Cross-border operation is a logical choice for the enterprises of small economies in the process of economic globalization. From the business perspective, cross-border operation can help companies improve "factor conditions" and "demand conditions" in Porter's Diamond Model, and hence strengthen their competitiveness. Enterprises in small economies such as Finland's Nokia, Sweden's Ikea, Switzerland's engineering manufacturer ABB and financial institution UBS, Holland's Philips, Canada's Northern Telecom, Southern Korea's Samsung, Hong Kong's Hutchison and HSBC as well as Taiwan's manufacturing sector are all among the great achievers from business operation across the border. Currently, the annual volumes of passenger and commodity flows between Hong Kong and southern China's PRD are probably among the largest cross-border flows in the world. A recent survey conducted by the University of Hong Kong shows that Hong Kong related companies have employed a total of 11 million workers or staff in PRD so far, roughly 1.6 times of Hong Kong's own population, and 3.1 times of Hong Kong's labour force. No larger scale of cross-border operation could possibly be found currently in the world.

From the perspective of an economy, in the process of economic globalization, large markets usually form stronger magnetic field, having greater attraction to both businesses and capital. This makes small economies in a disadvantageous position. Cross-border operation of small economies has a double-edged sword, benefiting its parent economy but also leading to capital and job outflow. Hence, this should be regarded as an important strategic issue, to which governments of small economies should attach top priority.

Facing the development of cross-border operations, different small economies have employed different strategies. In recent years, Canada mainly used proactive industry policies while Singapore focused on consolidating its role as a regional financial and service centre through attracting talents and upgrading infrastructures. Taiwan's approach, mainly out of political consideration, was featured with restricting and blocking investment to Mainland China. As for Hong Kong, it has basically stuck to its traditional principle of "positive non-interventionism", taking a laissez-faire attitude, and has not been aware of the strategic implications of cross-border economic operations. Different strategies have generated different results. Generally speaking, Taiwan was quite frustrated with its inability to block capital outflow. Singapore has struck a better balance between its domestic economy and production relocation. Hong Kong's lasses-faire has resulted in more and more production process relocated from Hong Kong to the firms' investment destinations, where both hardware and software infrastructures have been improving rapidly. The Canadian proactive industrial policy has generated positive impacts in strengthening its domestic economy, and achieved remarkable results.

Here, we would like to briefly introduce the Canadian government's strategies and experiences.

Since the U.S. and Canada began to open their markets to each other, Canada has always regarded how the domestic economy can benefit from the market opening up as an important strategic issue. A key thinking for this was to consolidate and strengthen its industrial base by nurturing and attracting more domestically based companies and production activities. The primary strategy designed was to build up resource-based strategic clusters within its border. (Clusters are geographically proximate groups of interconnected companies, suppliers, service providers, and associated institutions in a particular field, linked by commonalities and complementarities.). The Canadian government's role has been to help leading Canadian-based businesses by levying relatively low taxes on resource extraction and lowering their costs of capital through grants, low-interest loans and loan guarantees. After years of effort, Canada has successfully developed several strategic clusters within its border, including the auto assembly and auto parts industry in south-western Ontario, led by the big three US auto multinationals with their related and affiliated suppliers and distributors; the banking and financial services cluster in Toronto (Montreal's original position as a Canadian financial centre has been overshadowed by Toronto's abrupt rise, and has offered a real example of financial centre being replaced in modern times); the forest products industries in western and eastern Canada; the energy cluster in Alberta, led by large MNEs such as Dupont; the fisheries near the Atlantic; the telecom industry, led by Northern Telecom, IBM. This has enabled Canada to build a balanced economic foundation and make steady progress in the process of economic globalization.

It can be seen that a successful strategic cluster will have one or more large MNEs at its center. It does not matter whether these are home or foreign owned so long as they are globally competitive. These MNEs are flagship firms on which the strategic cluster depends. Ideally, they operate on a global basis and plan their competitive strategies within the framework of global competition. A vital component of the cluster is companies with related and supporting activities, including both private and public sector organizations. In addition, there are think tanks, research groups and education institutions. Building up such strategic clusters can provide strong support for the enterprises in production, assembling, distribution as well as R&D related activities that can help increase the attraction of small economies as production bases for MNEs and retain more production activities within their borders. Finland's success in retaining its mobile phone producer giant Nokia is a good example.

Turning back to Hong Kong, due to the uniqueness in the traditional role of its government, its current economic structure and its relationship with neighbouring economies, it is not advisable to follow straightly the successful approaches of other small economies. However, their mindsets of trying to retain and attract more production activities within the border should be Hong Kong's good reference.

After following the non-intervention principle for years, Hong Kong has basically been transformed into a financial and service center. The share of Hong Kong's service sector, currently 86%, will possibly grow further in the future, fostered by the positioning of 'four pillar' industries (financial services, logistics, tourism and producer services) identified by the government. Eventually, Hong Kong will become a pure financial and service center. Whether such an economic structure is favourable for Hong Kong's economic development will quite depend on how the relationship between Hong Kong and Mainland China develops in future. Such a positioning makes sense so long as Hong Kong can fully integrate itself with Mainland China, or at least with PRD. This should include the free flows of the production factors such as passengers, commodities, vehicles, and capital between the two economies; as well as Hong Kong's direct participation in the functional division in China's economy by playing the role as China's financial and service center. However, Hong Kong's current relationship with Mainland China is quite a different story. Under the internationally recognized permanent arrangement of "one country and two systems", Hong Kong is now dealing with Mainland China as an independent customs area and this also applies to dealings with other economies. No quality change to Hong Kong's status is envisaged in the foreseeable future, no matter how close the relationship between Hong Kong and Mainland China becomes. Therefore, it would be more rational and realistic for Hong Kong to consider its long-term economic structure and development strategies by positioning itself as a "small and independent economy".

What kind of industrial mix would be suitable for a small and independent economy like Hong Kong in order to maintain a relative stable and sustainable economic development is beyond the scope of this article, and need separate research. Nevertheless, many historical and international experiences have shown that in general, a balanced and diversified economic structure is good for an economy to maintain stable development and provide employment opportunities for its residents. Hence, manufacturing, financial service, high value-added industries and low value-added industries would all have irreplaceable roles and functions in Hong Kong's economic and social development. The objectives of macro-economic and monetary policies of the Hong Kong SAR government are to foster, facilitate and maintain the development of a balanced economic structure. To examine Hong Kong's strategies of cross-border economic activities under such thinking, our suggestions are as follows:

1.Working along two lines to develop Hong Kong's relationship with the Mainland market. That is, to aggressively broaden Hong Kong's small domestic market via speeding up the two-way free flows with PRD in production factors including passengers, commodities, vehicles, and capital (for detail exposition, see Bank of China's Economic Quarterly, 2000 No. 1). On the other hand, to attract Chinese companies, especially non-state-owned companies, to invest and operate in Hong Kong as well as encourage Chinese professional talents and entrepreneurs to settle down in Hong Kong and use Hong Kong as a platform to develop their careers.

2. Redevelop Hong Kong's present major Industrial Estates through planning and market means, with a view to move toward the concept of the strategic clusters, so as to attract Hong Kong manufacturers move their operations to the related industrial clusters. Facilitating R&D development in each cluster is also an important strategic measure to attract the remaining Hong Kong industries, such as electronics and fashion, to take their roots in the Hong Kong territory. We believe that China's weakness in reputable product brands will offer a big niche for Hong Kong's domestic firms to survive and develop.

With the advantages of convenience and scale economies, clusters can help Hong Kong offset part of its high operating costs (As Hong Kong cannot compete with neighbouring cities by low costs, building up the strategic clusters will be an effective strategy for Hong Kong to develop a diversified industrial structure at the high operating cost condition.), and enhance Hong Kong's attraction for domestic enterprises to take roots or retain more operations in the territory. This does not mean we regard manufacturing as Hong Kong's favourable industry and developing direction. We only advocate Hong Kong to try to make use of its available conditions, while only reasonable additional inputs are necessary, to retain some industries and maintain a more diversified economic structure rather than totally leave it alone and give up manufacturing. Actually, we agree that financial services, logistics, tourism and producer services are the main pillars of the Hong Kong economy, and should be given priority in promotional effort by the government.

3. Assure that the Cyber Port and the Science Park projects to be the homes for IT and bio-technology industries respectively, and shape them with the concept of strategic cluster. In order to ensure the success of these two latest high-tech industrial parks, the SAR government should play more proactive role in attracting investors, talents and maintaining a competitive operating environment in their debut stage. They should become Hong Kong's flagships of strategic clusters, and strong drivers of high value-added economic development in future.

4. Fostering economic diversification to provide Hong Kong society a variety of employment opportunities by nurturing new strategic clusters favourable for Hong Kong's situation. We appreciate the SAR government's intention to seek new dimension and inject new vigor into the Hong Kong economy by actively promoting creative industries. Based on Hong Kong's fundamental factors, fashion and product design, film and television production, and distribution are among the most advantageous and promising creative industries in Hong Kong, and are worthy of strong support and impetus by the government (such as providing suitable operating venues). In addition, as a key international media centre and hub of various talents in the Asia-Pacific Region, Hong Kong owns first class universities in Asia, developed international cultural networks, and thus has bright prospects in promoting the development of culture related industries, including publishing, tertiary education, as well as business, managerial and professional training.

In summary, as more investment opportunities will emerge from the opening up of neighbouring markets, cross-border operation will be a long-term trend in the development of the Hong Kong economy. The SAR government ought to regard this as an important strategic issue, and take effective measures to strike a balance between local firms' foreign investments and the development of the domestic economy. In order to implement measures effectively, the adjustment of the traditional role of the government will be an essential prerequisite. International and Hong Kong's own experiences in recent years have told us that the government's positive role, such as implementing proactive industrial policies, is very helpful for an economy's successful industrial restructuring and transformation. It has been more widely recognized that government's active role in fostering economic development does not necessarily contradict with economic freedom. How to adjust Hong Kong government's traditional role is no doubt a long-term strategic issue, and hence needs a very careful design. Basically, it will be advisable for the SAR government to adjust its traditional principle of "positive non-interventionism" to "limited proactive-interventionism" under the current circumstances. We will explore on this topic in a special research project.

Tse Kwok Leung