As China's accession to the World Trade Organization (WTO) has become a matter of time, the economic partnership between Hong Kong and China is embarking on a far-reaching new stage.  Along with Mainland's admission to WTO, a more favorable business environment characterized by easier market access, openness of services sectors, and sound regulatory framework with higher transparency and better compliance to international practice, will unfold in front of Hong Kong's investors, pushing up the limits of their business landscape in the world's largest emerging market. 

In recent years, capital flow from Hong Kong to the Mainland has been experiencing a continuous slowdown, although the territory has managed to maintain its status as the largest investor in China. On contracted amount basis, Hong Kong' share of China's total inbound investment dropped to 36% in 1997, 34% in 1998 and further to 32% last year, down form the average 58% during 1979-96. This trend, to some extent, manifests that the division-of-labor relationship between Hong Kong and the Mainland has come across a bottleneck, which should be cracked through the opening up of new cooperative areas and upgrading of cooperative level. Needless to say, China's accession to WTO could be a catalyst for broadening and deepening its economic relationships with Hong Kong, providing a locomotive for a new tide wave of investment by Hong Kong enterprises. 

In order to grasp the opportunities ahead, Hong Kong companies should step up their frays onto higher value adding activities, while strengthening traditional edges and first-mover advantages. Above the others, Hong Kong companies should consider such development routes as: moving from OEM (Original Equipment Manufacturing) to ODM (Original Design Manufacturing); shifting form export-orientation to market-orientation through the establishment of local marketing networks and sourcing channels; building up Hong Kong's own brand names in the Mainland market or even in international markets; utilizing Mainland talents and research manpower to upgrade the traditional modus operandi of "shop in the front, factory in the backyard" to novel modes like "idea-generating in Hong Kong, R &D and production in Mainland, marketing in Hong Kong/Mainland."  

Another important strategy that deserves much attention from the Hong Kong investors is to set up a foothold in China's vast hinterland, in response to the newly-released "Developing the West" campaign. Due to a spate of reasons, including the unfavorable geographical location and government's tilted policy orientation, the Western region has been slack in attracting foreign capital, garnering no more than 5% of China's inbound foreign direct investment. However, such late comer advantages, if properly exploited, could be a synonym of immense developmental potentiality.

In the run-up to China's accession to WTO, facing the various opportunities as well as challenges that may ensue, Hong Kong business community could no longer afford to neglect the following distinctive edges possessed by Western region:

• Market advantages: Although the income per capita is generally low in the West, its overall market capacity should be underestimated, given the tremendous population size there. Moreover, since Western provinces are contiguous to several Mid and Western Asian countries, they are important gateway to these markets. For Hong Kong companies that have an interest in exploring Mainland market or setting foot on border trades, the West region is more and more gaining importance.
  
  
• Resources advantages: By virtue of the large supply of land, rich mineral resources and immense energy reserves, the West is a desirable base for energy and resources-intensive industries, such as agriculture, agro-product processing, mining, energy exploration, and heavy manufacturing, e.g., steel, construction materials, chemicals and etc. By Setting up raw materials purchasing arms or processing branches in the Western region, Hong Kong manufacturing can diversify their operations and pursue intra-firm vertical integration.
  
  
• Manpower advantages: With a population of 280 million, Western region is abundant in unskilled and semi-skilled human resources. As China's traditional comparatively-advantaged industry and the major beneficiary of WTO accession, labor-intensive manufacturing will undoubtedly continue to flourish in the post-WTO era.. For example, the export of textiles will be greatly facilitated by the suspension of US quotas in 2005. Along this line if reasoning, a bright future for the development of labor-intensive industries and outward processing trade in the West could be safely expected.
  
  
• Technological advantages: The Western region is not short of technology and research forces. For instance, there are 42 universities and over 4,000 research institutions clustering in Xian city; and the Chong Qing Municipaility assembles 25 universities and 560,000 technological workers. The West, in its own right, is a promising backyard for Hong Kong's new adventure in innovation and technology. There is ample room for Hong Kong's business and Mainland-based research units to forge various strategic alliances, including the triangle partnership with foreign venture capitalists as the third party.  
  
  
• Policy advantages: In parallel to large-scale infrastructure works, the Central Government has promulgated a series of preferential policies to boost the attractiveness of Western region. Foreign investments can now enjoy a income tax rate of 15% for another 3 years once the general tax holiday expires, and this tax rate can be further cut down to 10% for hi-tech or export-oriented businesses. Moreover, existing foreign-funded enterprises (FFEs) are allowed to participate in the management of SOEs (State-owned Enterprises) in the West under certain contracting arrangements, and the establishments in which they acquire 25% of equity stake through re-investment, are entitled to favorable treatments for FFEs.

In a nutshell, China's accession to WTO and the launching of "Investing in the West" campaign have unveiled enormous opportunities for the further cooperation between Mainland China and Hong Kong. In order to capitalize on these opportunities and rise to the attendant challenges, it is imperative for Hong Kong investors to fine-tune their operating strategies, including the rationale behind location selection. By virtue of its edges in market size, supplies of labor and resources, industrial infrastructure, technology potential, and the policy configurations, the Western regions should not fail to be an emerging hotbed for Hong Kong future investment.