Be swift and precise to attract businesses and investments
This article appeared originally in the EJ Insight on 2 December, 2022.
Authors: Kenny Shui, Assistant Research Director and Head of Economic Development, and Arthur Tsang, Assistant Researcher at Our Hong Kong Foundation.
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The Northern Metropolis vision was promulgated in the 2021 Policy Address, and the project entails huge investments. In addition to the various infrastructure investments revealed by the Government last year for land development, investments in industry development are essential to turn the San Tin Technopole in the Metropolis into “Hong Kong’s Silicon Valley”. Instead of incessantly funding economic activities, the Government should attract businesses and investments and leverage market power to develop industries. This is also an unprecedented approach the Government pledged to undertake in this year’s Policy Address.
An output-oriented approach to draw strategic enterprises
The Government this year proposed establishing the “Office for Attracting Strategic Enterprises” (OASES) to solicit strategic enterprises to set foot in Hong Kong while proactively reaching out to target enterprises and talents through the “Dedicated Teams for Attracting Businesses and Talents” under the Economic and Trade Offices. Our Hong Kong Foundation has always been calling ardently for the attraction of “anchor institutions” instrumental in the development of innovation and technology (I&T) to settle in town. Without doubt, Hong Kong’s world-class universities are anchor institutions, but they are mainly responsible for upstream research. Meanwhile, among approximately 4000 startups in Hong Kong, there exist “unicorns” which can become anchor institutions yet they are scarce and take time to mature. Hong Kong still lacks enterprises that are capable of covering major markets and connecting both upstream and downstream industrial chains in order to generate massive economic benefits and job opportunities.
The new-term Government fairly understands this demand and pledges to attract no fewer than 100 high-potential and representative I&T enterprises to set up or expand their businesses in Hong Kong in the coming five years involving at least 20 top-notch I&T enterprises. Together they will bring over $10 billion of investment to Hong Kong and create thousands of jobs.
As their scales of economic activities and expansion potential in Hong Kong vary, it is hard for us to estimate the number of strategic enterprises required. Yet, more importantly, it is laudable that the Government regards the investment scale and job opportunities as the major criterion. While the last term Government set an “input” target to increase R&D spending to 1.5% of GDP, the new-term Government adopts an “output”-oriented approach as aforementioned. It would be even more uplifting if output size targets that are more comprehensive and concrete can be announced in the upcoming Hong Kong I&T Development Blueprint.
The Government also mentioned that the duties of the OASES include composing a list of target enterprises, enacting special facilitation measures and devising customised plans to facilitate their setting up in Hong Kong. While striving to cater for their needs, the Government ought to balance the interests of well-established enterprises and startups, as well as the interests of both local and overseas enterprises.
We believe that the “special” facilitation measures should be contingent on the output value, and there are various possible modes. Specifically, the Government can follow the measures of the mainland, offering preferential tax rates or subsidies to enterprises of selected I&T industries, regardless of their size and country of origin. In Singapore, the schemes of tax credits and preferential tax rates are governed by standardised indices of economic contribution to determine whether enterprises are eligible for relevant benefits. The preferential tax rates schemes in Israel consider the amount of venture capital financing and output growth rates of an enterprise when granting relevant benefits, thus taking into account the lifecycles of high growth star startups.
At the same time, the Government can offer tax benefits that are more inclusive. For instance, the benefits can be linked with R&D expenditures, as exemplified by Hong Kong’s existing tax deduction measures for R&D spending. To go even further, we can imitate the UK’s and Australia’s examples where tax rebates are offered for R&D expenditures and conditional refundable tax credits are even granted to startups, benefitting those which are yet to make a profit.
Besides, some governments offer subsidies or tax benefits for activities related to intellectual property (IP), including patent expenses and income, to incentivise the creation and transformation of patents. Members of the OECD even draw up agreements concerning the formulae of patent boxes, levying lower corporate tax on patent income. Given that IP assets can increase the profitability of I&T enterprises, regions worldwide are earnestly promoting such “output”.
As for land policy, most mature enterprises need an entire piece of land or the whole building to organise large-scale R&D activities and fulfil relevant requirements. Before approving the use of land or buildings to satisfy the needs of enterprises, the Government should ensure that related output goals are met when enterprises utilise the space. Yet it does not mean that land or property is only for lease but not for sale. On the mainland, the “rent-to-buy” practice allows enterprises to purchase the land on condition that their performance meets certain criteria during the lease period. As for other strategic enterprises, comparatively inclusive T&Cs of lease are currently offered by the Hong Kong Science Park and Cyberport to budding star start-ups. Existing policies should however be further optimised.
Investment strategies required for Government funds
Another means of encouraging foreign businesses and investments is through the provision of ample financing opportunities for strategic enterprises and their projects. As an international financial hub, Hong Kong is blessed with a large number of globally renowned venture capital and private equity firms. Lamentably, most enterprises conduct R&D overseas after financing in Hong Kong. Thus, the key lies in linking financing with R&D.
To this end, investors can be granted tax benefits. Many regions directly provide tax benefits to investors of local startups while their practices vary. For example, Germany and Australia offer tax rebates; in the UK, tax deduction is also available for investors of venture capital trust; the mainland allows investors to transfer unused tax benefits to other enterprises in case of business failure. All these are favourable to local start-ups and at the same time can attract strategic enterprises to settle.
Alternatively, the Government can consider direct investment. This enables the Government to gain an upper hand by being the dominant investor, setting investment objectives specifically for strategic enterprises and projects to facilitate local industry development. This is another creditable policy in this year’s Policy Address.
The Government proposed the establishment of the Hong Kong Investment Corporation Limited to consolidate several funds under the “Future Fund”, amounting to a total worth of $62 billion. We believe that distinct positioning and investment strategies should be set out for individual funds. For instance, to attract foreign businesses and investments, the Government should require invested strategic enterprises or projects to settle in Hong Kong; to nurture local startups, the Government can focus on helping promising start-ups to cross the “valley of death” by providing early-stage capital, or support “deep technology” startups with longer financing cycles and larger capital demands.
Another highlight is the newly established $30 billion Co-Investment Fund, which will be directly invested by the Government jointly with investment partners, unlike other funds which are being invested by delegating private equities as general partners. As the Government can then be more assertive in making investment decisions, we believe that this better coheres with the Government’s strategies in attracting foreign businesses and investments with enhanced effectiveness and efficiency. For example, the Government can thus ensure that the enterprises and projects invested match the selection of the OASES; and better coordination can also be achieved so that the OASES can devise comprehensive plans for invested enterprises to settle in Hong Kong. Obviously, the Government must make sure that the investment committee is competent and efficient enough to facilitate investment.
Anyway, the Government has to formulate clear investment strategies. Apart from ensuring investment returns, an “output”-oriented mindset is crucial to stimulate the development of the local I&T industry. A risk-adjusted approach and a long-term horizon should be adopted when formulating strategies.
It is noticeable that different government funds worldwide have their unique strategies. In recent years, Singapore’s Temasek tends to invest in companies with stable income sources yet requiring extra impetus or those related to future technologies; Shenzhen Capital Group Co., Ltd. also has multiple investment models, such as direct investment, investment in partnership with capital from society and overseas governments, and delegating investment and making investment delegated by others as well, most of which invest in maturing projects.
Gear up for the imminent “Hong Kong Silicon Valley”
Unquestionably, the strategies to attract businesses and investments covered in this year’s Policy Address are invigorating. Nevertheless, swiftness and preciseness in execution are crucial. Having decided on the governance direction and structured the governance framework, the Government must ensure the smooth operation of proactive and concrete measures to lure suitable enterprises to take root in Hong Kong. We believe that under an “output”-oriented approach with refined measures, “Hong Kong’s Silicon Valley” will thrive before long.