1. Asian Education and Development Studies
Emerald Article: Hong Kong and the knowledge-based economy: developments
and prospects
Alan Lung Ka-Lun
Article information:
To cite this document: Alan Lung Ka-Lun, (2012),"Hong Kong and the knowledge-based economy: developments and prospects", Asian
Education and Development Studies, Vol. 1 Iss: 3 pp. 294 - 300
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AEDS
1,3
Hong Kong and the knowledge-
based economy: developments
and prospects
294 Alan Lung Ka-Lun
Asia Pacific Intellectual Capital Centre, Hong Kong SAR, China
Abstract
Purpose – The purpose of this paper is to examine Hong Kong’s future economic diversification
prospects to become a high value-added knowledge-based economy.
Design/methodology/approach – This paper is a view of the knowledge-based economic
development of Hong Kong and its potential future prospects since its re-unification with China. It is
important to have a good understanding of the past before trying to predict the future.
Findings – The key message is that Hong Kong now needs a “horizontal” support structure, a good
understanding of how things work in a globalized knowledge economy, continuation of the “free
market” structure and a lightweight facilitation system that supports all high-value added economic
activities in Hong Kong.
Originality/value – The papers provides an original viewpoint on the potential for Hong Kong’s
knowledge-based economic development, in line with the rise of China as a global economic power.
Keywords Hong Kong, Innovation, Economic growth, Globalization, Knowledge-based economy,
Research and development
Paper type Viewpoint
Introduction
As the current HKSAR administration comes to the end of its term, this is probably
a good time to catch a glimpse of our past, so that we could have a better
understanding of our future. This paper is about Hong Kong’s future economic
diversification prospects to become a high value-added knowledge-based economy. It is
not a dissertation about science and technology, nor is it an account of what Captain
Charles Elliot (the first colonial administrator of Hong Kong) and the 28 colonial
governors did in Hong Kong from 1842 to 1997. One of the strategies Hong Kong could
consider to achieving such a goal is to make best use of our traditional strengths to find
a unique “market niche” in the new opportunity provided by China’s rise and in a
global economy driven by innovation and technology. However, we need to have a good
understanding of the past before we try to predict the future. So perhaps we should
start the story from the early 1900s when Hong Kong began building up its modern
economic capacity.
Hong Kong has always been about free trade
Hong Kong was still a young colony at the time the University of Hong Kong was built
in 1912. Shanghai was the centre of trade in China and was very much the focus of
attention throughout the roaring 1920s and 1930s. Hong Kong has always been about
Asian Education and Development free trade and has been innovative in trade. Probably because of this “trader
Studies
Vol. 1 No. 3, 2012
mentality”, we do not see the need in investing in the long term or in research and
pp. 294-300 development as an economic development capacity. Hong Kong’s rapid rise to become
r Emerald Group Publishing Limited
2046-3162
the trade and financial centre of Asia started at the end of the Second World War.
DOI 10.1108/20463161211270509 Triggered by the founding of Communist China, there was a flight of capital,

3. entrepreneur skills and cheap labour from the Mainland in the late 1940s and Hong Kong:
throughout the 1950s and 1960s. Hong Kong continued to thrive in the 1970s under developments
British rule: experienced colonial administrators had provided the basic infrastructure
as well as the legal and administration system that enabled trade and business to and prospects
thrive in Hong Kong. During the same period, China continued to make economic
mistakes and had remained an inward-looking country isolated from the world’s
economic development. It was not until the end of the Cultural Revolution (1966-1976) 295
and the beginning of Deng Xiao-ping’s “Reform and Opening” that China started its
modernization programme.
By that time, Hong Kong had already become one of the four “Asian Dragons”,
along with South Korea, Singapore and Taiwan, between the early 1960s and 1980s.
The beginning of the transfer of Hong Kong’s manufacturing industries into the Pearl
River Delta coincides with Mainland China’s “Reform and Opening” in the early 1980s.
Hong Kong provided a third of China’s foreign investment in the early days of China’s
“Reform and Opening”. Today’s China is the second largest economy of the world,
accounting for more than 10 per cent share of the world’s GDP. China is still at the
“Stage 2” of economic development where the main driver for growth is “efficiency”.
Hong Kong, however, has developed economic status to the “Stage 3” of economic
development (World Economic Forum, 2010). Over 90 per cent of today’s Hong Kong
GDP comes from the “service” sector and the main driver for this type of economy is
“innovation” – not the more basic things such as “infrastructure”, “institution” and the
overall efficiency of the economy which Mainland China is trying to achieve.
Along with Japan, Singapore and South Korea, Hong Kong is listed amongst the
“OECD Countries” of Asia. Hong Kong is an economic miracle that took a different
route from Japan and the other “Asian Dragons”. Japan’s technological capacities
were built since the Meiji period of late nineteenth century. South Korea, Singapore
and Taiwan have all developed strong scientific and technological capacities out of
necessity or an economic survival instinct. Even up to 2012, Hong Kong has largely
been run under the economic philosophy of “positive non-intervention” of John
Cowperthwaite (Hong Kong Financial Secretary from 1961-1971). Hong Kong is about
free trade. Cowperthwaite believes in the free market – he explained that the aggregate
decision of businessmen is more likely to be right than the centralized decisions of a
government when he made his first budget speech in 1961.
Today’s Hong Kong has all the necessary conditions to become a “knowledge-based
economy”. We are probably better placed that any other cities in China to start the
journey for Hong Kong and for China as a whole. However, unlike Mainland China,
Hong Kong has almost no experience in building up research and development (R&D)
capacity or related economic activities that require a longer-term view into the future.
Yes, there was a short departure from this “proven” Cowperthwaite strategy under
Tung Chee Hwa, the first Chief Executive of HKSAR, who coined the “four pillar
industries” – “financial services”, “trade and logistics”, “tourism” and “professional
service”. Against traditional wisdom of “free trade” and “positive non-intervention”,
Tung took Berkeley Professor Tien Chang-lin’s advice and pushed ahead with building
the Hong Kong Science and Technology Park and started funding initiatives under
the Innovation and Technology Commission. Tung resigned in March 2005 but he
should be given the credit for having the foresight to build up the innovation and
technology capacity Hong Kong now has today.
It is probably fair to say that Donald Tsang, the second Chief Executive, who led the
HKSAR Government since April 2005 has largely reverted back to the Cowperthwaite’s

4. AEDS economic philosophy, except in developing the financial industries quite aggressively.
1,3 In September 2006, Donald Tsang explained that he was certain that citizens in
Hong Kong would endorse his policy of “big market, small government” and that there
was consensus in the community that the government’s basic role was to provide
a framework for the market to operate effectively. Donald Tsang, who was
Hong Kong Financial Secretary from 1995 to 2001, has remained a good student of
296 Cowperthwaite and other financial secretaries of Hong Kong who preceded himself. Yet
after the Global Financial Crisis of 2008, Tsang launched the “six new economic
pillars” (“education services”, “cultural and creative industries”, “inspection and
certification”, “medical services”, “environmental protection industry” and “innovative
science and technology”) alongside the “four pillar industries” of Tung Chee-hwa.
The conflict between these two opposite economic philosophies of “free market” v.
“picking winners” was never resolved during Tsang’s regime. Probably because of this
unresolved conflict at the philosophical level, the “six new economic pillars” were not
executed fully in the three years since it was announced in 2008.
Its seems to me that Hong Kong does not understand that more advanced
OECD countries tend to deploy a “horizontal” industry-support strategy and offers
support to all knowledge-intensive industries and not the “vertical” support approach
of picking winning industrial sectors in centrally planned economies. John
Cowperthawaite’s instinct was probably correct. In a free market economy,
government cannot predict the winning industries and where the next burst of
economic growth might come from. However, Hong Kong does seem to fully
understand Cowperthawaite’s philosophy as one of the requirements of “positive
non-intervention” is the “positive” part – that government must not stand still and
must do as well as it possibly could.
What the World Economic Forum’s “Global Competitiveness Report” tells us?
Publicity churned out by the HKSAR Government always highlights Hong Kong’s
“freest economy” rating and Hong Kong’s global competitiveness ranking. It seems
that the Government genuinely cares about those ratings but is less interested
in publicizing that the World Economic Forum acknowledges that growth of the
advanced economies of the world come from “innovation” not “infrastructure” and
“efficiency factors” alone.
The World Economic Forum’s Global Competitiveness Report 2010-2011 lists Hong
Kong amongst the OECD countries at “Stage 3 development” – where “innovation” –
not “basic requirements” and “efficiency enhancers” – are the key driving force for
further economic growth. Out of 139 countries and territories surveyed, Hong Kong
has an overall ranking of 11th, ahead of Mainland China (27th), South Korea (22nd), UK
(12th) and Taiwan (13th) but behind Singapore (third) and Japan (sixth).
Hong Kong ranks first in the world in terms of meeting the overall “basic
requirements” category of economic development pillars – particularly achieving the
world Number 1 position in the second pillar of “Infrastructure”. Hong Kong is also
Number 2 in the world in terms of meeting the overall “efficiency enhancers”
requirements – in particular achieving the world Number 1 ranking in our sixth pillar
of “financial market development”. Hong Kong is now ahead of New York and London
in this particular economic development pillar. However, Hong Kong ranks number
24 in terms of overall “innovation and sophistication factors” – doing poorly in the
11th pillar of “business sophistication” (17th) and 12th pillar of “innovation” (29th).
The Report also shows that Hong Kong is under-performing in terms of the fifth

5. pillar of “high education and training” when compared to the average amongst the Hong Kong:
OECD countries. developments
Hong Kong must find its own market niche and prospects
From the figures, it seems that further economic growth in Hong Kong cannot
come from further investment in hard infrastructure alone. Such investment will
deliver diminishing economic returns and does not necessarily create the driving forces 297
now needed by Hong Kong as an advanced “OECD economy”. Investing in massive
construction projects does not create the high-quality employment opportunities
expected by the younger generation either. In the “efficiency enhancement” area, Hong
Kong is already at the top of the world rankings in terms of its “financial market
development”. Yes, Hong Kong should try to consolidate this Number 1 position, but a
narrow focus in the financial industry cannot bring the economic diversification
needed. Letting Hong Kong be at the mercy of a turbulent global financial market
cannot be the only answer for economic growth either.
As a developed and high-cost territory, Hong Kong does not have many choices
but to follow the examples of the OECD countries, become innovative and support all
high-value-added industries, regardless of whether they are “R&D”, “service” or
“manufacturing” industries. As part of China under “one countries, two system” and
yet seamlessly connected to the economies of the world, Hong Kong is an extremely
good position to connect Mainland China to the world and extract extremely
high-economic value from it. Such economic activities could include assisting
Mainland enterprises to “go out” or to assist international companies to use Hong Kong
to “go into” China. Particularly, Hong Kong should make best use of some of its
traditional strengths that include a separate legal and administrative systems and
further developing Hong Kong professional service capacity into an economic
development capacity that can handle “commercialization” of scientific output from
Mainland China and around the world.
In this future process of economic transformation, Hong Kong cannot be completely
ignorant of “R&D” and technology. Hong Kong should not repeat what Mainland
China and the world are already doing either. One of the strategies Hong Kong could
consider is to focus on the last 10 per cent of the process that leads to
commercialization of products. Such an approach will involve broad upgrading
of our knowledge-based economy capacity, including R&D, industrial and professional
service capacities. This is not a narrow “picking winners” approach to economic
development as described by the opponents of “innovation and technology”.
Coordinated economic diversification strategy and policy measures need to be
identified by the incoming HKSAR Government and implemented properly in the next
five to ten years (see Lung, 2011b). To begin with, Hong Kong should recognize that
China is now rich and money from Hong Kong will be of less relative valued when
compared to the early days of “Reform and Opening”. Hong Kong’s intangible
competitive advantages are often referred to as Hong Kong’s “soft power” – rule of law,
efficient institutions, the freest economy in the world, corruption free government,
freedom of speech and free flow of information, 1 July 2012 is the beginning of a five
(or ten) year period. This presents an opportunity for change and for Hong Kong to
think hard about what we ought to be doing to achieve sustainable economic growth in
the next ten year.
Hong Kong is well placed to transform itself from a traditional “trading hub” to
become as well a “knowledge hub” and a key player in the globalized knowledge

6. AEDS economy. The key concept behind the proposed “market niche” is that Hong Kong
1,3 already has all of the “soft power” which Mainland China is still trying to develop.
With the small addition of a strategy, more coordinated government policies,
and cooperation from the regional economies in Europe and around the world that wish
to work with China, Hong Kong has everything it needs to turn itself into a world class
knowledge-based economy. In this transformation process, Hong Kong can reap very
298 substantial economic benefit by positioning itself as the centre of excellence for
technology commercialization for China as a whole.
Hong Kong’s innovation and technology role in China’s 12th Five-Year Plan
Hong Kong must not write off the National 12th Five-Year Plan idea as nothing more
than central planning. Despite conflicting views about central economic planning,
Hong Kong cannot afford not to try to find a footing (positioning) and a more active
role in China’s 12th Five-Year Plan. Insisting on “laissez-faire” is not a feasible
alternative. At the very least, Hong Kong must not miss out on China’s rapid economic
development and run the risk of becoming totally irrelevant to the second largest
economy in the world (Lung, 2011a).
Hong Kong should not look at the exercise from a pure mercantile viewpoint
and an opportunity to grab more commercial interests either. No one should believe
that Shanghai – or any city or province in China – would stop developing because
of successful jockeying of certain narrow economic benefits for Hong Kong from the
Central Government through the 12th Five-Year Plan. We should, therefore, take a
wider social and economic development view on Hong Kong. At the same time, we
should examine what specific strategy Hong Kong might undertake to help China’s
national development objectives, and how Hong Kong might make use of this
opportunity for our own economic transformation.
As stated in the National 12th Five-Year Plan, economic planners at the Central
Government level would support Hong Kong’s: consolidation and advancement in its
roles as international finance, trading and logistics centres; innovation capacity in
business and industries; coordinated economic and social development; and regional
economic cooperation between Guangdong, Hong Kong and Macau. For the purpose of
finding a useful role for Hong Kong, we should treat these objectives as some of the
desirable goals and not as unmovable directives from above.
Specific factors which give Hong Kong distinct advantages over Mainland China in
the area of “innovation and technology” include: a free press, freedom of information,
rule of law, a corruption free and professional civil service and a very liberal and free
thinking environment. Hong Kong is a territory of China that has done most of the
important things right and a territory Mainland China could continue to look at when
faced with confusion regarding policy choices. Hong Kong does have some advantages
in terms of rule of law and societal freedom. This is the main reason why Google
decided to “shut down” Google-Beijing and China Telecom made up its mind to set up
its “International Headquarters” in the HKSAR where data can be protected far more
easily than the Mainland. As of 2012, about ten major data centres, such as Google,
HSBC and China Telecom, are being built in Hong Kong. These Hong Kong advantages
have also been described as the essential “first-level business conditions” which enable
Hong Kong to develop all the “second-level business conditions” – the essential
ingredients to turn into a world-class innovation and technology centre and incubation
and commercialization hub to service R&D outputs from Hong Kong, Mainland China
and from the world (Hong Kong Bauhinia Research Foundation, 2006, 2007). However,

7. compared to the size, scale and experience in commercialization that the Mainland Hong Kong:
universities have already possessed, Hong Kong does not really have any advantage developments
over the Mainland. The Hong Kong higher education does not really invest heavily in
research and technology, compared to the Mainland counterpart. and prospects
Lessons from OECD countries
The knowledge-based economy is not just about creating or pushing back the frontier 299
of knowledge. It is also about the creation of wealth through commercialization
of knowledge. The OECD defined “knowledge-based economies” as economies that are
directly based on the production, distribution and use of knowledge and information. It
was estimated that more than 50 per cent of GDP in the major OECD economies is
“knowledge-based” (OECD, 1996). There is a higher demand for highly skilled workers
in knowledge economies and correspondingly higher unemployment rate for those
with lower-secondary education. While OECD countries have been losing jobs in the
manufacturing industries, employment is growing in the high-technology, high-skilled
sectors such as computers and pharmaceuticals.
Facilitation from HKSAR Government is probably necessary. Such a move should
not be equated to Hong Kong abandoning the “free market” principle. A coordinated
policy and some facilitation would support creative and scientific start-ups, and the
R&D outputs from Mainland China and Hong Kong, and would absorb the supply
of young university graduates effectively. Hong Kong, however, has been applying its
knowledge and strength in a rather piecemeal fashion. The “intellectual argument”
behind Hong Kong’s economic development is an on-going issue amongst detractors
(and therefore the general public) who might see any sort of government “facilitation”
as economic “intervention”.
In fact, this is just only one of the many “intellectual arguments” amongst many
social, economic and political issues faced by Hong Kong. Hong Kong is the part of
China that has been doing all the important things right: now the British are gone,
we must think for ourselves. Based on its own unique history and political position as
part of China under “one country, two systems”, we must find our own irreplaceable
role in the context of Hong Kong as a city of China. The need to avoid failures also
needs to be balanced against the opportunities of success, national goals and the social
and economic well-being of Hong Kong’s own population. Hong Kong has always been
pragmatic. We have always faced difficulties with optimism and found solutions. We
have always done it through hard work – not lingering inactivity.
Practically, we have much to learn from some OECD countries. For example, the
Finland model is relatively unrivaled as its “old money” (i.e. funded by very wealthy
industrialists, the so-called “grateful entrepreneurs” who have made billions from
the production of pulp and timber) is used to help technology start-up through a very
specific incubation programme at some Finnish universities. The Finnish model
demonstrates how universities engage in technology-related investment – a
phenomenon found in Mainland China but not really in the case of the HKSAR.
Besides, there are also other models for the HKSAR government and higher education
to consider. In Canada, almost half of the universities are now following the “University
of Waterloo (UW) Model” in which university researchers can develop and possess
their own patents – precious products of their innovation and creativity. However,
according to the Chairman-Designate of the Canadian Association of University
Technology Manager, who is actually a Canadian scholar from the University of
Ottawa whom I met in Beijing in 2012, said that there is no evidence showing those

8. AEDS Canadian universities that follow the UW model are working better and more
1,3 successfully than the other universities. In short, Hong Kong may need to experiment
with everything that can contribute to technological innovation and also economic
profits – not an easy task amidst the need to change business culture and to build
territory-wide community consensus.
It has been 15 years since Hong Kong’s reunification with China but the big
300 hurdle to Hong Kong’s successful development into a world class knowledge economy
is still an unsolved intellectual argument. This paper does not advocate a “vertical”,
sector-by-sector approach to economic facilitation. The key message is Hong Kong
now needs a “horizontal” support structure, a good understanding of how things
work in a globalize knowledge economy, continuation of the “free market” structure
and a light weight facilitation system that supports all high-value added economic
activities in Hong Kong. In Beijing, our national leaders have kept the promise and
have been relying on Hong Kong people running Hong Kong under “one country, two
systems”. The world is now watching. It is now up to us to find our own way to develop
Hong Kong into a world class knowledge-based economy.
References
Hong Kong Bauhinia Research Foundation (2006), “Hong Kong competitiveness: a
multidimensional approach, phase I report: international views of Hong Kong’s
competitiveness”, available at: www.bauhinia.org/ESA-Bauhinia-Part1-Report-2006-09-
26-A.pdf (accessed 24 May 2012).
Hong Kong Bauhinia Research Foundation (2007), “Hong Kong competitiveness: a
multidimensional approach, phase II report: industry level competitiveness”, available
at: www.bauhinia.org/index_en.php
Lung, A. (2011a), “Hong Kong’s innovation and technology role in Mainland China’s 12th five
year plan”, available at: www.apicc.asia/wp-content/uploads/2011/03/HKs-Inno-Tech-Role-
in-12-5.pdf (accessed 24 May 2012).
Lung, A. (2011b), “Policies and practices for Hong Kong as a knowledge economy and the
proposed innovation and technology bureau”, available at: www.apicc.asia/wp-content/
uploads/2011/11/Inno-Tech-Bureau-English-25-7-2011.pdf (accessed 24 May 2012).
Organization for Economic Co-operation and Development (1996), The Knowledge-Based
Economy, OECD, Paris.
World Economic Forum (2010), The Global Competitiveness Report 2010-2011, World Economic
Forum, Geneva.
About the author
Alan Lung Ka-Lun was born and educated in Hong Kong. He was also educated at the University
of Wisconsin in the USA and Wilfrid Laurier University in Canada. He chairs the Hong Kong
Democratic Foundation (www.hkdf.org), a political and public policy think tank founded in 1989.
He is skilled in converting his knowledge of governments and public policies into practical steps
to move forward “Knowledge Economy” initiatives. He is a member of the Innovation and
Technology Advisory Committee of the Hong Kong Trade Development Council (HKTDC) and
he has been promoting innovation and technology practices in Hong Kong, Guangzhou and
Beijing through the Asia Pacific Intellectual Capital Centre (www.apicc.asia) (where he is
Director and General Manager), since 2006. Alan Lung Ka-Lun can be contacted at:
alanlung@apicc.asia
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