Advertisement
Advertisement
Rule of law helps Hong Kong succeed as a regional business centre.
Opinion
The View
by Stephen Vines
The View
by Stephen Vines

How to attract talent and capital

There are many factors affecting how some nations and not others draw talent and capital but key is regulation, rule of law - and perhaps comfort

The taxes are high, the bureaucracy is complex and, if you believe half of what you read in the newspapers, the government is at best suffering from stalemate and at worst terminally corrupt and evil. Yet millions of aspiring entrepreneurs and people with other valuable skills are really keen to move to the United States.

This paradox seems to defy explanation unless you are prepared to think a lot more critically about the usual explanations given for what it takes for nations to attract talent and capital.

[Tax is just one cost] … paying more often means getting more back

Received wisdom focuses on the need for a low tax regime to attract business. Why then are investors not flocking to East Timor, with its 0.2 per cent corporate tax rate, or to Vanuatu, which ranks No2 in the world league of low corporate taxes? The answer is pretty obvious and it is no coincidence that the nations with the lowest rates of tax attract very little real business (except as tax shelters) precisely because they do not have much else to offer.

On the flip side of the coin, you hear how businesses will flee if the bureaucracy gets too aggressive. If so, how come highly regulated Germany does so well and what about the US, with its national, state and city bureaucracies all enacting business rules while imposing their own taxes.

Meanwhile in Hong Kong, where there is a lot of political noise, we hear increasingly hysterical business spokesmen issuing dire warnings about how business is about to leave if Occupy Central goes ahead or will do so if the people get to elect their own government.

These overexcited individuals and organisations seem not to have noticed that very large occupy movements in New York and London hardly led to a business exodus; can they point to a single corporation that left because of these protest movements?

So, why are some countries more attractive than others for inward investment and able to lure entrepreneurs with ease, while others spend vast sums of money to achieve the same goal but with little success?

Let's start with taxes, because it's hard to think of a single business organisation that is not constantly harping on about the need for lower taxation. And it's not just organisations who go on about this because most companies would prefer to pay less in tax. However, taxation is just one of the costs of doing business and sensible businesses understand that paying more often means getting more back.

Illustration: Lau Ka-kuen
You get what you pay for, but the point is: where do taxes fit in the overall cost structure? The Netherlands, for example has a very high tax rate, but also has recently attracted an influx of entrepreneurs and skilled people. While taxes are high, other costs such as rentals, food and transport are low, so, with other cost factors taken into account, the Netherlands looks reasonable.

Moreover it pays to remember that companies only pay profits tax. This is pretty obvious but often overlooked if you don't understand that entrepreneurs are risk-takers who will accept spending for years without making a profit, and therefore taxation is hardly what's uppermost in their minds.

Then there is the question of regulation. Petty bureaucratic rules are a real pain and, please, let's not pretend free-enterprise-loving Hong Kong is free of them. However, the big picture is businesses like rules that come in the shape of the rule of law and the creation of an orderly and predictable business environment.

This primarily explains why Hong Kong excels as a regional financial centre in a neighbourhood where rule of law cannot be taken for granted, where corruption is rife and rules for business often play second fiddle to political considerations. Indeed it is the proximity of well-regulated jurisdictions to lawless places that lures business to the safe havens.

Then there's another factor, more difficult to define but relating to questions of attitude and environment. Britain, for example, is enjoying an enormous inflow of French entrepreneurial talent, making London France's fifth-largest city in terms of population. Frequently cited reasons for this phenomenon include the feeling that France is less business friendly, less conducive to risk-takers and lacking a critical mass of entrepreneurs.

And it's this latter point that often matters and can be a case of serendipity, as in the example of California's Silicon Valley, which has acted as a magnet for cyber-talent precisely because there is so much of it there already.

To understand what it takes to attract business it's best to look at where entrepreneurs are actually going. Some have entirely non-business reasons for their move, like quality of life. Others simply want to be where they feel most comfortable - try putting that on a spreadsheet.

This article appeared in the South China Morning Post print edition as: Understanding the attraction
Post