Encouraging small to medium-sized companies in the private sector to help create new jobs has become a hot economic topic in China. Many of the discussions tend to focus on tax incentives, preferential loans, special land grants and other government largesse.

This is the wrong approach.

It has been demonstrated in numerous other economies that private sector SMEs thrive in a free market environment with few bureaucratic constraints. Once the government begins granting privileges, bureaucrats will likely step in and choke the life out of businesses with red tape.

SMEs are particularly vulnerable to official meddling because their owners have neither the manpower nor the resources to satisfy the many inflexible bureaucratic procedures that often have little or nothing to do with public interests.

What's more, government subsidies can be harmful to SMEs because they usually have the effect of dulling the competitive spirit and numbing the market sense. Once hooked on handouts, many SMEs will perish because they are conditioned to look to the government rather than consumers as their primary patron.

Let's face it, subsidies are inherently unfair because they favour one segment of the economy over the others. To be sure, many governments provide incentives for certain specific undertakings such as research and development. But these incentives are made available to all businesses, irrespective of size and type, that make a genuine effort in such pursuits.

The government of Hong Kong, where SMEs as a whole account for the largest share of the economy and employ the biggest number of workers, used to observe the rule against subsidies with near religious fever. In the 1980s, for instance, it had held strong for years against the ambitious proposal for the extension of the Convention and Exhibition Centre on reclaimed land at the waterfront of Wanchai.

The government stand at that time was that such a huge investment of public funds would benefit only the manufacturing and export sector, which was the project's major proponent. A compromise was later reached and the project was built largely with private funding.

We all know by now that the government's original argument was flawed. The centre has been chosen as the venue for numerous events, including the IMF meeting in 1997, which helped promote Hong Kong as a whole. But the principle against favouring any particular industry or class of business over the others cannot be faulted.

This principle has played a major part in making it possible for Hong Kong to establish and maintain a fair, equitable and transparent environment that has proved to be so favourable for the hundreds of thousands of SMEs in all business fields. Without such an environment, many Hong Kong SMEs would not have been able to adapt so adroitly to the "big bang" style transformation from a manufacturing-based economy to one that is service-oriented in a brief decade after the opening of the mainland in 1978.

During that time, many Hong Kong entrepreneurs simply closed their old businesses and opened new ones that could better cater to the changes in consumer demand brought about by the economic transformation. Such flexibility was made easy by the almost complete absence of government red tape and bureaucratic interference.

Opening a business in Hong Kong is simple enough. All it takes is to fill in a form, pay a small fee, and you're in business.

I know through personal experience. In my first, and only, attempt to be an entrepreneur several years ago, I followed the trend and registered my own dot.com business in Hong Kong. I knew it was not complicated. Nonetheless, the simplicity and swiftness of the process came as quite a surprise.

SMEs in Hong Kong are resilient to changing business conditions because their owners have learned to rely on hard work and their own keen business sense. Many have committed a large part of their savings into their businesses. The cost of failure for many of them is high indeed.

And yet, none of them seriously expect special treatment from the government although various trade groups have made occasional requests for assistance to help get them through particularly trying times. During the height of the property boom in the earlier part of the 1990s, many associations representing SMEs made urgent calls on the government to provide their allegedly hard-pressed members with premises at subsidized rent. The matter was largely dropped after the bursting of the property bubble in 1997.

That served to further reinforce a common belief among business people in Hong Kong the power of the market.

Email: jamesleung@chinadaily.com.cn

(China Daily 12/20/2005 page4)