Four ways for Hong Kong to become a leader in technology, instead of always playing catch-up

In this more competitive second decade of the 21st century, there is a growing understanding across countries that technology and innovation are vital drivers of economic growth and higher living standards. Many believe Hong Kong risks falling behind because so few companies here foster innovation or are technology-oriented.

Hong Kong’s economy remains reliant on its traditional pillar industries of retail, property, financial services and shipping. Most of us spend similar amounts of time in grocery stores, banks and shopping malls as we did last century.

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In contrast, consumers in mainland China have embraced a digital life, using e-commerce, e-banking and social media to satisfy their daily needs. The central and local governments have invested in research and development directly and offered generous incentives to companies that develop and pursue innovation. Meanwhile, countless aspiring entrepreneurs have left their companies or schools to join start-ups that build new and better business models. Thus, China is witnessing an explosion of activity in the new economy, with many companies valued at over US$1 billion in the private or public market.

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A commonly cited factor for dismissing Hong Kong’s prospects to become an innovation hub is its small population. The fallacy of this is easily demonstrated: Israel, with a population of 8 million, is a global technology leader that has more listed companies on the tech-heavy NASDAQ than any other foreign country, except China, and attracts more venture capital than the entire continent of Europe.

Closer to home, Singapore is Asia’s most innovative economy, with successful homegrown companies operating in e-commerce and the biotechnology and financial technology sectors, despite having a smaller population than Hong Kong. Other countries similar in population size to Hong Kong, like Sweden and Finland, also compete globally, underscoring that size is not an impediment to economic advancement.

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Rather than population, I believe the critical factor for a successful innovation hub is having a robust network of experienced and motivated intellectual talent. Typically, ecosystems of innovation develop organically as outgrowths from research universities such as MIT or Stanford, cutting-edge government-sponsored institutions like the Israel Defence Forces, and world-class corporate research development programmes sponsored by tech-heavy firms such as Bell Labs, Intel and Google. Such institutions have the mission statement and financial power to expend major resources attracting and retaining the best talent while providing them with the freedom and funding needed to develop groundbreaking innovations.

Over time, some of these creative people become entrepreneurs. Other businesspeople move to these areas to get involved. And, often, the same research and development institutions collaborate with the start-up community to create and commercialise products. The result is an ecosystem that helps to shift the productivity and value curve for businesses and consumers, powering growth and job creation.

Historically, Hong Kong’s role in the British empire was as a distant entrepôt. The colony was governed according to a laissez-faire philosophy; the government maintained a light touch and let the market do the work. Research universities were not established; the largest indigenous businesses were trading companies, and a general short-term mentality and external focus prevailed.

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After the handover, the Hong Kong government quickly recognised the need to modernise the economy for the digital age. This objective was highlighted in the Digital 21 Strategy published in 1998 and last updated in 2014. The strategy plan listed five key action areas: facilitating a digital economy; promoting advanced technology and innovation; developing the city as a hub for technology cooperation and trade; enabling the next generation of public services; and building an inclusive, knowledge-based society.

Yet, despite this, the economy remains stubbornly dependent on old-economy industries. Fast broadband internet and well-functioning government websites are important but not sufficient for creating an innovation hub. It takes more than infrastructure, data connections and a favourable business climate to attract a critical mass of entrepreneurial and intellectual ­talent.

One of the most important actions taken by the government in this regard was establishing the Hong Kong University of Science and Technology and Polytechnic University in the 1990s to educate people capable of working in tech-related fields. However, if Hong Kong is ever to achieve the critical knowledge mass necessary to create a hub, the government, academia and the corporate and financial sectors will need to undertake major initiatives.

The following are some possible strategies.

First, Hong Kong should use its role as a global financial centre to foster a vibrant venture capital community. If it expanded its international stature from listing large companies to growing smaller ones, we would see more technology-oriented firms and entrepreneurs establishing a presence in the city to be closer to their financial backers. One way to kick-start the idea would be a massive government-sponsored fund, which would share risk with local angel and venture capital funds to invest in innovative companies.

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Second, Hong Kong needs an intelligent plan to encourage multinational corporations to establish their research and development centres in the city, as they are currently more likely to choose Singapore or Shanghai. In Hong Kong’s case, the barrier is often the cost of living, in particular housing, along with the availability of schooling and qualified employees. If the government offered compelling incentives, such as tax cuts, subsidised office space, enhanced school access, and a programme to lure home the top Hong Kong graduates from overseas universities, we could see the city become a more strategic location for innovative multinationals.

Third, Hong Kong needs to support universities in their bid to conduct research that has potential commercial applications. Local corporations and tycoons should be encouraged to increase their financial support of and collaboration with local universities. Those who have benefited most from Hong Kong’s favourable tax and business climate have a big stake in ensuring the vibrancy of its economy.

Fourth, Hong Kong’s primary and secondary education system needs careful attention. Increasing the pay and educational standards for teachers will be essential, as will be expanding computer literacy and the ability to think laterally. Government-supported schools should also be allowed to offer accelerated tracks to nurture youth with high potential, who can later become key employees in the science and technology ecosystem. The talent available will also push Hong Kong’s universities to a higher level.

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Under a blue-sky scenario, Hong Kong’s innovation hub would adopt ideas from its world-class universities, indigenous venture capital expertise, while sourcing industrial entrepreneurs from Shenzhen, and connecting to growth companies across the wider world. Such an ecosystem would mean Hong Kong’s free economy and clean legal system would be a natural draw for tomorrow’s companies, as they wouldn’t need to make sacrifices in terms of access to talent and cutting-edge technology.

This may be a dream, but which successful start-up company didn’t start that way?

Jesse Friedlander, CFA, is a Hong Kong-based research analyst and investor. His areas of interest include macroeconomics, geopolitics, language and culture