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Hong Kong and China: Strategic options for investors
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Long Range Planning, Vol. 25, No. 2, pp. 44 to 51, 1992 Printed in Great Britain
Hong Kong and China: Options for Investors V. H. Kirpalani,
0024-6301/92 $5.00 + .OO Pergamon Press Ltd
Strategic
K. C. Mun and M. Hui
Hong Kong will become a Special Administrative Region of China in 1997, retaining its capitalistic socioeconomic system for another 50 years under one country, two systems. This article examines the outlook of Hong Kong’s political and economic environments as well as the factors which have attracted foreign investment and investors’ expectations of these factors once Hong Kong returns to China in 7997. Given the expected changes, the article then reviews the reactions of various types of investors and their strategic management of risk. Recommendations are also made to businessmen and policy makers of both Hong Kong and China.
By the Sino-British Joint Declaration in December 1984, on 1 July 1997 Hong Kong will become a Special Administrative Region of China, retaining its capitalistic socioeconomic system for another 50 years under one country, two systems. Businessmen interested in the Hong Kong or China markets have to weigh a variety of strategic considerations concerning location and investment while formuby first lating their plans. This article proceeds discussing Hong Kong scenarios to 1977 and beyond. Then the findings of a recent survey that examines the factors attracting foreign investment to Hong Kong and the expectations regarding these factors once Hong Kong returns to China in 1997 are presented. The scenarios and empirical findings are used in an analysis of the strategic considerations and options for investors who want to or have already established a presence in Hong Kong and/or China. Included in the analysis is the strategic management of the risk arising from the uncertainty about the future of the region. Finally, conclusions are drawn and selected recommendations made for policy makers of Hong Kong and China.’
Dr V. H. (Manek) Kirpalani is professor of marketing and international business, Concordia University, Canada, and visiting professor of international business, the Chinese University of Hong Kong, Hong Kong. Dr K. C. Mun is professor of international business and dean of the faculty of business administration, the Chinese University of Hong Kong. Dr M. Hui is assistant professor of marketing, Concordia University.
One Country, Two Systems: Evolution and Reactions The concept of one country, two systems is innovative. No country, in modern history, has ever adopted this system nor does it exist at present. Besides, Hong Kong and China have great economic differences. Physically Hong Kong is small and has very limited natural resources. But its 6 million people have a per capita income of some $11,000. China is large, relatively well endowed in terms of physical resources, has over 1 billion people and a per capita income of about US$300. Hong Kong is a large international trader. Its 1989 exports at US$65bn place it twelfth in global ranking. China is now catching up. Its exports in 1978 were of the order of only US$lObn, some 556 per cent of its GNP. In 1989 its exports reached a level of The impetus for major growth to US$45bn.’ China’s trade came from the massive reform of the economy which began with the ‘Four Modernizations’ programme and continued with the October 1984 ‘Decision on the Reform of the Economic Structure’ and other succeeding initiatives. This economic reform has included an encouragement of foreign investment and a loosening of government control. Much of this external progress has occurred with Hong Kong’s assistance. However the knowledge that the paths of Hong Kong and China are irrevocably linked has evoked both positive and negative outcomes which will determine the role and prospect of Hong Kong once it returns to China in 1997. Scenario to 1997 A realistic scenario to 1997 is best visualized by analysing what is being done by the major participants: Hong Kong, China, the region’s superpower Japan and Taiwan.
Hong Kong. The Hong Kong scenario has both positive and negative aspects. The positive side of the coin is that Hong Kong has moved towards integration of its economy with China. Figure 1
Hong
Kong
and China-Strategic
Options
for Investors
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32.5
27.5
25
22.5
12.5
7.51
I 75
I 76
I 77
I 78
I 79
I 80
I 81
I 82
I
I
I
I
I
I
I
83
84
85
86
87
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89
1
90
Total Trade = Exports + RE - Exports + Imports Source: Asian Monetary
Figure
1. Integration
Monitor, March-April
of the Hong
Kong
1988, p. 5, and Government
and Chinese
illustrates the integration. Today Hong Kong is China’s largest market and China is Hong Kong’s second largest market after the U.S. The boom in Hong Kong’s trade with China is because of two major reasons. One is that in recent years Hong Kong manufacturers have made a massive shift of production facilities across the border. Hong Kong is trying to maintain its economic growth even at the cost of inflation. To reduce costs, Hong Kong companies have set up at least 2000 factories in China’s Guangdong province and another 8000 Chinese factories work as subcontractors for Hong Kong manufacturers. It is estimated that Hong Kong enterprises employ some 2 million workers in China’s Guangdong province,
Sources
Economies
adjoining Hong Kong, making clothes, toys, purses, fans, microwave ovens and computer peripherals. This has been aided by China having established some Special Economic Zones, a form of free trade zones, near Hong Kong. The plentiful Chinese labour supply and their low wage rates has given Hong Kong manufacturers considerable production flexibility. The second reason is that Hong Kong is trying to establish itself as the gateway to and from China. Hong Kong has the largest container port in the world. There are no deepwater facilities in Southern China, which includes some of the most rapidly growing economic regions. Therefore an increasing amount of trade between this part of China and the
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world passes through Hong Kong. At the same time, the infrastructure is being expanded. The government is planning new facilities at Kwan Chung port, Hong Kong, to handle more than double its present throughput by the year 2011. This is in order to prevent Singapore or Kaoshim in Taiwan attracting China’s trade.” Hong Kong is also becoming a major manufacturing centre for watches and clocks, electronic goods, toys, fashionable clothes, printing and design. It is al.so trying to become an increasingly important regional centre for finance and trade. Furthermore, 20 new five star hotels are under construction which when completed will lift the total to 82 available rates are high and hotels this year. Occupancy profits abound. This year some 6 million tourists are expected; 22 per cent from Japan, 20 per cent from Taiwan, 20 per cent from North America, 14 per cent from Europe, 14 per cent from the rest of South East Asia, 5 per cent from Australia and New Zealand, and the remaining 5 per cent from elsewhere.’ The negative side of the coin is that faith in China’s promise of ‘One country, Two systems’ was shaken by the Tiananmen Square event of 4 June 1989. Since then, politicians and administrators from China and Hong Kong have promulgated the Basic Law, a mini-constitution for the territory, that will come into force in 1997. Among others, Articles 169 and 170 are controversial. They give China the power to interpret and amend the Basic Law respectively. In response, the Hong Kong Legislative Council has passed a Bill of Rights. China has stated that this Bill will be secondary to the Basic Law.5 Hong Kong people are voting with their feet and pockets. Some 400,000 have left already for Australia, Canada, the U.S. and other political havens. Moreover, many of the biggest businesses are shifting their ownership and/or investments. China. China is sending out messages that political control will be in its hands; as witnessed by the provisions of the Basic Law. Further, politically China seems to have retreated into a tight control mode. The economic reforms are in trouble because of trying to run a command economy with a market economy. Inflation has been checked but only by restricting the growth of credit. This restriction risks a recession later on and further unrest. Structurally the state sector of the economy is not being reduced quickly enough. Wages have risen far faster than productivity in this sector. Deng and his main colleagues in power are all well over 80 years old and Hong Kong people fear that younger leaders of their opposition within the Communist Party will be even more heavy-handed. On the economic side, China is moving to increase its power in Hong Kong. Already with US$6-10bn placed, it is the largest single investment force in Hong Kong. Some 500 Chinese companies have ‘China approved’ investments in Hong Kong, with at least another
1992 1000 representative or branch agencies of parent bodies in China.h Residence in Hong Kong enables them to raise and invest foreign exchange outside China’s central plan. These companies also can be considered tax-favoured foreigners for joint ventures on the mainland. /apan. Japan’s investment in Hong Kong is rising. Already it totals US$5bn and the annual rate is over $lbn; higher th an J a p an’s investment in any other South-East Asian country.’ Japan is heavily involved in China and has lent the latter the equivalent of US$25bn which is roughly two-thirds of China’s entire external debt. The heavy Japanese tourist flow to Hong Kong comprises many businessmen enroute to China in addition to the many shoppers, who can purchase Japanese products even cheaper in Hong Kong than at home. Japan also trades heavily with and through Hong Kong. Although its imports are relatively low at US$3.5bn, its exports total USSl2bn plus reexports through Hong Kong of US$4bn. Taiwan. Taiwan is another important participant in the China trade via Hong Kong. Under Taiwan’s ‘three no’s’ (no trade, no contact, no talk), trade with China was illegal. Thus, Taiwan’s trade with China has been flourishing indirectly via Hong Kong. This can be surmised from the accelerated growth of Hong Kong’s re-export trade from Taiwan which now constitutes about 5 per cent of China’s imports. Although Taiwan’s restrictions on direct business with China are now lessening, the former’s use of Hong Kong contacts will probably remain. Investors from Taiwan are estimated to have placed US$400m so far in 300 projects in China; mainly in the Fujian province where 80 per cent of Taiwanese have their ancestral roots.” All this is beneficial to Hong Kong which is the go-between since the Taiwanese Government continues to forbid direct investment in China by its citizens. So Taiwanese invest via Hong Kong related affiliate companies.
Findings from a Survey To understand how individual firms may react to the impending return of Hong Kong to China, it is necessary to review the major factors that have drawn foreign investment to Hong Kong and the outlook regarding these factors in 1997. A review of the existing literature suggests that there are a total of 14 elements that have attracted foreign companies to invest in Hong Kong. These elements (see Table 1) were included in the questionnaire of a mail survey. The questionnaire was addressed to the managing director of 897 foreign companies in Hong Kong, chosen from various trade directories in a way to encompass different industry groups and countries of origin. The respondents were asked to
Hong Kong and China-Strategic Table 1. Elements attracting foreign investment in Hong Kong
(9) (IO) (11) (12) (13) (14)
Low tax rate Freedom to move capital Minimum amount of bureaucratic red tape British based judicial system Low wage costs Gateway to the China market No tariff/non-tariff barrier No discrimination between local and foreign owned firms Strategic position to access regional markets, excluding China Access to local sources of capital Local market potential Local management skills Wealth of local population Existence of good supporting industries/services
rate the degree of importance of the 14 elements in choosing to invest in Hong Kong on a 5-point scale (very important to very unimportant). Another 5point scale (very good to very poor) was used to measure the respondents’ expectations of the 14 elements once Hong Kong returns to China in 1997. A Japanese questionnaire was mailed to all Japanese companies included in the sample (207 out of the 897 chosen companies). For all the other companies, an English questionnaire was used. Back translation showed that the Japanese and English questionnaires exhibited satisfactory level of semantic and syntactic equivalence. Out of the 897 selected companies, 167 (18.7 per cent response rate) returned the questionnaire and all but one were usable for subsequent analysis. Fortytwo per cent of the usable questionnaires were from North American companies, 31 per cent from Japanese companies, and the rest from various regions of the world such as Australia and the U.K.
Table 2. Expectations returns to China
Options for Investors
47
The importance ratings on the 14 investment elements were factor analysed. Results of the principle-component analysis showed that there were four factors underlying the 14 elements. A simple factor structure was obtained when all factor loadings smaller than 0.5 were discarded. Each of the 14 elements loaded on one and only one of the four obtained factors. Table 2 details the four factors with their associated elements. The factors will be discussed in order of numerical rank in Table 2. The first factor is labelled as the ‘general business environment’ and it includes five different elements. Hong Kong is known for its management efficiency in both private and public sectors (minimum amount of bureaucratic red tape and local management skill), well established legal system (British based judicial system), strong infrastructure (existence of good supporting industries/ services), and positive attitudes toward foreign companies (no discrimination between local and foreign owned firms). The second factor contains three financial elements: low tax rate, freedom to move capital, and low wage costs. The third factor, labelled as the ‘domestic market’ factor, indicates that Hong Kong draws foreign investment because it has one of the highest per capita GDP (US$ll,OOO in 1990) in the Asia-Pacific region. A lot of foreign companies invest in Hong Kong because of the wealth of the local population and the local market potential. A presence in Hong Kong also allows these companies to get access to local sources of capital. Finally, Hong Kong is considered as a favourable investment location because of its strategic location for accessing Southeast Asia regional markets and as a gateway to the China market. Moreover, Hong Kong has very few trade barriers; tariff or non-tariff. These ‘trade related’ elements are captured by the fourth factor.
of investment factors once Hong Kong Mean rating’
Factor 1 : General Business Environment Amount of bureaucratic red tape Judicial system Local management skills Attitude towards foreign ownership Amount of supporting industries/services Factor 2: Financial Elements Taxation rate Freedom to move capital Wage costs Factor 3: Domestic Market Local market potential Wealth of local population Access to local sources of capital Factor 4: Trade Related Elements Tariff/non-tariff barrier Access to China market Access to regional markets, excluding China
3.48 3.94 3.60 3.61 3.27 3.00 3.04 3.01 3.15 2.97 3.04 2.84 3.16 3.12 2.61
‘I-5 rating. A rating of 1 (5) indicates a very good (poor) expectation.
3.16 1.95 2.76
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However, when asked about their opinions on the investment factors once Hong Kong returns to China in 1997, the respondents show a negative expectation with the ‘general business environment’. A mean score of 3.48 (1 indicates very good and 5 very poor) was obtained for this factor. As shown in Table 2, the respondents indicate concerns with the amount of bureaucratic red tape (3*94), supply of skilled local management (3*61), the judicial system (3.60), and attitude towards foreign ownership (3.27). The only element for which they do not show a negative expectation is the existence of supporting industries/services (3.00). On the other hand, the respondents remain positive with the trade related factor (2.61). The rating is an outcome of a very positive expectation on access to China market (1.95)) and a slightly positive expectation on access to other regional markets (2.76). A slightly negative expectation is obtained with the tariff/non-tariff barrier situation (3.12). Ratings also indicate that the respondents express neutral expectations with the other two factors, the financial factor and the domestic market factor (3.04 for both factors). Mean ratings between 2.84 and 3.16 (see Table 2) are obtained for the six elements associated with the two factors which again indicate largely neutral expectations. Prospects for Hong Kong The above findings provide strong support to our earlier descriptions of how China and Hong Kong are reacting to 1997. Most foreign investors expect the general business environment of Hong Kong, under the increasing political and economic intervention from China, will deteriorate. Specifically, the respondents expect there will be more bureaucratic red tape, a less effective legal system, less favourable attitudes toward foreign investment and decline in local management skill, which can be considered as an outcome of the recent brain drain in Hong Kong. On the other hand, the respondents also realize that Hong Kong is playing a more significant role in China trade. Despite more tariff/non-tariff barriers being expected, the respondents agree that Hong Kong will establish itself as a gateway to and from China. Furthermore, with a huge market behind it, the other regional markets will also become more accessible to Hong Kong.
Strategic Considerations for Investing Firms
and Options
Due to the fact that after 1997, Hong Kong and China are going to be ‘one country, two systems’, strategically investors must consider the region as such. Therefore, given the prospects previously discussed, what strategic options do firms which want to or have already invested in the region possess? How should they strategically manage the
1992 risk arising from a possible deterioration of the business environment in Hong Kong? These considerations and options are analysed best by segmenting the firms into categories: foreign firms, large Hong Kong firms owned by foreigners, large Hong Kong locally owned firms, small locally owned firms, and Chinese owned/backed Hong Kong firms. Explanatory theories and selective examples of investing firms are displayed in Table 3. Foreign Firms For foreign firms, the considerations and options are dictated by the market structure of their industry, their differential advantages, and their manufacturing processes. Given the uncertainties in regard to the prospect for the region, some large firms which have the resources and time to withstand any setbacks appear to be treating the China market as a major opportunity. The Japanese and Taiwan firms are motivated in part by some cultural affinity links. Others are attracted by the size of the market. As can be seen, foreign firms, having monopolistic advantages or belonging to oligopolies, are investing in China rather than in Hong Kong. Interestingly enough this is in accordance with theory. The monopolistic advantage theory attempts to explain horizontal foreign investment. The firm has certain specific advantages in superior knowledge and economies of scale. Monopolistic advantages derive from the control the firm has over its knowledge assets. The firm has already incurred the fixed costs of creating and acquiring these assets. Thus the marginal cost of knowledge output is very small. The possession of superior knowledge permits the firm to create differential products with physical differences created through technological differences and/or psychological differences created through marketing skills. Thus the firm can exert control over product prices and sales and is able to obtain an economic rent on its knowledge assets. Alternatively it can transfer knowledge to foreign markets at low costs. When such a firm, for example General Foods or Nisshan Oil Mills, have products that are low value consumer nondurables the obvious choice is to locate plants in China close to large consuming markets. The oligopolistic theory arises from dominate firms in an oligopoly being very sensitive to each others competitive moves. When one of these firms enters a new market the others tend to counteract; sooner or later. Not to do so would risk the loss of growth in that foreign market and thus in global market share; to the benefit of the initiating firm. Therefore oligopolistic firms tend to counterattack when rival firms threaten their global market share.’ But the question of location is dependent on the product, logistics costs and/or possibility of beneficial vertical integration. Dow Chemical is the initiating firm in the petrochemical oligopoly entering China. Chrysler and Volkswagen are members of a global oligopoly; as are L.M. Ericcson and AT & T.
Kong
Hong
Table
3. Internationalization
theories:
Theories
Firms
Monopolistic advantages
Oligopolistic
internalization
Geopolitics
Source:
Compiled
selected
and China-Strategic
examples Country of origin
for Hong
Kong
Options
for Investors
and China
Product
Location
Japan
Tapioca Instant coffee Beverage mix Radio Electronic appliances Vegetable
Guangzhou Tianjin Dongguan Beijing Guangdong Nanjiing
Dow Chemical Chrysler L.M. Ericcson Volkswagen AT&T
U.S.A. U.S.A. Sweden Germany U.S.A.
Urethane Jeeps Telephone Autos Transmission
Shanghai Beijing Beijing Shanghai Shanghai
2000 small companies
Hong Kong
China Thread Development
Hong Kong
Garment, toys and electronic appliances Polyester fibre
Guangzhou
China Light and Power Cable and Wireless Bank of China China Resources (Holdings) Yue Xiu CITIC
Hong Kong Hong Kong China China
Nuclear energy Telephone system Banking Trading
Daya Bay Shenzhen Hong Kong Hong Kong
China China
Hotel, toys 12.5% share in Cathay Pacific Airways (controlled by Swire)
Hong Kong Hong Kong
General Foods
U.S.A.
Nisshan Oil Mills
from various
newspaper
and magazine
49
system
Guangdong
reports.
However, many other multinationals are more cautious. They have adopted the strategy of ‘foothold’ market entry but are managing the risk by limiting the size of their initial investment. Over 7000 foreign investor linked projects have been sanctioned by China; although their average size is only between US962 and 3m and not all these projects are functioning.
holding company in Bermuda since 1984. The Swire Group always have been London based and intend to remain that way. The Swire Group just sold 12.5 per cent of Cathay Pacific to the China owned China International Trust and Investment Corporation (CITIC). Union Carbide has moved its regional headquarters to Singapore ostensibly because of the brain drain from Hong Kong.”
Large Foreign-Owned Hong Kong Firms Many large firms owned by foreigners which are already located in Hong Kong seem to be responding geopolitically. Their strategic management of risk consists of moving their headquarters and/or part of their operations to safeguard at least part of their assets from direct regulation by China.” Citibank has shifted its Asian Investment Banking although its other Hong Operations to Tokyo; Kong operations are being maintained. Data General’s 13-year-old manufacturing operations have migrated to Singapore. First Pacific Group has its beneficial owners in Indonesia and its ultimate holding company in Liberia while keeping its core businesses and management in Hong Kong. To some extent, Hong Kong and Shanghai Banking Corporation is diversifying out of the region. It has acquired 48 per cent of New York’s Marine Midland Bank plus 14.9 per cent of the U.K. Midland Bank. Jardine Matheson, along with two subsidiaries Dairy Farm and Mandarin Omni Hotels, has moved its domicile to Bermuda but still has 70 per cent of its assets invested in Hong Kong. Moreover, Jardine Matheson has been owned by a
Large Locally Owned Hong Kong Firms What options are being exercised by large locally owned Hong Kong firms? Again the response seems One option is to strongly to be geopolitical. cultivate relations with organizations inside China. The Shanghai Commercial Bank has appointed, as a Board Member, the younger brother of Mr Yiren who runs CITIC. Another option is to remain Hong Kong based but strategically manage risk by investing abroad. Tai Sang Land Development reportedly is selling some Hong Kong investments and buying heavily into U.S. property and U.S. food and beverage industries. Li Ka-Shing, Hong Kong’s biggest property tycoon and Chairman of Hutchison Whampoa, probably the largest business empire in Hong Kong, including Cheug Kong, Hong Kong Electric and Cavendish, is investing in Canada, Japan and elsewhere. In Canada he has a mammoth scheme to redevelop Vancouver’s waterfront and Hutchison Whampoa has purchased a major stake in Husky Oil. The third option is to do both. Hutchison Whampoa may move to a 75: 25 ratio of investment in Hong Kong: abroad. At the same time their trade with China is large; they
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purchase one-seventh of China’s coal exports, and food for their Hong Kong supermarkets. In return China buys machinery and other manufactures from them. Hutchison has invested in a hotel in China, a cosmetics factory, and supplies consultancy services to 10 power plants. Small Locally Owned Hong Kong Firms Smaller Hong Kong owned companies are internalizing by investing in China. The internalization theory conceptualizes the firm as an enterprise responding to imperfect intermediate product markets by developing ‘internal markets’ across national Obviously the firm must find it boundaries.‘* profitable to combine its assets with factor endowments abroad for international production to occur. As can be seen from Table 3, very many small Hong Kong companies are doing just that. This way they can still remain competitive in labour intensive industries. Some are just doing vertical integration for that part of their manufacturing process which is heavily labour intensive. They could have achieved the same objective by investing in other low labour cost areas of Southeast Asia but their geopolitical calculation is that they may deter action against themselves after 1997 by investing in China now.
China Owned/Supported
Hong Kong Firms
The final category is the Chinese owned/supported Hong Kong firms. This final category comprises firms such as Bank of China, CITIC, China Resources (Holdings) Ltd, Kanghua Development Corporation, Tian An China Investments Ltd and Yue Xiu. Broadly speaking, after the events of 4 June 1989, they have all been hurt by economic and political constraints such as the withdrawal of monies by Hong Kong people or control from the Government of China. It is reported that Bank of China had a run on its deposits, and the activities of China Resources (Holdings) Ltd have been cut somewhat. Further the China Communist Party Politburo have called for an audit of CITIC. Moreover, in July 1989, the Politburo issued an order that children of senior officials are to be banned from engaging in business. Moreover, they ordered the abolition of Kunghua Development Corporation. This trading company was closely linked to Deng Pufang, the eldest son of Deng Xiapong. Tian An China Investments Ltd is scaling down some of their projects.
Discussion Strategic business investment choices are being taken by foreign MNCs and small locally owned Hong Kong firms in line with their own comparaindustry structure and market tive advantages, requirements. In fact, their expansion is occurring in the manner that theory suggests. Some MNCs with monopolistic advantages are expanding into China and those in oligopolies who are interested in the benefits of vertical integration to lower costs or
1992 expand resource supplies are also doing so. Motivation at the regional level certainly has been manifested by Japan and, more recently, Taiwan. Small locally owned Hong Kong firms, in accordance with internalization theory are placing manufacturing plants in Southern China at a furious pace with the goal of cost efficiencies through use of lower cost Chinese labour. But geopolitical uncertainty is causing large Hong Kong firms, both those owned by foreigners and those owned by locals, to significantly diversify out of the region. However, large China firms are expanding into Hong Kong.
Recommendations A more stable business environment in Hong Kong (political, 1e g a 1, and economical) will permit better long range planning. Given the situational context and noting that it is unlikely to expect the geopolitical uncertainty to be dispelled completely, some recommendations are made which will be encouraging to businessmen. Their objective is to strengthen the infrastructure to the benefit of the entire system. The adoption of the suggested recommendations should in any event be very beneficial for both Hong Kong and China. Furthermore, foreign direct investment will tend to flow in increasing amounts into the area from abroad. Hong Kong is doing a very large re-export trade and a great amount of subcontracting. Therefore, it is recommended that the port and its attendant facilities must be expanded. Furthermore, a new airport is already necessary and communication facilities must be strengthened. Concomitant with these more industrial area facilities must be constructed. As we move into the future, some part of Hong Kong’s international marketing effort needs to shift to the value-adding of China’s products through brand name, advertising, promotion, and effective distribution. There are adequate numbers of Hong Kong people with management and marketing skills for this but, with the brain drain, more will probably be required. The educational infrastructure at the universities exists but education funding needs to be increased at the graduate level for business courses. The recommendations for China policy makers include:
(1) Formulate
clear foreign direct investment and joint venture regulations. Try to keep these regulations in place for a longish period of time. Have clearly defined arbitration procedures for disputes to allay the negative perceptions that nationalization can occur on terms that will be very unfavourable to the external party.
(2) Encourage
foreign direct investment from the developed countries to modernize industry. Till now, about 70 per cent of foreign direct investment has come from Hong Kong and has been largely for cost reduction and market development.
(3) Encourage
the formation
of Advisory
Councils
Hong Kong and China-Strategic in each major industry sector. These councils should be manned by China and Hong Kong representatives from both government and industry, and by invited foreign representative from MNCs.
(4) Form
joint R & D teams by industry sector to combine China’s research technology units at universities and factories with Hong Kong’s managerial skill and applied capability to bring products to market. China has, for instance, done a significant amount of R & D in satellite technology, small arms and defence industries.
The recommendations for businessmen are directed to policy makers in foreign and Hong Kong firms. They are broadly twofold: region should be regarded as an area of great opportunity. For long range planning purposes, maintain awareness of happenings in the region and market possibilities. Change is likely to occur rapidly and unexpected markets to appear as demand from the region’s emerging middle class leapfrogs towards particular products. For instance, the television market in China is booming much faster than other consumer durables.
investing in China. Also select Hong Kong partners for handling Hong Kong employees. The total effect of implementing these recommendations is likely to help businessmen. They also would be very beneficial to both Hong Kong and China. Strategic planners can note that the region has substantial opportunities which can become much more attractive.
References (1) K. C. Mun, Conditions for the success of one country, two system and Hong Kong relations, in Managing in a Global Economy, Proceedings of the Third International Conference, Eastern Academy of Management, Hong Kong, June (1989).
(1) The
(2) Strategically
manage business risk in the region by containing financial investment at risk and The improving operational effectiveness. former can be done by great caution in any further expansion within the region. Those entering the first time should follow a ‘foothold’ market entry strategy. The operational effectiveness recommendation is to work in joint ventures rather than alone. Always select Hong Kong partners with ‘guanxi’ (good personal relations with the China bureaucracy) when
51
Options for Investors
(2) China emerges as an important Pacific trading partner, Asian Monetary Monitor, 12 (2), l-l 1, March/April
(1988).
(3) The World’s busiest container port, Global Trade, pp. 50-51, May (1989). (4)
Hong Kong Monthly Bulletin of Statistics, October (1989).
(5)
Hurd’s choice, The Economist, p. 24, 6 January (1990).
(6)
Chinese business in Hong Kong: where China learns to love capitalism, The Economist, pp. 61-62, 27 August (1988).
(7)
Old enemies come closer, Far East Business, pp. 9-10, (1989).
(8)
Charles 6. Kindleberger, American Business Abroad, Chapter I, Yale University Press, New Haven, Connecticut (1969).
(9)
Richard E. Caves, International corporation: the industrial economics of foreign investment, Economica, 38, l-27 (1971).
May
(10)
Duncan Freeman, Fear, caution in Hong Business, pp. 13-l 4, September (1989).
Kong, Far East
(11)
In China’s sweaty palm, The Economist, pp. 21-22,5 (1988).
(12)
Dick Wilson, Exploiting Hong Kong’s uncertain future, Management Today, pp. 95-l 10, November (1987).
November
Long Range Planning, Vol. 25, No. 2, pp. 44 to 51, 1992 Printed in Great Britain
Hong Kong and China: Options for Investors V. H. Kirpalani,
0024-6301/92 $5.00 + .OO Pergamon Press Ltd
Strategic
K. C. Mun and M. Hui
Hong Kong will become a Special Administrative Region of China in 1997, retaining its capitalistic socioeconomic system for another 50 years under one country, two systems. This article examines the outlook of Hong Kong’s political and economic environments as well as the factors which have attracted foreign investment and investors’ expectations of these factors once Hong Kong returns to China in 7997. Given the expected changes, the article then reviews the reactions of various types of investors and their strategic management of risk. Recommendations are also made to businessmen and policy makers of both Hong Kong and China.
By the Sino-British Joint Declaration in December 1984, on 1 July 1997 Hong Kong will become a Special Administrative Region of China, retaining its capitalistic socioeconomic system for another 50 years under one country, two systems. Businessmen interested in the Hong Kong or China markets have to weigh a variety of strategic considerations concerning location and investment while formuby first lating their plans. This article proceeds discussing Hong Kong scenarios to 1977 and beyond. Then the findings of a recent survey that examines the factors attracting foreign investment to Hong Kong and the expectations regarding these factors once Hong Kong returns to China in 1997 are presented. The scenarios and empirical findings are used in an analysis of the strategic considerations and options for investors who want to or have already established a presence in Hong Kong and/or China. Included in the analysis is the strategic management of the risk arising from the uncertainty about the future of the region. Finally, conclusions are drawn and selected recommendations made for policy makers of Hong Kong and China.’
Dr V. H. (Manek) Kirpalani is professor of marketing and international business, Concordia University, Canada, and visiting professor of international business, the Chinese University of Hong Kong, Hong Kong. Dr K. C. Mun is professor of international business and dean of the faculty of business administration, the Chinese University of Hong Kong. Dr M. Hui is assistant professor of marketing, Concordia University.
One Country, Two Systems: Evolution and Reactions The concept of one country, two systems is innovative. No country, in modern history, has ever adopted this system nor does it exist at present. Besides, Hong Kong and China have great economic differences. Physically Hong Kong is small and has very limited natural resources. But its 6 million people have a per capita income of some $11,000. China is large, relatively well endowed in terms of physical resources, has over 1 billion people and a per capita income of about US$300. Hong Kong is a large international trader. Its 1989 exports at US$65bn place it twelfth in global ranking. China is now catching up. Its exports in 1978 were of the order of only US$lObn, some 556 per cent of its GNP. In 1989 its exports reached a level of The impetus for major growth to US$45bn.’ China’s trade came from the massive reform of the economy which began with the ‘Four Modernizations’ programme and continued with the October 1984 ‘Decision on the Reform of the Economic Structure’ and other succeeding initiatives. This economic reform has included an encouragement of foreign investment and a loosening of government control. Much of this external progress has occurred with Hong Kong’s assistance. However the knowledge that the paths of Hong Kong and China are irrevocably linked has evoked both positive and negative outcomes which will determine the role and prospect of Hong Kong once it returns to China in 1997. Scenario to 1997 A realistic scenario to 1997 is best visualized by analysing what is being done by the major participants: Hong Kong, China, the region’s superpower Japan and Taiwan.
Hong Kong. The Hong Kong scenario has both positive and negative aspects. The positive side of the coin is that Hong Kong has moved towards integration of its economy with China. Figure 1
Hong
Kong
and China-Strategic
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for Investors
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32.5
27.5
25
22.5
12.5
7.51
I 75
I 76
I 77
I 78
I 79
I 80
I 81
I 82
I
I
I
I
I
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83
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1
90
Total Trade = Exports + RE - Exports + Imports Source: Asian Monetary
Figure
1. Integration
Monitor, March-April
of the Hong
Kong
1988, p. 5, and Government
and Chinese
illustrates the integration. Today Hong Kong is China’s largest market and China is Hong Kong’s second largest market after the U.S. The boom in Hong Kong’s trade with China is because of two major reasons. One is that in recent years Hong Kong manufacturers have made a massive shift of production facilities across the border. Hong Kong is trying to maintain its economic growth even at the cost of inflation. To reduce costs, Hong Kong companies have set up at least 2000 factories in China’s Guangdong province and another 8000 Chinese factories work as subcontractors for Hong Kong manufacturers. It is estimated that Hong Kong enterprises employ some 2 million workers in China’s Guangdong province,
Sources
Economies
adjoining Hong Kong, making clothes, toys, purses, fans, microwave ovens and computer peripherals. This has been aided by China having established some Special Economic Zones, a form of free trade zones, near Hong Kong. The plentiful Chinese labour supply and their low wage rates has given Hong Kong manufacturers considerable production flexibility. The second reason is that Hong Kong is trying to establish itself as the gateway to and from China. Hong Kong has the largest container port in the world. There are no deepwater facilities in Southern China, which includes some of the most rapidly growing economic regions. Therefore an increasing amount of trade between this part of China and the
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world passes through Hong Kong. At the same time, the infrastructure is being expanded. The government is planning new facilities at Kwan Chung port, Hong Kong, to handle more than double its present throughput by the year 2011. This is in order to prevent Singapore or Kaoshim in Taiwan attracting China’s trade.” Hong Kong is also becoming a major manufacturing centre for watches and clocks, electronic goods, toys, fashionable clothes, printing and design. It is al.so trying to become an increasingly important regional centre for finance and trade. Furthermore, 20 new five star hotels are under construction which when completed will lift the total to 82 available rates are high and hotels this year. Occupancy profits abound. This year some 6 million tourists are expected; 22 per cent from Japan, 20 per cent from Taiwan, 20 per cent from North America, 14 per cent from Europe, 14 per cent from the rest of South East Asia, 5 per cent from Australia and New Zealand, and the remaining 5 per cent from elsewhere.’ The negative side of the coin is that faith in China’s promise of ‘One country, Two systems’ was shaken by the Tiananmen Square event of 4 June 1989. Since then, politicians and administrators from China and Hong Kong have promulgated the Basic Law, a mini-constitution for the territory, that will come into force in 1997. Among others, Articles 169 and 170 are controversial. They give China the power to interpret and amend the Basic Law respectively. In response, the Hong Kong Legislative Council has passed a Bill of Rights. China has stated that this Bill will be secondary to the Basic Law.5 Hong Kong people are voting with their feet and pockets. Some 400,000 have left already for Australia, Canada, the U.S. and other political havens. Moreover, many of the biggest businesses are shifting their ownership and/or investments. China. China is sending out messages that political control will be in its hands; as witnessed by the provisions of the Basic Law. Further, politically China seems to have retreated into a tight control mode. The economic reforms are in trouble because of trying to run a command economy with a market economy. Inflation has been checked but only by restricting the growth of credit. This restriction risks a recession later on and further unrest. Structurally the state sector of the economy is not being reduced quickly enough. Wages have risen far faster than productivity in this sector. Deng and his main colleagues in power are all well over 80 years old and Hong Kong people fear that younger leaders of their opposition within the Communist Party will be even more heavy-handed. On the economic side, China is moving to increase its power in Hong Kong. Already with US$6-10bn placed, it is the largest single investment force in Hong Kong. Some 500 Chinese companies have ‘China approved’ investments in Hong Kong, with at least another
1992 1000 representative or branch agencies of parent bodies in China.h Residence in Hong Kong enables them to raise and invest foreign exchange outside China’s central plan. These companies also can be considered tax-favoured foreigners for joint ventures on the mainland. /apan. Japan’s investment in Hong Kong is rising. Already it totals US$5bn and the annual rate is over $lbn; higher th an J a p an’s investment in any other South-East Asian country.’ Japan is heavily involved in China and has lent the latter the equivalent of US$25bn which is roughly two-thirds of China’s entire external debt. The heavy Japanese tourist flow to Hong Kong comprises many businessmen enroute to China in addition to the many shoppers, who can purchase Japanese products even cheaper in Hong Kong than at home. Japan also trades heavily with and through Hong Kong. Although its imports are relatively low at US$3.5bn, its exports total USSl2bn plus reexports through Hong Kong of US$4bn. Taiwan. Taiwan is another important participant in the China trade via Hong Kong. Under Taiwan’s ‘three no’s’ (no trade, no contact, no talk), trade with China was illegal. Thus, Taiwan’s trade with China has been flourishing indirectly via Hong Kong. This can be surmised from the accelerated growth of Hong Kong’s re-export trade from Taiwan which now constitutes about 5 per cent of China’s imports. Although Taiwan’s restrictions on direct business with China are now lessening, the former’s use of Hong Kong contacts will probably remain. Investors from Taiwan are estimated to have placed US$400m so far in 300 projects in China; mainly in the Fujian province where 80 per cent of Taiwanese have their ancestral roots.” All this is beneficial to Hong Kong which is the go-between since the Taiwanese Government continues to forbid direct investment in China by its citizens. So Taiwanese invest via Hong Kong related affiliate companies.
Findings from a Survey To understand how individual firms may react to the impending return of Hong Kong to China, it is necessary to review the major factors that have drawn foreign investment to Hong Kong and the outlook regarding these factors in 1997. A review of the existing literature suggests that there are a total of 14 elements that have attracted foreign companies to invest in Hong Kong. These elements (see Table 1) were included in the questionnaire of a mail survey. The questionnaire was addressed to the managing director of 897 foreign companies in Hong Kong, chosen from various trade directories in a way to encompass different industry groups and countries of origin. The respondents were asked to
Hong Kong and China-Strategic Table 1. Elements attracting foreign investment in Hong Kong
(9) (IO) (11) (12) (13) (14)
Low tax rate Freedom to move capital Minimum amount of bureaucratic red tape British based judicial system Low wage costs Gateway to the China market No tariff/non-tariff barrier No discrimination between local and foreign owned firms Strategic position to access regional markets, excluding China Access to local sources of capital Local market potential Local management skills Wealth of local population Existence of good supporting industries/services
rate the degree of importance of the 14 elements in choosing to invest in Hong Kong on a 5-point scale (very important to very unimportant). Another 5point scale (very good to very poor) was used to measure the respondents’ expectations of the 14 elements once Hong Kong returns to China in 1997. A Japanese questionnaire was mailed to all Japanese companies included in the sample (207 out of the 897 chosen companies). For all the other companies, an English questionnaire was used. Back translation showed that the Japanese and English questionnaires exhibited satisfactory level of semantic and syntactic equivalence. Out of the 897 selected companies, 167 (18.7 per cent response rate) returned the questionnaire and all but one were usable for subsequent analysis. Fortytwo per cent of the usable questionnaires were from North American companies, 31 per cent from Japanese companies, and the rest from various regions of the world such as Australia and the U.K.
Table 2. Expectations returns to China
Options for Investors
47
The importance ratings on the 14 investment elements were factor analysed. Results of the principle-component analysis showed that there were four factors underlying the 14 elements. A simple factor structure was obtained when all factor loadings smaller than 0.5 were discarded. Each of the 14 elements loaded on one and only one of the four obtained factors. Table 2 details the four factors with their associated elements. The factors will be discussed in order of numerical rank in Table 2. The first factor is labelled as the ‘general business environment’ and it includes five different elements. Hong Kong is known for its management efficiency in both private and public sectors (minimum amount of bureaucratic red tape and local management skill), well established legal system (British based judicial system), strong infrastructure (existence of good supporting industries/ services), and positive attitudes toward foreign companies (no discrimination between local and foreign owned firms). The second factor contains three financial elements: low tax rate, freedom to move capital, and low wage costs. The third factor, labelled as the ‘domestic market’ factor, indicates that Hong Kong draws foreign investment because it has one of the highest per capita GDP (US$ll,OOO in 1990) in the Asia-Pacific region. A lot of foreign companies invest in Hong Kong because of the wealth of the local population and the local market potential. A presence in Hong Kong also allows these companies to get access to local sources of capital. Finally, Hong Kong is considered as a favourable investment location because of its strategic location for accessing Southeast Asia regional markets and as a gateway to the China market. Moreover, Hong Kong has very few trade barriers; tariff or non-tariff. These ‘trade related’ elements are captured by the fourth factor.
of investment factors once Hong Kong Mean rating’
Factor 1 : General Business Environment Amount of bureaucratic red tape Judicial system Local management skills Attitude towards foreign ownership Amount of supporting industries/services Factor 2: Financial Elements Taxation rate Freedom to move capital Wage costs Factor 3: Domestic Market Local market potential Wealth of local population Access to local sources of capital Factor 4: Trade Related Elements Tariff/non-tariff barrier Access to China market Access to regional markets, excluding China
3.48 3.94 3.60 3.61 3.27 3.00 3.04 3.01 3.15 2.97 3.04 2.84 3.16 3.12 2.61
‘I-5 rating. A rating of 1 (5) indicates a very good (poor) expectation.
3.16 1.95 2.76
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However, when asked about their opinions on the investment factors once Hong Kong returns to China in 1997, the respondents show a negative expectation with the ‘general business environment’. A mean score of 3.48 (1 indicates very good and 5 very poor) was obtained for this factor. As shown in Table 2, the respondents indicate concerns with the amount of bureaucratic red tape (3*94), supply of skilled local management (3*61), the judicial system (3.60), and attitude towards foreign ownership (3.27). The only element for which they do not show a negative expectation is the existence of supporting industries/services (3.00). On the other hand, the respondents remain positive with the trade related factor (2.61). The rating is an outcome of a very positive expectation on access to China market (1.95)) and a slightly positive expectation on access to other regional markets (2.76). A slightly negative expectation is obtained with the tariff/non-tariff barrier situation (3.12). Ratings also indicate that the respondents express neutral expectations with the other two factors, the financial factor and the domestic market factor (3.04 for both factors). Mean ratings between 2.84 and 3.16 (see Table 2) are obtained for the six elements associated with the two factors which again indicate largely neutral expectations. Prospects for Hong Kong The above findings provide strong support to our earlier descriptions of how China and Hong Kong are reacting to 1997. Most foreign investors expect the general business environment of Hong Kong, under the increasing political and economic intervention from China, will deteriorate. Specifically, the respondents expect there will be more bureaucratic red tape, a less effective legal system, less favourable attitudes toward foreign investment and decline in local management skill, which can be considered as an outcome of the recent brain drain in Hong Kong. On the other hand, the respondents also realize that Hong Kong is playing a more significant role in China trade. Despite more tariff/non-tariff barriers being expected, the respondents agree that Hong Kong will establish itself as a gateway to and from China. Furthermore, with a huge market behind it, the other regional markets will also become more accessible to Hong Kong.
Strategic Considerations for Investing Firms
and Options
Due to the fact that after 1997, Hong Kong and China are going to be ‘one country, two systems’, strategically investors must consider the region as such. Therefore, given the prospects previously discussed, what strategic options do firms which want to or have already invested in the region possess? How should they strategically manage the
1992 risk arising from a possible deterioration of the business environment in Hong Kong? These considerations and options are analysed best by segmenting the firms into categories: foreign firms, large Hong Kong firms owned by foreigners, large Hong Kong locally owned firms, small locally owned firms, and Chinese owned/backed Hong Kong firms. Explanatory theories and selective examples of investing firms are displayed in Table 3. Foreign Firms For foreign firms, the considerations and options are dictated by the market structure of their industry, their differential advantages, and their manufacturing processes. Given the uncertainties in regard to the prospect for the region, some large firms which have the resources and time to withstand any setbacks appear to be treating the China market as a major opportunity. The Japanese and Taiwan firms are motivated in part by some cultural affinity links. Others are attracted by the size of the market. As can be seen, foreign firms, having monopolistic advantages or belonging to oligopolies, are investing in China rather than in Hong Kong. Interestingly enough this is in accordance with theory. The monopolistic advantage theory attempts to explain horizontal foreign investment. The firm has certain specific advantages in superior knowledge and economies of scale. Monopolistic advantages derive from the control the firm has over its knowledge assets. The firm has already incurred the fixed costs of creating and acquiring these assets. Thus the marginal cost of knowledge output is very small. The possession of superior knowledge permits the firm to create differential products with physical differences created through technological differences and/or psychological differences created through marketing skills. Thus the firm can exert control over product prices and sales and is able to obtain an economic rent on its knowledge assets. Alternatively it can transfer knowledge to foreign markets at low costs. When such a firm, for example General Foods or Nisshan Oil Mills, have products that are low value consumer nondurables the obvious choice is to locate plants in China close to large consuming markets. The oligopolistic theory arises from dominate firms in an oligopoly being very sensitive to each others competitive moves. When one of these firms enters a new market the others tend to counteract; sooner or later. Not to do so would risk the loss of growth in that foreign market and thus in global market share; to the benefit of the initiating firm. Therefore oligopolistic firms tend to counterattack when rival firms threaten their global market share.’ But the question of location is dependent on the product, logistics costs and/or possibility of beneficial vertical integration. Dow Chemical is the initiating firm in the petrochemical oligopoly entering China. Chrysler and Volkswagen are members of a global oligopoly; as are L.M. Ericcson and AT & T.
Kong
Hong
Table
3. Internationalization
theories:
Theories
Firms
Monopolistic advantages
Oligopolistic
internalization
Geopolitics
Source:
Compiled
selected
and China-Strategic
examples Country of origin
for Hong
Kong
Options
for Investors
and China
Product
Location
Japan
Tapioca Instant coffee Beverage mix Radio Electronic appliances Vegetable
Guangzhou Tianjin Dongguan Beijing Guangdong Nanjiing
Dow Chemical Chrysler L.M. Ericcson Volkswagen AT&T
U.S.A. U.S.A. Sweden Germany U.S.A.
Urethane Jeeps Telephone Autos Transmission
Shanghai Beijing Beijing Shanghai Shanghai
2000 small companies
Hong Kong
China Thread Development
Hong Kong
Garment, toys and electronic appliances Polyester fibre
Guangzhou
China Light and Power Cable and Wireless Bank of China China Resources (Holdings) Yue Xiu CITIC
Hong Kong Hong Kong China China
Nuclear energy Telephone system Banking Trading
Daya Bay Shenzhen Hong Kong Hong Kong
China China
Hotel, toys 12.5% share in Cathay Pacific Airways (controlled by Swire)
Hong Kong Hong Kong
General Foods
U.S.A.
Nisshan Oil Mills
from various
newspaper
and magazine
49
system
Guangdong
reports.
However, many other multinationals are more cautious. They have adopted the strategy of ‘foothold’ market entry but are managing the risk by limiting the size of their initial investment. Over 7000 foreign investor linked projects have been sanctioned by China; although their average size is only between US962 and 3m and not all these projects are functioning.
holding company in Bermuda since 1984. The Swire Group always have been London based and intend to remain that way. The Swire Group just sold 12.5 per cent of Cathay Pacific to the China owned China International Trust and Investment Corporation (CITIC). Union Carbide has moved its regional headquarters to Singapore ostensibly because of the brain drain from Hong Kong.”
Large Foreign-Owned Hong Kong Firms Many large firms owned by foreigners which are already located in Hong Kong seem to be responding geopolitically. Their strategic management of risk consists of moving their headquarters and/or part of their operations to safeguard at least part of their assets from direct regulation by China.” Citibank has shifted its Asian Investment Banking although its other Hong Operations to Tokyo; Kong operations are being maintained. Data General’s 13-year-old manufacturing operations have migrated to Singapore. First Pacific Group has its beneficial owners in Indonesia and its ultimate holding company in Liberia while keeping its core businesses and management in Hong Kong. To some extent, Hong Kong and Shanghai Banking Corporation is diversifying out of the region. It has acquired 48 per cent of New York’s Marine Midland Bank plus 14.9 per cent of the U.K. Midland Bank. Jardine Matheson, along with two subsidiaries Dairy Farm and Mandarin Omni Hotels, has moved its domicile to Bermuda but still has 70 per cent of its assets invested in Hong Kong. Moreover, Jardine Matheson has been owned by a
Large Locally Owned Hong Kong Firms What options are being exercised by large locally owned Hong Kong firms? Again the response seems One option is to strongly to be geopolitical. cultivate relations with organizations inside China. The Shanghai Commercial Bank has appointed, as a Board Member, the younger brother of Mr Yiren who runs CITIC. Another option is to remain Hong Kong based but strategically manage risk by investing abroad. Tai Sang Land Development reportedly is selling some Hong Kong investments and buying heavily into U.S. property and U.S. food and beverage industries. Li Ka-Shing, Hong Kong’s biggest property tycoon and Chairman of Hutchison Whampoa, probably the largest business empire in Hong Kong, including Cheug Kong, Hong Kong Electric and Cavendish, is investing in Canada, Japan and elsewhere. In Canada he has a mammoth scheme to redevelop Vancouver’s waterfront and Hutchison Whampoa has purchased a major stake in Husky Oil. The third option is to do both. Hutchison Whampoa may move to a 75: 25 ratio of investment in Hong Kong: abroad. At the same time their trade with China is large; they
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purchase one-seventh of China’s coal exports, and food for their Hong Kong supermarkets. In return China buys machinery and other manufactures from them. Hutchison has invested in a hotel in China, a cosmetics factory, and supplies consultancy services to 10 power plants. Small Locally Owned Hong Kong Firms Smaller Hong Kong owned companies are internalizing by investing in China. The internalization theory conceptualizes the firm as an enterprise responding to imperfect intermediate product markets by developing ‘internal markets’ across national Obviously the firm must find it boundaries.‘* profitable to combine its assets with factor endowments abroad for international production to occur. As can be seen from Table 3, very many small Hong Kong companies are doing just that. This way they can still remain competitive in labour intensive industries. Some are just doing vertical integration for that part of their manufacturing process which is heavily labour intensive. They could have achieved the same objective by investing in other low labour cost areas of Southeast Asia but their geopolitical calculation is that they may deter action against themselves after 1997 by investing in China now.
China Owned/Supported
Hong Kong Firms
The final category is the Chinese owned/supported Hong Kong firms. This final category comprises firms such as Bank of China, CITIC, China Resources (Holdings) Ltd, Kanghua Development Corporation, Tian An China Investments Ltd and Yue Xiu. Broadly speaking, after the events of 4 June 1989, they have all been hurt by economic and political constraints such as the withdrawal of monies by Hong Kong people or control from the Government of China. It is reported that Bank of China had a run on its deposits, and the activities of China Resources (Holdings) Ltd have been cut somewhat. Further the China Communist Party Politburo have called for an audit of CITIC. Moreover, in July 1989, the Politburo issued an order that children of senior officials are to be banned from engaging in business. Moreover, they ordered the abolition of Kunghua Development Corporation. This trading company was closely linked to Deng Pufang, the eldest son of Deng Xiapong. Tian An China Investments Ltd is scaling down some of their projects.
Discussion Strategic business investment choices are being taken by foreign MNCs and small locally owned Hong Kong firms in line with their own comparaindustry structure and market tive advantages, requirements. In fact, their expansion is occurring in the manner that theory suggests. Some MNCs with monopolistic advantages are expanding into China and those in oligopolies who are interested in the benefits of vertical integration to lower costs or
1992 expand resource supplies are also doing so. Motivation at the regional level certainly has been manifested by Japan and, more recently, Taiwan. Small locally owned Hong Kong firms, in accordance with internalization theory are placing manufacturing plants in Southern China at a furious pace with the goal of cost efficiencies through use of lower cost Chinese labour. But geopolitical uncertainty is causing large Hong Kong firms, both those owned by foreigners and those owned by locals, to significantly diversify out of the region. However, large China firms are expanding into Hong Kong.
Recommendations A more stable business environment in Hong Kong (political, 1e g a 1, and economical) will permit better long range planning. Given the situational context and noting that it is unlikely to expect the geopolitical uncertainty to be dispelled completely, some recommendations are made which will be encouraging to businessmen. Their objective is to strengthen the infrastructure to the benefit of the entire system. The adoption of the suggested recommendations should in any event be very beneficial for both Hong Kong and China. Furthermore, foreign direct investment will tend to flow in increasing amounts into the area from abroad. Hong Kong is doing a very large re-export trade and a great amount of subcontracting. Therefore, it is recommended that the port and its attendant facilities must be expanded. Furthermore, a new airport is already necessary and communication facilities must be strengthened. Concomitant with these more industrial area facilities must be constructed. As we move into the future, some part of Hong Kong’s international marketing effort needs to shift to the value-adding of China’s products through brand name, advertising, promotion, and effective distribution. There are adequate numbers of Hong Kong people with management and marketing skills for this but, with the brain drain, more will probably be required. The educational infrastructure at the universities exists but education funding needs to be increased at the graduate level for business courses. The recommendations for China policy makers include:
(1) Formulate
clear foreign direct investment and joint venture regulations. Try to keep these regulations in place for a longish period of time. Have clearly defined arbitration procedures for disputes to allay the negative perceptions that nationalization can occur on terms that will be very unfavourable to the external party.
(2) Encourage
foreign direct investment from the developed countries to modernize industry. Till now, about 70 per cent of foreign direct investment has come from Hong Kong and has been largely for cost reduction and market development.
(3) Encourage
the formation
of Advisory
Councils
Hong Kong and China-Strategic in each major industry sector. These councils should be manned by China and Hong Kong representatives from both government and industry, and by invited foreign representative from MNCs.
(4) Form
joint R & D teams by industry sector to combine China’s research technology units at universities and factories with Hong Kong’s managerial skill and applied capability to bring products to market. China has, for instance, done a significant amount of R & D in satellite technology, small arms and defence industries.
The recommendations for businessmen are directed to policy makers in foreign and Hong Kong firms. They are broadly twofold: region should be regarded as an area of great opportunity. For long range planning purposes, maintain awareness of happenings in the region and market possibilities. Change is likely to occur rapidly and unexpected markets to appear as demand from the region’s emerging middle class leapfrogs towards particular products. For instance, the television market in China is booming much faster than other consumer durables.
investing in China. Also select Hong Kong partners for handling Hong Kong employees. The total effect of implementing these recommendations is likely to help businessmen. They also would be very beneficial to both Hong Kong and China. Strategic planners can note that the region has substantial opportunities which can become much more attractive.
References (1) K. C. Mun, Conditions for the success of one country, two system and Hong Kong relations, in Managing in a Global Economy, Proceedings of the Third International Conference, Eastern Academy of Management, Hong Kong, June (1989).
(1) The
(2) Strategically
manage business risk in the region by containing financial investment at risk and The improving operational effectiveness. former can be done by great caution in any further expansion within the region. Those entering the first time should follow a ‘foothold’ market entry strategy. The operational effectiveness recommendation is to work in joint ventures rather than alone. Always select Hong Kong partners with ‘guanxi’ (good personal relations with the China bureaucracy) when
51
Options for Investors
(2) China emerges as an important Pacific trading partner, Asian Monetary Monitor, 12 (2), l-l 1, March/April
(1988).
(3) The World’s busiest container port, Global Trade, pp. 50-51, May (1989). (4)
Hong Kong Monthly Bulletin of Statistics, October (1989).
(5)
Hurd’s choice, The Economist, p. 24, 6 January (1990).
(6)
Chinese business in Hong Kong: where China learns to love capitalism, The Economist, pp. 61-62, 27 August (1988).
(7)
Old enemies come closer, Far East Business, pp. 9-10, (1989).
(8)
Charles 6. Kindleberger, American Business Abroad, Chapter I, Yale University Press, New Haven, Connecticut (1969).
(9)
Richard E. Caves, International corporation: the industrial economics of foreign investment, Economica, 38, l-27 (1971).
May
(10)
Duncan Freeman, Fear, caution in Hong Business, pp. 13-l 4, September (1989).
Kong, Far East
(11)
In China’s sweaty palm, The Economist, pp. 21-22,5 (1988).
(12)
Dick Wilson, Exploiting Hong Kong’s uncertain future, Management Today, pp. 95-l 10, November (1987).
November