Back to "Speeches" LAUNCHING A SMALL-TO-MEDIUM-SIZED BUSINESS IN HONG KONG - THE DOS, THE DON'TS, AND THE GOVERNMENT'S INITIATIVES By Rosanna Ure, Director, Hong Kong Economic and Trade Office (Canada) Ottawa, May 9, 2001 INTRODUCTION Small to medium sized enterprises are the building blocks of Canadian and Hong Kong economy. While large multinational corporations do have the resources and network to establish their branch offices overseas, the small-to-medium sized companies don't. These enterprises are keen to expand but they need the information and the connection to make the correct decision. That is why I want to focus on the practical aspects of launching such a company in Hong Kong and hope that what I am going to share with you today will facilitate your decision-making process and will eventually bear fruit. The dos There are many factors that a company will need to look into when it decides to set up an office anywhere. These considerations include, typically but not exclusively, Research into business opportunities of the investment destination Financing Government rules and regulations and the tax regime Human resources Capacity for research and development for certain sectors Environmental management support Market access Infrastructure development Faced with this multitude of factors, how can a Canadian company go about doing the research work, let alone setting up an office? The Hong Kong government is well aware of your needs, that's why a new department called Invest Hong Kong was formed in 2000 to provide one-stop service to those who need help. In my office, the Hong Kong Economic and Trade Office, which is based in Toronto but covers the whole of Canada, we have a small unit called the Investment Promotion Unit. This unit works closely with InvestHK to give our customers the latest news and to liaise with companies in Hong Kong, which have the potential to be your partners. Typically, our liaison with Canadian companies starts from a phone call, e-mail, or a company visit. We also organise seminars and conferences to our prospective clients of various sectors to inform them of the most up-to-date business information of Hong Kong. While clients in Canada are looked after by us, colleagues in InvestHK will do the research and matching for those Canadian enterprises that have shown an interest. The service we offer is free of charge and we abide by the confidentiality principle. So if your ask me what is the first do, I would say you do need to pay us a visit, either physically or in the cyber space, so that we can understand your plans and brief you on the latest news about Hong Kong. This first step is very often the crucial step in making your business a global and successful enterprise in the years to come. Once you have established an interest in doing business in Hong Kong and perhaps have identified a partner there, you may want to know more about how the other government departments in Hong Kong can help. So far I have mentioned only one government department, that is Invest Hong Kong which is responsible for attracting inward investment. Once you have formed a company, there are other departments that can be of immense help to you. In the Trade and Industry Department of the Hong Kong Government, there is an SME Office whose responsibility is to, amongst others, co-ordinate the efforts of the public sector and industry support organisations in supporting the development of SMEs and meeting their needs. It also provides information on current services provided to SMEs by all the relevant organisations. This office can provide help on many aspects and so once your have set up a base in Hong Kong, do make use of the excellent service of this office. The third aspect I want to touch on is the numerous organisations that are ready to assist you. To give you some examples, the Hong Kong Industrial Technology Centre Corporation runs a Technology-based Business Incubation Programme which helps technology-based SMEs in Hong Kong; the Hong Kong Productivity Council can assist you in evaluating the technical and financial viability of a given business plan submitted by Hong Kong SMEs; and the Vocational Training Council Management Development Centre has a Business Start-up Centre one of whose responsibilities is to provide accounting, marketing, management and legal advisory services to users of this Centre. For companies which specialise in trading, they may find the services of the Hong Kong Trade Development Council very useful. The Council plays an important role in facilitating trading activities between Hong Kong and other economies. So my third advice is do make use of these helpful organisations when you launch your business in Hong Kong. For the IT industry, if innovation is the soul, venture capital is no doubt the blood. Availability of venture capital is a key pull factor attracting IT companies. In Asia, Hong Kong is the largest venture capital centre having the second largest concentration of venture capital professionals in the region. According to the Asian Venture Capital Journal, Hong Kong manages 32% of the total venture capital pool in the region, followed by Japan (27%), Singapore (11%), Taiwan (8%) and mainland China (7%). Hong Kong is basically a disbursement hub of venture capital. More than 90% of the funds under management come from outside Hong Kong while more than 90% of the funds are serving overseas companies' projects. About 40% of the investments are made for expansion financing, 27% for start-up financing and 15% for buyout. The Hong Kong Venture Capital Association has over 130 members. It has recently opened a matching corner in their electronic newsletter for those who are seeking venture capital partner to launch their projects. Apart from venture capital, our second board - Growth Enterprise Market - provides technology companies with another venue for fund-raising. It is the tiny Hong Kong version of Nasdaq. 65 companies from the region have been listed in the GEM with a market capitalization of US$7.8billion as at March 2001. The Commission of Innovation and Technology also operates some funding schemes for applied research projects. Partnering with a Hong Kong company will let you gain access to these sources of financing. So, if you are an IT company looking at business opportunities in Hong Kong, do bear in mind that there are numerous sources of financing for your company. The information is just a "click" away. The don'ts When Canadian entrepreneurs want to start a company in Hong Kong, they inevitably express the concern that rent is very high in Hong Kong. As the world's major financial and business centre, offices in prime locations in the central business district in Hong Kong are at a premium. But the return of doing business in Hong Kong is also high. Not being an economist, I would like to use a very crude but simple way to make a point. If you simply take the rent of Hong Kong as the reference point, you may think a Big Mac in Hong Kong will cost a fortune. However, last week when I checked the price of a Big Mac in Hong Kong, it costs two Canadian dollars whereas it costs nearly three Canadian dollars before tax here in Canada. Why is a Big Mac so much cheaper in Hong Kong? It is, I would venture a guess, because of the sheer volume this chain restaurant is selling in Hong Kong every day. Therefore my first advice is don't be scared away by the so-called high rent in Hong Kong. Indeed after the Asian financial turmoil, property price and rent have come down considerably. For companies that do not have to be in prime locations as the central business district, the rent is indeed very reasonable. The average monthly rental of Grade A offices in the Central District is as high as US$57 per sq.m. But the rental in neighbouring business districts just 10 minutes from Central by subway is just about 60% of the prime rental. That is why there is a cluster of IT firms in Quarry Bay, which is 10 minutes by our underground railway from Central District. Some companies often ask us whether there are tax concessions or other types of subsidy the Hong Kong government can offer if they start a business in Hong Kong. I am afraid there is none. Hong Kong has one of the lowest tax rates in the world. Our salary tax for the highest income bracket is 15% while corporate profits tax stands at 16%. There is no sales tax and capital gains tax. So it is obvious that we cannot possibly offer any more concessions. What we can offer, however, is a pro-business environment, predictable economic and tax policies, an efficient government and level playing field. Just quote an example, you can get a business registration certificate in Hong Kong within 30 minutes over the counter. Time is money. Efficiency counts. So for those who opt for places which offer these "attractive" terms, I would suggest that you don't forget to examine the other factors which are not so apparent. If a city has a good investment environment, why does it have to offer these attractive terms to you? If they offer these terms to you, will they offer even more attractive terms to others? Are there other hidden costs? The third don't I want to mention is don't forget Hong Kong is the gateway to China. Let me go through some figures so that you will have a brief idea about the market potential in China for IT companies. According to the Centre of Computer and Microelectronics Industry Development (CCID) under China's Ministry of Information Industry (MII), China's IT market was valued at about US$25 billion in 2000, a 20% increase from US$20.7 billion in 1999. The software market is the fastest growing segment and was expected to grow to around US$ 2.4 billion in 2000. The growth of Internet access and e-commerce activities in China has also boosted the demand for software related to Internet-based applications such as B2C/B2B/G2C transactions, web-based content development, ASP-related applications, wireless device support programmes, etc. According to forecasts by International Data Corporation, by 2004 China would spend over US$5 billion on buying software, with products and related services accounting for 25% of the country's total IT spending. The imminent accession of the Mainland into the World Trade Organisation will create immense investment opportunities. For example, at present, foreign firms are not allowed to own or operate any telecoms services, including the provision of Internet service in China. However, upon China's WTO accession, foreign firms will be permitted to establish minority-stake (less than 30%) joint-venture enterprises in Beijing, Shanghai and Guangzhou. The ceiling will be raised to 49% a year later and to 50% in two years. Cities opened to foreign investment in the Internet sector will be extended to 14 more cities in a year. A logical question to follow is: with the liberalization of the market, why should companies enter China via Hong Kong? Why not directly into China? The fact is many international software houses are partnering or planning to partner with Hong Kong firms to enter the China market. Canadian IT companies are partnering with Hong Kong companies or establishing offices in Hong Kong to provide support for their sales activities in China. For example, Sierra Wireless has entered into an agreement with a Hong Kong listed company to supply wireless data transmission equipment to Southern China. Norsat, another Canadian high tech company, has an office in Hong Kong to support its strong sales of satellite broadband transmission equipment and solutions in China. The government's initiatives As I explained earlier, the Hong Kong government has already put in place a number of measures to facilitate SMEs in doing business in Hong Kong. With the accession of China into the World Trade Organisation and the opening up of the western part of the Mainland, business opportunities would abound. To help SMEs to keep abreast of Chinese business trends and market movements, the Hong Kong Trade Development Council would set up a China Business Advisory Unit to provide SMEs with one-stop services for doing business in Guangdong, the southern province adjacent to Hong Kong. Three hundred million Hong Kong dollars have been set aside for the establishment of a training fund to subsidise SMEs' training initiatives. Apart from this, the government will invest heavily on the upgrading of our workforce. Substantial resources have been ploughed into providing quality education to our young people. We will encourage overseas tertiary institutes to run IT and multimedia courses in Hong Kong for our students. The Hong Kong government will also relax our restriction on the importation of skilled IT professionals from the Mainland to meet the huge demand for talents in this industry. On the part of my office, we have re-examined our approach to help Canadian businesses to have a better understanding of Hong Kong as a base for their regional office. We believe we must be more proactive in offering our service and target some sectors that we believe will do well in Hong Kong. We are also planning to revamp our HKETO website to make it easier for visitors to get the necessary information and to contact us. We also try to establish more media links with Canadian media groups to ensure that they are provided with the most up-to-date and correct information. Of course, we also rely heavily on friends of Hong Kong such as the Hong Kong Canada Business Association to disseminate the message and refer those who have shown interest in doing business in Hong Kong to us. Ladies and gentlemen, you may think what I have just said are theories, but what about the practice? For a start, I have to confess that I am a career civil servant and so I cannot honestly say that I have experience in doing business. Fortunately, however, some Canadian companies have put my formula to test and the result is a resounding "It works"! IT companies such as Hummingbird and Entrust have, through the assistance of my office, set up their regional offices in Hong Kong and have been doing very well. Conclusion Hong Kong has a population of nearly 7 million and this domestic market is not the limit to Canadian SMEs. The Pearl River Delta in Southern China is one of the fastest growing and wealthiest parts of the Mainland and the market potentials have only started to be apparent. With the imminent accession of the Mainland to the WTO, the opportunities are endless. Hong Kong is strategically located at the mouth of the Pearl River and has been the gateway to that part of China for the past twenty years. The experience our businessmen have earned, the absence of a language barrier and the well-established network we have built up through the years are distinct advantages that Hong Kong companies enjoy. I invite all of you to consider Hong Kong as your ally and partner when you consider your business expansion plan into the Asia Pacific Region. Thank you. 9 May 2001 in Ottawa Back to "Speeches"