Reinvigorating Hong Kong's Innovation System: Project Overview

1. Reinvigorating Hong Kong's Innovation System: Project Overview Douglas B. Fuller January 9, 2009 Hong Kong Innovation Project Conference Sponsored by Central Policy Unit 中央政策組 and Savantas Policy Institute 匯賢智庫

2. Hong Kong’s High-level Equilibrium Trap • Financial crisis a timely reminder that Hong Kong’s successful pattern of development has reached its limits • Hong Kong’s “monoculture” of finance • Continued failure to promote forcefully knowledge-intensive industries • Competition • Regional competitors are continuously experimenting to improve already formidable public policies in support of knowledge-intensive industries e.g. Taiwan, Korea and Singapore • Hong Kong’s unique strategic positioning in the Chinese market may disappear

3. Social Cost of Neglecting Innovation? • Hong Kong’s inequality has been historically worse • Hong Kong’s witnessed an increase inequality to become one of the most unequal societies • Taiwan and Korea have maintained a moderate level of Inequality • Hong Kong has hollowed out industrial activity whereas Taiwan has not

4. As Hong Kong Sleeps Its East Asian Rivals Have Been on the Move • Singapore • Acts to promote SMEs to augment the already formidable cluster of MNCs in the city state • Korea • Acts to foster entrepreneurship and small start-ups to augment Samsung, LG and the other chaebol • Taiwan • Acts to lure MNC R&D to Taiwan to augment the large base of domestic IT design and manufacturing firms • Rivals proactively adjust policies despite already successful knowledge-based industrialization

5. Hong Kong’s Diminishing Role in China • Hong Kong has served as the window to Chinese economy for three decades offering • Managerial expertise • Superior infrastructure • Rule of Law • But • Chinese educated abroad are returning home and bringing managerial skills back to China • China’s domestic educational institutions are rapidly improving e.g. joint MBAs with major foreign institutions • China’s soft and hard infrastructure • Leaving only the rule of law as Hong Kong’s competitive edge in serving as a window into China

6. Global Opportunities as Industrial Landscape Reorganizes • IT revolution has dramatically lowered barriers (costs) on two fronts: • Organization • Location • Organizational Revolution: from vertically integrated to de-verticalized (segmented) and dispersed value chains • Locational Revolution: from clusters of critical activities in the HQ locations to globally dispersed activities • Opportunities for New Entrants: • Economies of scale and scope are no longer necessary to enter many industrial activities • Make use of suppliers along the segmented value chain • Small firms can access resources at a distance so the whole value chain does not have to built in country • Human capital trumps financial capital as a lure

7. Example of Opportunities in New industrial Landscape: Semiconductors • Previous new entrants (Korea and Japan) into the industry need large pools of capital to build vertically-integrated behemoths to cover the value chain • Information necessary for next activity in the chain was too complicated to communicate to outsiders • Taiwan’s miracle by mistake • With less money to spend, Morris Chang and Taiwan stumbled upon the idea of segmenting the value chain with firms focusing on discrete functions of the production chain just as improvements in IT made it feasible to transfer information easily to outsiders

8. Program for Revitalizing Innovation in Hong Kong Two Main Issues/Questions: • How to Capitalize on Opportunities in the New Industrial Landscape? • How to Rectify Institutional Deficiencies in Hong Kong?

9. Capitalizing on New Opportunities: A Sectoral Approach • Identify knowledge-intensive sectors already de-verticalized or ripe for de-verticalization • Investigate the current state of these sectors by interviewing industry participants and officials involved in relevant policy arenas • Research team brings significant knowledge of the sector to the investigation • Create specific, actionable and realizable policies to promote each sector • Keeping in mind the generally non-technical background of most Hong Kong officials • Hong Kong’s current capabilities in the relevant sector • How Hong Kong can create synergies with Mainland China in this sector

10. Sectors • 1) Semiconductors • Hong Kong has had some success but could do better • 2) Environmental Technology • Growing global importance; Chinese state is starting to emphasize this sector • 3) New Entertainment Media • Natural area of exploration given the importance of IPR and Hong Kong’s continued intra-China institutional advantage in IPR • 4) Biotechnology • Growing sector currently undergoing large industrial reorganization • 5) IT Services • Build on Hong Kong’s traditional media and service industry strengths • 6) General R&D • Continued competencies in R&D for mature industries

11. Assessing Hong Kong’s System of Innovation:Institutions and Innovation • Key Institutions: • Technical training (human capital) • Entrepreneurial finance (venture capital) • University-Industry linkages • Public funding of research and public research institutions • Management of IPR • Regional links • No one right way to innovation • Benchmark Hong Kong across a set of countries/economies: US, EU, Japan, Taiwan, Canada, Singapore, Israel, India and China • But some innovation systems are less effective than others

12. Hong Kong’s System of Innovation Deficient • Obvious deficiencies: • R&D expenditure and technology output are low • Lack of technology entrepreneurship • Not a magnet for skilled techies such as Singapore, Shanghai, Beijing, Taipei/Hsinchu • Any strengths? • Non-technological (organizational) innovations, particularly in the service sectors • Strong IPR regime • Reasonably good universities • Human capital but can Hong Kong keep, create and attract more? • Links to China and the rest of East Asia • Hong Kong needs to explore ways to improve each of the key institutions of its innovation system • And build on strengths

13. Six Targeted Institutional Features • Regional Innovation • How to leverage Pearl River Delta and China generally? • IP Management • How to leverage Hong Kong’s superior IPR? • Transform Hong Kong into a provider/manager of IP for the Chinese marketplace? • Human Resources (two studies) • Assessment of current science and engineering education and labor supply for a knowledge-based economy • Workforce training within corporations (benchmarked against India and the US) • University-Industrial Linkages • Without large-scale industrial conglomerates, these links are critical for creating and commercializing new technologies • Venture Capital • How to create proper environment for investors and technology entrepreneurs? • Public funding of research • How to improve performance of existing institutions/funding?

14. Expected Output • Output • Initial reports on each sector and institutional feature presented at this conference • Savantas will release final report with recommendations in March of 2009 • Identify key problem areas in each sector and institutional arena • Offer focused, specific and feasible programs to rectify problems and improve performance • Report must be a “how-to” guide for policymakers rather than a purely academic document • Report to be submitted for publication as book in March 2009

15. Introduction to the Research Team and Review Committee • Fifteen scholars of innovation policy • Globally diverse • 8 Asia-based Scholars: Taiwan (3), Singapore (2), Hong Kong (1), China (1) and Japan (1) • 5 North America-based Scholars: USA (4), Canada (1) • 2 EU-based Scholars: UK (2) • Disciplinary diverse • Management, Engineering, Public Policy, International Affairs, Political Science, Law • Review Committee of Five Eminent Scholars: Henry Rowen (Stanford), Suzanne Berger (MIT), Ben Martin (SPRU/Sussex), Louis Pauly (University of Toronto) and Richard Dasher (Stanford)

16. Q&A