Since the Asia financial turmoil, Hong Kong has spared no effort in fostering a new round of economic transformation. The result has not been satisfactory so far. It is considered that in addition to developing high value-added services and strengthening economic integration with the Mainland, Hong Kong has to promote vigorously a new round of industrialisation that emphasizes high value-added industries, so that the new transformation can be successful.

I. Major Reasons

1. Industrial production remained the basis of Hong Kong's economy in the past two rounds of transformation. In the past half-century, Hong Kong underwent two major rounds of economic transformation. Nevertheless, northward relocation of the manufacturing process during the second economic transformation did not alter the mode of processing trade, but only extended the base to the Pearl River Delta. Although the share of domestic manufacturing activities in Hong Kong has dropped substantially, it would remain similar to that 20 years ago should the value-added created in Hong Kong's outward processing in the Mainland also be counted. At the same time, Hong Kong's services sector has been highly production-related, with value-added from production-related services occupying about 55% of the total value-added of Hong Kong's services. Adding up the two, Hong Kong's industrial sector and related services occupy a high share of about 65% in the overall economy, even surpassing that of about 60% in the early 1980s. Thus, it can be seen that the northward relocation of Hong Kong's manufacturing activities has not weakened our industrial production, but on the contrary has further strengthened its role as the foundation of the Hong Kong economy, through making use of the advantages of the Mainland. Without the industrial base, there would not have been the development and prosperity of the real estate sector and consumption businesses.

2. International experience demonstrates that an independent economy cannot exist without an industrial base. Although the services sector occupies a substantial share in the GDP of the developed countries and regions, it cannot be isolated from the industrial base. Hong Kong, though maintaining very close economic relationship with the Mainland, is still a relatively independent economy. This unique status has served to preserve Hong Kong's long-established characteristic of being a free economy, but it has also hindered Hong Kong from becoming the trading and financial centre for the whole of China, like that of New York to the U.S. So far, Hong Kong's services sector has still been mainly serving its manufacturing activities in the Pearl River Delta. No doubt, Hong Kong's services sector can enter the Mainland market after China's accession to the WTO, but this only represents a form of foreign investment and does not signify the provision of services basing on internal division of labour. Besides, development of Hong Kong's services sector in the Mainland market is going to be constrained by the terms and conditions that China will follow when joining the WTO. Hong Kong's financial activities associated with the Mainland will be constrained by the restrictions on Renminbi convertibility and foreign debt scale. Should Hong Kong give up its industrial sector, it will face the risk of losing the target of its services.

3. With the "basin effect", Hong Kong may experience "industrial hollowing out". During the past 20 years, the "basin effect" generated through economic liberalisation in the Mainland caused Hong Kong's production, services and consumption to shift to the Mainland where costs or prices were lower. As a result, there are three notable "substitutions" taking place. The first is "production substitution", i.e. production in the Mainland has replaced imports, affecting Hong Kong's exports, re-exports and retail market. The second is "consumption substitution", i.e. consumption market in the Mainland has been absorbing Hong Kong's purchasing power. Hong Kong's total retail sales value last year was still lower than that of 1997 by HK$ 50 billion, while consumption by Hong Kong people in the Mainland totalled HK$ 29.4 billion. The third is "services substitution", i.e. the emergence of the services sector in the Mainland is gradually substituting the traditional services industry of Hong Kong. For example, the shipping industry in the Mainland is gradually taking over some of the business of Hong Kong's shipping industry, Hong Kong entrepreneurs' seeking finance in the Mainland has affected Hong Kong's financial business, the services sector has been relocating part of its operations northward and etc. It should be pointed out that the manufacturing process relocated northward in the past has not broken away from Hong Kong's economic operation, but massive transfer or substitution of services would bring about the problem of "hollowing out of industries" for Hong Kong.

4. Developing high value-added services cannot resolve all the problems currently faced by Hong Kong. The past two rounds of economic transformation took place both under specific and favourable historical and market conditions. However, in this new round of transformation, the situation is entirely different. Now, as Hong Kong develops high value-added services, it is going to face problems related to market, competitive pressure and etc. Although Hong Kong still possesses advantages and potential, there are bound to be obstacles. Besides, Hong Kong cannot rely only on high value-added services to solve its many acute problems at present, particularly unemployment, poverty, steadily growing welfare burden and etc. Should Hong Kong not make use of new industrialisation to create new employment opportunities, it will have to increase comprehensive assistance continuously, falling into the ever-deepening abyss of welfarism and unable to extricate itself. Fostering new industrialisation will create the conditions for self-reliance and shunning poverty, thus will be favourable for establishing a culture of endeavouring to make progress in the society.

II. Qualities and Directions

It is worthy of attention that recently there has been an argument of "industries can make no fortune" in the society, denying any room for industrial development in Hong Kong. Actually, Hong Kong still possesses the qualities for new industrialisation. In addition to the industrial base created and experiences accumulated throughout the past 50 years, Hong Kong's qualities include: strong economic fundamentals, sound financial standing of the government and some corporations, first class banking services, a developed and regularised securities market, certain foundation and experience in science and technology, successful experiences and potential demonstrated by the rise of world major producers of LCD tubes and micro-motors as well as the international pioneer status of domestic manufacturing techniques of clocks and watches, high development potential of our human resources. Basing on these qualities, Hong Kong should pursue new industrialisation in the following directions.

1. Upgrade the existing industries and enhance the ability to increase value-addedHong Kong has to grasp the opportunities offered by China's accession to the WTO and make itself the manufacturing centre of medium-high quality light industrial products, particularly the centre for design and manufacturing of fashion, clocks and watches, and toys, through employing new techniques, creating its own brand-names and enhancing product quality. Southern China should remain the location of Hong Kong's major manufacturing base, but it is necessary to foster its upgrade and increase competitiveness. Upgrading existing industries does not imply massively expanding the production base in Hong Kong. It means to carry out more definite division of labour as well as cooperation between Hong Kong and the Mainland. This is a major characteristic of the new industrialisation in Hong Kong.

2. Develop new technology industries in Hong Kong based on its advantagesAs information technology and biotechnology have become the two major pillars in new technology in the world nowadays, Hong Kong should actively catch up and choose to develop the content and items appropriate for itself. Applied software industry should be an item Hong Kong has to actively develop in future. Hong Kong has certain advantages in biochemical technology (e.g. genetic screening). Modern Chinese medicine should be another spot of Hong Kong's future new technology industries. With the gradual improvement in conditions for scientific research, Hong Kong can further expand its scope in the development of new technology industries in future, e.g. scientific apparatus, office equipment, new type of materials and etc.

3. Develop creative industries by making use of Hong Kong's innovative capabilityNew industrialisation also includes creative industries, e.g. games creation, film making, mass media, advertising production and etc. For a long time, Hong Kong has followed closely the current trends and has produced numerous innovative products, many of which are highly creative. Hong Kong movies have been well received overseas and recently have won various Oscar Awards. These demonstrate that Hong Kong's creative industries have big advantages and market potential. Should Hong Kong make more effort, it may become the centre for creative industries in the Asia Pacific region.

III. Major Measures

1. Formulate policies and strategies for new industrialisationThe major obstacle to industrial development in Hong Kong is the difficulty in attracting foreign investment. The crux lies in the lack of the necessary subsidies and encouragement to industries. It cannot be denied that Hong Kong's non-interventionist policy has been proved successful. Nevertheless, success in the past does not necessarily guarantee the same in future, since the situation has changed drastically. In the past, Hong Kong was the most open and freest economy in the region. Now neighbouring areas have begun to open up and attract foreign investment. Traditional labour-intensive industries and services require a market environment with little intervention, but high value-added and high technology industries incur high risks and demand more in the market environment. In other words, the presently favourable business environment is no longer sufficient. More proactive government policies to create more business opportunities are necessary. In this respect, basing on social consensus built up, the government has to design policies and strategies, and these should surpass the normality and break through the traditional policy constraints in particular. Preferential policies and measures supporting new industrialisation, including preferential land policy and tax treatment, should be put forward without hesitation. Besides, more aggressive policies in promoting science and technology and attracting talents have to be formulated. Furthermore, infrastructure has to be strengthened while a location with beautiful scenery has to be selected for building up a zone for creative industries.

2. More commitment by the government in modern technology research and developmentNew industrialisation is based on technology and innovation. Hong Kong is relatively weak in scientific research and this is a major obstacle to new industrialisation. Measures to help improve the situation include: (1) Establish a Science and Technology Bureau and make it one of the policy bureaux. (2) Commit more in the development of science and technology and even drawing upon fiscal reserves to a proper extent, increasing the ratio of research and development expenditure to GDP gradually to 1.5% or above from the present 0.4%. (3) Form an Institute for Development of Science and Technology in each major university. (4) Establish professional and technical colleges of different areas. (5) Upgrade the Hong Kong Academy of Performing Arts to Hong Kong Art University, making it a first class university of composite art in Asia.

3. Support small and medium-sized enterprises vigorously, particularly those engaging in processing tradeSmall and medium-sized enterprises, particularly those engaging in processing trade, represent a major party in Hong Kong's industrial sector. Therefore, they also form a major force of Hong Kong's new industrialisation. Hong Kong needs to learn from the successful experiences of supporting the development of small and medium-sized enterprises in Taiwan and Singapore, and review comprehensively the present policy for small and medium-sized enterprises. More proactive and long-term strategies have to be formulated to help these enterprises establish new industrial base of high value-added in Hong Kong.

4. Strengthen cooperation with the Mainland in the development of new industrialisationThe first is that cooperation in science and technology should not be restricted to the "shop in front and factory at the back" style. Vertical cooperation under processing trade should be transformed to horizontal cooperation under new industrialisation. Second, cooperation in upgrading Hong Kong's manufacturing activities in the Mainland should be strengthened. Last, more effort should be made to attract talents in science and technology from the Mainland. In addition to information technology, talents in other areas of scientific technology that suit Hong Kong's needs in industrial development should also be targeted.

In summery, fostering new industrialisation in Hong Kong will require the consent of the society, the initiation of the government, the response of the enterprises and cooperation between Mainland and Hong Kong. New industrialisation is not to create a closed and comprehensive economic system in Hong Kong, hindering further economic integration of Hong Kong and the Mainland. It is to allow new industries to form another pillar in Hong Kong, thereby extending the room for cooperation between both sides. Developing new industries in Hong Kong will not affect the development of high value-added services, but foster it. High value-added industries and services are the two major pillars of the future Hong Kong economy. Only through the progress of both will Hong Kong be successful in achieving economic transformation.