Made by Hong Kong /
edited by Suzanne Berger and Richard K. Lester ; made by Hong Kong study leaders, Alice H. Amsden ... [et al.].
Hong Kong : Oxford University Press, 1997.
xvi, 376 p. : ill. ; 23 cm.
More Details
Hong Kong : Oxford University Press, 1997.
catalogue key
Includes bibliographical references and index.
A Look Inside
First Chapter

Chapter One

Part One

Hong Kong Industry and its Future

1 Why Study Hong Kong Industry?

In 1996, a group of researchers from the Massachusetts Institute of Technology set out on a study of Hong Kong industry that would bring them into hundreds of factories, laboratories, and headquarters in Hong Kong and China. MIT professors in electrical engineering and computer science, economics, urban studies, chemical engineering, political science, and nuclear engineering went with senior research colleagues and graduate students into Hong Kong companies and their China-based plants to try to discern the future of industry in East Asia from a firm-level-up perspective. Many have asked us why senior faculty and researchers from an institution known for its contributions to education and research in technology and science would devote so much effort to analyzing activities in China and Hong Kong. At a time when the American economy is booming and when the US lead across a broad spectrum of high-technology industries is greater than at any point since the 1960s, why focus on China, except as a market for US exports? Within China, why study Hong Kong?

Those of us who have chosen to work on the Made By Hong Kong project believe that to remain a world leader in advancing science and technology for the common good, MIT needs to work on the frontiers of knowledge creation and application, wherever they are. After World War II, the US economy and market, as well as its research enterprises, dominated the world, and there seemed to be little need to look abroad for innovation and opportunity. Over the half century since the end of the war, other nations have emerged alongside the United States as strong independent centers of science, technology, and industry. Americans can no longer afford--if ever they could--to remain focused exclusively on the domestic market or on domestic sources of new ideas and processes. Rather, to derive the fullest range of benefits from our engagement in the global economy and in the worldwide knowledge creation, we need to be able to learn in diverse national settings, to work in centers of innovation outside our own society, and to problem-solve beyond our own borders. These imperatives first became clear to American society in the 1980s, as we saw Japanese industry and technology pose major competitive challenges to the best US companies. The MIT Commission on Industrial Productivity, authors of Made in America: Regaining the Productive Edge (MIT Press, 1989)--a study in which a number of us on the Hong Kong team participated--emphasized the importance of moving beyond parochialism to understand industry and technology abroad.

Today the emergent frontier in industry and technology is East Asia. Its extraordinary growth rates and large market constitute a major draw for American and multinational industry. Between 1974 and 1993, the annual average rate of GDP growth in East Asia was 7.5 percent per year, in contrast to only 2.9 percent in the advanced industrial world. Today Asia accounts for close to a third of world trade, and between 1993 and 2000, the World Bank has estimated, Asia will account for half the growth in world trade. Asians will comprise 3.5 billion of the world's estimated 6.2 billion people by the year 2000. There will be about a billion middle-class consumers in Asia by 2000. But beyond the potential of this vast emerging consumer base, we see an enormous potential for scientific, technological, and industrial achievements that we need to understand in the making. The rapid advances of Korea, Taiwan, and Singapore in the electronics field show the potential of this region to equal the industrial prowess of the West. The ambitious research agendas of the laboratories of leading Chinese institutions of science and technology, the strength and depth of their reservoir of scientific personnel, the new and growing ability to attract back home students who have been trained in the best Western universities, and the concentrated effort on pulling advanced technology from multinational companies--all these factors are working to build technological capabilities that will be formidable in the future, however uneven they are today. For all these reasons, anyone with an interest in the forces that will drive the global economy of the twenty-first century needs to focus on Asia.

If Asia, why Hong Kong? Three broad sets of considerations drew us to conclude--and we believe should convince others--that Hong Kong is a privileged site for observing the emergence of Asia as a major player in the global economy. First, Hong Kong provides a unique window onto China. No society in the world has more experience investing and producing in China. Hong Kong has been the largest source of foreign direct investment in China since the mid-1980s. Although the exact figure is impossible to determine, various statistical sources estimate Hong Kong's contribution to realized foreign investment in China by 1994 to comprise about two thirds of the total. By comparison, the Japanese share was about 13 percent. In Guangdong Province the dominance of Hong Kong capital was greatest, with about 90 percent of all foreign-invested companies. About 35 percent of China's international trade (43 percent of exports and 25 percent of imports) is handled by Hong Kong. Overseas Chinese investors--often Hong Kong companies, or investors operating out of Hong Kong--employ some 14-15 million people in China.

As we observed on our visits to the Hong Kong-owned and managed plants in the Pearl River Delta and elsewhere in China, Hong Kong managers have an unparalleled fund of knowledge about what it takes to operate production systems distributed across long distances and to turn out high-quality goods in a wide range of industries in `greenfield' sites in China. Some have argued that Hong Kong entrepreneurs are uniquely qualified to operate in China--because of linguistic, cultural, and family ties--and that others are likely to fail where Hong Kong managers succeed. The more recent successes of some of the Taiwanese, Korean, Japanese, and American joint ventures who are now operating on the same terrain suggest to us that such a claim is exaggerated. But Hong Kong's experience still stands as a benchmark for working in China and thus provides an extraordinary chance to learn what the potential opportunities and pitfalls may be of shifting some part of the activities of advanced industrial societies into China.

The second factor that drew us to this study of Hong Kong industry was the importance to the United States of Hong Kong as an economy and society. On the barren rocks of a small trading port and fishing village with about half a million people at the end of World War II, Hong Kong has built a first-rate world manufacturing power. The dynamism, growth rate, and world reach of this economy is today vitally connected with American interests. Depending on the source, Hong Kong ranks either as the world's third most competitive economy (in the Institute for Management Development's 1996 World Competitiveness Yearbook) or as the second most competitive (by the World Economic Forum's reckoning). Over the 15-year interval 1980-95, Hong Kong's annual average rate of growth of GDP was 6 percent; and by 1994 its GDP per person (calculated in purchasing power parity) was US$23,080, topping Singapore ($21,430), South Korea ($10,549), and Taiwan ($13,022). Moreover, unlike the other `little dragons,' Hong Kong's growth pattern was one in which government eschewed any direct role in promoting industry. This fact was reflected in Hong Kong's heading a list of countries ranked by their economic freedom.

As Hong Kong became a powerful and rich economy, it became increasingly more important to the United States: today it is its 13th largest trading partner and the 11th biggest market for US exports. The US Commerce Department estimates that direct US investment in Hong Kong is US$13.8 billion. As the United States-Hong Kong Policy Act Report of March 31, 1996 described, US stakes in Hong Kong are multiple and significant: `Last year's exports to Hong Kong, many of which are re-exported to China, total over US$14 billion. We have US$12 billion investment in Hong Kong. Some 1,000 resident US firms employ 250,000 Hong Kong workers (10 percent of the workforce), and Hong Kong's open society and attractive living environment are home to over 36,000 American citizens.' There are 198 regional headquarters and 228 regional offices of US companies in Hong Kong, and the American Chamber of Commerce in Hong Kong is the largest one outside the United States, with over 1,200 members. In last year's debates over renewing China's most-favored-nation status in the US Congress, one source calculated that the exports to Hong Kong of 15 key US states total US$8.3 billion alone and that, together with the US$7.9 billion exports of these states to China, they create over 800,000 jobs in the United States. For Hong Kong, only China is a bigger partner than the United States.

At this point, given the massive Hong Kong investment in productive facilities in China and the major role that Hong Kong plays in re-exporting goods made in China to the outside world and re-exporting the world's goods into China, it is extremely difficult to disentangle US interests in Hong Kong from those in China. As Barry Naughton, an expert on US-China relations, has explained, conventional trade accounting overstates China's exports and understates Hong Kong (and Taiwan)'s contributions to the US trade deficit with China. Foreign-invested firms generate a large share (41 percent) of China's total exports. Hong Kong is the major foreign investor in China, hence is directly responsible for a large component of those Chinese exports. Naughton traces the continuity between today's US trade deficit with China and earlier trade deficits between the United States and Hong Kong and Taiwan. `For a whole series of commodities such as footwear, toys, and bicycles, declining US market share for Taiwan or Hong Kong has been matched by increasing market share for the PRC. Thus underlying the dramatic growth in US-PRC trade is the substantial continuing role of Hong Kong and Taiwan businesses as intermediaries in this trade.'

Naughton examines further the `value-added chain' of production which brings inputs (fabric, electronic devices, materials, and so forth) from Hong Kong into China; assembles products in China; then returns the products to Hong Kong for packaging, marketing, and shipping. He estimates that of imports arriving at the port in Long Beach California, value added in China may be 20 to 25 cents or less per dollar of c.i.f. [cost, insurance, and freight, or cost in full] imports. Thus much of the large US deficit in trade with China should be attributed to Hong Kong (and Taiwan). In sum, Hong Kong's economic importance to the United States is greater than the trade or investment figures that relate directly to Hong Kong-based activities reflect, for Hong Kong inputs create a large part of the economic flows within the US-China economic relationship.

A third--and for us compelling--reason to focus on Hong Kong's experience is that it may help us address one of the most important questions confronting American society: What is the impact of globalization on the productive and innovative capabilities of firms which shift some part of their activities across national borders into low-cost labor markets and retain others in domestic markets in close proximity to skilled personnel and centers of research and development? Is it possible to break up production systems geographically and to separate physically the functions of research, product conception and design, development, production, and commercialization without losing efficiency and the ability to design products that can be manufactured well? What are the effects of globalization of production on employment in home territory? Can production be located very far from ultimate end users without losing a vital feedback possibility that drives improvement and new products?

These questions first entered debates over industrial performance in the 1980s, when the issue was to explain the significance of differences between the American and Japanese systems of production. At that time, much of the Japanese industrial superiority--in developing and bringing to market new generations of products rapidly and in continuously improving the processes of production--seemed to derive from the closeness of R&D, product development, and production. It also derived from the intense interactions and frequent rotations of personnel among these activities. In the United States, by contrast, many of the weaknesses of our industrial system seemed to derive from its compartmentalization and from the fact that ideas conceived in R&D labs were `tossed over the transom' to manufacturing with little regard for how they could be produced or modified.

Today, Japanese, Americans, and Europeans alike are moving parts of their productive activities out of their own societies into Asia, East Europe, and Latin America, driven by a search for lower costs, or to gain market access, or to stay close to vital customers. Globalization seems to be fragmenting production systems everywhere. But which activities are shifted and separated and which are retained in close proximity in order to sustain the capacity for future innovation and growth--these decisions are made differently in various companies and in various countries. Their consequences may shape critical differences in capabilities, hence determine the performance of firms in the future. They may also matter for the quality and number of jobs that remain in the home country.

We believe that a firm's ability to perform well and to continue to turn out a solid stream of innovations will, increasingly, depend on the decisions it makes on the location of design, research, product development, and manufacturing. But we still know little about the consequences of these patterns of outsourcing. The early findings of a University of California/San Diego research team on US, Japanese, and Asian firms in the hard disk drive industry suggest very great variations in the decisions firms from different countries make about the location of production and employment. These differences raise major questions about the proximity of manufacturing and product development and its implications for locating R&D abroad. The San Diego team argues that manufacturing tolerances may be growing tighter with technological advances in hard disk drive production, so colocating design and manufacturing--instead of distributing them at geographically distant sites--may become increasingly important. If this were true in other high-tech sectors as well, then maintaining real manufacturing capabilities in close proximity to design and R&D may be a source of competitive advantage.

There are real trade-offs between the advantages to be gained from lean production and the cost savings to be gained from distributed network production systems, as geographic distances and delays between units associated in the production of goods greatly reduce the possibility of very low inventories, of seamless collaboration with suppliers and customers, and of monitoring in ways that rapidly halt defects. As David L. Levy reports in a recent analysis, these two strategies cannot be completely married, and hard choices need to be made among them. Hong Kong's rich experience in this domain has great interest for many who are beginning to discover the difficulties of interacting with vital parts of their production network which are not within close geographic reach.

For those seeking to learn the lessons of early globalizers who organized their production in networks extending in distributed chains out from headquarters in high-wage societies into low-cost labor manufacturing sites in emerging countries, Hong Kong, in fact, represents a kind of critical case. Since China's opening and the economic reforms of the late 1970s, Hong Kong manufacturing industry has been transferring activities to China on a massive scale. At its peak in 1984, Hong Kong had a manufacturing workforce of 905,000 (41.7 percent of the active labor force); by 1995 those employed in industry had shrunk to 386,000 (15.3 percent of the Hong Kong workforce). There were 48,992 manufacturing establishments in Hong Kong in 1984 and only 31,114 by 1995. Manufacturing, which had been the largest component of GDP in the 1970s and 1980s--about 23 percent of GDP--now represents only 9.2 percent. But while `Made in Hong Kong' manufacturing declined, `Made By Hong Kong' manufacturing--that is, manufacturing in Hong Kong-owned and managed plants operating outside Hong Kong proper but using significant Hong Kong inputs--flourished. By shifting parts of their operations to China, Hong Kong industrialists vastly increased the scope of their enterprises. By 1997, Hong Kong manufacturing companies were estimated to employ some 5 million in their plants in Hong Kong and China--over five times the workforce they had employed in Hong Kong at the peak of manufacturing in the territory in 1984. Manufacturing productivity in Hong Kong itself had risen from US$25,501 (gross output per employee) in 1984 to $87,789 in 1994.

We can observe, in effect, a roughly decade-long natural experiment with distributing the activities of a production system between Hong Kong, a high-wage society with a per capita GDP in 1993 of US$18,530 and China, a poor country, whose most prosperous province, Guangdong had a per capita GDP in that same year of US$826. What have been the effects on the profitability of Hong Kong companies? On the levels and kinds of employment opportunities in Hong Kong? On Hong Kong's societal well-being? On Hong Kong's innovative and managerial capabilities? On Hong Kong's chances of developing new higher-value-added industries in high-technology areas? On Hong Kong's ability to sustain a high-growth trajectory over time? What would be the consequences if all manufacturing activities shifted out of Hong Kong across the border and only services remained in Hong Kong? It was this last issue above all that troubled the Hong Kong groups that offered to support our research, for they worried about the sustainability of Hong Kong's prosperity and autonomy if all their industry should move out. These worries are hardly Hong Kong's alone, but are voiced with greater and greater insistence everywhere in the developed world. These are the questions we hoped to answer by examining in the microcosm of Hong Kong a set of relationships that all of the advanced societies are entering into with the emerging economies.

Finally, why study Hong Kong industry, others asked us--and we wondered ourselves--on the eve of Hong Kong's return to Chinese sovereignty? On July 1, 1997 Hong Kong will become a Special Administrative Region (SAR) within China, after 154 years as a British crown colony. What reason is there to believe that the fundamental conditions that supported the extraordinary societal and economic flourishing of the past will persist? These societal foundations are the rule of law, limited government, honesty and transparency in administration, private enterprise, public commitments to relatively high levels of social goods and equity, and protection of individual freedoms of expression, association, and belief. In the words of newly chosen Chief Executive for the Hong Kong SAR, Tung Chee-hwa, `The success of Hong Kong is the freedoms we enjoy. Freedom of every nature--freedom of thought, freedom of movement, freedom of the press, freedom of information, freedom to be creative.' But if these freedoms were to be significantly eroded, what basis would we have for laying out scenarios for possible new directions in the Hong Kong economy?

In the course of our research in Hong Kong and China, we heard a range of very different views about Hong Kong's political future. Many in Hong Kong repeated to us the commitments that China's highest leaders have expressed over the years to the framework of `one country, two systems.' They also emphasized China's enormous material stakes in Hong Kong's prosperity and explained that these interests make it likely that the foundational conditions of a prosperous and innovative economy and social stability will be preserved. Equally sanguine, some argue that the transition has really already taken place gradually during the 13 years since the British and Chinese signed the Joint Declaration, as Hong Kong people have taken the eventual change in sovereignty into account. On this reading, 1997 has only a symbolic value. Others, more pessimistically, doubt that China truly understands the links between these political and societal foundations and the vital motors of the Hong Kong economy--that even if China wants to keep alive the goose that lays the golden eggs, it doesn't understand what kind of food the goose eats, in Thomas Friedman's pithy expression. Still others see a dark future, because they believe that China's fears about political and social unrest in Hong Kong spilling into the mainland are so great that the leadership's priority for political survival will overwhelm the concerns for preserving the economic status quo.

As outsiders and as researchers, we did not attempt to reach consensus on these issues. Since the best informed of those we were privileged to meet during our research did not agree among themselves, we do not believe that we can do so. The absence of an analysis of Hong Kong's prospects as a free society in this report does not mean that we care less about this matter than about others which receive extended discussion here. Nor do we think Hong Kong's economic prosperity could continue, let alone be enhanced, if its historic freedoms were to be abridged. Whatever claims may be made about the compatibility of authoritarian rule and economic growth in other societies, this is not Hong Kong's legacy and we cannot conceive it as a plausible future scenario. On the contrary: our analysis, prognosis, and recommendations for Hong Kong depend on two basic assumptions--without any certainty that they will prove warranted. We assume that within the framework of `one country, two systems,' Hong Kong can maintain the status quo of its commitments to high levels of societal well-being and equity, to individual freedoms, to a market-driven economy, to limited government, to the transparency and integrity of the civil service, and to the rule of law. Secondly, we assume, as the condition of the rest, that there exists a real will on the part of both the Hong Kong people and the Chinese to find ways of working together that provide mutual benefit.

Long Description
Hong Kong, one of the world's great manufacturing societies, now faces major challenges and competition from developing countries building middle-tech industries with low-wage labour. Based on the results of a major year-long study, this book analyses the resources and handicaps of a significant set of Hong Kong industries as they attempt to utilize a diverse and strong set of assets such as new technologies and proximity to China.
Main Description
Hong Kong, one of the world's great manufacturing societies, now faces major challenges and competition from developing countries building middle-tech industries and offering low-wage labor. Confronting the challenges that Hong Kong will face in the next decade, Made By Hong Kong focuses on the role of manufacturing in the development of the Hong Kong economy and analyzes alternative strategies and new directions for industrial growth. It shows how economic abilities, employment and social well-being can be maintained even as many of society's production activities move outside the domestic territory. The authors suggest ways to develop while maintaining and enhancing production activities. They examine the role of biotechnology and information technology by bringing in international experts in these fields from the MIT research community and provide recommendations for government, industry, and academia. Based on the results of a major year-long study, Made By Hong Kong analyzes the resources and handicaps of a significant set of Hong Kong industries as they attempt to utilize a diverse and strong set of new assets such as new technologies and a new proximity to China.
Table of Contents
Tables, Figures, and Appendices
A New Direction for Hong Kong: An Executive Summary
Hong Kong Industry and its Futurep. 1
Why Study Hong Kong Industry?p. 3
Industry in Hong Kong: A Short Historyp. 15
Manufacturing and Services in Hong Kongp. 27
The Strengths of Hong Kong Industryp. 34
How Sustainable is the Hong Kong Model?p. 52
Challenges to Hong Kong Industryp. 59
Upgrading Hong Kong's Core Capabilitiesp. 97
Lessons for US Industryp. 129
Industry Studiesp. 137
Textiles and Clothing in Hong Kongp. 139
The Hong Kong Electronics Industryp. 186
Information Technology in Hong Kongp. 216
Biotechnology and Hong Kongp. 249
Capital Markets in Hong Kongp. 293
Manufacturing Capabilities: Hong Kong's New Engine of Growth?p. 320
Indexp. 367
Table of Contents provided by Blackwell. All Rights Reserved.

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