Leading Industry of World Cities

The concept of "World City", raised by Prof. John Friedmann of UCLA in 1986 (in his article "The World City Hypothesis"), has become hot in the academia in recent years. It suggests that the flow of capital across the world has contributed to the rise of new city forms. These cities, characterised by their outward orientation, emerge as nodes of the global or regional economy. They are known as "world cities" or "global cities".

The emergence of world cities has much to do with the global strategy of multinationals. Amid trade liberalisation and technological advancement, multinationals managed to allocate resources more efficiently. Their penetration into different parts of the world has generated huge demand for productive services, including finance, accounting, legal service, management, communications and advertising. At the same time, complications of the production process demand highly efficient control and directions from the headquarters. Under such circumstances, cities with comparative advantages have become nodes of the global economy, with a concentration of headquarters as well as clusters of necessary services.

As such, it has been recognised that world cities do not need the backing of domestic manufacturing activities. Instead, their developed service sectors can form the major economic engine. In light of the uniqueness of cities, the most advantageous to develop should be services of intensive nature, while capital or labour-intensive manufacturing activities would inevitably be relocated to suburban areas.

Hong Kong is undoubtedly a typical world city. Academics have identified two classes of world cities. The first class has a particularly strong service sector, being major nodes of the global economy. New York, London and Tokyo are clear examples. The second class belongs to regional nodes. Hong Kong is a typical one. No doubt, Hong Kong's status has been enhanced, according to a survey in U.K., ranking just below New York and London. Among the 500 major global multinationals, 8 have their headquarters in Hong Kong, while 29 and 28 have theirs in London and New York respectively. Besides, statistics show that regional headquarters located in Hong Kong has risen to 1,167 last year. This demonstrates the growing significance of headquarters in the Hong Kong economy.

The development of world cities cannot be separated from their hinterlands. The cases of Hong Kong and Singapore have been special, nevertheless, with their hinterlands separated by a border or boundary, restricting the flows of factors of production.

The service sector is dominant in the economy of world cities. Take New York or London as examples, the share of their service sectors has exceeded 85%. Nevertheless, it is worthwhile to note the differences among the service industries and their varied contributions to the economy. This may shed more insights into the development of the economic structure of cities.

Knowledge economics has first classified economic activities according to major factors instead of modes of production. According to OECD's definition, the knowledge economy is built on the production, distribution and application of knowledge and information. The matured market has enabled knowledge to emerge as "commodities". In particular, as people attempt to tackle problems associated with shortage of resources, knowledge has played a crucial role, even surpassing those of capital and labour.

Apparently, knowledge-based industries should be suitable to play a leading role in cities. Yet, there still exists controversies about the definition. According to OECD, knowledge-based industries include high-tech industries, medium-high-tech industries, information services, finance, insurance, community, social and personal services. The former two involve manufacturing activities and would probably not be located in the city centre, while the knowledge content of community, social and personal services does not seem clear. The rest, i.e. information services, finance, insurance and etc. appears to fit the criteria most. Besides, the omission of modern logistics, which possesses high knowledge content, seems another shortcoming. Should this be included as a knowledge-based service, such group of knowledge-based service industries should assume fully the role of the economic pillar of world cities.

The Hong Kong Economy under Restructuring

Hong Kong is currently undergoing its third round of economic restructuring. This appears to continue the restructuring towards a service-oriented economy commenced in the 80s. Yet, major changes have already taken place.

1. The service sector has already dominated the economy. During early 80s when the second round of restructuring took place, the share of the service sector was only 68%. But it reached 85% in 1997. The share of the service sector further rose to 80% in 2004, despite the shock during the financial turmoil. In contrast, the share of the manufacturing sector shrank to 3.5%.

2. Restructuring in the service sector also took place, evidenced by rising knowledge-based elements and reduced contribution from property-related activities. The share of value-added of the financial sector grew from 10.3% in 1996 to 12.2% in 2004 and that of trade and logistics also rose from 22.7% to 27.7% in the same period. The share of professional and other business services fell from 12.4% to 10.6%, but it was only because of the substantial decline of contribution from property-related activities. Taking property-related businesses out, value-added of business services actually increased.

3. Restructuring in trade has also begun, with offshore trade gradually becoming the dominant pattern. It can be seen that services export related to business and trade grew by 15.3% on average per annum during 1995-2004, much faster than re-export, that grew only 8.1% on average per annum. The rise of offshore trade has boosted the growth of services export.

4. Concerning high-tech, Hong Kong is weak in development, but good in application. Such can be demonstrated in the information technology industry, particularly the infrastructure and coverage. In 2003, the value-added of IT industry occupied a share of 3.7% in GDP.

In general, Hong Kong has the largest service sector among world cities. Although currently Hong Kong is not yet a knowledge-based economy, development in knowledge-based services has still been remarkable. The issue here is to what extent such businesses can contribute to Hong Kong's economic development.

Sustainability of Knowledge-based Services

1. The development of knowledge-based services fits Hong Kong's comparative advantages. Amid the northward relocation of manufacturing activities, productive services have dominated the economy. With Hong Kong's unique location, well established networks, presence of thousands of trade and merchandising firms that makes it a merchandising centre, Hong Kong's advantage in productive services should not be doubted. Hong Kong can reap the opportunities from CEPA, extending the value chain northward.

2. Compared to first class world cities, Hong Kong's knowledge-based services have much room to develop. Currently, the value-added of New York's financial sector is about 7 times that of Hong Kong's, while that of business services is about 6 times Hong Kong's. London's financial sector exceeds Hong Kong's by more than a half, with the number of employees nearly doubled that of Hong Kong's. Both New York and London are prominent international cities. In comparison, Hong Kong's population is of similar size to both, and its economy is roughly comparable to London, but in terms of financial institutions and markets, Hong Kong is far behind the two. Hence, Hong Kong's financial and business services have much room to grow.

3. The Mainland offers vast opportunities for Hong Kong's knowledge-based services. As a major city of China, Hong Kong should contribute more to the development of the Mainland economy, including the financial markets. By the end of 2004, the overall size of Hong Kong and Mainland's stock markets was just USD1.3 trillion, much behind the USD14.2 trillion of the total of New York Stock Exchange and Nasdaq, and also lower than the market capitalisation of the London Stock Exchange. Such is obviously not commensurate with China's economic size, that exceeds the U.K.'s and roughly equals 1/6 of the U.S.'s, While two leading world stock exchanges can co-exist in the U.S., the same can undoubtedly take place in China. The development potential of Hong Kong's financial services can be seen.

4. Knowledge-based services have diversified. Apart from productive services, knowledge-based consumer services have also played an important role in world cities, e.g. private banking and wealth management. In this respect, Singapore and Hong Kong have had similar attainments. While Singapore targets overseas clients, Hong Kong has mainly focused on the domestic market. Amid rising wealth of the Mainland population, Hong Kong stands good chance to develop offshore wealth management business.

Develop Knowledge-based Services through Innovation

We have already seen Hong Kong's need to develop knowledge-based services. This fits the global trend and the "small government" doctrine, as well as the central government's intention to support Hong Kong's four pillars as spelt out in the 11th Five Year Plan. Nevertheless, we have to recognise our weaknesses, particularly the lack of innovation mechanism. This should demand government policy accommodation.

1. Expand R&D commitment - Productivity grew faster in knowledge-based services than traditional services. This can be demonstrated in the 10% per annum productivity growth in telecommunications in OECD countries in the past ten years, compared with the 4.5% per annum productivity growth of financial services. Among various manufacturing industries, the highest productivity growth was only 5% per annum during the period. Commitment in R&D formed the main impetus of productivity growth. During 1990-2001, R&D in service sector of OECD countries increased by 12% per annum, compared to 3% for the manufacturing sector. In contrast, R&D in Hong Kong has been relatively low, being 0.69% of GDP, not only below the OECD's 3%, but also behind Singapore's 2.3%. This definitely affects Hong Kong's competitiveness. Expansion in R&D should be of top priority.

2. Enhance public and private commitment - Compared with the U.S., the Hong Kong government has committed less in R&D, focusing mainly in providing a favourable environment. It is worthwhile to explore for additional commitment in R&D by the government. In fact, private commitment in R&D has grown rapidly in Hong Kong (by 2.6 times in 1995-2004), but is still far behind western countries. In the U.S., R&D can reach 20% of sales in some financial institutions. Innovations are also of wider scope, covering analytical tools in addition to data management and customer support. These are good references for Hong Kong.

3. Improve the innovation mechanism - Theories of innovation suggest that innovative activities can take place in any part of the value chain, e.g. product development, organisation optimisation, technical advancement, as well as strengthening management and marketing. Experiences from Singapore and Wales about their technological incubators, which attract potential innovative activities, are Hong Kong's good references. Hong Kong's capital market leads in Asia, in particular its growth enterprise market and private equity management. As high tech growth companies need capital, Hong Kong can create technological incubators to attract these companies, offering them the necessary finance through venture capital funds. Subsequent listing can also be sought in the growth enterprise market.

4. Take advantage of the connection with Shenzhen - Hong Kong has limited attractions to high tech investments. But taking into consideration of Shenzhen's strengths in this area, the picture would be different. While Hong Kong is strong in IT and finance, Shenzhen has had strong foundation in electronics. Although currently administrative restrictions have prevented more effective integration between Hong Kong and Shenzhen, it is still worthwhile to consider creating a R&D centre or technological incubator for electronics in the Lok Ma Chau Loop area, in an effort to create a high tech chain that links with Shenzhen.

Hong Kong vs. New York and London : Some Comparisons (2004)