Date
16 July 2019
Hong Kong's current approach to innovation support is misguided, an expert argues. Photo: HKEJ
Hong Kong's current approach to innovation support is misguided, an expert argues. Photo: HKEJ

Building a more innovative economy in HK

To foster Hong Kong’s growth, one strategy is to make the economy more innovative. Examining the city’s state of innovativeness will help authorities formulate appropriate measures for supporting innovation. As the related statistical data are relatively more complete and need more in-depth analysis, this article will focus on product and process innovation and will not touch on organizational and marketing innovation.

Product innovation is the market introduction of a new or significantly improved product (service or goods). The innovation must be new to the firm, but it does not need to be new to the market. Some examples are: a new banking service (e.g. mobile banking service), change of materials with improved characteristics (e.g. breathable textiles, light but strong composites, environmentally friendly plastics), video on demand via broadband Internet.

Process innovation, on the other hand, is the implementation of a new or significantly improved method of production, or method of supplying and delivering products, or support activity for products. Again, the innovation must be new to the firm, but it does not need to be new to the market. Some examples include: web-related services and e-commerce, Enterprise Resources Planning Systems, Customer Relationship Management Systems, Computer Aided Design, installation of new or improved manufacturing technology (such as automation equipment that can adjust processes).

Regarding the activities involved in innovation, they span not only research and development (R&D) but also other non-R&D activities, such as acquisition of machinery, equipment, and software for production, acquisition of other external knowledge, training, promotion of product or process innovation, design and other preparations for production or deliveries, acquisition of land and buildings and others.

According to the Census and Statistics Department’s survey statistics, over the years, the proportion of firms in Hong Kong that have undertaken product or process innovations (regardless of whether they have completed or succeeded in such endeavors) remains not only low but is actually declining. In 2008, the proportion of such firms was 3.9 percent, which had in turn dropped to 2.7 percent in 2016.

The other side of the picture revealed by the Census Department’s statistics is thus that every year in the period between 2008 and 2016, the vast majority of Hong Kong’s business establishments (over 95 percent) did not undertake any innovation activities to introduce a new or significantly improved product. Nor did they make effort to further develop their methods of production, or methods of service supply and delivery, or support activities for products.

Notwithstanding, to render a more complete picture of the innovativeness of Hong Kong’s economy, one should probably also take another group of firms into consideration: firms that were not undertaking any product or process innovation activities at the time of survey but nonetheless could also be counted as innovative because they had engaged in prior product or process innovation activities.

In 2008, the proportion of this group of firms was 1.2 percent. The proportion increased to 2.9 percent in 2016. Apparently, even counting this group of firms, Hong Kong’s economy is far from innovative. The total proportion of innovative firms in Hong Kong (firms mentioned in this paragraph plus the “active” innovative firms mentioned above) stood at only 5.6 percent (2.9 percent plus 2.7 percent) in 2016, a very low proportion to speak of.

Related statistical figures of other countries may help put Hong Kong’s innovativeness into perspective. Below lists the proportions of product/process innovative firms in selected countries: Australia (58.7%, 2014-2015); Austria (44.4%, 2012-2014); Belgium (52.9%, 2012-2014)); Brazil (38.9%, 2012-2014); Denmark (37.0%, 2012-2014); Germany (52.6%, 2012-2014); Italy (37.0%, 2012-2014), Japan (28.3%, 2012-2014); Korea (34.6%, 2013-2015); Luxembourg (42.0%, 2012-2014); Poland (15.8%, 2012-2014); Slovakia (20.3%, 2012-2014).

When compared to other countries, whether more or less advanced, Hong Kong’s proportion of product/process innovative firms is undeniably low.

Such low level of as well as lack of advancement in Hong Kong’s innovativeness demand explanation.

One simple and straightforward explanation is that there has been no innovation support. The government’s innovation support has so far mainly focused on scientific-technological R&D-based innovation. However, about 90 percent of Hong Kong’s business establishments are in the services industries, such as import and export, wholesale and retail, accommodation and food services, financing and insurance, real estate, professional and business services, and social and personal services. R&D is of little or even no relevancy to the growth of many of these businesses. Therefore, the government’s innovation support is simply irrelevant to the majority of business establishments in Hong Kong and is therefore “mistargeted”. If there had been more targeted support, Hong Kong would have been a lot more innovative.

This explanation may carry some truth. However, in addition to this reason, further survey statistics indicate that there is an even more fundamental reason for the lack of innovativeness of Hong Kong’s economy.

Further Census Department statistics show that among firms that had not undertaken any product or process innovation activities in the period 2008-2016, constantly about 90 percent cited the reason for not doing so as “no need due to market or business conditions”. (According to the Chinese version of the statistical report, the term “business conditions” means “conditions of firms’ industries” – “行業情況”).

Another most frequently cited reason was the existence of barriers to engaging in innovation activities, although it should be noted that the proportion of firms citing this reason for not doing innovation dropped significantly from 45 percent in 2008 to only 11 percent in 2016.

These figures together suggest that among the firms not doing product or process innovation, “no need due to market or business conditions” had become almost the sole reason for not doing innovation over the years. In other words, firms did not innovate its products or processes increasingly solely on the ground that their market or industrial conditions did not require them do so. In 2008, among the firms not innovating, it can be estimated from the statistics cited above that between 45 percent and 55 percent did not innovate solely on this ground. In 2016, this proportion rose to at least 80 percent.

These statistics reveal an important trend regarding the innovation outlook of the vast majority of firms in Hong Kong, namely, that product or process innovation has become less and less important to their survival. If the Census Department’s statistics are accurate, this is very likely to be the fundamental cause of the lack of product and process innovation in Hong Kong.

A firm that does not feel the need to innovate its products or processes in order to survive may not necessarily become motivated to do so even with the stimulation of governmental support. Talk of providing innovation support to firms is thus likely to miss the whole point. To encourage innovation in Hong Kong, policy emphasis should be on cajoling enterprises into feeling the need of joining the innovation contest in the first place instead.

On this policy emphasis, an examination of why innovation is unnecessary for a great number of enterprises is needed. Although the Census Department statistics render no further insight in this regard, one may reason that if firms do not find innovation necessary for their survival, it is either because they do not need to compete in their markets or because they do not need to compete on innovation. The former reason speaks to a situation where there is little competition in the firms’ markets while the latter suggests a situation of little demand for innovative products (at least from the perspective of the firms themselves).

Survey statistics based on 19 EU member states lend support to this line of conjecture. In the period 2012-2014, the two most frequently cited reasons by non-innovative firms for not considering innovation were “low market demand for innovations” and “little market competition”.

Thus, if our conjecture is correct, to induce non-innovative firms to feel a need to innovate, policy measures to increase market competition as well as demand for innovative products are required. To this end, expanding the markets of such firms would be one possible policy direction.

As a matter of fact, it is well established in the literature that because of high levels of competition in the international market, the more internationalized a firm is, the more likely that it engages in innovation. For example, another set of EU survey statistics based on 22 member states during the period 2012-2014 show that “the share of innovative enterprises became progressively higher as enterprises became more international.” “Among enterprises whose largest market was local or regional, around two-fifths (39.9 %) were innovative. This share rose to more than half for those enterprises whose largest market was either national (54.9 %) or European (51.6 %), and peaked at almost three quarters (66.9 %) for those enterprises whose main market was international and outside Europe.”

The analysis and policy suggestions above are admittedly based on limited evidence only. More has to be done to examine why so many firms in Hong Kong find product and process innovation unnecessary for their businesses. Without a thorough understanding of this, the government is unlikely to be able to formulate an effective policy to make Hong Kong more innovative. While the limited evidence cited herein cannot provide a definite answer as to what will work in this regard, it should draw attention to the fact that the current approach to innovation support is misguided.

The objective of making Hong Kong more innovative is economic growth. An innovation support policy that fails to take the needs, characteristics, and market or business conditions of the majority of firms in an economy into consideration is not likely to contribute to this objective.

As mentioned before, the majority of firms in Hong Kong are in the services industries, which account for at least 80 percent of Hong Kong’s GDP. The growth of these industries contributes significantly to the growth of Hong Kong’s GDP. On the other hand, three out of the four industries that the government has specifically targeted for innovation support are in “high-teach” areas.

They are, namely, artificial intelligence, biotechnology, and robotics. All of them are still in their infancy. It will be a huge, perhaps impossible challenge to develop these industries to a point where they can each make a meaningful contribution to GDP, meaning each being able to deliver several percentage points of GDP. The government needs to seriously evaluate whether a scientific-technological R&D-based innovation support policy is a sensible use of public money for fostering economic growth.

– Contact us at [email protected]

RC

Member of Hong Kong Democratic Foundation

EJI Weekly Newsletter

Please click here to unsubscribe