Lai See

Hong Kong government can't be bothered to support start-ups

PUBLISHED : Wednesday, 28 May, 2014, 12:34am
UPDATED : Wednesday, 28 May, 2014, 12:34am

There has been a good deal of talk recently as to whether Hong Kong has the wherewithal to become a start-up hub. For many, it's a conundrum as to why one of the richest and most entrepreneurial cities in the world shouldn't be better at this.

There are those, like our colleague Jake van der Kamp, who would say this is because it is not Hong Kong's forte. Hong Kong is better at trading and finance than start-ups, he says.

Others have remarked on the high level of capital in Hong Kong and the striking lack of investment that finds its way into technology start-ups compared with other rich centres. In their World Bank study, Martin, Han and Tanaka described the venture capital sector as successful in Taiwan and Israel, but not in Hong Kong.

Ken Au and Steven White, in Hong Kong's Venture Capital System and the Commercialisation of New Technology, attribute this to the city's "historically rooted trading-and-arbitrage business mentality, the legacy of British banking practices, manufacturers' reliance on short-term loans, and the particular backgrounds of locally active VC investors".

Nevertheless, there are also a good number of people that say Hong Kong has the potential. Legislative councillor Charles Mok believes it could be done. He was an internet entrepreneur and has been promoting the start-up and technology sector.

Musing with him recently, he was frustrated by what the Hong Kong government does for start-ups compared with those in Singapore, South Korea and mainland China. There, the government sets up investment vehicles which have a degree of independence over their investments and are able to take long-term views. At the same time, the presence of government equity attracts outside investors.

Mok said the Hong Kong government's efforts had been half-hearted. It set up its own venture capital fund in 1993 with HK$750 million at its disposal. But many of the investments were criticised for their poor performance and the fund was abandoned in 2005.

Its replacement, the Small Entrepreneur Research Assistance Programme (Serap), was set up differently in that it made loans of up to HK$6 million on a matching basis. This was not very successful and did little to encourage outside investors, Mok said.

He said bureaucrats felt uncomfortable with Serap since they were supposed to recoup the loans, and when they didn't, were criticised by the Legislative Council and the Audit Commission.

So they had come up with a scheme that suited them better called the Enterprise Support Programme, Mok said. It has yet to come into effect since it is a budget measure and is currently trapped in Legco. The scheme will hand out funds of up to HK$10 million, again on a matching basis, but as a grant rather than a loan.

Mok said this saved bureaucrats from the inconvenience of having to chase after firms when they didn't repay the funds, and from Legco and Audit Commission criticism when they failed.

"The problem is that when the Hong Kong government does something, it does it not because it is particularly worthwhile in itself, but because it doesn't want to do something else," Mok said.

In this view, the government launched Serap because it didn't want equity in start-ups, and because it didn't want to give tax deductions for research and development, which the sector has been requesting for years.

"The answer is always: 'We want to keep our taxes simple and low,'" Mok said.

He said that while places like Singapore were able to make the necessary tax adjustments, the Hong Kong government "just wants to make things easier for itself, rather than doing something really useful for these companies".

Lai See thinks that if there is a desire to aid the start-up industry, then the easiest and quickest way is to provide tax deductions for investors. This keeps the government out of the way while allowing the market to decide what to support.

This proposal will inevitably invite from bureaucrats the mantra: "If we give tax breaks to this sector, what's to stop others from asking for them?"

Our answer to this is to show some backbone. Just because they don't offer civil servants the prospect of a cosy retirement job doesn't mean start-ups shouldn't be encouraged.

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