The investment environment in Hong Kong has changed considerably over the years. From the early 1980s, during the Sino-British negotiations and because of the growth of Hong Kong as a financial center, many local investors adopted a "short-term investment" attitude. Thus, speculation in properties and stocks became the easy way to acquire wealth. Consequently, Hong Kong lacked long-term investment in heavy industry.

Other than emphasizing the territory's rule of law and simple, low-rate tax system, the pre-1997 government was reticent in enlarging Hong Kong's economic and industrial capabilities. Post-1997 SAR governments have focused more on solving short-term problems than promoting long-term economic development. Furthermore, most of Hong Kong's successful post-1960s tycoons are now in their golden years. Other than engaging in their existing businesses, there has been little incentive for them to expand Hong Kong's economic capacity.

Since the early 1990s, (due to the belief that business in Hong Kong involves high costs) numerous local businesses have established businesses on the mainland. They believed the mainland offered twin advantages of low production costs and a huge market. But they now realize that the mainland market is more protectionist than they once thought. Moreover, rising labor costs together with new environmental regulations have hindered the expansion of their industries. Furthermore, at that time these entrepreneurs were young, but are now aging. The rapid growth of businesses on the mainland also presents strong competition for Hong Kong firms.

Hong Kong is mainly a service and financial center, and these sectors comprise over 90 percent of domestic output. Many service-related professions do not require sophisticated skills. They offer either a low degree of social mobility or at best no more than short-term prospects to their workers. Unlike industrial jobs where experienced workers are retained, aging workers in service sectors are made redundant or pushed to the margins of their sector, into poorly paid, low-skill jobs. Yet Hong Kong claims to be a knowledge-based economy. But numerous university graduates with engineering and scientific qualifications end up in marketing roles.

Recently the importance of investors, vis-a-vis welfare advocates in Hong Kong, has declined. While there is need to take care of the less fortunate, government intervention in the economy has increased. It has now reached the stage where it is distorting attitudes to investment and welfare.

Local tycoons are seen spending directly on welfare rather than investing to create employment. On the contrary one can also see quasi-welfare associations attempting to establish business in the form of social enterprise. This will not help Hong Kong broaden its economic base or boost industrial capacity.

Financial crises in Hong Kong have unfortunately encouraged more people to look to the government for help. Traditionally the government in Hong Kong has not been a key innovator, nor can it offer business expertise. The "backseat" nature of the government means it can only encourage infrastructure development and investment in human capital in order to help businesses. The "front seat" role of investment and employment creation can only be performed by the private sector. Broadening Hong Kong's economic base would require a change in attitude - from the short-term, speculative outlook on investment to a long-term attitude. But who will initiate this investment - and in what areas?

Business consortia could provide the solution. Businesses, either voluntarily or through chambers of commerce, should form consortia for different areas of investment in Hong Kong. A land development, population growth and property supply consortium could be formed. Another, focusing on high-tech development would be feasible.

The only natural resources Hong Kong possesses are the sea and warm weather. So another consortium on use of these resources, together with environmental protection, could be established.

The consortia could identify areas for potential investment. With their recommendations and feasibility studies, the businesses could invite the government to initiate new policy and regulation. These investment priorities would be business-driven. It would be important to create investment clusters so people could visualize areas for future development.

There are several advantages arising from promoting consortia.

Firstly, a triangular relationship between business, academia and government could be promoted. Business provides the investment; academics provide the research and recommendations; and the government deals with regulation.

Secondly, local, mainland and foreign investors could be encouraged to join consortia. For example, there are the over 1,700 tariff-free export items shipping to the mainland under CEPA agreements. These offer great future investment potential. The supposedly "high" cost of doing business in Hong Kong pales into insignificance when the huge potential of the mainland market is taken into account.

Thirdly, consortia could stimulate investment. Once a certain amount of investments has been raised, more and more would follow.

The author is associate professor of the Department of Economics and Finance at City University of Hong Kong.

(HK Edition 08/04/2014 page9)