A Study on Technological Progress and Economic Growth in Hong Kong

A Study on Technological Progress and
Economic Growth in Hong Kong

Introduction

After the economic success of Japan in the 1950s and 1960s, four economies, namely, Taiwan, Korea, Singapore, and Hong Kong, developed from backward conditions to newly industrialized economies, or NIEs, in the 1970s and 1980s. 1 These four economies are often grouped together and coined as Asia's "Four Little Dragons" because of their dynamic economic growth. In the 1970s and 1980s, Hong Kong obtained similar growth with the other three economies. But in the 1990s, the economic growth of Hong Kong lagged behind other three.
Annual Average Growth Rate of GDP (in percentage)
he annual economic growth of Hong Kong dropped from 9.2% in the 1970s to 5.3% in the 90s. Although such decline was caused by many factors, such as enlarged base due to a rather high level of economic development and competition from Thailand, Malaysia, Indonesia and China, all of them still maintained a consistent growth of over 6%. In addition, after the 1997-98 Asian financial crises, Hong Kong was one of the slowest to recover from. Signs of recovery only began to emerge in the second half of 1999 (Far Eastern Economic Review: 2000 Yearbook: 118). Why Hong Kong's economic growth lagged behind? This paper tries to tackle this issue through analyzing the relationship between technological progress and economic growth.

Economic Growth Theories

Explanations of economic growth have changed over time and differed among disciplines. The physiatrist thought that land and its products were major sources of economic growth. Classical economists substituted labor for land. They considered growth an outcome of capital accumulation. Neoclassical economists regarded technological progress as a critical source of economic growth. More recently, explanations have emphasized institution, such as legal framework, stock exchange, banking system, efficient and no-corrupt bureaucracy, and appropriate government policies.

A. Standard Neoclassical Theory

The standard neoclassical theory of growth was formulated and formalized by R. M. Slow 2, among others. In the works of M. Abramovitz 3, Slow and E. Denison 4, they attributed economic growth to the increase of capital and labor input, and technological progress as measured by total factor productivity (TFP).

The neoclassical model is very simple. It has the advantage of lending itself to empirical analysis, but, it also has some deficiencies. As has been pointed out:
It treats technological progress as being exogenous. Critics maintain that technological progress cannot take place in a vacuum because new technology requires new investment, both for its invention and for its application. Technological progress is not independent of investment, because firms are constantly innovating/renovating their products and processes in order to survive competition. However, technological progress does not affect only capital; it also affects the quality of labor and conditions industrial relations arrangements. 5

B. Endogenous Growth Theory
The endogenous growth theory was initiated by P. M. Romer 6 and R. E. Lucas 7, s who also developed models which are endogenously determined by technological process. The basic endogenous growth model incorporates human capital as a source of economic growth. Greater propensities for saving, low allocate distortions and larger technological opportunities have permanent effects on economic growth. Its crucial assumption is the increasing return of scale.

According to this theory, governments can, and should, play an active role (through taxes, subsidies, tariff and so on) in promoting economic growth.

Technological Progress and Economic Growth in Hong Kong

There are many models analyzing economic growth. The Slow growth formula, regardless of its limitations, focuses firmly upon the role of technological progress. It is the most common approach to explain a country's long-term growth experience and has been applied to Hong Kong. 8 In the formula, economic growth is comprised of three components: growth of labor input, capital input and total factor productivity (TFP). The growth of TFP was viewed as a standard to gauge technological progress and to estimate the approximate "residual" growth. Although the Slow model receives criticism and has been verified, it remains the most popular framework for studying economic growth. With the available data, this paper will also employ this model to analyze economic growth in Hong Kong.

A. The model

Given the Cobb-Douglas production function

Where Y is output, K and L are inputs of capital and labor respectively, A is technological progress, the exponents and is elasticity's of output with respect to capital and labor. And lie between 0 and 1.

Taking logs on both sides of equation (1), we can have

Differentiating from time (denoted by t), we obtain

This may be expressed as
. . . .
. . . .

Where, Y, A, K, L denote the instantaneous proportionate growth rates of the respective variables.
Therefore, the total factor productivity of growth is given by,
. . . .

B. The Hypothesis

Constant returns to scale, i.e., the constant capital/output ratio and labor/output ratio;
Under perfect competition, the sum of the elasticity's of output with respect to labor and capital is 1.
The payment of factors is equal to the total product.
Diminishing marginal productivity of inputs, labor and capital.

The Data

Output growth rate refers to the annual GDP growth rate over the preceding year at constant price (1990).
Growth rate of labor input refers to the annual growth rate of labor force over the preceding year.
Growth rate of capital input refers to the annual growth rate of total value of societal fixed assets.
Based on previous studies (Chen, 1979; Peebles, 1988), here we also assume a=0.4 and so s =0.6.

Research findings

The empirical results

Growth Rate of Output, Input and TFP in Hong Kong (in percentage)
From Table 2, we can see a clear pattern. Although the contribution to growth due to increasing labor and capital input has risen, the GDP growth kept declining. This, of course, means that the contribution of increasing technological progress has fallen substantially. So, it is the slowdown of technological progress that caused the fall of growth rate in Hong Kong. Hence, technological progress can be seen as the main driving force of economic growth.
IV. Analysis on the Slow Progress of Technological Development in Hong Kong
Technological progress refers to an improvement in technology, which is more than that of scientific knowledge. Technology encompasses knowledge in all forms, from simple and routine procedures of everyday life, to methods of organization and management, from machinery that initially required many manual workers, to complex scientific investigations that create new inventions and products. 10 Technological progresses are at the heart of industrialization and economic development. 11 There are a variety of factors affecting the growth rate of TFP, such as the advancement of technology, allocation of resources, economies of scale and status of education. To me, since the 1970s, Hong Kong has done well in the latter three; the decline of TFP is mainly caused by the slow progress of technological development. Considering the economy of Hong Kong, we can find reasons for the slowness.
A. Inadequate Investment in Research and Development (R&D).
Unlike Singapore, South Korea or Taiwan, Hong Kong has little investment in R&D to enhance its scientific and technological (S&T) capability (See Table 3). Compared to the other three economies, Hong Kong lagged far behind in R&D investment. There are approximately 1,000 research institutes in South Korea, half of which are in private industry. South Korea is making enormous efforts in accumulating indigenous knowledge, with an increasing emphasis on fundamental long-term researches. Comparatively speaking, the research basis in Hong Kong is rather weak and most enterprises have no ability to do scientific researches. The entire manufacturing industry lacks organized planning in scientific studies and technical development. In technological level, Hong Kong has lagged 5 to 7 years behind the other three dragons. Unlike South Korea and Taiwan, The Hong Kong government depends heavily on expertise outside Hong Kong instead of encouraging local development. The major success of technological progress today occurs as a result of intensive R&D activities undertaken by private industries and governments. Significant and sustained efforts in R&D, combined with technological networking, are the key to technological advancement and strong competitiveness. Besides generating knowledge, investment in R&D can help create technological capability which allows rapid acquisition and dissemination of knowledge developed elsewhere.
R&D in Asian Dragons

Hong Kong's Industrial Structure
Since World War II, the economy of Hong Kong has experienced two major restructuring, from enter-pot to manufacturing centre, and then to a service economy. In the 21st Century, the economy of Hong Kong is service-oriented (see Table 4). The overall tertiary sector in GDP rose steadily, from 58% in 1965 to around 74% in 1990 and further to over 85% in 1996. With the relocation of labor-intensive and lower value-added manufacturing industries to the Mainland, the secondary sector has fallen to the level of contributing only 14.7% of GDP while the manufacturing sector falling to 7.2%. Although the productivity of the manufacturing sector is lower than that of the tertiary, the annual growth rate of productivity in the manufacturing industry is higher than that of the latter, the figures being 4.16% and 2.1% respectively between 1985 and 1994. 13
Industrial Structure of GDP in Hong Kong (%)

C. Manufacturing Industry's Heavy Reliance on Labor-intensive Manufacturing Operations
Over the last two decades, Hong Kong has developed into a centre of labor-intensive manufacturing industries, becoming the world's largest producer of garments, toys and watches at one time or another. 14 Since the end of the 1970s, labor-intensive industries in Hong Kong encountered intense challenges from other newly industrializing economies in Asia, on account of its increasing land rent and wages. According to the general law of development, Hong Kong should have tried other ways out in the orientation of capital and technology. Just around the time, the Mainland launched its economic reform and open door policy in 1979. In order to keep its competitiveness, Hong Kong manufacturers relocated their factories to the Mainland. Hence, Hong Kong has no interaction or impetus to upgrade its technology, or develop capital-intensive and technology-intensive industries. The slow development of high-tech industry hindered technological progress as a whole.
D. Deficiency in Highly Skilled Professionals, Scientists and Engineers
The rapid expansion of tertiary education in Hong Kong was a result of the burgeoning service-oriented economy. Most intelligent professionals flooded into the high value-added service sector, and workers in Hong Kong received inadequate technological training. Today, the essence of technological progress lies in the development of human resources, which in turn determines the competitiveness of an economy. As C. Greer puts it,
In a growing number of organizations, human resources are now viewed as a source of competitive advantage. There is greater recognition that distinctive competencies are obtained through highly developed skills, distinctive organizational cultures, management processes, and systems. This is in contrast to the traditional emphases on transferable resources such as equipment which can be purchased by competitors. Increasingly, it is being recognized that competitive advantage can be obtained with a high quality workforce that enables organizations to compete on the basis of market responsiveness, product and service quality, differentiated products, and technological innovation. 15
E. Ineffective Government Support to Technological Progress
For a very long period of time, the Hong Kong government has implemented the so-called "positive non-interventionist" policy. It stayed away from picking winners or providing subsidies to promote strategic industries, especially high-tech industries. It assumed that businessmen will work on their own, while the other three Asian governments exerted policies to ensure an adequate supply of industrial land, transport and communications, water and other infrastructure. Although the Hong Kong government has played a more active role in the 90s, and exercised the "minimum intervention with maximum support" industrial policy, it will take Hong Kong a long time to catch up with the others.
V. Developing Information Technology for Sustained Economic Growth in Hong Kong
Recently, Hong Kong faces other challenges and has to work out strategies to sustain economic growth in future. More than ever before, "competitiveness" has received intense attention and is extensively deployed amongst policy makers. According to M E Porter's analysis 16, technology is a crucial ingredient in strengthening the competitiveness of the nation. As we can see, technological progress has underpinned the growth of the U.S. economy, so, high value-added activities-high technology industries are what Hong Kong should exploit. But of which field should be Hong Kong's first choice?
A. Information Technology -- The Primary Choice to Boost Hong Kong's Economy
Recent developments in the fields of communications and information technology are indeed revolutionary in nature. Information and knowledge are expanding in quantity and accessibility. In many fields future decision-makers will be presented with unprecedented new tools for development. In such fields as agriculture, health, education, human resources and environmental management, or transport and business development, the consequences really could be revolutionary. Communications and information technology have enormous potential, especially for developing countries, and in furthering sustainable development 17
Hong Kong is already an internationally renowned financial centre, and holds leading positions in trade and transportation. It has considerable expertise in the service sector as well. Service plays a central role in facilitating and stimulating economic growth in all sectors. In terms of this infra-structural role, communication and information industries perhaps are the most important. Today, Hong Kong is a prolific user of information technology. It becomes an important regional information and telecommunication hub in recent years. It has one of the world's fully digitized telephone systems and the highest per capita ownership of telephones at approximately 71:100 populations. 18 It has more than 130 Internet service providers. The number of internet users in Hong Kong has increased tremendously, from 830,000 in October 1998 to 2,500,000 in March 2000 and there has been a 100% increase in the number of Hong Kong people making purchases over the Internet in the past year. Therefore, considering the features and strength of Hong Kong economy, information technology should be the primary choice for Hong Kong in sustaining economic growth.
B. Recent Hong Kong Government Information Technology Initiatives
Will Hong Kong ever make herself a high-tech centre? By building highly wired offices, and dangling enough invitations, Hong Kong hopes to lead the development of information technology. The Hong Kong government has recently shifted its emphasis from minimum intervention to maximum support in the arena of productivity and technology. 19 The following are what the government has done so far:
Establishment of the Industry and Technology Development Council (ITDC)
In the early 1990s, Hong Kong government established the Industry and Technology Development Council (ITDC) to promote the use of advanced technologies in Hong Kong. They advise the government on how to make quick responses to international technology developments and devise strategies to assist technology development and application. The Information Technology Committee (ITC) is one of the four committees which support the work of ITDC. It serves as an advisor and coordinator on IT-related issues.
Support for Industry
Technological insufficiency has come into public notice. The government has initiated several programs to indirectly support the private sector to raise its technological level and to introduce new products. For example, the Applied Research and Development Scheme provide venture capital for technological ventures or R&D activities that have good commercial potential. It aims to encourage technological upgrading of local manufacturing industries. In addition, the government also set up two bodies, Hong Kong Industrial Technology Centre (HKITC) and Hong Kong Productivity Council (HKPC), to foster IT development and application.

Another initiative which will boost support for Hong Kong's industries in developing high value-added products is the establishment of Applied Science and Technology Research Institute (ASTRI). Targeted for completion in 2004, ASTRI will carry out high-quality mid-stream research and development projects to facilitate to industry sector.
Support for University Research
Responding to a lack of human capital and weakness in R&D, the government has set up the University of Science and Technology in 1988 to strengthen science and technology education. Besides, Hong Kong Government has steadily and dramatically increased research funding for various universities as demonstrated in Table 5.
Increasing Research Support in Hong Kong (in million HK$)

Setting up of the Second-tier Growth Enterprise Market
Hong Kong launched a second-tier Growth Enterprise Market (GEM) in 1999, modeled on NASDAQ in the U.S., to help fund start-ups which lack track records of profitability required by the main stock exchange.

GEM serves as an alternative mechanism enabling new companies to raise funds for business development. A successful GEM will in turn attract venture capital to Hong Kong.
IT Use in the Civil Service
In order to encourage the development of IT industry and e-commerce, Hong Kong government has introduced the Electronic Service Delivery (ESC) Scheme. The government takes the lead and puts its services on-line under this scheme. It aims not only at providing efficient and better-quality services to the public through electronic means, but also helps to familiarize citizens with and gives them confidence in using e-commerce. As part of an open and common information infrastructure, the scheme will help private sectors in expanding electronic commerce in the future.
Cyber-port project and Science Park
In March 1999, Hong Kong Government announced the initiation of Cyber-port project which will be an ultramodern $1.7 billion office-cum-residential complex. This is a very significant step taken by the government to create in Hong Kong a critical mass of high-value, technology-intensive companies in the information services sector. At least ten leading technology-based multinational corporations have registered their plans to operate in the Cyber-port, and many more have shown their interests.
The Science Park to be operated in 2001 will be another important initiative to improve Hong Kong's technological infrastructure. Its aim is to help position Hong Kong as a regional centre for innovative design and R&D activities. It will be a focal point attracting overseas investments on the one hand, and stimulate the growth of local technology-based businesses on the other.

To maintain competitive edge in the information age of the 21st century, Hong Kong Government plays an important role as both a promoter and facilitator. It helps private enterprises to develop technology and make full use of information, and promotes Hong Kong as a leading digital city. It also serves as a supporter in financing technology development projects and researches through various funding schemes.

Cooperation with the Mainland
The Hong Kong government is fully committed to encouraging the development of information technology. It is expected that with advanced technology, Hong Kong's competitive edge can be maintained. Although Hong Kong Government has initiated many departments and institutions to facilitate the application of information technology, there are still many barriers to be overcome if Hong Kong aims to become leading hi-tech hub in Asia. In that case, Hong Kong can make use of the advantage in Mainland China. Comparing two places, it is obvious that they can complement each other in many areas. Table 6 is a comparative advantage analysis between Hong Kong and the Mainland.
Table 6 : Analysis of Comparative Advantage in Factors to Develop Information Technology between Hong Kong and the Mainland China
From table 6, we can see clearly that although Hong Kong has a dynamic and flexible entrepreneurial spirit, productive and adaptable workforce, well-established and sound legal system, excellent transport, financial and telecommunications infrastructure, small, clean and efficient government, and simple taxation system with low rates, Hong Kong has a severe shortage of scientific and engineering experts and is weak in basic R&D.

It is known that human capital is a key factor in innovation and hi-tech development and many surveys suggest a lack of skilled labor as barriers to innovation and technology development. Mainland China has large numbers of scientists, engineers and skilled labor from which Hong Kong can draw. Hong Kong Government began to take in Mainland Chinese experts starting in 2000. The government hopes that the best and brightest of the Mainland will combine their talents with entrepreneurial skills in Hong Kong.

R&D is an important contributor to the total output and productivity growth. Empirical evidence shows that typically 1% increase in the stock of R&D leads to a rise in output of 0.05-0.15%. The Mainland has a large number of research institutions and laboratories covering a wide range of technology and industrial areas. The volume of research results produced by these institutions is enormous and is growing over time.

Therefore, it is possible that Hong Kong can capitalize on its synergy with the Mainland, and make full use of the comparative advantages in China to overcome its insufficiencies. In that case, Hong Kong will be able to become a regional centre of information in the long run.