EF3461EF3461The Economies of Mainland The Economies of Mainland

China and Hong KongChina and Hong Kong

Tutorial 3Tutorial 3Hong Kong’s business environmentHong Kong’s business environment

and productivityand productivity

City University of Hong KongCity University of Hong Kong

Dr. Isabel YanDr. Isabel Yan

1. Friendly Business Environment in HK1. Friendly Business Environment in HK(Enright, 1997)(Enright, 1997)

1.1. Economic ClusterEconomic Cluster

““Economic clusters” means the clusters of related industries, Economic clusters” means the clusters of related industries, which provide relevant economic goods and services for the which provide relevant economic goods and services for the efficient operation of businesses efficient operation of businesses

e.g. Good banking and financial services, telecommunication e.g. Good banking and financial services, telecommunication facilitate business transactions .facilitate business transactions .

Economies of scopeEconomies of scope

The cluster of allied business services creates the benefit of The cluster of allied business services creates the benefit of

economy of scope.economy of scope.

Hong Kong’s clusters (groups of industries):Hong Kong’s clusters (groups of industries):i. i. infrastructure and real estate development clusterinfrastructure and real estate development cluster

linking property development and construction groups with linking property development and construction groups with engineers, architects, surveyors and interior designers.engineers, architects, surveyors and interior designers.

ii.ii. business and financial services clusterbusiness and financial services clusterthis cluster includes legal services and accounting services as well this cluster includes legal services and accounting services as well as financial services like private banking, corporate finance etc.as financial services like private banking, corporate finance etc.

iii. iii. transport and logistics clustertransport and logistics clusterit comprises air cargo, sea cargo, tourism and logistics-related it comprises air cargo, sea cargo, tourism and logistics-related services etc.services etc.

iv. iv. light manufacturing and trading clusterlight manufacturing and trading clusterit comprises the 4 largest manufacturing industries in HK by export it comprises the 4 largest manufacturing industries in HK by export value – clothing, electronics, textiles and watches/clocks.value – clothing, electronics, textiles and watches/clocks.

v. v. Tourism clusterTourism clusterit includesit includes the hotel industry and tourism-oriented services like the hotel industry and tourism-oriented services like restaurants.restaurants.

2.2. Strategic location for trade and excellent harbor Strategic location for trade and excellent harbor

A hub for trade into and out of Southern China and East Asia. A hub for trade into and out of Southern China and East Asia. Hong Kong’s seaport is the world’s busiest container port.Hong Kong’s seaport is the world’s busiest container port.

India

China

S.KoreaJapan

Taiwan

PhilippinesThailand

Malaysia

Indonesia

goods Supporting services

3. 3. Capital and FinanceCapital and FinanceHong Kong’s capital markets are advanced. For instance, HK’s Hong Kong’s capital markets are advanced. For instance, HK’s stock market is the second largest in Asia after Tokyo. stock market is the second largest in Asia after Tokyo.

4.4. Rule of lawRule of lawHK’s legal system has been based on the rule of law and an HK’s legal system has been based on the rule of law and an independent judiciary. This provides HK a free and liberal independent judiciary. This provides HK a free and liberal investment regime.investment regime.

5.5. Free Trade & Free Market Free Trade & Free Market 6.6. Corruption-free & Stable SocietyCorruption-free & Stable Society7.7. Low and Predictable TaxesLow and Predictable Taxes

The total salaries tax charges will not exceed 15% of a person’s The total salaries tax charges will not exceed 15% of a person’s assessable income.assessable income.

8.8. Workforce and EducationWorkforce and EducationNine years of free education. Use of IT in the school curriculum.Nine years of free education. Use of IT in the school curriculum.

HK’s economic challenges (Enright,1997)(1)HK’s economic challenges (Enright,1997)(1)

1.1. Cost pressureCost pressure

HK’s residential and office rental costs are widely known to be HK’s residential and office rental costs are widely known to be among the most expensive in the world. Unless the cost among the most expensive in the world. Unless the cost increases are matched by increases in productivity, the cost increases are matched by increases in productivity, the cost increases will hurt competitiveness.increases will hurt competitiveness.

HK’s economic challenges (Enright,1997)(2)HK’s economic challenges (Enright,1997)(2)

2. 2. Challenges for the non-traded sectorChallenges for the non-traded sector

The non-traded sector influences the competitiveness of an The non-traded sector influences the competitiveness of an economy in 2 ways:economy in 2 ways:

(i)(i) it provides key inputs and services to the traded sector and it provides key inputs and services to the traded sector and hence contributes to its success or failures in the international hence contributes to its success or failures in the international markets.markets.

e.g. air/water transportation, storage, insurance etc.e.g. air/water transportation, storage, insurance etc.

(ii) (ii) the efficiency and productivity of this sector directly affects the efficiency and productivity of this sector directly affects the standard of living of an economythe standard of living of an economy

e.g. restaurants; electricity, gas and water etc.e.g. restaurants; electricity, gas and water etc.

2. The Productivity of HK (Li(2002) Ch3)2. The Productivity of HK (Li(2002) Ch3)

Definition of Total Factor Productivity (TFP)Definition of Total Factor Productivity (TFP)

Total factor productivity measures the overall efficiency of production. Total factor productivity measures the overall efficiency of production.

In a neo-classical production function, the aggregate output (Y) In a neo-classical production function, the aggregate output (Y)

depends on the quantity of capital (K), the quantity of labor (L) and depends on the quantity of capital (K), the quantity of labor (L) and

the total factor productivity/level of technology (A). “A” is a catchall the total factor productivity/level of technology (A). “A” is a catchall

term that captures the total production efficiency. The production term that captures the total production efficiency. The production

function is specified as followsfunction is specified as follows::

KALYfunctionproductionDouglasCobbge

LKAFY

:..

),,(

Productivity Accounting – How to Measure Total Productivity Growth?Productivity Accounting – How to Measure Total Productivity Growth?

Differentiating the production function with respect to time and Differentiating the production function with respect to time and

dividing through by Y:dividing through by Y:

DefineDefine , ,

In other words, productivity growth is the “residual” growth after we subtract the In other words, productivity growth is the “residual” growth after we subtract the

growth of capital and labor (each weighted by its share of factor payment) fromgrowth of capital and labor (each weighted by its share of factor payment) from

the output growth.the output growth.

Usually a constant returns to scale is assumed, which means that .Usually a constant returns to scale is assumed, which means that .

))(())((L

L

Y

LF

K

K

Y

KFg

Y

Y LKA

)(),(Y

LFs

Y

KFs L

LK

K

inputlaborin

growth

outputtotalinpayment

factorlaborofshare

L

inputcapitalin

growth

outputtotalinpayment

factorcapitalofshare

K

outputingrowth

progressicaltechno

growthtyproductivi

A L

Ls

K

Ks

Y

Yg

log/

1 LK ss

Classification of industries:

Before looking at the data, we need to know how the industries Before looking at the data, we need to know how the industries

are classified into various sectors based on their are classified into various sectors based on their tradabilitytradability::

Goods sectorGoods sector Services sector Services sector

Tradable goods sector

Nontradable goods sector

Nontradable services sector

Tradable services sector

Manufacturing,

Mining and quarrying

Construction

Electricity, gas and water

Real estate

Hotel

Air/water Transportation

Storage

Financial services, business services, insurance and real estate services

Wholesale and retail trade

Restaurants

Communication

Community, social and personal services

An alternative classification of the services sector is made by An alternative classification of the services sector is made by Richard Wong and Zhigang Tao(2000). They classify services Richard Wong and Zhigang Tao(2000). They classify services according to the according to the production activitiesproduction activities::

Services sectorServices sector

Consumer services

Services for final consumption

Producer services

Services output of the industries that produce intermediate inputs. Producer services add values to the output of other economic units

Government services

Services provided by the government

Restaurants

Hotels

Community & Personal Services

Financial services, business services, insurance and real estate services

Government Services

Discussion Question 1Discussion Question 11. Based on the data in table 3.6, analyze the changes in 1. Based on the data in table 3.6, analyze the changes in

the productivity of HK in the various sectors.the productivity of HK in the various sectors.1a. Which sector had the highest total productivity growth during 1a. Which sector had the highest total productivity growth during

1995-2000? Does this industry belong to the tradable or 1995-2000? Does this industry belong to the tradable or nontradable sector?nontradable sector?

1b.1b. What do you think are the factors that contribute to the rapid What do you think are the factors that contribute to the rapid total productivity growth of this industry?total productivity growth of this industry?

1c. Which sector had the lowest total productivity growth during 1c. Which sector had the lowest total productivity growth during 1995-2000? Does this industry belong to the tradable or 1995-2000? Does this industry belong to the tradable or nontradable sector?nontradable sector?

Lowest TFP growth in 1996-2000.

Highest TFP growth in 1996-2000.

1a. The financial services/insurance/real estate services/business services 1a. The financial services/insurance/real estate services/business services industry had the highest TFP growth in 1996-2000. This industry industry had the highest TFP growth in 1996-2000. This industry belongs to the belongs to the tradable services sectortradable services sector, or the , or the producer service sectorproducer service sector based on Richard and Zhigang’s classification.based on Richard and Zhigang’s classification.

1b. 1b. Reasons for the high technological growth in the tradable sector/ Reasons for the high technological growth in the tradable sector/ producer service sector:producer service sector:1. The tradable services sector is a 1. The tradable services sector is a competitivecompetitive sector which faces keen sector which faces keen

competitions from foreign suppliers. For this reason, higher competitions from foreign suppliers. For this reason, higher technological growth is necessary to keep up with parallel technological growth is necessary to keep up with parallel competitors.competitors.2. The 2. The economic integration with the Mainland Chinaeconomic integration with the Mainland China gives rise to gives rise to the demand for producer services in HK, because Mainland China the demand for producer services in HK, because Mainland China hinterland is actually home to 2/3 of HK’s relocated industries. The hinterland is actually home to 2/3 of HK’s relocated industries. The higher demand provides incentives for the higher demand provides incentives for the introduction of new introduction of new technology to lower cost and improve efficiencytechnology to lower cost and improve efficiency..

1c. The electricity, gas and water industry had the lowest TFP growth in 1996-1c. The electricity, gas and water industry had the lowest TFP growth in 1996-2000. This industry belongs to the 2000. This industry belongs to the nontradable goods sectornontradable goods sector..

3. The Competitiveness of HK3. The Competitiveness of HKTwo Measures of Competitiveness:

1. Productivity -- Total factor productivity (TFP)

2. Unit Labor Cost

One measure of the production cost is the unit labor cost, which is measured as the ratio of payroll per person and

labor productivity:

unit labor cost = payroll per person/ labor productivity

where payroll payroll includes wages, overtime pay, shift allowance, bonuses includes wages, overtime pay, shift allowance, bonuses etc.etc.

Labor productivityLabor productivity is the ratio of real output and the number of is the ratio of real output and the number of

persons engaged in the production. persons engaged in the production.

Based on the definition, we can see that the unit labor cost is inversely related to the labor productivity.

Discussion Question 2Discussion Question 22. Based on the data in table 3.9, analyze the changes in 2. Based on the data in table 3.9, analyze the changes in

the unit labor cost of the various sectors in HK during the unit labor cost of the various sectors in HK during

1995-2000.1995-2000.1a. Which sector had the largest 1a. Which sector had the largest increaseincrease in unit labor cost during in unit labor cost during

1995-2000? 1995-2000?

1b. Which sector had the largest 1b. Which sector had the largest declinedecline in unit labor cost during in unit labor cost during 1995-2000? 1995-2000?

Nontradable

Tradable

Based on the data in table 3.9, we observe the following characteristics of HK’s competitiveness during 1995-2000:

The competitiveness of HK’s nontradable sector fell, as indicated by the increase in the unit labor cost. This supports the hypothesis that the high monopolistic power in the nontradable sector shields them from international competition, resulting in higher costs in this sector and hence erodes its competitiveness

The tradable goods industries (mainly manufacturing) showed the largest increase in competitiveness as indicated by its large decline in the unit labor cost

Possible Project Topic on the Productivity Possible Project Topic on the Productivity and Competitiveness of Hong Kongand Competitiveness of Hong Kong

““One country, two levels of competitiveness? One country, two levels of competitiveness? -- Is Hong Kong losing its competitiveness to -- Is Hong Kong losing its competitiveness to the Southern Mainland China?” the Southern Mainland China?”

In the project, you can compare the productivity of HK and In the project, you can compare the productivity of HK and the Southern Mainland China (like Guangzhou, Shenzhen) the Southern Mainland China (like Guangzhou, Shenzhen) in various sectors. In what sectors are HK’s competitiveness in various sectors. In what sectors are HK’s competitiveness declining? Are the Southern Mainland China gaining declining? Are the Southern Mainland China gaining competitiveness in these sectors?competitiveness in these sectors?

An example of the short proposal on this topicAn example of the short proposal on this topic : : Concerns about the ability of Hong Kong’s manufacturing and service Concerns about the ability of Hong Kong’s manufacturing and service

industries to keep pace with their competitors in the Southern Mainland industries to keep pace with their competitors in the Southern Mainland China, such as Guangzhou and Shenzhen, have been heightened in recent China, such as Guangzhou and Shenzhen, have been heightened in recent years by rising labor and property costs. Many observers have argued that, years by rising labor and property costs. Many observers have argued that, with Hong Kong entering a new era, a fresh look should be taken at the with Hong Kong entering a new era, a fresh look should be taken at the government’s hands-off approach to industrial policy. government’s hands-off approach to industrial policy.

To address some of these issues in an analytical framework, this study To address some of these issues in an analytical framework, this study constructs estimates of competitiveness for Hong Kong and the Southern constructs estimates of competitiveness for Hong Kong and the Southern Mainland China’s manufacturing and services industries from highly Mainland China’s manufacturing and services industries from highly disaggregated production-based GDP data for 1990-2000. For Hong Kong, disaggregated production-based GDP data for 1990-2000. For Hong Kong, it was argued that (Dodsworth and Mihaljek, 1997) labor and other it was argued that (Dodsworth and Mihaljek, 1997) labor and other resources have moved in a clear, predictable pattern from manufacturing resources have moved in a clear, predictable pattern from manufacturing and certain declining service industries to the rapidly growing sectors, such and certain declining service industries to the rapidly growing sectors, such as trade, transportation, financing, and business services. Also, there has as trade, transportation, financing, and business services. Also, there has been a marked difference in the performance of tradable and nontradable been a marked difference in the performance of tradable and nontradable industries. Manufacturing and tradable services (import/export trade, most industries. Manufacturing and tradable services (import/export trade, most transportation industries, financing) expanded on average twice as fast as transportation industries, financing) expanded on average twice as fast as nontradable services (retail trade, restaurants and hotels, domestic nontradable services (retail trade, restaurants and hotels, domestic passenger transportation, real estate, and social and personal services). passenger transportation, real estate, and social and personal services).

In this project, we will compare the unit labor cost and productivity In this project, we will compare the unit labor cost and productivity between HK and the Southern China in different industries. This sheds between HK and the Southern China in different industries. This sheds light on the changes in the competitiveness of the two places.light on the changes in the competitiveness of the two places.