in Asia for British companies, and, in part, to its consistent and longstanding reputation for openness, simplicity of operation, and institutional familiarity. As a result, more than 2,000 multinational companies maintain regional offices or headquarters in the territory.

In addition to the hundreds of thousands of small firms, Hong Kong is the home of numerous, large local companies. (See Tables 2.1 and 2.2.), many of which are banks, conglomerates, property and development firms, and public utilities. Despite their range and depth, Hong Kong's leading banking firms are not as widely known in the West as their stature would warrant. The Hongkong and Shanghai Bank Group (HSBC Holdings plc) founded in 1865, is one of the largest banking groups in the world. HSBC controls banking groups in the United Kingdom and United States and holds a controlling interest in Hang Seng Bank, Hong Kong's second largest local bank. Hang Seng Bank has overseas offices in New York, San Francisco, Shanghai, Shenzhen, and Xiamen. The Bank of East Asia, Hong Kong's third largest listed bank, has 91 local branches, and has been the most active of the Hong Kong banks in the Mainland, with six branches, four representative offices, and four joint-venture finance companies.

Matheson and the Swire Group, trace their roots in the territory back to the British hongs of the mid-1800s. Today, Jardine Matheson has a vast and diversified presence in Hong Kong, Asia, and elsewhere. Its trading and services arm, Jardine Pacific, employs 70,000 people in 21 countries, in such lines as restaurants, engineering and construction, aviation and shipping, security and environmental services, financial services, and property. Other group companies are active in property, automobile distribution, insurance, merchant banking, food, retailing, and deluxe hotels.

The Swire Group is active in aviation (through its stake in Cathay Pacific), property, trading, marine services, air cargo services, and insurance. Swire Pacific, the group's main industrial division, has operations in beverages (Coca-Cola bottling operations in Hong Kong, mainland China, and Taiwan, as well as Carlsberg beer-bottling operations), engineering services, paints, and food production and distribution, among others.

Wheelock & Co., once a Jardine company, is one of Hong Kong's biggest conglomerates, with major business operations in real estate, retailing, travel, communications, hotels, property, and investments. Wheelock & Co. has international activities in the United States and Singapore, and is very active in China. Projects on the Mainland include container ports, cable TV networks, land transportation projects, industrial parks, power plants, and housing projects. Wharf (Holdings) Ltd., a member of the Wheelock Group, is an investment company with interests in property, hotels, mass transport, container terminal operations, infrastructure, and cable television.

Cheung Kong, one of Hong Kong's most diversified companies, is the principal holding company for the interests of Li Ka-shing, one of Asia's richest men. Cheung Kong embraces property development, power generation, port development and operation, and communications, and has a controlling stake in the Hutchison Whampoa group of companies. Hutchison Whampoa is one of Hong Kong's largest property developers and investors, with projects in Hong Kong, on the Mainland, and throughout the region. Hutchison Whampoa is also active in telecommunications, retailing, utilities, and container ports. Li Ka-shing's purchase of a large share in the formerly British-owned Hutchison in 1979 was considered a milestone in the emergence of ethnic Chinese business interests in Hong Kong.

Sun Hung Kai Properties is active in property and infrastructure development, counting among its recent projects: Beijing's New Town Plaza and Sun Dong An Plaza; refurbishment of Hong Kong's World Trade Centre Shopping Centre; and construction of a new highway in the New Territories (Route 3) which will improve road links with mainland China by linking existing highways that serve the metropolitan area with others that cross into the Mainland. It is also active in telecommunications, hotels, cinemas, and garment manufacturing. Sun Hung Kai Properties was voted Hong Kong's best managed company in Asiamoney's 1995 survey, which noted the group's consistent strategy, prudent financial management, and focused, yet conservative management style.

Henderson Land Development, majority-owned by magnate Lee Shau-kee, is active in real estate development in Hong Kong and the Mainland, including commercial and housing projects, department stores, hotels, and utilities. One of Hong Kong's largest investors in the Mainland, it is pursuing growth with a focus on mixed residential and commercial projects at prime locations in Shanghai, Beijing, and Guangzhou.

New World Development Co., Ltd., is a property company involved in large infrastructure projects and hotels in Hong Kong and on the Mainland. It is Hong Kong's single largest investor on the Mainland, with an estimated US$3.2 billion invested. Its infrastructure projects on the Mainland include toll roads, bridges, and an airport in the city of Wuhan.

Hopewell Holdings is a major developer of infrastructure projects in Hong Kong, on the Mainland, and throughout the Asia-Pacific region. It is Hong Kong's second largest investor on the Mainland, where projects include the Guangzhou-Shenzhen-Zhuhai Superhighway. Other investments include power plants and transportation projects throughout the region.

Hongkong Telecommunications, Ltd., the territory's leading telecommunications group, offers a wide range of voice and data services, and operates one of the only fully digital telephone networks in the world. Once the local telephone monopoly, Hongkong Telecom still retains a monopoly on Hong Kong's international telephone gateway, and has extensive international fibre optic and satellite networks. It operates in seven countries and is actively building links in mainland China and Taiwan. Hongkong Telecom is 58 per cent controlled by Cable & Wireless of the United Kingdom and accounts for the bulk of that company's profits. A second prominent shareholder is the China International Trust and Investment Corporation (CITIC).

China Light & Power Co. has a monopoly of electricity service in Kowloon and the New Territories and is the larger of the two Hong Kong-based electricity companies. It is closely linked with the Kadoorie family, one of the territory's leading non-Chinese dynasties. China Light & Power has a stake in the Daya Bay nuclear power plant in South China, just 50 kilometres from Hong Kong, and has in recent years been an important supplier of power in the Pearl River Delta.

Hong Kong Electric Holdings, Ltd., a member of the Hutchison Whampoa Group, has the electricity monopoly on Hong Kong Island. Hong Kong Electric is currently focusing on power provision in the domestic market and is taking a cautious approach toward investing in power plants on the Mainland. Its consulting arm, Associated Technical Services Limited, has clients throughout Asia and in Saudi Arabia and Kuwait.

Hong Kong also is one of the world's leading centres for overseas firms. Over 200 of the Fortune 500 companies have a presence in the territory. The American Chamber of Commerce in Hong Kong, with more than 1,100 corporate members, is the largest American Chamber outside of North America. The Japanese Chamber in Hong Kong reports that more than 2,000 Japanese companies operate from the territory. The countries with the largest number of overseas firm headquarters in Hong Kong are, in order of importance, the United States, Japan, the United Kingdom, and the People's Republic of China.

The overseas firm sector is so large and diverse that no one actually knows how many there are. As of May 1996, nearly 4,500 overseas companies had established a place of business in Hong Kong under Part XI of the Companies Ordinance--and these were only those that were officially registered. An attempt by the Hong Kong Government Industry Department to identify all overseas companies operating in Hong Kong yielded a prospective list of 7,300 firms and 3,400 survey responses. Of the responding firms, 782 had a regional headquarters in Hong Kong and another 1,286 had a regional office as of June 1995.

The presence of overseas firms in Hong Kong provides ready sources of information and access to events and markets elsewhere in the world. In addition, the fact that even very small Hong Kong firms tend to have international operations provides a wealth of infrastructure, knowledge, and capabilities that overseas firms draw upon in managing their Asian activities from Hong Kong. Many multinationals feel "at home" when they join such an unusually large, integrated, cosmopolitan local and expatriate business community. Bankers, accountants, lawyers, and other professionals who serve multinational firms have thrived in a community of local firms that has become increasingly transnational since the opening of the Mainland to foreign trade and investment in the late 1970s. This deep-rooted local familiarity with the needs of international business makes Hong Kong an easy place in which to find joint-venture partners, and to find expatriate professionals. Local staff can easily be recruited from local companies which have a ready familiarity with the dispersed operating needs of a multinational business.

The mixture and balance between local and overseas firms found in Hong Kong is unique within Asia if not the world. The Singaporean economy is dominated by overseas firms and state holding companies. Korea does not have a comparable contingent of overseas firms. Taiwan is perhaps closest to Hong Kong in its mix of overseas and local firms, but it still does not have the same cosmopolitan, international flavour that overseas firms bring to Hong Kong. Overseas firms do not play nearly as important a role in Japan as they do in Hong Kong. Hong Kong is unsurpassed in the extent to which it brings local and overseas firms together into a single business community. The constant interaction between thousands of overseas firms and local businesses, in a supercharged business environment, generates growth opportunities for both sides--in setting up international networks, entering new lines of business, finding new sources of supply and new markets, and linking up with business partners from Hong Kong, China, and elsewhere. As one local business executive observed: "For multinational firms which seek out and thrive from interaction with the local environment and local firms, Hong Kong is the Asian location without par."

Entrepreneurial and Managerial Firms

Another remarkable and distinctive feature of the Hong Kong business environment is the interplay between "entrepreneurial" and "managerial" firms. Hong Kong is the home of almost rampant entrepreneurship. This entrepreneurship is supported by a system that encourages people to start their own companies and rewards their efforts through low taxation and other benefits. The territory boasts more than 470,000 privately owned small and medium-sized companies, most with very small staffs. The "Hong Kong trader" mentality is one of constantly seeking out and making new deals and looking for commercial opportunity.

Some of Hong Kong's greatest fortunes have been made by individuals who started rather humble businesses and built them into vast empires over the last few decades. The stories of Li Ka-shing, who started out selling plastic flowers and now controls a multibillion-dollar industrial and property empire, or Stanley Ho, who left Hong Kong for Macau with hardly a dollar to his name in the 1940s and eventually built a multibillion-dollar entertainment group, make Horatio Alger pale in comparison. These stories, albeit extreme examples, are only two instances of a widespread phenomenon made possible by the high degree of upward social mobility in Hong Kong.

Hong Kong's entrepreneurial companies are almost invariably founded by Chinese families, and remain under the control of those same families. As such, they have distinctive characteristics: decision-making power tends to be highly concentrated at the centre of the company, often embodied in one patriarch; professional managers and technically expert staff are recruited in increasing numbers as such family companies grow, but are seldom offered--or expect to be offered--any shareholding in the company, or top executive position; and policy decisions or shifts can be taken extremely quickly, enabling the company to respond with great flexibility to shifts in market circumstances or fast-changing fashion trends.

It is regarded as quite normal that ambitious professional staff who are not members of the controlling family should at some point want to "jump ship" and found their own company. Not only are such resignations commonplace, but they also rarely result in any schism between the company's owners and the resigning employee. On the contrary, once an owner learns that a member of staff plans to leave and set up his or her own company, arrangements will often be made to help the employee in the start-up of the company--either by agreeing to buy the product in which it plans to specialize, or by offering to develop the new company's product or products jointly, or to use the new company's service. It is at the same time recognized that a valued manager needs to be rewarded handsomely if he or she is to be given appropriate incentives to remain a salaried employee.

Some observers have pointed out that the owner or patriarch (as is the usual case) of a family firm in Hong Kong is in undisputed control. Even if the company has publicly traded shares, as long as the family retains a controlling block, then outside shareholders share in the good fortune of the company, but do not have much of a say in the running of the company. Other issues that can arise from unitary control are those of information flow and execution. There is a strong tendency not to wish to present the owner with bad news, which limits the information he or she has on which to base decisions. Since the owner is used to getting what he or she wants quickly, there is often a lack of detailed, long-term planning, even for deals and investments that require such planning.

Hong Kong's entrepreneurial culture has been stimulated by an ethos that values entrepreneurial success. Hong Kong's "merchant princes" are respected and used as role models for new entrepreneurs. In addition, in Hong Kong, entrepreneurs are generally allowed second chances. One business failure does not mean the end of a career. Instead, it is a temporary set-back to be overcome the next time. Hong Kong industrialist Haking Wong, for example, started two business ventures that failed before founding W. Haking Enterprise, which became an industrial empire. This tolerance of failure is unusual for Asia, with the exception of Taiwan. In many Asian nations, individual initiative and accomplishment are subordinated to the group, and entrepreneurs who have one failure to their name often do not get a second chance. In Japan, one hears that "the nail that stands up gets hammered down." In Singapore, relatively few entrepreneurs of note have emerged. In Korea, a relatively small group of industrial leaders seem to have cornered much of the market for entrepreneurs. Only in the United States and Taiwan does one see similar scope for entrepreneurs, due in part to the fact that entrepreneurial success is valued and, in part, to the fact that entrepreneurs get second chances.

While this entrepreneurial culture is what most outsiders associate with Hong Kong business, it would be wrong to underestimate the size and vitality of the territory's managerial-style firms. The roots of Hong Kong's managerial culture grew initially within the colonial hongs, and the large utilities granted monopolies or oligopolies over the provision of various key infrastructure services in the territory. Companies such as Jardine Matheson, the Swire Group, Hongkong Telecom, the Hongkong Bank, and others, are numerically a minority in Hong Kong, but in terms of their capitalization and the number of people they employ, they are important forces in the economy. They were from the outset international in their outlook, often with close links to the United Kingdom. Top executive positions were filled mainly by expatriates by a process of steady managerial promotion through a long career in the company. A substantial proportion of the benefits package of managerial staff in such companies was accounted for--and continues to be accounted for--by housing, generous pension schemes, and even memberships of clubs or the provision of annual air tickets home. Such companies today are largely staffed by Hong Kong Chinese, but their historic managerial styles have remained intact.

These firms have a style far different from the firms run by individual entrepreneurs. Many have organizations and management structures similar to those found in North America or Western Europe. Most are publicly traded or owned by publicly traded firms. They are run by professional managers who have risen through the ranks, usually within the same firm, less often through the ranks of similar firms. Decision-making tends to be more distributed in these firms than in Hong Kong's entrepreneur-run firms, with more delegation by top management. In the managerial firms, long-range planning is more the norm than in the entrepreneur-run firms. It is still less prevalent, however, than in equivalent firms in North America or Europe, where there tends to be more planning and less intuitive management.

Hong Kong's managerial firms invest in relationships just as the entrepreneurial firms do, but in many cases the relationships are of different types. Firms that operate franchises generally have good relationships with regulators that oversee the franchise and frequently are consulted on any policy initiatives that might influence the operation or value of the franchise. Historically, some local firms were able to turn such relationships into influence or other advantages in the marketplace, though in recent years this generally has been less the case.

The size of Hong Kong's community of "managerial-style" firms has grown steadily over the past two decades, as multinational companies have settled in the territory, developing substantial local operations, and often using Hong Kong as their hub for regional business. This growth has driven strongly the demand for higher educational and professional qualifications. Firms such as Citicorp, Bank of America, and Exxon have brought in American-style professional management and management techniques, have augmented the local pool of expatriate professionals, and have added significantly to the amount of in-company training that goes on in the territory.

What has been unique about the combination of entrepreneurial and managerial firms in Hong Kong is the way they interact and influence one another. Some local entrepreneurial firms have learned from the managerial firms and have developed modern corporate practices and management systems. Many have raided the managerial firms for talented individuals and many have been founded by people who have been through the training systems of one of the larger managerial firms. Hong Kong's managerial firms, on their part, tend to be influenced by the fast-paced Hong Kong entrepreneurial style. They tend to manage in a somewhat more personal and intuitive manner than many of their Western counterparts. At the same time, the omnipresent danger that trained staff will be poached by small local companies, or leave to start up businesses of their own, has led Hong Kong's managerial firms to develop special strategies for retaining and providing incentives for valued local staff. Managerial firms find they must give managers more flexibility and responsibility than they might otherwise, and tie compensation more directly to individual performance or business unit profitability. In the process, they become more entrepreneurial themselves.

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