IEMS Newsletter - Jul 2014 - page 1

KEY POINTS
Changes in the regulatory
and business environment
accompanying rapid
development in Guangdong
province threaten the survival
of Hong Kong–owned
manufacturers.
Neither relocating elsewhere
in China nor remaining in
Guangdong is an attractive
option for low-end, low-cost,
highly polluting industries.
A recent survey found that
Hong Kong–owned firms that
undertake process or product
innovation or conduct R&D
and collaborative innovation
activities in China are more
likely to survive the challenging
business environment.
The governments of Hong Kong
and Guangdong should adopt
policies that support innovation
and work to develop a highly
integrated regional innovation
system that enables actors in
all relevant sectors to work
together effectively.
Innovate or Die:
How Hong Kong-owned
Manufacturing Firms in China
Can Survive and Thrive
ISSUE
Many economists believe that innovation
generates economic development and
growth. What role might this principle play
in boosting economic growth in Hong Kong
in the era of Chinese economic reform and
Hong Kong’s transition to postcolonial
status? Since 1979, many firms in Hong
Kong have been operating as traders in
Hong Kong and as proprietors or partners
in plant facilities in China, particularly in
Guangdong province, importing goods
from their factories in Guangdong and
subsequently re-exporting them from
Hong Kong . Fo l l owi ng t h i s bus i nes s
model, Hong Kong entrepreneurs have
successfully reduced manufacturing costs
by leveraging cheap, abundant labor and
land as well as cultural and linguistic
familiarity to establish manufacturing
operations in Guangdong, primarily in the
Pearl River Delta.
This formula for success has been
threatened, however, by government policies
affecting Guangdong’s manufacturing
environment that have penalized low-end,
low-cost manufacturing as China, like many
emerging market countries, seeks to move
up the value chain and emphasize high-tech,
high value-added industries. The policies
include requiring exporters to pay a hefty
deposit to import some two thousand raw
materials; cancelling or reducing tax refunds
on a range of goods; strengthening of the
Yuan; strictly controlling pollution; and
granting new welfare benefits to employees.
A sweeping new labor law also adds to the
burden on manufacturers. In addition, like
firms in many emerging markets, those in
Guangdong have also faced rapidly rising
wages and escalating global prices for energy
and raw materials.
These challenges have forced highly
polluting firms operating in labor-intensive
industries, many managed or owned by
Hong Kong–based entrepreneurs, to choose
between shutting their factories altogether or
moving elsewhere in China or abroad. Hong
Kong–based manufacturers argue that the
one–two punch of the high cost of relocation
and higher operating costs effectively
make relocation out of Guangdong a sub-
optimal choice and staying there even more
problematic. The evidence suggests that
rising costs are the main factor when firms
move out of Guangdong, while attractive
conditions for business expansion at other
locations rarely persuade business owners to
relocate (Figure 1).
JULY
2014
THOUGHT
LEADERSHIP
BRIEF
No.1
Naubahar Sharif
1
1 2,3,4
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