Foreign firms will boost Hong Kong only if local industries benefit

For a ‘headquarters economy’ to work, foreign corporations must be encouraged to connect with local industry and local talent, and strengthen the local supply chain
Hong Kong’s true competitiveness does not lie in attracting more foreign companies but in building up a strong local economy

John Hanzhang Ye

Published: 3:30pm, 3 Nov 2023

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In his policy address, Chief Executive John Lee Ka-chiu outlined the important task of creating a strong impetus for economic growth in Hong Kong. The measures introduced so far include making the city more attractive to foreign talent and large international corporations, furthering collaboration with mainland China and pledging more support for small and medium-sized enterprises.

With the government largely looking outwards, however, it needs to strengthen the link between incoming enterprises and local industries, helping the latter thrive to maintain a strong local economy. After all, it is easy for large corporations to leave.

Over the past several months, the government has invested in efforts to attract companies to set up their headquarters or regional offices in Hong Kong. This, said Lee, would develop a “headquarters economy” in the city and boost its competitiveness.

The idea is not new. Hong Kong has long been home to the headquarters, regional offices and local offices of many international corporations – HSBC being one successful and well-known example. And it is hard to say how significant the improvement to the economy will be.

According to the census, the number of regional headquarters in Hong Kong dropped from 1,457 in 2021 to 1,411 last year, with regional offices falling from 2,483 to 2,397 – while local offices increased from 5,109 to 5,170. The drops might seem small but they are an alert: foreign-affiliated companies’ perception of Hong Kong’s position in their global strategies is changing.

Hong Kong faces a dilemma. US-China tensions are causing international corporations, in particular Western companies, to re-evaluate their investments in Hong Kong. Meanwhile, the city’s growing collaboration with Shenzhen, coupled with Shenzhen’s own efforts to attract foreign investment, are making Hong Kong seem less attractive. Foreign companies can simply set up their regional offices in Shenzhen instead, with the added advantage of gaining more direct access to the mainland market.

Although Hong Kong’s tax and legal systems are still attractive, the government needs to address foreign investors’ concerns over the political situation if it wants to make a success of the “headquarters economy”.

Also, Lee’s policy address did not provide direction on how the attracting of foreign talent and companies would benefit local industry. If we look back on the economic history of East Asia, the way to maximise the economic benefit of foreign investment is to boost local industries and train local talent, who then go on to start their own companies and maintain the economic impetus.

This was how Guangdong developed in the early 1980s, and Taiwan in the 1960s. But the Hong Kong government has not specified how the new foreign investment can benefit Hong Kong other than creating job opportunities.

And, given the streamlining of procedures for foreign talent to enter Hong Kong, the job opportunities created by new corporations might fall into the hands of foreigners instead.

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Although foreigners are an important source of labour for the local economy, their departure can be as easy as their arrival. Unlike local talent, with family living here and connections to the city, foreign talent can be more easily lured away by incentives or a desire for change.

The government must therefore introduce more measures to ensure local talent benefits from these incoming foreign companies. It can, for instance, establish requirements for the employment of locals, or set up training programmes for local graduates to gain experience in these international companies.

How Hong Kong can look within to nurture the talent it needs

Another aspect of the “headquarters economy” is that connections need to be boosted between local industries and incoming enterprises. Lee has announced some programmes to support the “headquarters economy”. But, in addition to financial support, the government can foster links between local industries involved in the designated core industries and foreign companies, to build a Hong Kong-based supply chain.

A strong local supply chain would help Hong Kong build a solid local economic base. This could continue even if the newly attracted head offices do decide to leave one day, thus protecting Hong Kong’s economy.

Lee’s policy address has unveiled many measures aimed at boosting Hong Kong’s economic competitiveness. But the city’s true competitiveness does not lie in attracting more foreign companies but in building up a strong local economy and local talent. The government needs to make sure that incoming enterprises truly benefit the local economy and local talent.

John Hanzhang Ye is a PhD student in science and technology history at the University of Minnesota, Twin Cities and also holds an MPhil degree in sociology from the Chinese University of Hong Kong