Overview

• The information technology (IT) sector of Hong Kong is among the most advance in the world - according to the World Economic Forum's Networked Readiness Index 2006/07, Hong Kong ranked 2nd in Asia and among the world's top 15 economies in terms of its readiness to participate in and benefit from IT developments.
  
  
• A key factor contributing to Hong Kong's advance IT status is the top-notch telecommunications infrastructure of the city – Hong Kong is the world's first city to have a fully digitized fixed telephone network; the city leads the Asian region in terms of international call time and the penetration of telephone lines, mobile phones and fax machines; it operates Asia's largest commercial satellite-earth station.
  
  
• According to a survey¹ conducted by the Hong Kong Productivity Council (HKPC), nearly 80% of the Hong Kong IT service providers are SMEs with less than 20 employees.  Of all the surveyed IT service providers in Hong Kong, nearly 90% are specialized in software design and development while nearly 40% provide IT consultancy services.
  
  
• Thanks to their technical competency, flexibility, and international exposures, many Hong Kong IT service providers are able to compete internationally while delivering effective solutions at home.  According to the afore-cited HKPC survey, about one-fifth of IT service providers in Hong Kong cater to foreign IT markets, inter alia, the Chinese mainland, ASEAN, the EU and the US.
  
  
• Stemming from the government's vision to become a world-class digital city as outlined in the Digital 21 Strategy (firstly published in 1998), Hong Kong continues to offer the world's most affordable Internet connection and mobile telephone services. In terms of infrastructure, Cyberport and the Hong Kong Science Park have been developed as strategic hubs bringing together clusters of IT companies and professional talents from all over the world.
  
  
• Internationally, Hong Kong has entered into cooperative IT arrangements with many advance economies in the world, including Canada, Finland, France, Germany, India, Ireland, Israel, Italy, Japan, South Korea, the Netherlands, and the UK. These arrangements are aimed at promoting and supporting inter-governmental exchanges, business partnerships, investment cooperation and joint research and development in the areas of IT and telecommunications.
  

Industry Data

Exports

Total Exports of Computer Software 2000-2006 (HK$ million)

i) Software distributors

Local dealers are growing in terms of size, scope of operations and sophistication. Many services that were once performed by computer vendors are now done by dealers. Proprietary software companies also enter overseas markets through local dealers.

ii) Software developer

Many software houses undertake software development projects for companies on the mainland and in Southeast Asia. Local companies install management information systems to monitor their subsidiaries on the mainland and elsewhere. These companies usually prefer to install in their overseas subsidiaries the same computer systems as in their Hong Kong headquarters, especially in financial reporting and electronic mail, which can be standardised to a high extent internationally.

An area where Hong Kong software firms have been serving clients in other Asian countries is in designing web sites and developing "secure software" for electronic trading. Hong Kong software firms either have offices in Asian countries to service their customers there; or install and maintain the software, and train overseas customers through telecommunications networks and remote control software.

In order to enhance their competitiveness, many Hong Kong software companies are active in achieving Capability Maturity Model (CMM) standard and ISO 9000. In November 2002, Hong Kong software company Azeus Systems became the first company in the Greater China region to have attained Level 5 (the highest level) in CMM assessment.  As of end February 2007, there are at least 4 companies in Hong Kong attained the CMM 5.


Industry Development and Market Outlook

The development of the IT industry is key to Hong Kong's position as a world centre of business and has brought innovations to many sectors - Octopus in public transport, the Airport Management System, the Modern Port Management System used in the container ports, the Online and Wireless Banking System in the financial sector, and the Smart ID of the public sector.  In return, this world centre has provided a suitable environment to nurture the growth of Hong Kong IT businesses.

In terms of infrastructure, Hong Kong has provided the industry with the Cyberport, a hi-tech multimedia hub costing HK$ 13 billion, under the joint efforts of the public and private sectors.  The Cyberport has the capacity to house about 30 large to medium-sized companies and 100 smaller companies specialising in the development of services and multimedia content to support various industries. The first three phases of the Cyberport, which was completed between 2002 and 2004, provide state-of-the-art IT, telecommunications and digital media facilities to create a strategic cluster of IT companies and to support and facilitate development of new technologies, applications, services and content.  The whole project is scheduled for completion by 2007.

Furthermore, in order to facilitate public access to the Internet, the Hong Kong government will earmark $210 million to provide WiFi networks in government venues for free use by our citizens.  WiFi networks will first be installed in all public libraries, major cultural and recreational centres, community halls, large parks, and those government offices that are frequently visited by the public.

Efforts from both the private and public sectors in Hong Kong have provided a secure IT environment.  According to the International Intellectual Property Alliance, software piracy is much lower in Hong Kong than elsewhere in Asia due to the government's strict enforcement of intellectual property rights.  According to the HKPC's survey, the portion of Hong Kong SMEs not using any security technologies has dropped significantly from 12.1% in 2003 to 4.4% in 2004 and the security level for Hong Kong businesses greatly improved in 2004.

Financially, the establishment of the Growth Enterprise Market (GEM) in November 1999 has provided a fund-raising venue for Hong Kong IT-related companies.  As of end March 2007, GEM's total market capitalization had reached over HK$108.7 billion, with nearly 200 companies listed.  As the GEM also functions as an exit platform for venture capitalists, it continues to facilitate venture capital firms to consider financing local software startups.

The Hong Kong government's Innovation and Technology Fund (ITF) has provided an alternative source of funding for the IT industry.    As of end 2006, the ITF had approved 897 funding applications from the IT industry with a total of HK$2.7 billion.

In line with its "2004 Digital 21 Information Technology Strategy" to position Hong Kong as a leading e-business community and digital city, the Hong Kong government would increase its IT expenditure to HK$5.2 billion for 2006/07, up from HK$3.5 billion in 2005/06.. Currently, 95% of the government's new projects have been outsourced. With the government's commitment to an active outsourcing strategy, this expanded IT expenditure would sustain many business opportunities for the IT industry.

On e-commerce, the government launched the Electronic Service Delivery Scheme in 2000. More than 200 public services are now offered online. For Hong Kong end-users for electronic business services², their utilisation rate of reached 97.4% in 2006 as compared to 97.3% in 2005. In 2006, their usage of online purchasing services also reached 508,300 persons as compared to 498,200 back in2005. In general, Hong Kong has demonstrated its receptiveness to take advantage of the latest technologies.

This receptiveness to technology has attracted some world-class IT services companies to use Hong Kong as their headquarters or platform for partnerships:

• In January 2006, Network Appliance Inc, a company specialized in disk storage systems and storage software, announced the opening of its regional headquarters in Hong Kong.
  
  
• In May 2006, Ovum, the largest European-headquartered consultant on telecoms, software and IT services, opened its operation in Hong Kong. The new office is part of the firm's proactive strategy to deepen relationships with clients based in Asia, and to grow business and develop markets throughout the region.
  
  
• In June 2006, Fortinet, Inc., a leading provider of multi-threat IT network security solutions, established its regional headquarters in Hong Kong. The new office will lead and coordinate the sales and support of the company's operations in the Asia Pacific region, which includes Australia, Japan, South Korea, Singapore, Malaysia, Thailand, the Philippines, India, Taiwan and the Chinese mainland.

In the future, Hong Kong businesses should continue to leverage this receptiveness by using Hong Kong as a platform for commercialising and exporting technologies to the world. Recent successful cases include:

• Since 2003, Octopus Hong Kong has started to export its locally developed Octopus technology. The Netherlands' public transit system was the company's first move. In late 2006, the Octopus technology was extended to Macau.
  
  
• Since 2005, PCCW has started to export its locally developed IPTV to different countries. Thaliand was the company's first move.

China Market

According to IDC, the ICT market in China will remain the largest in Asia in 2007 at US$42.1 billion, up from US$37.1 billion in 2006, driven by continued business and 2008 Olympics-related infrastructure expansions.

According to The Global Information Technology Report 2004-2005 by the World Economic Forum, China has made much progress in adopting information and communication technology (ICT). The world ranking of China in the Network Readiness Index (NRI) jumped from 51 in 2003 to 41 in 2004. The competitive environment will push mainland enterprises, both state and private, to leverage IT to improve their productivity and service standards.

Under the eleventh Five-Year Plan, IT-enabled service outsourcing is expected to contribute more to the growth of the Chinese ICT industry. It is particularly significant as the convergence of IT and other manufacturing and services sectors makes IT development indispensable for achieving higher efficiency and productivity. Moreover, multinational corporations entering the China market would need substantial IT customisation. According to the report titled "China IT Outsourcing Market Report 2005-2006" by Analysys International, the latest breakdown of the Chinese IT sourcing market is as follows:

• the IT operations and maintenance segment reached RMB 2.63 billion, accounting for about 84% of the market total;
• the IT application and management segment reached RMB 380 million, accounting for 12% the market total;
• the Help Desk market size reached RMB 120 million, accounting for 4% the market total. 

Further growth in the telecommunications and multimedia areas is expected with the announced construction of network for 3G mobile telephones on the mainland.

Hong Kong companies can tap into the mainland market either through setting up a branch office, joint venture or acting as mediator between international IT firms and the mainland counterparts. According to the HKPC survey, 33.8% of the surveyed IT companies in Hong Kong had already established operations on the Chinese mainland. Looking into the near future, over 72% of the surveyed companies were interested to either start or expand their business into the mainland market.

The mainland counterpart usually provides research and development, programming and system support. Hong Kong companies usually concentrate on designing software applications, defining operation procedures, marketing as well as technology transfer. Through a joint-venture arrangement, Hong Kong companies can develop localised products and build up their distribution channel on the mainland. Moreover, China's research results will also offer opportunities for commercialisation by Hong Kong companies. In June 2004, City University of Hong Kong (CityU) and the University of Science and Technology of China (USTC) signed a memorandum of understanding to jointly establish a high-level, joint research centre in Suzhou. The centre aims to advance CityU's research base in the booming Yangtze River Delta region, following the success of the university's Shenzhen and Zhuhai research centres in the Pearl River Delta region.

While major international computer companies have set up their offices on the mainland to market their products, many of them are co-operating with Hong Kong companies to provide software and service support.


The Closer Economic Partnership Arrangement between Hong Kong and the Mainland (CEPA)

CEPA II opens a new sector of information technology services to allow Hong Kong service suppliers to apply for computer information system integration qualification certification in accordance with the provisions of relevant mainland laws, regulations and rules. Hong Kong IT companies are expected to benefit from this arrangement and their competitiveness in the mainland market will be enhanced by such qualification certification.

On the other hand, the Chinese mainland introduced in January 2004 its revised National Computer and Software Technology Qualifications Examination to enhance professionalism of its IT sector. As provided under CEPA II, Hong Kong residents are allowed to take the qualification examination regarding computing technology and software. Therefore, Hong Kong IT professionals will be able to render services related to systems integration (an area not included in the WTO commitment) after they have passed the examination. This will facilitate Hong Kong IT professionals to participate in large-scale IT projects, which usually require system integration services at the senior level of project management.

With the approval of the Ministry of Personnel and Ministry of Information Industry, an examination centre for the National Computer and Software Technology Qualifications Examination has been set up in Hong Kong. Hong Kong IT professionals are now able to sit this examination for mainland qualifications.

In light of the frequent exchanges between mainland and Hong Kong IT professionals in recent years, the establishment of an examination centre can further promote exchanges in information, personnel and technology between the two places.

The move also represents a step forward in the bilateral cooperation in trade in services. It can be expected that following the certification of IT professional qualifications in Hong Kong, progress will be made in the mutual recognition of corporate qualifications.

The non-profit Beijing-Hong Kong Academic Exchange Centre in Hong Kong will be in charge of the new examination centre.

As of 31 March 2007, 12 Hong Kong IT services providers were approved for the Certificate of Hong Kong Service Supplier applications under CEPA.

¹ Study on Hong KongIT Services Sector 2006
² Included the use of Octopus card, Automatic Teller Machine (ATM), e-cash, Easy Pay System (EPS), Payment by Phone Service (PPS), online searching for financial information/information on goods and services/information on job vacancies, etc.