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An empirical analysis of direct foreign investments in manufacturing in Hong Kong Hung, Chiu Ling 1981

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AN EMPIRICAL ANALYSIS OF DIRECT FOREIGN INVESTMENTS IN MANUFACTURING IN HONG KONG by Chiu Lingj^Hung B.A., University of Hong Kong, 1965 M.A., University of Hong Kong, 1968 M.Sc. (Bus. Admin.), University of B r i t i s h Columbia, 1973 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF DOCTOR OF PHILOSOPHY i n THE FACULTY OF COMMERCE AND BUSINESS ADMINISTRATION We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA OCTOBER, 1980 In presenting t h i s . t h e s i s in par t i a l fu l f i lment of the requirements for an advanced degree at the Univers i ty of B r i t i s h Columbia, I agree that the L ibrary sha l l make it f ree ly ava i lab le for reference and study. I fur ther agree that permission for extensive copying of th is thesis for scho lar ly purposes may be granted by the Head of my Department or by his representat ives . It is understood that copying or pub l i ca t ion of th is thes is fo r f inanc ia l gain sha l l not be allowed without my writ ten permission. Chiu L i n g Hung Department of Commerce & Business A d m i n i s t r a t i o n The Univers i ty of B r i t i s h Columbia 2075 Wesbrook Place Vancouver, Canada V6T 1W5 6 ABSTRACT Th i s t h e s i s p r e s e n t s an e m p i r i c a l a n a l y s i s o f d i r e c t f o r e i g n investments i n manufacturing i n Hong Kong. The a n a l y s i s i s based upon two main data sources - Hong Kong government s t a t i s t i c s and a q u e s t i o n n a i r e survey conducted i n March 1979. The data c o l l e c t e d are put together to pr o v i d e a comprehensive p i c t u r e o f the investment p a t t e r n o f the f o r e i g n manufacturers and to p i n p o i n t t h e i r economic s i g n i f i c a n c e to Hong Kong. T h e i r o p e r a t i o n a l c h a r a c t e r i s t i c s as w e l l as t h e i r motives and needs are a l s o e x p l o r e d t o gi v e b e t t e r i n s i g h t s i n t o t h e i r a c t i v i t i e s and to t e s t the v a l i d i t y o f d i r e c t f o r e i g n investment t h e o r i e s . Hong Kong has an extremely l i b e r a l economic p o l i c y and there i s very l i t t l e government.iintervention i n p r i v a t e b usiness a c t i v i t i e s . T h i s p o l i c y i s extended to i t s treatment o f f o r e i g n investment. The o u t s t a n d i n g f e a t u r e i s t h a t i t does not d i f f e r e n t i a t e between f o r e i g n and l o c a l c o r p o r a t i o n s . Consequently, there i s no s p e c i a l r e s t r i c t i o n on f o r e i g n investment, but n e i t h e r i s any con c e s s i o n g i v e n . F o r e i g n i n v e s t o r s f i n d t h i s p o l i c y most agreeable. There i s i n t e n s i v e and d i v e r s i f i e d f o r e i g n investment i n t e r e s t i n Hong Kong. With the o n l y e x c e p t i o n of manufacturing, f o r e i g n i n v e s t o r s now h o l d dominating p o s i t i o n s i n a l l major economic sectors. The number of foreign manufacturers comprises only about one percent of the t o t a l number of manufacturing establishments i n Hong Kong, but t h e i r contributions i n terms of providing i n d u s t r i a l employment and exports are approximately ten times as much. More s i g n i f i c a n t l y , t h e i r investments have helped Hong Kong very much i n i t s e f f o r t s to upgrade and d i v e r s i f y i t s industries. They are an important agent for transf e r r i n g technology into Hong Kong. Foreign investors i n manufacturing have come mostly from the U.S., Japan, Western Europe and Asian P a c i f i c countries. The industries i n which they have invested most are electronics, t e x t i l e s , chemical products and e l e c t r i c a l products. Foreign investments i n manufacturing i n Hong Kong are mostly of the export oriented type. There are close l i n k s i n management, production and marketing established between the foreign manufacturers and th e i r overseas a f f i l i a t e s i n d i c a t i n g that t h e i r operations are integrated. Furthermore, foreign manufacturers appear to have a higher degree of sophistication and d i v e r s i f i c a t i o n i n t h e i r production and marketing operations than t h e i r l o c a l counterparts. i v A comparison between U.S. and Japanese investment c h a r a c t e r i s t i c s shows t h a t f o u r out of f i v e h y p o t h e t i c a l p r o p o s i t i o n s d e r i v e d from t h e o r e t i c a l U.S. and Japanese f o r e i g n investment models are supported. There i s enough evidence t o i n d i c a t e t h a t the i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d are d i f f e r e n t and are t e c h n o l o g i c a l l y l e s s advanced, th a t Japanese manufacturing o p e r a t i o n s are more labour i n t e n s i v e , t h a t Japanese f i r m s use unadapted home country technology more o f t e n and t h a t Japanese f i r m s export back to Japan a g r e a t e r p r o p o r t i o n o f t h e i r s a l e s than U.S. firms do to the U.S. The on l y one o f the hypotheses examined which cannot be supported i s t h a t t h e r e i s a higher i n c i d e n c e of m i n o r i t y h o l d i n g s and j o i n t ventures being used by Japanese manufacturers. In Hong Kong, both the U.S. and Japanese manufacturers have a s t r o n g p r e f e r e n c e f o r m a j o r i t y or f u l l ownership. V TABLE 0F: CONTENTS Page A b s t r a c t i i Table of Contents v L i s t of Tables v i i Acknowledgement x Chapter I: I n t r o d u c t i o n 1 — o b j e c t i v e s and scope of t h e s i s 1 — o r g a n i z a t i o n of t h e s i s 5 — data sources and c o l l e c t i o n 7 — t h e o r e t i c a l concepts of d i r e c t f o r e i g n investments 12 — notes 33 Chapter I I : I n d u s t r i a l Development i n Hong Kong 38 -- i n d u s t r i a l development and p r e s e n t s t r u c t u r e 38 — growth f a c t o r s and the government's r o l e 47 — notes 52 Chapter I I I : Government P o l i c y Towards F o r e i g n Investments 53 — p o l i c y i n Hong Kong 53 — a comparison w i t h o t h e r c o u n t r i e s i n Southeast A s i a 56 — overview of f o r e i g n investments i n Hong Kong 58 — notes 67 Chapter IV: Investments i n Manufacturing 6 9 — emergence and growth 69 — country source of investment 7 3 — i n d u s t r y d i s t r i b u t i o n , 76 — notes 81 Chapter V: Economic S i g n i f i c a n c e 82 — i n d u s t r i a l employment 85 — manufacturing output and exports 8 9 — t r a n s f e r of technology 92 — notes 101 v i Chapter VX: O p e r a t i o n a l C h a r a c t e r i s t i c s 104 — motives and type of investment 104 — ownership and management c o n t r o l 110 — p r o d u c t i o n and marketing 120 — notes 133 Chapter V I I : Assessment of Investment C o n d i t i o n s 135 — importance o f investment f a c t o r s 135 — f a v o u r a b i l i t y of f a c t o r s ; 14 3 — performance and s e l f e v a l u a t i o n 151 — notes 155 Chapter V I I I : A Comparative A n a l y s i s of U.S. and Japanese Investment C h a r a c t e r i s t i c s 157 — c h a r a c t e r i z a t i o n s of the U.S. model and the Japanese model 158 — h y p o t h e t i c a l p r o p o s i t i o n s 168 — t e s t i n g of hypotheses 174 — other s i m i l a r i t i e s and d i f f e r e n c e s 187 — notes 196 Chapter IX: Summary and C o n c l u s i o n 201 — summary of f i n d i n g s 201 — importance and i m p l i c a t i o n s o f f i n d i n g s 206 — notes 215 B i b l i o g r a p h y 216 Appendix I: Q u e s t i o n n a i r e on F o r e i g n Manufacturers i n Hong Kong 2 22 Appendix I I : S t a t i s t i c a l T e s t s 236 Appendix I I I : Exchange Value of the Hong Kong D o l l a r 256 v i i LIST OF TABLES Table Page 1-1 - Summary R e s u l t of Survey Response 9 1-2 - Breakdown o f the 108 E f f e c t i v e Responses 10 I I I - l - A Comparison Between Hong Kong and Other Southeast A s i a n C o u n t r i e s i n T h e i r P o l i c i e s Towards F o r e i g n Investment 59 III-2 - F o r e i g n Branch O f f i c e s a t March 31, 1977 (by N a t i o n a l i t y of Head O f f i c e ) 62 I I I - 3 - F o r e i g n Branch O f f i c e s a t March 31, 1977 (by Nature o f Business) 63 III-4 - Insurance Companies a t March 31, 1977 65 IV-1 - Year of E s t a b l i s h m e n t of F o r e i g n Manufacturers Operating a t December 31, 1977 70 IV-2 - Hong Kong's I n d u s t r i a l Growth 1971-77 72 IV-3 - D i s t r i b u t i o n of F o r e i g n Investments i n Manufacturing by Source Country 74 IV-4 - D i s t r i b u t i o n of F o r e i g n Investments i n Manufacturing by Type of Industry 77 IV-5 - D i s t r i b u t i o n of F o r e i g n Investments i n Manufacturing by Type of Industry and by Source Country 8 0 V - l - S i z e o f Manufacturing Establishments a t 31/12/74 83 V-2 - C a p i t a l Investments i n F o r e i g n Manufacturing E s t a b l i s h m e n t s a t 31/12/74 84 V-3 - Employment i n Manufacturing Establishments w i t h 20 or More Workers a t 31/12/73 86 V-4 - Employment i n Manufacturing E s t a b l i s h m e n t s w i t h F o r e i g n Ownership a t 31/12/77 by Type of Industry 88 v i i i V- 5 - Gross Output of Manufacturing Establishments w i t h 20 or More Workers i n 1973 90 V- 6 - P r o d u c t i o n Output i n Manufacturing Establishments w i t h F o r e i g n Ownership by Type of Industry i n 1974 91 V- 7 - Stock o f F i x e d A s s e t s i n Manufacturing Establishments w i t h 20 or More Workers a t 31/12/73 95 V- 8 - P r o v i s i o n s i n F o r e i g n - L o c a l J o i n t Ventures i n 1974 by Type of Industry 96 V- 9 - Numbfer of Patents R e g i s t e r e d , 1970/71 -1977/78 99 VI- 1 - The Investment Motives 105 VI- 2 - Type of Ownership 110 V I - 3 - Amount of C a p i t a l Investment 112 VI- 4 - Share of F o r e i g n Ownership 113 VI- 5 - Amount o f C a p i t a l Investments and Percent Share of F o r e i g n Ownership a t 31/12/78 114 VI- 6 - Method o f Ownership P a r t i c i p a t i o n 115 VI- 7 - Use of J o i n t Ventures 116 VI- 8 - Overseas Ownership A f f i l i a t i o n 117 VI- 9 - Management C o n t r o l 119 VI-10 - P r o d u c t i o n A c t i v i t i e s Performed 121 VI-11 - S k i l l e d Workers Employed 122 VI-12 - Product L i n e C o n c e n t r a t i o n 123 VI-13 - L i c e n s e d P r o d u c t i o n 124 VI-14 - Sources o f Equipment and M a t e r i a l S u p p l i e s 126 VI-15 - Marketing A c t i v i t i e s Performed 127 VI-16 - Export Sales 128 I X VI-17 - Degree of Market C o n c e n t r a t i o n 130 VI-18 - Overseas L i n k s i n Marketing 131 V I I - 1 - Degree of Importance of Investment F a c t o r s 137 V I I - 2 - Degree of F a v o u r a b i l i t y of Investment F a c t o r s 144 V I I - 3 - R e l a t i v e P o s i t i o n s of Importance and F a v o u r a b i l i t y 149 V I I - 4 - Performance and S e l f E v a l u a t i o n 152 V I I - 5 - Business Environment and Choice f o r R e l o c a t i o n 154 V I I I - 1 - Industry D i s t r i b u t i o n a t February 28, 1979 174 V I I I - 2 - S k i l l e d Workers Employed a t December 31, 1978 176 V I I I - 3 - P r o d u c t i o n A c t i v i t i e s Performed 177 V I I I - 4 - C a p i t a l Investment and Number of Workers Employed a t December 31, 1978 179 V I I I - 5 - Export Sales i n 1978 181 V I I I - 6 - Import of C a p i t a l Equipment, Machinery and Raw M a t e r i a l s i n 1978 183 V I I I - 7 - Share o f Ownership and Use o f J o i n t Ventures 186 V I I I - 8 - Investment Motives 188 V I I I - 9 - Management C o n t r o l by Headquarters Company 191 VIII-10 - Product L i n e C o n c e n t r a t i o n 193 VIII-11 - S a l e s to F o r e i g n A f f i l i a t e d Companies 194 VIII-12 - Marketing A c t i v i t i e s Performed 195 X ACKNOWLEDGEMENT I wish to express my s i n c e r e thanks to P r o f e s s o r s J.D. Forbes, S.P.S. Ho, S.M. Oberg, M. Thompson and J.W.C. Tomlinson f o r t h e i r many u s e f u l a d v i c e and comments on my work. I am p a r t i c u l a r l y g r a t e f u l to P r o f e s s o r J.W.C. Tomlinson who s u p e r v i s e d my r e s e a r c h and gave me a l o t o f v a l u a b l e help and guidance throughout my study programme. My thanks go a l s o to the many f o r e i g n manufacturing f i r m s i n Hong Kong which responded to my survey and pr o v i d e d me wit h the data I needed f o r w r i t i n g t h i s t h e s i s . Chiu L i n g Hung U n i v e r s i t y of B r i t i s h Columbia, October, 1980. 1 CHAPTER I - INTRODUCTION T h i s t h e s i s p r e s e n t s an e m p i r i c a l a n a l y s i s o f d i r e c t f o r e i g n investments i n the manufacturing s e c t o r i n Hong Kong. O b j e c t i v e s and Scope of T h e s i s T h i s t h e s i s has two main o b j e c t i v e s . The f i r s t o b j e c t i v e i s to serve as a p i o n e e r i n g study on f o r e i g n i n v e s t -ments i n Hong Kong. T h i s i s y e t an unexplored s u b j e c t d e s p i t e i t s importance not o n l y to those concerned with the economy of Hong Kong but a l s o to those i n t e r e s t e d i n the study of investment motives and c h a r a c t e r i s t i c s and i n . t h e i n t e r a c t i o n s between government p o l i c i e s , f o r e i g n investments and economic development. The dramatic i n d u s t r i a l growth of Hong Kong i n the post-war years has a t t r a c t e d world-wide a t t e n t i o n . I t has a l s o l e d to a number of r e s e a r c h s t u d i e s on i t s growth p a t t e r n and a t t r i b u t e s . In these s t u d i e s , the r o l e p l a y e d by f o r e i g n investments i s o f t e n mentioned and r e c o g n i z e d , but t h i s i s u s u a l l y made with no more than a few c u r s o r y and c o n j e c t u r a l remarks.''" Hence, what t h i s t h e s i s hopes to achieve i n the f i r s t p l a c e i s to put a l l the a v a i l a b l e b i t s and p i e c e s t ogether so as to p r o v i d e a comprehen-s i v e p i c t u r e of f o r e i g n investments i n Hong Kong and a broad data base which can be used f o r r e l a t e d s t u d i e s and f u t u r e r e s e a r c h . 2 The second o b j e c t i v e i s to expl o r e the investment motives and o p e r a t i o n a l c h a r a c t e r i s t i c s o f f o r e i g n manufacturers i n Hong Kong and to use the e m p i r i c a l f i n d i n g s to t e s t the 2 v a l i d i t y o f d i r e c t f o r e i g n investment t h e o r i e s . Hong Kong i s an i d e a l p l a c e f o r s t u d y i n g f o r e i g n investment motives and c h a r a c t e r i s t i c s and pr o v i d e s a l a b o r a t o r y case f o r t e s t i n g economic t h e o r i e s o f d i r e c t f o r e i g n investment. T h i s i s because the c i t y i t s e l f i s cosmopolitan and the economy of Hong Kong i s open and f r e e . There i s i n Hong Kong very l i t t l e government i n t e r v e n t i o n i n p r i v a t e business a c t i v i t i e s and no d i f f e r e n t i a t i o n made between f o r e i g n and l o c a l c o r p o r a t i o n s . F o r e i g n i n v e s t o r s have maximum freedom i n d e s i g n i n g and imple-menting t h e i r investment plans and business s t r a t e g i e s so as to best s u i t t h e i r o b j e c t i v e s and requirements. Consequently, the observed investment p a t t e r n and o p e r a t i o n a l c h a r a c t e r i s t i c s w i l l be a c c u r a t e r e f l e c t i o n s o f the economic f o r c e s behind t h e i r investments. In c o n t r a s t , i n c o u n t r i e s where p o l i t i c a l or economic n a t i o n a l i s m i s s t r o n g and where there e x i s t s t r i c t c o n t r o l s over f o r e i g n c o r p o r a t i o n s , t h e i r investment p a t t e r n and o p e r a t i o n s may be determined s o l e l y by what and how much foreign;'.investors are per m i t t e d to do. Th i s t h e s i s i s focussed upon the manufacturing s e c t o r f o r s e v e r a l reasons. F i r s t l y , d i r e c t f o r e i g n investment analyses i n i n t e r n a t i o n a l business l i t e r a t u r e u s u a l l y c e n t r e on 3 manufacturing. T h i s i s because by f a r the m a j o r i t y of the l e a d i n g i n v e s t o r c o r p o r a t i o n s i n the world are manufacturing 3 c o r p o r a t i o n s . T h e i r investment i n t e r e s t l i e s mainly i n 4 manufacturing too. Secondly, manufacturing has been the backbone of the Hong Kong economy s i n c e 1950. I t has a l s o been the f a s t e s t growing s e c t o r . In r e c e n t y e a r s , manufacturing a c t i v i t i e s account f o r one-quarter to o n e - t h i r d of Hong Kong's gross domestic products. F i n a l l y , the Hong Kong government has, s i n c e 1970, t r a c k e d down those establishments with f o r e i g n ownership i n manufacturing. T h i s has not been done f o r non-manufacturing e s t a b l i s h m e n t s . Because o f t h i s , the manufacturing s e c t o r i s the o n l y s e c t o r which can be approached by a question-^ n a i r e survey to generate primary data f o r a n a l y s i s of f o r e i g n investments t h e r e i n . In u s i n g the e m p i r i c a l f i n d i n g s f o r t e s t i n g the v a l i d i t y o f d i r e c t f o r e i g n investment t h e o r i e s , s p e c i f i c a l l y the investment and o p e r a t i o n a l c h a r a c t e r i s t i c s of U.S. and Japanese manufacturers i n Hong Kong w i l l be compared i n order to see whether or not these c h a r a c t e r i s t i c s accord with t h e o r e t i c a l f o r e i g n investment models f o r these two c o u n t r i e s . There are a l s o a few reasons why U.S. and Japanese investments are chosen f o r a comparative a n a l y s i s . F i r s t l y , they are the two l e a d i n g f o r e i g n i n v e s t o r s i n Hong Kong. T h e i r combined investments i n manufacturing a t the end of 1978 accounted f o r over 65% of t o t a l f o r e i g n investments i n d o l l a r terms, and 4 over 50% i n terms of the number of e s t a b l i s h m e n t s . Secondly, the.U.S. and Japan are now the two most important t r a d i n g p a r t n e r s of Hong Kong, being the number one customer and the number one s u p p l i e r r e s p e c t i v e l y . T h i r d l y , and most i m p o r t a n t l y , the t h e o r e t i c a l f o r e i g n investment models f o r the U.S. and Japan suggest t h a t these two c o u n t r i e s have somewhat d i f f e r e n t f o r e i g n investment motives and needs. A comparative a n a l y s i s of t h e i r investment and o p e r a t i o n a l c h a r a c t e r i s t i c s i n Hong Kong may r e v e a l how v a l i d are these models. T h i s t h e s i s , however, i s not intended to develop new t h e o r i e s , nor i s i t s o l e l y concerned w i t h t e s t i n g of hypotheses. Furthermore, i t w i l l not attempt to compare U.S. and Japanese investments i n Hong Kong with t h e i r investments i n o t h e r c o u n t r i e s . Even though c r o s s country comparisons may g i v e even b e t t e r i n s i g h t s i n t o the impact of investment motives on investment p a t t e r n and c h a r a c t e r i s t i c s , obvious c o n s t r a i n t s have p r o h i b i t e d the w r i t e r from going beyond the p r e s e n t scope. I n t e r n a t i o n a l l y c o n s i s t e n t and comparable data on f o r e i g n investment p a t t e r n and o p e r a t i o n a l c h a r a c t e r i s t i c s are l a c k i n g , and to generate such data i s not what one man can do, g i v e n the time and resource l i m i a t i o n s . F i n a l l y , t h i s t h e s i s i s not aimed a t u s i n g the example o f Hong Kong to i l l u s t r a t e the impact of d i r e c t f o r e i g n investments on economic development. Unquestionably, the impact 5 o f f o r e i g n investments on the economic development o f Hong Kong i s c l o s e l y r e l a t e d to the s u b j e c t matter o f t h i s t h e s i s and i s a l s o very worthy of study, but we do not have the necessary s t a t i s t i c s f o r a n a l y s i n g t h i s impact. Consequently, when the s i g n i f i c a n c e o f d i r e c t f o r e i g n investments i n the manufacturing s e c t o r i n Hong Kong w i l l be d i s c u s s e d , t h i s t h e s i s w i l l not go i n t o any depth i n a n a l y s i n g the magnitude and c o n t r o v e r s i e s o f t h i s impact. O r g a n i z a t i o n o f t h e s i s T h i s t h e s i s i s org a n i z e d i n t o nine c h a p t e r s . T h i s i n t r o d u c t o r y chapter e x p l a i n s the o b j e c t i v e s and scope of the t h e s i s , i t s data sources and the survey conducted by the w r i t e r . The l a s t s e c t i o n i s a review of some t h e o r e t i c a l concepts of d i r e c t f o r e i g n investment. F o l l o w i n g the i n t r o d u c t i o n i s a chapter on the i n d u s t r i a l development o f Hong Kong (Chapter I I ) . I t begins with a h i s t o r i c a l account o f the Hong Kong economy i n i t s f i r s t hundred years and the process o f i n d u s t r i a l i z a t i o n i n the p o s t -war y e a r s , and ends w i t h an i n v e s t i g a t i o n o f the growth f a c t o r s and the r o l e p l a y e d by the government. In Chapter I I I , the Hong Kong government's p o l i c y towards f o r e i g n investments i s analysed and then compared wi t h 6 those o f neighbouring Southeast A s i a n c o u n t r i e s . T h i s i s f o l l o w e d by a g e n e r a l overview of f o r e i g n investments i n non-manufacturing a c t i v i t i e s . Chapters IV t,o VII look s p e c i f i c a l l y i n t o f o r e i g n investments i n the manufacturing s e c t o r . Chapter IV f i r s t t r a c e s t h e i r emeregence and growth b e f o r e p r e s e n t i n g t h e i r d i s t r i b u t i o n i n r e c e n t years by country source of investment and by type o f i n d u s t r y . Then t h e i r economic s i g n i f i c a n c e i s analysed i n Chapter V i n terms of t h e i r c o n t r i b u t i o n s to i n d u s t r i a l employment, manufacturing output and e x p o r t s , and t r a n s f e r of technology to Hong Kong. Using the data generated from a q u e s t i o n n a i r e survey, the c h a r a c t e r i s t i c s of these f o r e i g n manufacturers are e x p l o r e d i n Chapter VI. In t h i s chapter, t h e i r investment motives, ownership and c o n t r o l p o l i c i e s , and p r o d u c t i o n and marketing o p e r a t i o n s are analysed. Chapter VII i s devoted e n t i r e l y to t h e i r assessment of investment c o n d i t i o n s i n Hong Kong, what they c o n s i d e r as important and f a v o u r a b l e , and how they e v a l u a t e t h e i r own performance a c c o r d i n g to t h e i r e x p e c t a t i o n s . Chapter V I I I g i v e s a comparative a n a l y s i s of U.S. and Japanese investments. I t begins with a review of the U.S. and Japanese f o r e i g n investment models. Hypotheses on d i f f e r e n c e s between the two c o u n t r i e s ' investment c h a r a c t e r i s t i c s are then d e r i v e d and t e s t e d . Other s i m i l a r i t i e s and d i f f e r e n c e s r e v e a l e d by the survey w i l l a l s o be presented and d i s c u s s e d . 7 The l a s t chapter, Chapter IX, concludes t h i s t h e s i s w i t h a b r i e f summary o f the f i n d i n g s and a d i s c u s s i o n of t h e i r importance and i m p l i c a t i o n s . Data Sources and C o l l e c t i o n The a n a l y s i s i n t h i s t h e s i s was based upon two main data sources - Hong Kong government s t a t i s t i c s and a q u e s t i o n n a i r e survey. Hong Kong government s t a t i s t i c s i n c l u d e d those p u b l i s h e d by (i) the Department o f Census and S t a t i s t i c s , ( i i ) the Department of Trade, Industry and Customs, ( i i i ) the Labour Department and (iv) the R e g i s t r a r G eneral. The data taken from these o f f i c i a l sources were used to p r o v i d e a h i s t o r i c a l back-ground on the i n d u s t r i a l development of Hong Kong, to examine the emergence and growth of f o r e i g n investments and to analyse the economic s i g n i f i c a n c e of these investments i n the manufac-t u r i n g s e c t o r i n HOng Kong. The q u e s t i o n n a i r e survey was designed and .conducted w i t h the purpose of g e t t i n g primary i n f o r m a t i o n d i r e c t l y from the f o r e i g n manufacturers on t h e i r investment motives, needs and o p e r a t i o n a l c h a r a c t e r i s t i c s . There were a l s o follow-up i n t e r v i e w s w i t h eleven U.S. and seven Japanese manufacturing f i r m s . 8 The q u e s t i o n n a i r e survey was conducted i n March 6 197 9. (A copy of the q u e s t i o n n a i r e i s attached i n Appendix I.) The questionnaire contained f i f t y q u e s t i o n s and was d i v i d e d i n t o t h r e e p a r t s : (i) ownership and c o n t r o l , ( i i ) p r o d u c t i o n and marketing and ( i i i ) investment needs and assessment of i n v e s t -ment c o n d i t i o n s i n Hong Kong. The r e s u l t s of the r e t u r n s were used to analyse (i) the m o t i v a t i o n behind these f o r e i g n i n v e s t o r s to manufacture i n Hong Kong, ( i i ) t h e i r ownership and management c o n t r o l methods, ( i i i ) the major c h a r a c t e r i s t i c s o f t h e i r p r o d u c t i o n and marketing o p e r a t i o n s , (iv) what they c o n s i d e r e d as important investment f a c t o r s a f f e c t i n g o p e r a t i o n s , (v) how they assessed these f a c t o r s i n the environment of Hong Kong and (vi) t h e i r o v e r a l l performance and t h e i r own e v a l u a t i o n of t h e i r o r i g i n a l investment d e c i s i o n s . Also/..,the r e t u r n s from the U.S. and Japanese manufacturers were used f o r comparing t h e i r c h a r a c t e r i s t i c s and f o r t e s t i n g hypotheses d e r i v e d from t h e i r r e s p e c t i v e f o r e i g n investment models. The q u e s t i o n n a i r e was sent to a l l 391 manufacturing e s t a b l i s h m e n t s known to have had f o r e i g n ownership i n t e r e s t a t 7 February 28, 1979 a c c o r d i n g to government r e c o r d s . The m a i l i n g was completed i n e a r l y March. Telephone c o n t a c t s were used to s o l i c i t c o o p e r a t i o n of these e s t a b l i s h m e n t s and to complete g q u e s t i o n s which were omitted i n the f i r s t i n s t a n c e . A p e r i o d of two months was allowed f o r the r e t u r n s . Table 1-1 summarizes the survey response by May 15 and Table 1-2 g i v e s a breakdown 9 TABLE 1-1 Summary R e s u l t of Survey Response Response Number L e t t e r r e t u r n e d by post o f f i c e because . the f i r m had ceased o p e r a t i o n L e t t e r r e t u r n e d by post o f f i c e because the f i r m had moved and c o u l d not be 16 t r a c e d Q u e s t i o n n a i r e r e t u r n e d but not completed because the f i r m d e c l a r e d t h a t i t c o u l d 14 not d i v u l g e i n f o r m a t i o n on i t s o p e r a t i o n s Q u e s t i o n n a i r e r e t u r n e d but not used because the f i r m had l e s s than 5% f o r e i g n owner- 5 s h i p i n t e r e s t i n 1978 Q u e s t i o n n a i r e r e t u r n e d but not used because the f i r m was no longer engaged i n 2 manufacturing a c t i v i t i e s i n 1978 Q u e s t i o n n a i r e r e t u r n e d but not used because t h e r e were more than f i v e q u e s t i o n s 6 unanswered No response 236 E f f e c t i v e responses used i n the a n a l y s i s 108 T o t a l 391 % of T o t a l 1.0% 4.1% 3.6% 1.3% 0.5% 1.5% 60.4% 27.6% 100.0% of the 108 e f f e c t i v e responses which were used i n the a n a l y s i s . The e f f e c t i v e response r a t e of 27.6% was a l r e a d y 9 very s a t i s f a c t o r y by Hong Kong standards. On the whole, i n v e s t o r s from the U.S. and Western Europe were more w i l l i n g 10 TABLE 1-2 Breakdown of the 108 E f f e c t i v e Responses By Indu s t r y E l e c t r o n i c s T e x t i l e s Metal products Watches, c l o c k s & a c c e s s o r i e s E l e c t r i c a l products Chemical products P r i n t i n g £ p u b l i s h i n g Food manufactures Metal r o l l i n g , e x t r u s i o n s * f a b r i c a t i o n Toys B u i l d i n g & c o n s t r u c t i o n m a t e r i a l s Others T o t a l By Country Source of Investment Un i t e d S t a t e s United Kingdom Japan West Germany A u s t r a l i a S w i t z e r l a n d T h a i l a n d Others T o t a l By P o s i t i o n of Respondent General manager Managing d i r e c t o r C h i e f accountant / accountant F i n a n c i a l manager A d m i n i s t r a t i o n / O f f i c e manager Others T o t a l Number 25 l x9 13 8 6 5 5 2 2 2 1 20 108 41 17 15 8 7 3 3 18 (112) 38 24 16 14 7 9 % of T o t a l 23.1% 17.6% 12.0% 7.4% 5.6% 4.6% 4, 1 1 6% 9% 9% 1.9% 0.9% 18.5% 100.0% 36.6% 15.2% 13.4% 7.1% 6 2 2 16 3% 7% 7% 1% 108 100.0% 35.2% 22.2% 14.8% 13.0% 6.5% 8.3% 100.0% Notes: (1) (2) (3) There were three f o r e i g n e r s ' j o i n t v entures, two with two f o r e i g n i n v e s t o r s each and one wit h three f o r e i g n i n v e s t o r s . The i n d u s t r y breakdown f o l l o w s t h a t o f the Hong Kong government. C o u n t r i e s i n c l u d e d i n 'others' had l e s s than t h r e e e f f e c t i v e responses each. ( 11 to respond w h i l e those from Southeast A s i a n c o u n t r i e s were more r e l u c t a n t . Consequently, even though the response r a t e d i d not d i f f e r s i g n i f i c a n t l y by type of i n d u s t r y , t h i s was not the case on a country b a s i s . "^ At any r a t e , an a n a l y s i s of the c a p i t a l investments of these 108 responding f i r m s i n d i c a t e d t h a t they were a good r e p r e s e n t a t i v e sample of the 391 f i r m s i n the population.'''"'" In o r d e r to e x t r a c t more i n f o r m a t i o n on the i n v e s t -ment c h a r a c t e r i s t i c s of U.S. and Japanese manufacturers, follow-up i n t e r v i e w s were arranged w i t h e l e v e n U.S. f i r m s and seven Japanese f i r m s . The i n t e r v i e w e d f i r m s were s e l e c t e d from the responses. They a l l had 100% U.S. or Japanese ownership and had operated i n Hong Kong f o r a t l e a s t t hree y e a r s . The reason f o r s e t t i n g these two s e l e c t i o n c r i t e r i a was to ensure t h a t the U.S. or Japanese parent c o r p o r a t i o n s c o u l d have f u l l management c o n t r o l over t h e i r s u b s i d i a r i e s ' o p e r a t i o n s i n Hong Kong and they d i d have s e v e r a l y e a r s ' experience and r e s u l t s to adapt t h e i r investment s t r a t e g i e s . The i n t e r v i e w s were conducted i n the months of October and November, 1979. In the i n t e r v i e w s , the w r i t e r ' s main i n t e r e s t was not on the day-to-day o p e r a t i o n s of these f i r m s but on how t h e i r investment motives and needs a f f e c t e d t h e i r investment p a t t e r n s and o p e r a t i o n s . The i n t e r v i e w s were u n s t r u c t u r e d . The i n t e r v i e w e e s , who were i n most i n s t a n c e s the 12 c h i e f e x e c u t i v e s themselves or department managers, were f i r s t g i v e n the o p p o r t u n i t y to make e l a b o r a t i o n s on the answers which they had put down i n the r e t u r n s . Then they would proceed to d i s c u s s f r e e l y any r e l a t e d matters which they wished to b r i n g up or s t r e s s . The i n t e r v i e w f i n d i n g s were used mainly to supplement the data generated by the q u e s t i o n n a i r e survey. T h e o r e t i c a l Concepts of D i r e c t F o r e i g n Investments T h i s s e c t i o n g i v e s a b r i e f review of the t h e o r e t i c a l concepts of d i r e c t f o r e i g n investments. The emphasis i s on the t h e o r i e s which attempt to e x p l a i n the economic f o r c e s behind these investments but not the management a c t i v i t i e s o f the i n t e r n a t i o n a l c o r p o r a t i o n s . 1 ^ D i r e c t vs I n d i r e c t F o r e i g n Investments. C a p i t a l investments are c l a s s i f i e d i n t o two- main kinds u s i n g the degree of management c o n t r o l as the c r i t e r i o n : d i r e c t investment and i n d i r e c t or p o r t f o l i o investment. The former i s d i s t i n g u i s h e d from the l a t t e r i n t h a t i t e n t a i l s s i g n i f i c a n t management c o n t r o l of the business a s s e t s i n which the c a p i t a l i s i n v e s t e d . An i n d i r e c t investment i s b a s i c a l l y f i n a n c i a l i n nature; i t o n l y r e p r e s e n t s an investment i n the s e c u r i t i e s i s s u e d by some business c o r p o r a t i o n s . However, even though'the c o n c e p t u a l d i f f e r e n c e between the two i s p r e t t y c l e a r , t e c h n i c a l l y t here 13 can be problems i n drawing the d i v i d i n g l i n e . In the f i r s t p l a c e , 'management c o n t r o l ' i s more q u a l i t a t i v e than q u a n t i t a -t i v e and does not le n d i t s e l f to p r e c i s e measurements. Secondly, the degree of management c o n t r o l an i n v e s t o r can e x e r c i s e on h i s investment may not be i n p r o p o r t i o n to h i s ownership i n t e r e s t i n d o l l a r terms. T h i r d l y , t here i s no s i n g l e c r i t e r i o n on what 13 c o n s t i t u t e s ' s i g n i f i c a n t management c o n t r o l ' . F i n a l l y , the two kinds o f investment may interchange from time to time. For example, an investment may begin as i n d i r e c t , but a gradual c a p i t a l a c q u i s i t i o n by the i n v e s t o r or a sudden c a p i t a l w i t h -drawal by ot h e r owners may convert i t i n t o a d i r e c t investment. On the other hand, an o r i g i n a l l y d i r e c t investment may become i n d i r e c t when the c a p i t a l s t r u c t u r e changes i n the o p p o s i t e d i r e c t i o n . Or, a r e o r g a n i z a t i o n of the company may r e s u l t i n management changing hands from one i n v e s t o r to another without any changes i n ownership. D i r e c t f o r e i g n investments are made e s s e n t i a l l y by c o r p o r a t i o n s and examples of d i r e c t investments by i n d i v i d u a l f o r e i g n e r s are r e l a t i v e l y r a r e and are normally of s h o r t d u r a t i o n . I n d i r e c t investments are made by p r i v a t e i n d i v i d u a l s as w e l l as business c o r p o r a t i o n s which i n t h i s case w i l l mostly be f i n a n -c i a l i n s t i t u t i o n s . For i n d i r e c t investments i n f o r e i g n c o u n t r i e s , the investment motives are more f i n a n c i a l i n nature; f o r example, to take advantage of higher s e c u r i t y r e t u r n s overseas or to g e o g r a p h i c a l l y spread the investment r i s k . The r i s k elements 14 are r e l a t e d e s s e n t i a l l y to f l u c t u a t i o n s i n s e c u r i t i e s p r i c e s , 14 i n exchange r a t e s and i n d i v i d e n d e a r n i n g s . The motives and determinants o f d i r e c t f o r e i g n investments i n f o r e i g n c o u n t r i e s are more s u b t l e and complicated. Even though i n the f i n a l a n a l y s i s , i n t e r n a t i o n a l c o r p o r a t i o n s are motivated by market o p p o r t u n i t i e s and p r o f i t p o t e n t i a l s to i n v e s t overseas, a number of investment f a c t o r s u n d e r l i e t h i s simple t r u t h . T h e o r i e s o f D i r e c t F o r e i g n Investment. The upsurge of d i r e c t f o r e i g n investments i n the post-war years has been phenomenal and very s i g n i f i c a n t i n the i n t e r n a t i o n a l economy. De s p i t e the l a c k o f complete s t a t i s t i c s because of v a r i o u s t e c h n i c a l and d e f i n i t i o n a l problems, a l l a v a i l a b l e evidence i n d i c a t e s t h a t there has been a more r a p i d r a t e o f growth i n d i r e c t f o r e i g n investments than i n world trade or gross world product. Using the American f i g u r e s f o r i l l u s t r a t i o n , U.S.'s d i r e c t f o r e i g n investments a t book value rose from an estimate of US$11.8 b i l l i o n i n 1950 to US$78.2 b i l l i o n i n 1970 - an i n c r e a s e o f 662.7% i n two decades. In the same twenty-year p e r i o d the r a t e o f i n c r e a s e i n world trade and t o t a l gross n a t i o n a l products o f the elev e n l e a d i n g i n d u s t r i a l c o u n t r i e s of the West were 516.7% (from US$60 b i l l i o n to US$310 b i l l i o n ) and 428.3% (from US$449 b i l l i o n to US$1,923 b i l l i o n ) r e s p e c t -. , 15 l v e l y . 15 T h i s r a p i d growth i n i n t e r n a t i o n a l business a c t i v i t i e s has l e d to an e x t e n s i v e search f o r the u n d e r l y i n g economic f o r c e s both w i t h i n the i n v e s t i n g c o r p o r a t i o n s (the i n t e r n a l push f a c t o r s ) and i n the f o r e i g n c o u n t r i e s i n which these c o r p o r a t i o n s i n v e s t (the e x t e r n a l p u l l f a c t o r s ) . D i f f e r e n t t h e o r i e s have a l s o been formulated. However, i n view o f the many s u b t l e t i e s i n v o l v e d and the l a r g e number o f d i v e r -gent cases p o s s i b l e , most o f these t h e o r i e s o n l y o f f e r e x p l a n a t i o n s to some, but not a l l , f o r e i g n investment d e c i s i o n s . The theory which i s now widely accepted as having more g e n e r a l i n s t e a d of p a r t i a l a p p l i c a b i l i t y i s the one 16 developed by Hymer i n 1960. E s s e n t i a l l y , t h i s theory, which can be c a l l e d the m o n o p o l i s t i c theory, was the outcome of an attempt by Hymer to make up f o r the inadequacies of two c l a s s i c a l economic t h e o r i e s which are r e l a t e d t o , but cannot s a t i s f a c t o r i l y e x p l a i n d i r e c t f o r e i g n investment d e c i s i o n s and p a t t e r n s . These two c l a s s i c a l economic t h e o r i e s are the theory of i n t e r n a t i o n a l trade and the theory of the f i r m . The c l a s s i c a l theory of i n t e r n a t i o n a l t r ade has i t s foundation on comparative c o s t s ( R i c a r d i a n model) and r e l a t i v e f a c t o r endowment (Heckscher-Ohlin model) i n d i f f e r e n t c o u n t r i e s . I t g e n e r a l l y assumes p e r f e c t l y c o m p e t i t i v e product markets, i d e n t i c a l p r o d u c t i o n f u n c t i o n s and immobility of p r o d u c t i v e 16 factors with the exception of c a p i t a l which moves i n response to differences i n in t e r e s t rates. While i t s predictions accord with the general fact that countries s p e c i a l i z e i n the produc-ti o n of goods which they can produce more cheaply and e f f i c i -ently and that r i c h (or capital-abundant) countries invest i n poor (or capital-scarce) countries, the theory can hardly provide a complete explanation of d i r e c t foreign investments. For example, i t does not explain why d i r e c t investments are preferred to p o r t f o l i o investments, why production i s being undertaken by foreign investors instead of l o c a l investors, why there exists cross investments by large corporations i n r i c h countries and why are there transfers of other productive factors (technology, management and marketing knowhow, for example) which constitute as great a part of international business operations as the shipment of goods or movements of c a p i t a l . S i m i l a r l y , the theory of the firm has i t s inade-quacies. While i t depicts very well the impact of market structure, competition and production costs on a firm's operations, i t does not explain why firms should expand beyond the national boundary nor take into consideration the many r e s t r i c t i o n s and additional costs and ri s k s i n operating overseas. Furthermore, to the extent that i t assumes that firms are i n perfect competition, i t i s not useful at a l l i n analysing the behaviour of international corporations which grow 17 i n extremely imperfect markets. Hymer, t h e r e f o r e , turned to e x p l a n a t i o n s based on market i m p e r f e c t i o n s and p o s s e s s i o n o f m o n o p o l i s t i c advantages by f o r e i g n i n v e s t o r s . He reasoned t h a t because f i r m s which operate i n t e r n a t i o n a l l y i n c u r a d d i t i o n a l c o s t s and r i s k s which t h e i r domestic c o u n t e r p a r t s do not i n c u r , d i r e c t f o r e i g n investments can never be p r o f i t a b l e under c o n d i t i o n s o f p e r f e c t c o m p e t i t i o n . Thus, i n t e r n a t i o n a l f i r m s must possess c e r t a i n advantages which more than compensate the a d d i t i o n a l c o s t s o f o p e r a t i n g i n t e r n a t i o n a l l y . These advantages may be economies of s c a l e from world-wide i n t e g r a t e d o p e r a t i o n s or e a s i e r access to c a p i t a l and markets, but the d e c i s i v e ones, a c c o r d i n g to Hymer, are probably s u p e r i o r knowhow i n technology, management and marketing:-With t h i s as the s t a r t i n g p o i n t , Hymer argued t h a t the fundamental reason f o r business f i r m s to i n v e s t overseas i s to more f u l l y e x p l o i t the m o n o p o l i s t i c advantages which they possess, o r i n other words, t o maximize the economic r e n t . The argument c e r t a i n l y has a very s o l i d base as i t r e l a t e s the f o r e i g n investment motive d i r e c t l y with p r o f i t maximization which i s t r a d i t i o n a l l y assumed to be the number one business o b j e c t i v e . The theory has been w e l l supported- by e m p i r i c a l evidence too, s i n c e i n t e r n a t i o n a l f i r m s do have many s u p e r i o r o p e r a t i o n a l advantages over t h e i r domestic c o u n t e r p a r t s . 18 But there i s s t i l l a loophole: why should an international firm which possesses superior knowhow choose to exploit the advantages by means of d i r e c t foreign investments instead of exporting when the former i s c l e a r l y more risky than the l a t t e r ? Evidently, there must be some economic factors which determine the choice. While the posse-ssion of monopolistic advantages i s a necessary condition for d i r e c t foreign investments, i t i s not a s u f f i c i e n t condition. We need to know why i t i s preferred to exporting. The difference i n cost of production i n d i f f e r e n t countries provides the most obvious explanation. Given the exchange rate, the techniques of production, the costs of transport and of transferring technology, and a range of d i f f e r e n t costs for factors of production, c l e a r l y some countries have a cost advantage over others as manufacturing bases. If international corporations are assumed to have a t r u l y global perspective, to make investment decisions on r a t i o n a l cost calculations and are not to be inhibited, by government r e s t r i c t i o n s or other non-economic motives, they can also be expected to alloc a t e t h e i r resources i n the most economically e f f i c i e n t manner among d i f f e r e n t countries. This being the case, exporting w i l l not be a substitute for d i r e c t foreign investments. Another important factor i s the existence of trade 19 r e s t r i c t i o n s , or the threat that the foreign country may impose them. Exporting i s most vulnerable to trade r e s t r i c t i o n s i n the form of t a r i f f s or quotas, but d i r e c t foreign investments are not because few countries, i f any at a l l , p r o h i b i t the inflow of investment c a p i t a l . In fact, many trade barr i e r s set up by the less developed countries are intended to complement an import substitution p o l i c y and are largely responsible for inducing foreign firms which used to s e l l to these countries through exports to set up manufacturing f a c i l i t i e s i n these countries to prevent th e i r markets from being cut o f f . The wisdom of such an import substitution p o l i c y implemented by protective trade bar r i e r s i s dubious and debatable. A discussion on thi s p o l icy i s beyond the scope of t h i s study, but i t i s a fact of l i f e that t h i s world i s s t i l l characterized by r e s t r i c t i v e trade 17 rather than free trade. Thus, even though exporting may be the most e f f i c i e n t way of exploiting an advantage, i t may not be fe a s i b l e i n face of r e s t r i c t i v e trade b a r r i e r s . The t h i r d reason why exporting may not be a feasible substitute for d i r e c t foreign investments relates to the nature of the advantage. Some advantages, for example superior marketing knowhow, cannot be embodied i n a product to be exported. When the firm's advantages l i e i n i t s a b i l i t y to d i f f e r e n t i a t e products, to advertise, to serve customers or to respond to changes i n consumer tastes and market demand, i t can only f u l l y e x p loit them by l o c a l manufacturing. This again c a l l s for d i r e c t 20 f o r e i g n investments r a t h e r than e x p o r t i n g . A few words must a l s o be mentioned on the c h o i c e between undertaking d i r e c t f o r e i g n investments and making use of f o r e i g n l i c e n s i n g . Even though s t r i c t l y speaking, f o r e i g n l i c e n s i n g i s a l s o a form of d i r e c t f o r e i g n investment, the degree of involvement between the two i s so d i f f e r e n t t h a t i t seems b e t t e r to c o n s i d e r them as competing a l t e r n a t i v e s . There are a number of f a c t o r s which i n f l u e n c e the c h o i c e between the two. These i n c l u d e the s i z e of the market, the r i s k i n e s s pf investment, the n o v e l t y o f the technology, the p o l i c y of the host government, the management s t r a t e g y of the f i r m , the i n d u s t r i a l market s t r u c t u r e and the range of techno-l o g i e s and products i n v o l v e d . As a broad g e n e r a l i z a t i o n , i f the f o r e i g n market i s l a r g e , i f business c o n d i t i o n s are s t a b l e , i f the technology i n v o l v e d i s new and can be t i g h t l y c o n t r o l l e d , i f the i n v e s t i n g f i r m i s an experienced i n t e r n a t i o n a l o p e r a t o r w i t h b r o a d l y based f i n a n c i a l and marketing c a p a b i l i t i e s , then d i r e c t investments w i l l be p r e f e r r e d to l i c e n s i n g . Otherwise, l i c e n s i n g may be more advantageous. T h i s g e n e r a l i z a t i o n i s o f course j u s t a t e r s e and s i m p l i f i e d one f o r a complex d e c i s i o n , and many i n t e r m e d i a t e p o s i t i o n s are p o s s i b l e between investment i n a wholly owned manufacturing s u b s i d i a r y and l i c e n s i n g to an u n r e l a t e d f i r m i n the f o r e i g n country. However, . i n t e r n a t i o n a l c o r p o r a t i o n s may.. not 21 n e c e s s a r i l y always have f o r e i g n l i c e n s i n g as a f e a s i b l e a l t e r n a t i v e . Some of the advantages they possess cannot i n f a c t be l i c e n s e d to other f i r m s e i t h e r because they are i n h e r e n t to the o r g a n i z a t i o n or because they are so d i f f u s e d t h a t they are i m p o s s i b l e to d e f i n e , value and t r a n s f e r . For example, a c o r p o r a t i o n ' s managerial c a p a b i l i t i e s , i t s organ-i z a t i o n a l set-up, i t s e x e c u t i v e s ' experience, i t s c r e d i t s t a n d i n g or i t s r e l a t i o n s w i t h other f i r m s can h a r d l y be l i c e n s e d . Moreover, s i n c e these advantages tend to grow c u m u l a t i v e l y with s i z e and g r e a t e r degree of i n t e r n a t i o n a l involvement, i n v e s t i n g c o r p o r a t i o n s may want to i n t e r n a l i z e these advantages r a t h e r than d i s s i p a t e them by l i c e n s i n g . In t h i s case, f o r e i g n l i c e n s i n g i s not a f e a s i b l e a l t e r n a t i v e to d i r e c t investment. Summing up, the p o s s i b i l i t y o f e x p o r t i n g or f o r e i g n l i c e n s i n g c l e a r l y i n d i c a t e s t h a t the p o s s e s s i o n of m o n o p o l i s t i c advantages i s not a s u f f i c i e n t c o n d i t i o n f o r f o r e i g n investments. Even though i n the f i n a l a n a l y s i s , a l l i n v e s t i n g c o r p o r a t i o n s must possess, or they t h i n k they possess, c e r t a i n advantages over l o c a l f i r m s or p o t e n t i a l l o c a l c ompetitors, one must a l s o e x p l a i n why the conceived advantages are not o u t r i g h t l y e x p l o i t e d through e x p o r t i n g or l i c e n s i n g which i n v o l v e s a l e s s e r degree of business r i s k . The answer, i n a n u t - s h e l l , l i e s i n the n o n - m a r k e t a b i l i t y or f i r m - s p e c i f i c i t y nature of the advantages. 22 C l o s e l y r e l a t e d to the m o n o p o l i s t i c theory and the methods f o r e x p l o i t i n g the advantages i s the product l i f e c y c l e 18 theory developed by Vernon, H i r s c h and W e l l s . Even though t h i s theory does not i n t r o d u c e any new elements, i t deserves to be c o n s i d e r e d s e p a r a t e l y because of the s p e c i a l sequence i t p o s t u l a t e s and because of the way i n which i t combines and a s s i g n s v a r y i n g roles- to technology, p r o d u c t i o n c o s t s and marketing f a c t o r s . I t p r o v i d e s a p a r t i c u l a r e x p l a n a t i o n o f how \ these f a c t o r s i n t e r a c t over time to determine d i r e c t f o r e i g n investment p a t t e r n s . In essence, the i n t e r n a t i o n a l product l i f e c y c l e theory blends together the theory of comparative c o s t i n economics w i t h the product l i f e c y c l e concept i n marketing l i t e r a t u r e and e x p l a i n s d i r e c t f o r e i g n investments as i.a d e f e n s i v e s t r a t e g y which i s aimed a t p r e s e r v i n g an i n n o v a t o r ' s i n i t i a l advantages and e x i s t i n g business i n t e r e s t s . The main assumptions of the product l i f e c y c l e theory are t h a t (i) products undergo p r e d i c t a b l e changes i n t h e i r p r o d u c t i o n and marketing c h a r a c t e r i s t i c s over time ( i i ) i n n o v a t i o n s of new products and processes w i l l occur a t or near p o t e n t i a l market areas and ( i i i ) the p r o d u c t i o n process i s char-a c t e r i z e d by economies of s c a l e . With these assumptions, the theory hypothesizes t h a t a new product or process w i l l be inno-vated i n an advanced and a f f l u e n t country l i k e the U.S. which 2 3 a l s o possesses the advantages of a l a r g e and f r e e market and a r e l a t i v e l y abundunt supply of t e c h n o l o g i c a l and e n t r e p r e n e u r i a l r e s o u r c e s . The product w i l l enjoy a m o n o p o l i s t i c market p o s i t i o n , f i r s t a t home and then overseas i n f o r e i g n c o u n t r i e s where i t i s a l s o i n demand;- But when f o r e i g n demand grows to a s u b s t a n t i a l l e v e l and the p r o d u c t i o n technology has become d i f f u s e d and s t a n d a r d i z e d , l o c a l producers w i l l be a t t r a c t e d to enter the market. At the same time, the l o c a l government may be pledged to e s t a b l i s h t a r i f f s o r other b a r r i e r s to p r o t e c t the 'new' i n d u s t r y . Before t h i s happens, the i n n o v a t o r w i l l have to i n v e s t d i r e c t l y i n l o c a l manufacturing, or he w i l l l o s e the f o r e i g n market to l o c a l producers. Worse s t i l l , the i n n o v a t o r ' s home country market may be invaded l a t e i n the days when the product e n t e r s a m a t u r i t y stage i n the i n t e r n a t i o n a l economy and there i s mass p r o d u c t i o n overseas, probably i n some l e s s developed c o u n t r i e s where u n s k i l l e d labour i s p l e n t i f u l and cheap. Thus, d i r e c t f o r e i g n investment i s the o n l y v i a b l e s t r a t e g y f o r the i n n o v a t o r to meet the p o t e n t i a l t h r e a t of l o c a l c o m p e t i t i o n and to m a i n t a i n h i s o r i g i n a l advantages. In the words of G i l p i n , i t i s "a method by which to e l i m i n a t e p o t e n t i a l competitors 19 through market preemption". The i n t e r n a t i o n a l product l i f e c y c l e theory i s not intended to p r o v i d e a complete e x p l a n a t i o n of trade and investment p a t t e r n s . I t does not e x p l a i n d i r e c t investments i n non-manufacturing o p e r a t i o n s or i n c o u n t r i e s where there i s no 24 p o t e n t i a l t h r e a t o f l o c a l c o m p e t i t i o n . But the theory e x p l a i n s very w e l l c e r t a i n types o f d i r e c t f o r e i g n investments, espe-c i a l l y those i n the manufacture of l i g h t consumer goods i n l e s s developed c o u n t r i e s . E m p i r i c a l l y , a number o f prod u c t s ' trade and investment p a t t e r n s do conform very much to the p r e d i c t i o n s of t h i s theory, f o r example, t e x t i l e goods, p l a s t i c p r oducts, e l e c t r i c a l a p p l i a n c e s and more r e c e n t l y , e l e c t r o n i c s . The theory i s v a l u a b l e i n understanding some c r u c i a l f o r c e s i n the growth of i n t e r n a t i o n a l c o r p o r a t i o n s such as the importance o f m a i n t a i n i n g m o n o p o l i s t i c l e a d s , the changing r o l e o f technology and marketing over the c y c l e and the t i m i n g o f i n t r o d u c i n g new products and techniques overseas. The m o n o p o l i s t i c theory and the product l i f e c y c l e theory are e s s e n t i a l l y based upon c o m p e t i t i o n i n product markets. There have a l s o been t h e o r i e s which are i n s t e a d formulated on behaviour of f i r m s or f i n a n c i a l markets. An example of the 20 former i s the one advanced by Knickerbocker. Observing t h a t the i n d u s t r i e s i n which i n t e r n a t i o n a l c o r p o r a t i o n s i n v e s t are mostly o l i g o p o l i s t i c i n nature, Knickerbocker reasoned t h a t some d i r e c t f o r e i g n investments may simply be the r e s u l t of o l i g o p o l i s t i c r e a c t i o n . When one f i r m goes i n t e r n a t i o n a l , o t h e r f i r m s f o l l o w i n order to ensure t h a t they w i l l not l a g behind t h e i r r i v a l . The speed o f r e a c t i o n d i f f e r s from i n d u s t r y to i n d u s t r y . I t w i l l be more r a p i d i f the l e v e l o f i n d u s t r y c o n c e n t r a t i o n i s hi g h , the product range i s narrow and the product 25 i s s t a n d a r d i z e d . The major weakness of t h i s theory i s t h a t i t does not e x p l a i n the i n t e r n a l f a c t o r s which push the l e a d i n g f i r m to i n v e s t overseas i n the f i r s t p l a c e . Turning to something more f i n a n c i a l i n nature, i n t e r e s t r a t e d i f f e r e n t i a l s and ex p e c t a t i o n s i n exchange r a t e movements are the b a s i s o f A l i b e r ' s theory o f d i r e c t f o r e i g n 21 investments. His main assumption i s t h a t h o l d e r s of l i q u i d a s s e t s are w i l l i n g to pay a premium to h o l d these a s s e t s i n a st r o n g c u r r e n c y . I f the premium i s r e f l e c t e d i n the e f f e c t i v e i n t e r e s t r a t e d i f f e r e n t i a l between two c u r r e n c i e s such t h a t the d i f f e r e n t i a l equals the sum o f the premium p l u s the r a t e a t which the s t r o n g e r currency i s l i k e l y to a p p r e c i a t e r e l a t i v e to the weaker currency, then an i n v e s t o r i n a s t r o n g e r currency area w i l l be ab l e to secure c a p i t a l a t a lower c o s t , and hence w i l l e v a l u a t e investment o p p o r t u n i t i e s a t a lower d i s c o u n t r a t e than an i n v e s t o r i n a weak currency area. Consequently, some investment p r o j e c t s i n a weak currency area which are u n a t t r a c -t i v e to l o c a l i n v e s t o r s may be a t t r a c t i v e to f o r e i g n i n v e s t o r s from s t r o n g currency areas, thus i n d u c i n g d i r e c t f o r e i g n i n v e s t -ments . T h i s theory i s e v i d e n t l y too narrow even i f i t i s supposed to o f f e r o n l y a p a r t i a l e x p l a n a t i o n to d i r e c t f o r e i g n investment d e c i s i o n s . I n t e r e s t d i f f e r e n t i a l s and the exchange r a t e may c o n c e i v a b l y be r e l e v a n t to i n t e r n a t i o n a l c a p i t a l move-o 26 merits, but as these elements are r e l a t i v e l y v o l a t i l e and may f l u c t u a t e w i d e l y and f r e q u e n t l y , i t i s u n l i k e l y t h a t they alone can motivate d i r e c t f o r e i g n investments which are u s u a l l y l o n g term commitments. Furthermore, the p r e d i c t i o n s of t h i s l i n e of argument are c o n t r a r y to d i r e c t f o r e i g n investment trends of the middle to l a t e 1960s when, although the American d o l l a r was o v e r v a l u e d (hence weak) r e l a t i v e to most European c u r r e n c i e s , the r a t e of U.S. d i r e c t investments i n Europe was a t r e c o r d l e v e l s and g r e a t l y exceeded the r a t e of European d i r e c t i n v e s t -ments i n the U.S. D i f f e r e n c e s i n the degree of p e r f e c t i o n i n s e c u r i t i e s markets p r o v i d e • an answer to the apparent c o n t r a d i c t i o n . In the words o f Ragazzi, "Even i n the absence of o l i g o p o l i s t i c behaviour or of t e c h n i c a l advantages, d i r e c t investment may be a t t r a c t e d toward areas where average r a t e s of p r o f i t are h i g h e r when such r a t e s are not e q u a l i z e d i n t e r n a t i o n a l l y by p o r t f o l i o 22 c a p i t a l flows owing to i n e f f i c i e n c i e s i n s e c u r i t i e s markets." He p o i n t e d out t h a t h i g h e r r i s k elements and wide f l u c t u a t i o n s i n stock p r i c e s a s s o c i a t e d w i t h s m a l l and i m p e r f e c t s e c u r i t i e s markets have a negative impact on i n d i r e c t ( p o r t f o l i o ) i n v e s t -ments, and d i r e c t investments become the s u b s t i t u t e . That i s why i n 1951-67 American investments overseas had been more i n the form of d i r e c t investments w h i l e European investments i n the U.S. had been more i n the form of p o r t f o l i o investments. During t h i s p e r i o d , even though the r a t e s o f r e t u r n on s t o c k s were not 27 too d i f f e r e n t i n the two markets, t h e f l u c t u a t i o n s i n annual r a t e s of r e t u r n were d e f i n i t e l y m i l d e r i n the U.S. than i n the European c o u n t r i e s . Ragazzi's e x p l a n a t i o n i s c e r t a i n l y h e l p f u l i n understanding why d i r e c t investments may be p r e f e r r e d to p o r t f o l i o investments, but i t does not show why, i n the absence of p o s i t i v e economic f o r c e s , a f i r m would c o n s i d e r i n v e s t i n g overseas i n the f i r s t p l a c e . Another theory which i s a l s o more f i n a n c i a l i n nature c e n t r e s on i n t e r n a t i o n a l d i v e r s i f i c a t i o n of investment p o r t f o l i o s . As argued by Levy and Sarnat, f i r m s go i n t e r n a t i o n a l 23 i n o r d e r to have a more o p t i m a l balance of r i s k and r e t u r n . D i r e c t f o r e i g n investments are thus b a s i c a l l y d e f e n s i v e from a'corporate s t r a t e g y ' s p o i n t of view, aimed a t spreading the business r i s k g e o g r a p h i c a l l y . T h i s argument undoubtedly has a g r a i n of t r u t h s i n c e many i n t e r n a t i o n a l managers do o f t e n c i t e g e o g r a p h i c a l d i v e r s i f i c a t i o n as one of the motives f o r t h e i r companies to operate overseas. But why i s g e o g r a p h i c a l d i v e r -s i f i c a t i o n p r e f e r r e d to i n d u s t r y d i v e r s i f i c a t i o n ? And w i l l d i v e r s i f i c a t i o n a cross n a t i o n a l boundaries i n c r e a s e r a t h e r than decrease the business r i s k ? These are p o i n t s of c o n t e n t i o n 24 which the p o r t f o l i o theory does not answer. To conclude from t h i s s h o r t review, there i s probably 28 no s i n g l e motive and, t h e r e f o r e , no s i n g l e theory which i s good enough to e x p l a i n a l l d i r e c t f o r e i g n investment d e c i s i o n s . But, no matter how, i n t e r n a t i o n a l c o r p o r a t i o n s are business o r g a n i z a t i o n s . The economic force, u n d e r l y i n g the f o r e i g n investment d e c i s i o n ? as w e l l ' a s a l l business d e c i s i o n s , must e v e n t u a l l y be r e l a t e d to the p r o f i t o b j e c t i v e . " " The d i f f e r e n t t h e o r i e s o n l y expound on the d i f f e r e n t p r o f i t o p p o r t u n i t i e s which i n d i v i d u a l f i r m s may come across and e x p l o r e . Though d i s i n t e g r a t i v e , they are complementary to one another. Types, C h a r a c t e r i s t i c s and Motives. D i r e c t f o r e i g n investments i n manufacturing can be c l a s s i f i e d i n t o three main types, each w i t h i t s own d i s t i n c t c h a r a c t e r i s t i c s : export o r i e n t e d investments, market development investments and government i n i t i a t e d investments. Export o r i e n t e d investments are p r i m a r i l y made to serve markets o u t s i d e - t h e host country. These markets can be the i n v e s t o r ' s home country market or sorr.e other markets. The i n v e s t o r ' s motive i s to make use of the indigenous p r o d u c t i o n f a c t o r s which can be some n a t u r a l r e s o u r c e s , labour or i n f r a s -t r u c t u r e f a c i l i t i e s to produce f o r exp o r t s . The common charac- -t e r i s t i c s o f export o r i e n t e d investments a c c o r d i n g to Reuber 26 a r e : (a). The p r i n c i p a l m o t i v a t i o n i s to p r o t e c t or improve the i n v e s t o r ' s c o m p e t i t i v e p o s i t i o n a t home or. i n t e r n a t i o n a l l y , 29 but not i n the host country market. (b) These investments are v e r t i c a l l y i n t e g r a t e d i n t o the i n t e r n a t i o n a l c o r p o r a t i o n ' s world-wide o p e r a t i o n s . (c) The c h o i c e of investment country depends on f a c t o r s related, to p r o d u c t i o n c o s t s and r e l i a b i l i t y of p r o d u c t i o n f a c t o r s . (d) Because of the emphasis on p r o d u c t i o n c o s t s , such i n v e s t -ments tend to be'more v o l a t i l e than the other two types. I f the f o r e i g n i n v e s t o r f i n d s t h a t p r o d u c t i o n c o s t s i n the i n v e s t e d country are no longer c o m p e t i t i v e , he w i l l be more ready to l e a v e . (e) Such investments tend to be h i g h l y p r o f i t a b l e i n the s h o r t run. Export o r i e n t e d investments i n e v i t a b l y have a high p r o p o r t i o n o f the p r o d u c t i o n output being exported from the host 27 country, u s u a l l y i n excess of 50%."' Many export o r i e n t e d investments i n manufacturing are made i n l e s s developed c o u n t r i e s where labour c o s t s are low. Others are i n the e x t r a c t i o n o f min e r a l s and. o i l f o r export back to the i n v e s t o r ' s home country. These investments are a l s o c a l l e d labour o r i e n t e d investments and n a t u r a l resources o r i e n t e d investments. Export o r i e n t e d investments can e i t h e r i n c r e a s e or reduce the trade o f the i n v e s t o r ' s home country. The former w i l l be 'trade o r i e n t e d ' and r e f e r s to the case i n which the 30 investment outputs are mostly exported back to the investor's 2 8 home country, thus increasing the country*s trade. ' On the other hand, i f the investment outputs are mainly sold to some other countries, the investment may be 'anti-trade oriented' because these sales replace the exports previously coming from the 29 investor's home country. Market development investments, inocontrast to export oriented investments, are undertaken with the primary motivation of achieving greater penetration of the host country market. The distinguishing features of t h i s type of investments are: (a) The investments are made primarily i n response to underlying economic considerations such as the size of l o c a l market and i t s long run po t e n t i a l . (b) The investment outputs are primarily intended for sale i n the host country. (c) The.investments represent a long term commitment i n the host country; hence, investors are more concerned with the long term outlook and s t a b i l i t y of the host country. Short to medium term p r o f i t a b i l i t y considerations may only be secondary. (d) These investments are d i r e c t l y influenced by p a r t i c u l a r host country p o l i c i e s on t a r i f f s , trade controls, taxes and subsidies as well as regulations imposed upon foreign investors. 31 Compared to export o r i e n t e d investments, t h e r e w i l l be a g r e a t e r p r o p o r t i o n o f outputs being s o l d i n the host country. Again the a r b i t r a r y benchmark of 50% may be used f o r d i f f e r e n t i a t i n g between the two."^ Many investments by i n t e r -n a t i o n a l c o r p o r a t i o n s i n manufacturing i n developed c o u n t r i e s are o f the market development type. Investments induced by trade b a r r i e r s w i l l a l s o belong t o t h i s category. But of course, an investment may begin as a anarket development investment, then t u r n i n g i n s t e a d to export o r i e n t e d when the h o s t country market reaches s a t u r a t i o n . Government i n i t i a t e d investments are undertaken mainly a t the i n i t i a t i v e o f the host country government. The investment outputs can be mostly f o r exports as i n the case of investments i n m i n e r a l e x t r a c t i o n , or to serve the host country's needs. The host country government takes up the i n i t i a t i v e to a t t r a c t o r even i n v i t e f o r e i g n i n v e s t o r s to undertake c e r t a i n investment p r o j e c t s e i t h e r because l o c a l supply and demand c o n d i t i o n s do not warrant p r o f i t a b l e undertakings by l o c a l i n v e s t o r s , or on l y the f o r e i g n i n v e s t o r s possess the r e q u i r e d technology and c a p i t a l . Investment i n c e n t i v e s are u s u a l l y p r o v i d e d i n a v a r i e t y o f forms such as tax h o l i d a y s , a c c e l e r a t e d d e p r e c i a t i o n , guarantees o f c a p i t a l r e p a t r i a t i o n and p r o f i t r e m ittances or duty f r e e imports o f m a t e r i a l s and equipment. The reasons why such concessions are g i v e n are g e n e r a l l y r o o t e d i n the government's d e s i r e to e s t a b l i s h new i n d u s t r i e s , to promote 32 r e g i o n a l development, to generate employment or to import technology. Such investments i n e v i t a b l y c r e a t e a h i g h degree of interdependence between the f o r e i g n i n v e s t o r s and the host country government. In a number of i n s t a n c e s , they are made i n the form of j o i n t ventures between the two p a r t i e s . Many investments i n c a p i t a l p r o j e c t s i n . l e s s developed c o u n t r i e s or investments i n manufacturing i n f r e e trade zones belong to t h i s category. F i n a l l y , a few words on the i n i t i a l d e c i s i o n to s e l e c t a p a r t i c u l a r country f o r investment i n s t e a d of another. A c c o r d i n g to Brooke and Remmers, the e x t e r n a l p u l l f a c t o r s can be c l a s s i f i e d as ' d e f e n s i v e 1 , 'aggressive' and 'other p r e s s u r e ' 31 reasons. "The d i s t i n c t i o n between a d e f e n s i v e reason and an a g g r e s s i v e reason i s somewhat b l u r r e d and a r b i t r a r y . I t l i e s i n t h a t the former i s e s s e n t i a l l y concerned w i t h p r e s e r v i n g e x i s t i n g business i n t e r e s t s i n the f o r e i g n country w h i l e the l a t t e r i n v o l v e s a change i n d i r e c t i o n or a search f o r new business 32 o p p o r t u n i t i e s . For example, a f o r e i g n investment to meet the p o t e n t i a l t h r e a t of l o c a l c o m p e t i t i o n as i s suggested by the product l i f e c y c l e theory w i l l be d e f e n s i v e i n nature whereas one which aims a t e x p l o i t i n g more f u l l y the c o r p o r a t i o n ' s c o m p e t i t i v e advantages w i l l be a g g r e s s i v e . 'Other p r e s s u r e s ' r e p r e s e n t those reasons which do not f i t i n t o e i t h e r of these two c a t e g o r i e s and i n c l u d e , f o r example, p e r s o n a l c o n v i c t i o n s of the c h i e f e x e c u t i v e r e g a r d i n g the need to expand overseas. 33 Notes 1. For example, see Geiger, T. and Geiger, F.M., The Development Progress of Horig: Kong arid Singapore (Tales o f Two C i t y States) , Macmillan, Hong Kong, 1976. Hopkins, K. (ed.), Hong Kong: The I n d u s t r i a l Colony,Oxford U n i v e r s i t y P ress, London, 1971. Szczepanik, E., The Economic Growth o f Hong Kong, Oxford U n i v e r s i t y P ress, London, 1958. 2. Throughout t h i s t h e s i s , a ' f o r e i g n manufacturer' i s used to denote a manufacturing f i r m which has 25% or more f o r e i g n ownership i n t e r e s t . 3. A c c o r d i n g to a U n i t e d Nations study (United Nations, M u l t i n a t i o n a l C o r p o r a t i o n s i n World Development, New York, 1973) a l l of the l e a d i n g twenty-one m u l t i n a t i o n a l c o r p o r a -t i o n s i n 1971 (each with f o r e i g n a s s e t h o l d i n g s exceeding US$1 b i l l i o n ) were engaged i n e i t h e r manufacturing or i n the mining and e x t r a c t i o n of m i n e r a l s and o i l . In descen-d i n g order i n terms of amount o f f o r e i g n a s s e t s , they were Exxon, Royal Dutch S h e l l , I.T.T., Ford Motors, M o b i l O i l , G u l f O i l , P h i l i p s , U.S. S t e e l , General Motors, U n i l e v e r , N e s t l e , I.B.M., B r i t i s h Petroleum, B r i t i s h - A m e r i c a n Tobacco, Volkswagon, P e t r o f i n a , R i o - T i n t o - Z i n c , C h r y s l e r , Texaco, F i a t and General E l e c t r i c . 4. For example, i n r e c e n t years the U.S., which alone accounts f o r around 50% o f the world's t o t a l d i r e c t f o r e i g n i n v e s t -ments, has o n l y about o n e - f i f t h of i t s d i r e c t f o r e i g n investments i n non-manufacturing a c t i v i t i e s . E x c l u d i n g petroleum and mining, manufacturing s t i l l accounts f o r over 40% o f t o t a l U.S. d i r e c t investments abroad s i n c e 1966. 5. In the year 1978, Hong Kong's exports to the U.S. amounted to HK$15,125 m i l l i o n which was 37.2% of Hong Kong's t o t a l domestic e x p o r t s . In the same year, Hong Kong's imports from Japan were HK$14,405 m i l l i o n , or 22.8% of Hong Kong's t o t a l imports. (The r a t e of exchange f o r 1978 averaged about HK$1 = US$0,213.) Source: Hong Kong Annual Report, 1979. 6. T h i s q u e s t i o n n a i r e survey a c t u a l l y formed a p a r t of a wider and continuous r e s e a r c h study which a l s o aimed a t comparing the o p e r a t i o n s of f o r e i g n manufacturers i n Hong Kong w i t h t h e i r l o c a l c o u n t e r p a r t s and r e v e a l i n g changes, i f any, i n t h e i r s t r a t e g i e s and a t t i t u d e s through time. The q u e s t i o n n a i r e had been p i l o t t e s t e d i n a survey i n 1977 i n order to f i n d out whether or not the f o r e i g n manufacturers understood the q u e s t i o n s and would be a b l e and w i l l i n g to answer. There were some qu e s t i o n s on f i n a n c i n g and p r i c i n g which drew very poor 34 responses i n the p i l o t survey. They were subsequently d e l e t e d i n the 1979 survey. 7. The l i s t o f manufacturing f i r m s w i t h f o r e i g n ownership i n t e r e s t was compiled by the w r i t e r from r e s t r i c t e d r e c o r d f i l e s kept by the Trade Promotion Branch, Department of Trade, Industry and Customs, Hong Kong government. 8. The most common que s t i o n s unanswered i n the r e t u r n s i n the f i r s t i n s t a n c e were those r e l a t e d to " c a p i t a l 1 , ' s a l e s ' and ' r e t u r n on investment'. 9. P r i v a t e business f i r m s i n Hong Kong are not p a r t i c u l a r l y c o o p e r a t i v e w i t h academic s t u d i e s . The response r a t e s of v a r i o u s business r e s e a r c h p r o j e c t s conducted by u n i v e r s i t y s t a f f and students u s i n g q u e s t i o n n a i r e s have seldom exceeded 20%. 10. See Appendix I I - l . l and Appendix I I - l . 2 . 11. See the s e c t i o n on 'ownership and management c o n t r o l ' i n Chapter VI and Appendix II-6.1. 12. T h e o r i e s r e l a t e d to the management o f i n t e r n a t i o n a l c o r p o r -a t i o n s may be regarded as a subset of t h e o r i e s of d i r e c t f o r e i g n investments. Some w r i t e r s regard these t h e o r i e s as r e p r e s e n t i n g a business a d m i n i s t r a t i o n approach even though they are b a s i c a l l y concerned w i t h how f o r e i g n investments are or should be managed i n s t e a d of why f o r e i g n investments have taken p l a c e . Many books on i n t e r n a t i o n a l business do c o n t a i n v a r i o u s t h e o r i e s on managing the exchange r i s k , n e g o t i a t i n g w i t h f o r e i g n governments, b a r g a i n i n g w i t h i n t e r n a t i o n a l unions, o r g a n i z i n g g l o b a l o p e r a t i o n s , and so f o r t h . For example: Dymsza, W.A. , M u l t i n a t i o n a l Business S t r a t e g y , McGraw H i l l New York, 1972, Fayerweather, J . , I n t e r n a t i o n a l Business Management, McGraw H i l l , New York, 1969, Farmer, R.N. and Richman, B.M., I n t e r n a t i o n a l Business; An O p e r a t i o n a l Theory, Irwin, Homewood, 1972, Robinson, R.D., I n t e r n a t i o n a l Business Management, H o l t , R i n e h a r t and Winston, New York, 1973, Robock, S.H. and Simmonds, K., I n t e r n a t i o n a l Business and M u l t i n a t i o n a l E n t e r p r i s e , Irwin, Homewood, 1973 and S t o p f o r d , J.M. and W e l l s , L.T. J r . , Managing the M u l t i -n a t i o n a l E n t e r p r i s e , B a s i c Books, New York, 1972. 13. In i n t e r n a t i o n a l business l i t e r a t u r e , the common c r i t e r i a used f o r i d e n t i f y i n g ' s i g n i f i c a n t management c o n t r o l ' by f o r e i g n e r s a r e : (i) when f o r e i g n e r s own 50% or more of the i s s u e d c a p i t a l , or ( i i ) when f o r e i g n e r s own 50% or more o f the v o t i n g c a p i t a l , or ( i i i ) when 25% of more of the v o t i n g 3 5 c a p i t a l are c o n c e n t r a t e d i n the hands of a s i n g l e f o r e i g n e r or an o r g a n i z e d group of f o r e i g n h o l d e r s or (iv) when f o r e i g n e r s are known to have a c o n t r o l l i n g v o i c e i n the company's p o l i c i e s through, f o r example, r e p r e s e n t a t i o n i n the board of d i r e c t o r s or some management c o n t r a c t s signed with l o c a l owners.(But even the l a s t c r i t e r i o n i s not exact enough to serve as a workable d e f i n i t i o n i n some i n s t a n c e s . ) 14. A good d i s c u s s i o n o f the determinants of i n d i r e c t f o r e i g n investments i s g i v e n i n the a r t i c l e by Ragazzi, G., "Theories of the Determinants of D i r e c t F o r e i g n Investment", I n t e r n a t i o n a l Monetary Fund S t a f f Papers, Vol.XX, July,1973. 15. These f i g u r e s are o b t a i n e d from Wallace' J r . , D., I n t e r n a - t i o n a l R e g u l a t i o n s of M u l t i n a t i o n a l C o r p o r a t i o n s , Praeger, New York, 197 6, Table 1-1, page 7. The e l e v e n l e a d i n g i n d u s t r i a l c o u n t r i e s o f the West r e f e r r e d t o are Belgium, Canada, France, I t a l y , Japan, the Netherlands, Sweden, S w i t z e r l a n d , U n i t e d Kingdom, the United S t a t e s and West Germany. 16. Hymer, S., The I n t e r n a t i o n a l Operations of N a t i o n a l Firms:  A Study Of D i r e c t F o r e i g n Investment, The M.I.T. P r e s s , Cambridge, Mass., 1976. Even though t h i s work was p u b l i s h e d i n 1976, i t was i n f a c t a d o c t o r a l d i s s e r t a t i o n completed by Hymer i n 1960 under the s u p e r v i s i o n of C P . K i n d l e b e r g e r . T h i s theory i s a l s o sometimes c a l l e d the Kindleberger-Hymer theory or Kindleberger-Hymer-Cave theory as the three of them were probably the e a r l i e s t advocates o f the theory. See a l s o , K i n d l e b e r g e r , C P . , American Business Abroad: S i x  L e c t u r e s on D i r e c t Investment, Yale U n i v e r s i t y P r e s s , New Haven, 1969 and Caves, R.E., " I n t e r n a t i o n a l C o r p o r a t i o n : The I n d u s t r i a l Economics of F o r e i g n Investment", Economica, February, 1971. 17. See L i t t l e , I . , S c i t o r s k y , T. and S c o t t , M., Industry and  Trade i n Some Developing C o u n t r i e s , Oxford U n i v e r s i t y Press London, 1970 and Kohlhagen S.W., "Host Country P o l i c i e s and MNC's: The P a t t e r n o f F o r e i g n Investment i n Southeast A s i a " , Columbia J o u r n a l of World Business, S p r i n g , 1977 f o r a d i s c u s s i o n of the import s u b s t i t u t i o n p o l i c y . 18. Vernon, R., " I n t e r n a t i o n a l Investment and I n t e r n a t i o n a l Trade i n the Product C y c l e " , Q u a r t e r l y J o u r n a l of Economics, February, 1967; H i r s c h , S., L o c a t i o n of Industry and  I n t e r n a t i o n a l Competitiveness, Oxford U n i v e r s i t y P r e s s , London, 1967; Wells J r . , L.T., The Product L i f e C y c l e and I n t e r n a t i o n a l Trade, Harvard Business School, D i v i s i o n of Research, Boston, 1972. 3 6 19. G i l p i n , R., U.S. Power and the M u l t i n a t i o n a l C o r p o r a t i o n , B a s i c Books, New York, 1975, p.122. 20. Knickerbocker, F.T., O l i g o p o l i s t i c Reaction and M u l t i n a - t i o n a l E n t e r p r i s e s , Harvard U n i v e r s i t y P r e s s , Cambridge, Mass., 1974. 21. A l i b e r , R., "A Theory of D i r e c t F o r e i g n Investment" i n The I n t e r n a t i o n a l C o r p o r a t i o n : A Symposium e d i t e d by C P . K i n d l e b e r g e r , The M.I.T. Pre s s , Cambridge, Mass., 197 0. 22. Ragazai, G., "Theories of the Determinants of D i r e c t F o r e i g n Investment", I n t e r n a t i o n a l Monetary Fund S t a f f  Papers, V o l . XX, J u l y , 1973, page 480. 23. Levy, H. and Sarnat, M., " I n t e r n a t i o n a l D i v e r s i f i c a t i o n and Investment P o r t f o l i o s " , American Economic Review, September, 1970. 24. A more r e c e n t and d e t a i l e d a n a l y s i s on i n t e r n a t i o n a l d i v e r s i f i c a t i o n i s g i v e n i n Rugman, A.L., I n t e r n a t i o n a l  D i v e r s i f i c a t i o n and the M u l t i n a t i o n a l E n t e r p r i s e , Lexington Books, Lexington, Mass., 1979. 25. For example, a survey of the t h e o r e t i c a l and e m p i r i c a l s t u d i e s on f o r e i g n investment d e c i s i o n s by Stevens i n 1973 (Stevens, G.V.G., "The M u l t i n a t i o n a l Firms and the Determinants of Investment", I n t e r n a t i o n a l Finance D i s c u s s i o n  Paper 29, Washington, D.C., 1973) concluded t h a t there was no compelling t h e o r e t i c a l base or e m p i r i c a l evidence to suggest t h a t i n t e r n a t i o n a l f i r m s d e v i a t e d from the economic assumption of p r o f i t maximization i n making t h e i r d e c i s i o n s . 26. Reuber, G.L. (with C r o o k e l l , H., Emerson, M. and G a l l a i s -Hamonno, G.), P r i v a t e F o r e i g n Investment i n Development, Clarendon P r e s s , Oxford, 1973. 27. Reuber used 'over 10% of the p r o j e c t ' s output i s exported' as the c r i t e r i o n ; but i n the w r i t e r ' s o p i n i o n , t h i s i s f a r too low a percentage to be used. At any r a t e , i n Reuber's study, out of the e i g h t y p r o j e c t s , twenty-six were c l a s s i f i e d as export o r i e n t e d and t h e i r export s a l e s r e p r e s e n t e d 87% of t h e i r t o t a l s a l e s . 28. Kojima, K., D i r e c t F o r e i g n Investment: A Japanese Model of  M u l t i n a t i o n a l Business Operations, Croom Helm, London, 1978. 29. There i s another i n t e r p r e t a t i o n of trade o r i e n t e d and a n t i -t r a d e o r i e n t e d f o r e i g n investments which has the host country as the s t a r t i n g p o i n t . xAccording to t h i s i n t e r p r e -37 t a t i o n , an investment i s trade o r i e n t e d i f i t generates an excess demand f o r imports, and an excess supply o f expor-t a b l e s a t constant terms of trade and i t i s a n t i - t r a d e o r i e n t e d i f the converse h o l d s . See P u r v i s , D.D., "Technology, Trade and F a c t o r M o b i l i t y " , Economic J o u r n a l , September, 197 2. 30. The use of 50% may be too high i n t h i s case, but th e r e i s no g e n e r a l l y accepted c l e a r - c u t d i v i d i n g l i n e between the two. The investment motive i s e v i d e n t l y a b e t t e r c r i t e r i o n to be used than the a c t u a l p r o p o r t i o n o f export s a l e s . 31. Brooke, M.Z. and Remmers, H.L., The S t r a t e g y o f M u l t i n a t i o n a l  E n t e r p r i s e s : O r g a n i z a t i o n and Finance, Longman, London, 1970, Chapter 9:1 " S t r a t e g i c C o n s i d e r a t i o n s i n the MoverAbroad". 32. The w r i t e r has r e s e r v a t i o n s over the use of the word 'aggressive' because i t s l i t e r a l connoation may be m i s l e a d i n g . I t should not i n any case imply something p r o v o c a t i v e . 38 CHAPTER II - •INDUSTRIAL DEVELOPMENT IN HONG KONG T h i s chapter g i v e s a b r i e f account of i n d u s t r i a l development i n Hong Kong and examines i t s present s t r u c t u r e , the growth f a c t o r s and the r o l e p l a y e d by the government. I t s purpose i s to serve as a r e f e r e n c e f o r a n a l y s i n g d i r e c t f o r e i g n investments i n manufacturing i n Hong Kong. I n d u s t r i a l Development and Present S t r u c t u r e The F i r s t Hundred Years: Hong Kong was annexed by the B r i t i s h to serve as i t s t r a d i n g post i n the Far E a s t . I t comprises the V i c t o r i a I s l a n d (29 square miles) and the adjacent Kowloon P e n i n s u l a (3 3/4 square miles) ceded i n p e r p e t u i t y i n 1842 and 1860 r e s p e c t i v e l y , and 365 square m i l e s of the contiguous mainland and i s l a n d s known as the New T e r r i t o r i e s l e a s e d f o r n i n e t y - n i n e years i n 1898. The f i r s t hundred years of the development of Hong Kong might be d e s c r i b e d as a century of the growth of an e n t r e p o t economy. Po s s e s s i n g a s t r a t e g i c l o c a t i o n and a n a t u r a l harbour which i s one of the world's l a r g e s t and f i n e s t , i t f i r s t served as a d i s t r i b u t i o n , s o r t i n g and g r a d i n g c e n t r e f o r the B r i t i s h and Chinese t r a d e r s . Soon a f t e r i t became a B r i t i s h colony, the freedom of trade and s e c u r i t y of B r i t i s h r u l e a t t r a c t e d a l a r g e 39 number of B r i t i s h and Chinese merchants to come to Hong Kong and s e t up b u s i n e s s e s . By the t u r n of the century they were b u s i l y engaged not only i n t r a d i n g but a l s o i n s h i p p i n g , f i n a n c i n g and even as management agencies f o r the c o n s t r u c t i o n o f r a i l r o a d s , p o r t f a c i l i t i e s , p u b l i c u t i l i t i e s and other p r o j e c t s throughout sbmthern China. The b i g B r i t i s h banks arranged s y n d i c a t e s to f l o a t loans f o r the Manchu government and, a f t e r the R e v o l u t i o n of 1911, f o r the r e p u b l i c a n regime. Chinese merchant houses and banks a l s o grew s u b s t a n t i a l l y i n number, s i z e and scope o f a c t i v i t i e s . By the 1930s, Hong Kong was second o n l y to Shanghai as the' b u s i e s t t r a d i n g p o r t along the China c o a s t . During these y e a r s , the i n d u s t r i e s t h a t Hong Kong had were extremely rudimentary and were mostly l i n k e d up with i t s p o r t and t r a d i n g a c t i v i t i e s . The i n d u s t r i e s which c o u l d be regarded as having some importance were s h i p b u i l d i n g and r e p a i r i n g and i t s r e l a t e d o p e r a t i o n s such as the manufacture of ropes, nets, n a i l s , screws, hinges, wire, e t c . L o c a l demand f o r b a s i c n e c e s s i t i e s a l s o brought f o r t h the manufacture of wearing a p p a r e l , food products and beverages. These a c t i v i t i e s , however, were l i m i t e d i n scope and were c o n f i n e d almost e x c l u s i v e l y to cottage i n d u s t r y type o p e r a t i o n s . i In the inter-war years the growth i n p o p u l a t i o n and the Commonwealth p r e f e r e n c e scheme under the Ottawa Agreement of 1932 c o u l d have given Hong Kong manufacturers some inducement to 40 expand p r o d u c t i o n and to export to nearby Commonwealth c o u n t r i e s ; but World War I I soon broke out and Hong Kong was occupied by the Japanese i n 1941. T h i s brought l o c a l i n d u s t r i e s as w e l l as i t s e n t r e p o t trade with China to a h a l t . The Post-war Years: When the War ended, Hong Kong's war-torn economy was extremely f r a g i l e . While r e c o n s t r u c t i o n plans were s t i l l being developed, there o c c u r r e d two i n c i d e n t s , e i t h e r of which c o u l d have been d i s a s t r o u s . But e v e n t u a l l y both i n c i d e n t s turned out to be b l e s s i n g s i n d i s g u i s e as they somehow f o r c e d Hong Kong to embark upon a process of i n d u s t r i a l i z a t i o n . The r e s u l t was a remarkable t r a n s f o r m a t i o n w i t h achievements t h a t impressed as w e l l as s u r p r i s e d the whole world. The f i r s t was an e x p l o s i v e r i s e i n p o p u l a t i o n . When the Japanese surrendered i n August 194 5, Hong Kong had a popu-l a t i o n of l e s s than 600,000. When peace r e t u r n e d , many former r e s i d e n t s who f l e d to the Chinese mainland d u r i n g the War came back to Hong Kong. The p o p u l a t i o n more than doubled i n one year to 1.55 m i l l i o n i n mid-1946. I t s t e a d i l y i n c r e a s e d i n the ensuing years and when the c o n f l i c t s between the N a t i o n a l i s t s and Communists i n t e n s i f i e d i n China there was another i n f l u x , t h i s time of refugees, b r i n g i n g Hong Kong's p o p u l a t i o n to over 2.2 m i l l i o n by the end of 1952. T h i s put tremendous pr e s s u r e on the economy. Although e n t r e p o t trade w i t h China r e v i v e d q u i t e s a t i s f a c t o r i l y d u r i n g the l a t e 1940s i t c o u l d not p r o v i d e enough 41 employment f o r the people nor c o u l d i t generate s u f f i c i e n t incomes and government revenues needed to house, feed and c l o t h e them. Then came the Korean War. Because of Chinese p a r t i c i p a t i o n i n the war, the U.S. government i n December 1950 put a ban on a l l trade w i t h mainland China under Communist c o n t r o l . T h i s was f o l l o w e d by the United Nation's embargo i n May 19 51, p l a c i n g r e s t r i c t i o n s on i t s member c o u n t r i e s i n e x p o r t i n g s t r a t e g i c goods to China. As a r e s u l t , Hong Kong's ent r e p o t t r a d e , which was then s t i l l i t s most important source of income, was d e a l t a near mortal blow. I t s exports to China--36.2% of i t s t o t a l exports i n 1951, f e l l from HK$1,604 m i l l i o n i n t h a t year to o n l y HK$520 m i l l i o n i n 1952 and HK$182 m i l l i o n i n 1955. 1 Faced with such severe a d v e r s i t i e s , Hong Kong turned to manufacturing f o r s u r v i v a l and managed to do so almost 2 completely on i t s own. The f i r s t p rocess Of i n d u s t r i a l i z a t i o n was to a c e r t a i n extent i n c i d e n t a l with the events i n China. Among the new immigrants and refugees who f l e d from the communist regime i n China were many. Shanghai entrepreneurs w i t h long business experience i n o p e r a t i n g c o t t o n s p i n n i n g and weaving m i l l s . With the machines they brought w i t h them they r e e s t a b l i s h e d t h e i r t e x t i l e f a c t o r i e s i n Hong Kong. T h e i r manufacturing o p e r a t i o n s r e c e i v e d i n s t a n t support from the r e a d i l y a v a i l a b l e work f o r c e who were w i l l i n g to work f o r extremely low wages and 42 under harsh c o n d i t i o n s , from the c r e d i t forthcoming from l o c a l banks l o o k i n g f o r a l t e r n a t i v e investment o u t l e t s , and from the export marketing channels p r o v i d e d by the long e s t a b l i s h e d B r i t i s h and Chinese merchant h o u s e s . I n s p i r e d by t h e i r q uick success, the l o c a l Cantonese soon f o l l o w e d . They were j o i n e d by the overseas Chinese who sought a safe and f a m i l i a r harbour f o r t h e i r c a p i t a l when p o l i t i c a l s i t u a t i o n s i n Indo-China turned dubious and c h a o t i c . I n d u s t r i e s i n Eong Kong began to f l o u r i s h and g r a d u a l l y expanded and d i v e r s i f i e d , from c o t t o n s p i n n i n g and weaving to woolen and man-made t e x t i l e products, c l o t h i n g and footwear of a l l k i n d s , t o y s , a r t i f i c i a l f l o w e r s , handbags, wigs, f u r n i t u r e , p l a s t i c household goods, wood and metal products and . Eore r e c e n t l y i n t o consumer durable goods such as r a d i o s , o p t i c a l and photographic equipment, e l e c t r i c a l a p p l i a n c e s and e l e c t r o n i c s p roducts. Heavier i n d u s t r i e s a l s o began to emerge, such as metal r o l l i n g and the manufacture of machine t o o l s and equipment which c a t e r e d to the needs of the l o c a l l i g h t i n d u s t r i e s . These developments i n t u r n s t i m u l a t e d the grov.'th of a n c i l l a r y a c t i v i t i e s such as the c o n s t r u c t i o n of f a c t o r i e s and warehouses, t r a n s -p o r t a t i o n and communication f a c i l i t i e s , p u b l i c u t i l i t i e s , o f f i c e s and s t o r e s , and of a u x i l i a r y s e r v i c e s such as banking, i n s u r a n c e , s h i p p i n g , accounting, a d v e r t i s i n g , l e g a l and management c o n s u l -tancy. By mid-1960s, Hong Kong was not o n l y a world famous i n d u s t r i a l c i t y , i t was a l s o w e l l known as a f i n a n c i a l , i nsurance and s h i p p i n g c e n t r e , second i n i t s business volume on l y to Tokyo i n Southeast A s i a . 43 The process of i n d u s t r i a l t r a n s f o r m a t i o n i n Hong Kong c o u l d be regarded as completed i n 1959 when i t s domestic e x p o r t s , based e n t i r e l y on i t s manufacturing p r o d u c t i o n , f o r the f i r s t time surpassed i t s r e e x p o r t s , and by a comfortable margin (HK$2,282 m i l l i o n as a g a i n s t HKS995 m i l l i o n ) . From then onwards, not o n l y d i d domestic exports m a i n t a i n the l e a d but a l s o the gap r a p i d l y widened. F u l l employment was achieved by 1960 and has been maintained ever s i n c e . In f a c t , i n s t e a d of having unemploy-ment which has been p l a g u e i n g many c o u n t r i e s i n r e c e n t y e a r s , Hong Kong has had labour shortages most of the time. Although Hong Kong has no manufacturing output s t a t i s t i c s , i t s i n d u s t r i a l growth i s r e f l e c t e d by the f o l l o w i n g f i g u r e s : In the two decades from 1957 to 1977, the number of manufacturing establishments i n c r e a s e d more than t e n - f o l d from 3,290 to 37,568; employment i n manufacturing i n d u s t r i e s more than f i v e - f o l d from 148 thousand to 755 thousand; and domestic exports more than t h i r t y times from HK$1,200 m i l l i o n to HK$35,004 m i l l i o n . 3 The Present S t r u c t u r e : The prese n t s t r u c t u r e o f the Hong Kong economy can be summarized by the f o l l o w i n g d i s t i n c t i v e f e a t u r e s : (1) Hong Kong's manufacturing s e c t o r i s h e a v i l y dominated by l i g h t consumer goods i n d u s t r i e s . The on l y i n d u s t r i e s 44 which may be c o n s i d e r e d as heavy are s h i p b u i l d i n g and r e p a i r i n g , a i r c r a f t maintenance and the manufacture o f machine t o o l s and equipment. The l e a d i n g l i g h t i n d u s t r i e s i n descending order of importance are t e x t i l e s and c l o t h i n g , e l e c t r o n i c s , p l a s t i c s (the b ulk of which are p l a s t i c toys) and watches, c l o c k s and a c c e s s o r i e s . In 1977, these f o u r i n d u s t r i e s employed 69% of the t o t a l i n d u s t r i a l work f o r c e and s u p p l i e d 76% of Hong Kong's 4 domestic e x p o r t s . Other more important l i g h t i n d u s t r i e s i n c l u d e s p o r t i n g and t r a v e l l i n g goods, handbags, metal products, a r t i f i c i a l j e w e l l e r y and e l e c t r i c a l apparatus and a p p l i a n c e s . (2) Hong Kong i n d u s t r i e s are h i g h l y export o r i e n t e d . As c a l c u l a t e d from f i g u r e s produced i n the government's 1971  Census of Manufacturing E s t a b l i s h m e n t s , about 8 0% of t o t a l 5 l o c a l l y manufactured products waseexported d i r e c t l y i n 1971. The three l e a d i n g i n d u s t r i e s - t e x t i l e s and c l o t h i n g , p l a s t i c s and e l e c t r o n i c s a l l had over 85% o f p t h e i r outputs being exported. (3) The overwhelming m a j o r i t y of manufacturing establishments i n Hong Kong are s m a l l f i r m s . Of the 37,568 manufacturing establishments r e g i s t e r e d with the government a t the end of 1977, 24,846 • (66.1%) employed l e s s than ten workers, 5,600 (14.9%) ten to n i n e t e e n workers and 4,186 (11.1%) twenty to f o r t y - n i n e workers. In other words, i f we use the d e f i n i t i o n of a s m a l l i n d u s t r y as being one which employs l e s s than f i f t y workers as recommended by the Working P a r t y on Small S c a l e Industry of the Un i t e d Nation's Economic and S o c i a l Commission f o r A s i a and the P a c i f i c , then over 90% of the manufacturing es t a b l i s h m e n t s i n Hong Kong were s m a l l . They together accounted f o r over 40% of t o t a l i n d u s t r i a l employment. Of the remaining e s t a b l i s h m e n t s , o n l y f o r t y had an employment of more than one thousand workers a t the end of 1977 and might be c o n s i d e r e d as l a r g e f i r m s . (4) There i s a high degree of i n d u s t r i a l harmony i n Hong Kong. Labour d i s p u t e s are r a r e and the number of work stoppages i s extremely low by Western standards. In 1977 , there were a l t o g e t h e r o n l y 27 minor work stoppages i n manufacturing 7 r e s u l t i n g i n a t o t a l of 7 ,978 man-days l o s t . (5) There i s a h i g h p r o p o r t i o n of female workers working i n i n d u s t r i e s . Hong Kong i s probably the o n l y i n d u s t r i a l c i t y i n the world which r e l i e s more on female workers than on male workers. A t the end o f 1977 , 386 ,257 or 51.2% of the 755 ,108 workers working i n manufacturing i n d u s t r i e s were female.' (The p r o p o r t i o n o f females i n the p o p u l a t i o n o f Hong Kong a t the end of 1977 was 48.2%.) (6) The i n d u s t r i a l labour market i s h i g h l y competi-t i v e . T h i s i s because the m a j o r i t y o f the i n d u s t r i a l work f o r c e i s u n s k i l l e d , the c i t y i s very m e t r o p o l i t a n and the i n d u s t r i e s are g e o g r a p h i c a l l y c o n c e n t r a t e d . There i s a constant s t r u g g l e 4 6 among d i f f e r e n t i n d u s t r i e s to a t t r a c t more workers by h i g h e r wages. P r e s e n t l y , the i n d u s t r i a l wage l e v e l i n Hong Kong, under the f o r c e of f r e e market com p e t i t i o n , i s the second h i g h e s t i n Southeast A s i a , next to Japan. Apart from these f e a t u r e s , a government survey i n 9 1973 gave the f o l l o w i n g breakdowns of manufacturing c o s t s : Consumption of m a t e r i a l s 59.5% F u e l , water and e l e c t r i c i t y 1.3% I n d u s t r i a l s e r v i c e s 3.6% N o n - i n d u s t r i a l s e r v i c e s 2.9% Labour c o s t 19.3% Rental and o t h e r payments 2.9% D e p r e c i a t i o n of f i x e d a s s e t s 2.2% Net o p e r a t i n g s u r p l u s 8.3% 100.0% Consumption of m a t e r i a l s , around 62.5% of which was d i r e c t l y imported, accounted f o r c l o s e to 60% of the v a l u e of the products ( t o t a l c o s t p l u s net o p e r a t i n g s u r p l u s ) . Labour c o s t was the next h e a v i e s t item and took up c l o s e to 20%. Compared to other f a c t o r c o s t s , i t was extremely h i g h . T h i s i n d i c a t e d t h a t manufacturing o p e r a t i o n s i n Hong Kong were h i g h l y labour i n t e n s i v e . However, t o t a l f a c t o r incomes (labour c o s t , r e n t , d e p r e c i a t i o n and net o p e r a t i n g surplus) came to an average of 32.7% of t o t a l v a l u e and t h i s p r o p o r t i o n was r e l a t i v e l y low when compared to t h a t of other i n d u s t r i a l c o u n t r i e s whose p r o p o r t i o n more o f t e n f e l l between 40 to 50%. 47 Growth F a c t o r s and the Government's Role The phenomenal i n d u s t r i a l growth of Hong Kong i n the post-war years i s commonly e x p l a i n e d i n terms of an i n f l u x o f p r o d u c t i v e f a c t o r s , i t s l o c a t i o n and i t s e s t a b l i s h e d i n s t i -t u t i o n s , i n p a r t i c u l a r , i t s overseas market l i n k s and the government's economic p o l i c y . The purpose of t h i s s e c t i o n i s to e l a b o r a t e and to examine more c r i t i c a l l y these growth f a c t o r s . The i n f l u x of labour, c a p i t a l and e n t r e p r e n e u r i a l s k i l l i n the immediate post-war years was unquestionably the main engine behind Hong Kong's i n d u s t r i a l i z a t i o n . The e x p l o s i v e r i s e i n p o p u l a t i o n provided a l a r g e pool of labour and the i n f l o w s of c a p i t a l and entrepreneurs from Shanghai l e d to the expansion of the t e x t i l e i n d u s t r y which spearheaded the p r o c e s s . Then f u r t h e r i n f l o w s of c a p i t a l from nearby c o u n t r i e s i n South-east A s i a kept f i n a n c e p l e n t i f u l and cheap. Being f a v o u r a b l y l o c a t e d to r e c e i v e these v a l u a b l e i n p u t s was c e r t a i n l y something to Hong Kong's b e n e f i t . In f a c t , the s t r a t e g i c g e o g r a p h i c a l l o c a t i o n appears f r e q u e n t l y i n accounts of Hong Kong as the main reason f o r i t s success, and i s perhaps j u s t i f i a b l e i n view of i t s c r u c i a l importance i n r e l a t i o n to Hong Kong's emergence as an e n t r e p o t ipoiJt. But the r e l a t i o n between l o c a t i o n and i n d u s t r i a l growth i n Hong Kong i s not as s t r a i g h t forward as some may have thought. Although the en t r e p o t 48 f a c i l i t i e s d i d help Hong Kong's i n d u s t r i a l i z a t i o n i n i t s e a r l y days, the a c t u a l g e o g r a p h i c a l l o c a t i o n has been an hindrance i n o ther ways. I t i s unfavourable both i n r e l a t i o n to sources of raw m a t e r i a l s and to export markets. Hong Kong's h i n t e r l a n d i s China, an underdeveloped communist country which can n e i t h e r supply to Hong Kong i t s i n d u s t r i a l raw m a t e r i a l needs nor p r o v i d e a good p o t e n t i a l market f o r i t s products. The U.S. and Western Europe which together account f o r over 65% of Hong Kong's domestic exports i n r e c e n t years are thousands of m i l e s away. M a t e r i a l s u p p l i e s a l s o have to come from d i s t a n t c o u n t r i e s . Thus, Hong Kong's l o c a t i o n i n r e l a t i o n to i t s i n d u s t r i a l needs and market o u t l e t s cannot be regarded as i d e a l . The remaining f a c t o r , l a n d , i s most unfavourable. Hong Kong has no m i n e r a l resources and i s s t r i c t l y l i m i t e d i n usable la n d e s p e c i a l l y f l a t l a n d which i s s u i t a b l e f o r i n d u s t r i a l s i t e s . Most of i t s i n d u s t r i a l premises are now a c t u a l l y l o c a t e d on land r e c l a i m e d from the sea a t a h i g h c o s t - K a i Chung, Kwun Tong, Tuen Mun and T a i Po, a l l i n the New T e r r i t o r i e s which are under l e a s e from China. Land c o s t s i n c l u d i n g those f o r f a c t o r i e s , o f f i c e s and r e s i d e n t i a l apartments are extremely h i g h and are now among the top i n the World. E v i d e n t l y , the combination of p r o d u c t i v e f a c t o r s has o n l y been a mixed b l e s s i n g and cannot f u l l y e x p l a i n Hong 49 Kong's r a p i d i n d u s t r i a l growth. The i n s t i t u t i o n a l set-up and the government's economic p o l i c y have to be i n c l u d e d f o r a more complete e x p l a n a t i o n . To begin w i t h , Hong Kong's entrep o t h i s t o r y l e f t behind a commercial s e c t o r w i t h e s t a b l i s h e d overseas market l i n k s . When the entrepo t trade subsided i n the e a r l y 1950s, many commercial f i r m s took the i n i t i a t i v e i n d e v e l o p i n g manu-f a c t u r i n g i n d u s t r i e s to provide,themselves w i t h the merchandise to t r a d e . L o c a l commercial banks a l s o w i l l i n g l y i gnored the t r a d i t i o n a l canon of prudent banking, a c c o r d i n g to which they should c o n c e n t r a t e on s h o r t term l e n d i n g and funding o f c a p i t a l . Instead, they f i n a n c e d much of the f i x e d investment i n f a c t o r y b u i l d i n g s and machinery. Thus, the manufacturers r e c e i v e d s t r o n g f i n a n c i a l support which they badly needed. The manufacturers, however, were a l s o wise on t h e i r p a r t . They s e n s i b l y chose a set-up which allowed them to s u r v i v e and grow. They s p e c i a l i z e d i n manufacturing a l i m i t e d range of products and processes i n the e a r l y stage o f t h e i r o p e r a t i o n s . They o f f e r e d themselves to overseas buyers more or l e s s as produc-t i o n workshops and manufactured t h e i r products a c c o r d i n g to the l a t t e r ' s s p e c i f i c a t i o n s and requirements. Aided by the s e r v i c e o f the commercial s e c t o r , they e s t a b l i s h e d themselves i n overseas markets by a l l y i n g themselves t o , r a t h e r than attempting to compete with, f o r e i g n producers. T h i s s h e l t e r e d them from the s u p e r i o r 50 r e s e a r c h , product designs and marketing of the otherwise would be r i v a l s . G r a d u a l l y when the experience and s k i l l s were obta i n e d , they were able to i n t e g r a t e i n both d i r e c t i o n s - to 'manufacture-up' the p r o d u c t i o n process, to d e s i g n t h e i r own products and to e s t a b l i s h s a l e s o f f i c e s i n f o r e i g n c o u n t r i e s . Many now e s t a b l i s h e d i n d u s t r i a l i s t s i n Hong Kong a c t u a l l y s t a r t e d themselves as assembly workshops twenty years ago. The p a r t p l a y e d by the government has been most c o n t r o v e r s i a l , not so much i n what i t has done, but i n what i t has not done. Hong Kong was founded as a f r e e p o r t and t h i s i d e a has remained unchanged i n a century, l e a v i n g i t as the o n l y c i t y which i s s t i l l p r a c t i s i n g l a i s s e z f a i r e i n t h i s modern world. In Hong Kong, th e r e are no p r i c e c o n t r o l s , no p r o t e c t i v e t a r i f f s , no wage c o n t r o l s , no f i v e - y e a r p l a n s , no subventions, no tax h o l i d a y s and nothing of the s o r t . Even the b a s i c n e c e s s i t i e s such as e l e c t r i c i t y and l i g h t , gas, telephone s e r v i c e and p u b l i c t r a n s p o r t are p r i v a t e l y owned. Market f o r c e s are allowed to shape the economy, to s e l e c t the i n d u s t r i e s to be developed and to determine a l l product and f a c t o r p r i c e s . The Hong Kong d o l l a r i s backed more than 100% by r e s e r v e s and i s r e g u l a t e d by a mechanism not u n l i k e the o l d g o l d standard system. The budget i s always a balanced one which aims a t f i s c a l n e u t r a l i t y . In a n u t s h e l l , the government's economic p o l i c y i s one o f minimal government and n o n - i n t e r f e r e n c e i n p r i v a t e business a c t i v i t i e s . 51 T h i s p o l i c y has o f t e n come under a t t a c k : from the economists f o r not u s i n g f i s c a l measures to remove the extreme i n e q u a l i t i e s o f income, from trade u n i o n i s t s f o r g i v i n g workers no p r o t e c t i o n a g a i n s t unemployment and no minimum wage l e g i s l a t i o n and from i n d u s t r i a l i s t s f o r not p r o v i d i n g them with s u b s i d i z e d f a c t o r y premises. But the government has i n a number of i n s t a n c e s r e i t e r a t e d i t s i n t e n t i o n to s t i c k to i t s p r e s e n t p o l i c y of n o n - i n t e r v e n t i o n . The j u s t i f i c a t i o n i s simply i t has worked. In the p a s t y e a r s , Hong Kong has been a b l e to achieve a whole range o f economic goals without r e c o u r s e to government i n t e r v e n t i o n i n the economy. There seems to be no v a l i d reason f o r changing a p o l i c y which i s so f a r , so good. At any r a t e , no one has been able to prove, or to d i s p r o v e t h a t such a p o l i c y i s not the most i d e a l f o r Hong Kong i n i t s unique environment. 5 2 Notes 1. Source: Hong Kong Government, Deaprtment of Commerce and Indu s t r y (now the Department o f Trade, Ind u s t r y and Customs), D i r e c t o r y of Commerce, Industry arid F i n a n c e , 1957. 2. In the immediate post-war years the o n l y o u t s i d e a i d Hong Kong r e c e i v e d was f o r r e l i e f and r e h a b i l i t a t i o n o f the refugees and not f o r r e c o n s t r u c t i o n and development. 3. Source: Hong Kong Government, Department of Census and S t a t i s t i c s , Monthly D i g e s t o f S t a t i s t i c s , v a r i o u s i s s u e s . 4. I b i d . 5. Department of Commerce and Industry, Hong Kong Government, 1971 Census of Manufacturing E s t a b l i s h m e n t s , Hong Kong, 1972. 6. Source: Hong Kong Government, Department o f Census and S t a t i s t i c s , Monthly D i g e s t of S t a t i s t i c s , June 1978. 7. I b i d . 8. I b i d . 9. The survey was conducted by the Census and S t a t i s t i c s Department i n 1974. I t covered a l l manufacturing e s t a b l i s h -ments employing twenty or more workers. These e s t a b l i s h -ments, a t the time of the survey, accounted f o r 77% of the i n d u s t r i a l work f o r c e , 86% o f gross manufacturing output and 84% of v a l u e added i n manufacturing. 53 CHAPTER I I I - GOVERNMENT POLICY TOWARDS FOREIGN INVESTMENTS In t h i s chapter, we s h a l l look i n t o Hong Kong government's p o l i c y towards f o r e i g n investments, compare i t with those o f neighbouring Southeast A s i a n c o u n t r i e s and take an overview of f o r e i g n investments i n Hong Kong. T h i s w i l l complete our examination of the business environment f o r f o r e i g n manufacturers i n Hong Kong. P o l i c y i n Hong Kong The government's n o n - i n t e r v e n t i o n economic p o l i c y has been extended to i t s treatment of f o r e i g n i n v e s t o r s . I t i s one of n o n - d i f f e r e n t i a t i o n under which a l l p r i v a t e b usinesses are t r e a t e d a l i k e . F o r e i g n and l o c a l c o r p o r a t i o n s are r e g i s t e r e d under the same laws, s u b j e c t e d to the same s e t of business r e g u l a t i o n s and taxed a t the same: r a t e . L e g a l requirements f o r f o r e i g n i n v e s t o r s are minimal. They are here summarized below: (1) Ownership: F o r e i g n e r s can i n v e s t i n any bu s i n e s s and own e q u i t y up to 100%. There i s no s p e c i a l r e s t r i c -t i o n of any k i n d . 54 (2) Employment: There i s no r e s t r i c t i v e employment l e g i s l a t i o n a p a r t from the one which i s enacted to p r o t e c t c h i l d and female l a b o u r e r s and t h i s l e g i s l a t i o n a p p l i e s to a l l p r i v a t e businesses."'" F o r e i g n e r s can o b t a i n working v i s a s e a s i l y and there i s no d i f f i c u l t y i n renewal. (3) Remittances: There i s ab s o l u t e freedom f o r r e p a t r i a t i o n o f c a p i t a l and remittances o f ear n i n g s , loans, i n t e r e s t o r other f e e s . Hong Kong has no exchange c o n t r o l ; f o r e i g n c u r r e n c i e s can move f r e e l y i n and out of Hong Kong a t any moment. (4) Business p r o t e c t i o n : Hong Kong l e g i s l a t i o n s p r o v i d e patent p r o t e c t i o n . There i s no guarantee to p r i v a t e businesses a g a i n s t l o s s e s due to n a t i o n a l i z a t i o n , wars, revo-l u t i o n s , i n s u r r e c t i o n s and i n c o n v e r t i b i l i t y o f c u r r e n c i e s e t c . ; but there has never been an i n c i d e n t o f t h i s k i n d i n the past y e a r s . (5) D u t i e s : There i s no ge n e r a l t a r i f f on imports except f o r four groups of commodities:-- a l c o h o l i c l i q u o r , tobacco, c e r t a i n hydrocarbon o i l s and methy a l c o h o l s i r r e s p e c t i v e of whether they are imported or manufactured l o c a l l y . (6) Taxes: Taxes are l e v i e d on s p e c i f i e d sources of income a r i s i n g i n or d e r i v e d from Hong Kong on l y , namely, 55 p r o p e r t y tax, i n t e r e s t tax, p r o f i t tax and s a l a r y tax. There i s no c a p i t a l gains tax, no tax on c o r p o r a t e c a p i t a l and no other w i t h h o l d i n g taxes a p a r t from i n t e r e s t tax. Property tax i s charged at the standard r a t e of 15% on the owner of land and/or b u i l d i n g except f o r p r o p e r t i e s occupied by the owner f o r h i s r e s i d e n c e , vacant premises and p r o p e r t i e s i n c e r t a i n p a r t s of the New T e r r i t o r i e s . P r o p e r t i e s owned by c o r p o r a t i o n s c a r r y i n g on business i n Hong Kong are exempted from paying p r o p e r t y tax because p r o f i t s from t h e i r ownership are chargeable to p r o f i t tax. I n t e r e s t tax i s charged a t the standard r a t e of 15% on i n t e r e s t a r i s i n g i n or d e r i v e d from Hong Kong. T h i s i s a w i t h h o l d i n g tax deducted a t source unless the i n t e r e s t forms a p a r t of the p r o f i t s of a c o r p o r a t i o n c a r r y i n g on business i n Hong Kong, i n which case i t i s s u b j e c t to p r o f i t tax. I n t e r e s t payable a t a r a t e not exceeding the savings d e p o s i t r a t e by 2 l i c e n s e d commercial banks i s exempt. P r o f i t tax i s charged a l s o a t the standard r a t e of 15% f o r u n i n c o r p o r a t e d b u s i n e s s e s , but f o r i n c o r p o r a t e d companies there i s a 2% surcharge, i . e . , a t 17% s i n c e A p r i l 1, 1976. G e n e r a l l y a l l expenses to the extent to which they have been i n c u r r e d i n the p r o d u c t i o n of p r o f i t s chargeable to tax are deductable. Losses can be c a r r i e d forward i n d e f i n i t e l y and 56 allowances f o r w r i t i n g o f f c a p i t a l expenditure are generous, a t 20-25% i n the f i r s t year and 5-30% i n ensuing years depending on the estimated working l i f e o f the p a r t i c u l a r category of c a p i t a l expenditure. However, there i s no tax allowance f o r o r g a n i z a t i o n and p r e o p e r a t i n g expenses nor deduction f o r expansion reinvestment. S a l a r y tax i s c a l c u l a t e d on a graduating s c a l e from 5% to 30% onnnet chargeable income, i . e . , income a f t e r deductions of p e r s o n a l allowances. But the o v e r a l l e f f e c t i v e tax r a t e i s l i m i t e d to the standard r a t e of 15% on t o t a l gross income. 3 A Comparison with Other C o u n t r i e s i n Southeast A s i a Compared to Hong Kong, c o u n t r i e s i n Southeast A s i a have f a r more d e l i b e r a t e and s p e c i f i c p o l i c i e s towards f o r e i g n investments. On one hand, they r e c o g n i z e the v a l u a b l e c o n t r i -b u t i o n s t h a t f o r e i g n investments b r i n g to t h e i r c o u n t r i e s , but a t the same time they are anxious to c o n t r o l the areas to which f o r e i g n investments flow and to encourage the p a r t i c i p a t i o n of l o c a l i n v e s t o r s . To t h i s end, these c o u n t r i e s have c r e a t e d a v a s t a r r a y of i n c e n t i v e schemes and r e s t r i c t i v e r e g u l a t i o n s . Economic 5 7 n a t i o n a l i s m i s conspicuous. A l l new f o r e i g n investment p r o j e c t s r e q u i r e government approval and c o n f i r m a t i o n o f t h e i r ' s t a t u s ' . Some s e c t o r s are c l o s e d e n t i r e l y to f o r e i g n i n v e s t o r s w h i l e o t h e r s r e q u i r e m a j o r i t y l o c a l ownership. Pr e f e r e n c e s are u s u a l l y g i v e n to export o r i e n t e d and t e c h n o l o g i c a l l y advanced i n d u s t r i e s . In r e c e n t y e a r s , emphasis i s a l s o p l a c e d on those i n d u s t r i e s which make use of l o c a l resources (have a high l o c a l content) and generate s u b s t a n t i a l employment. The i n c e n t i v e s p r o v i d e d to compensate f o r the r e s t r i c t i o n s are mainly i n the form of tax h o l i d a y s , duty f r e e imports of c a p i t a l goods and raw m a t e r i a l s , a c c e l e r a t e d d e p r e c i a t i o n and guarantees of r e p a t r i a t i o n o f c a p i t a l arid r e mittances o f ea r n i n g s . T h i s i s , o f course, o n l y a very t e r s e and g e n e r a l i z e d d e s c r i p t i o n of some complicated s e t s o f business r e g u l a t i o n s . Furthermore, these c o u n t r i e s u s u a l l y a d m i n i s t e r t h e i r p o l i c i e s w ith f l e x i b i l i t y and f o r e i g n investment p r o p o s a l s are o f t e n d e a l t with on a case by case b a s i s . The broad g u i d e l i n e s are w r i t t e n i n t h e o r e g u l a t i o n s but most of the terms are not r i g i d nor unchangeable. T h i s i s good i n some i n s t a n c e s , but i n o t h e r s , i t can generate u n c e r t a i n t i e s and o p p o r t u n i t i e s f o r d i s c r i m i n a t i o n and p o s s i b l e b u r e a u c r a t i c e x p l o i t a t i o n . A comparison between Hong Kong and other Southeast A s i a n c o u n t r i e s (Indonesia, M a l a y s i a , P h i l i p p i n e s , Singapore, South Korea, Taiwan and Thailand) i n t h e i r p o l i c i e s towards 58 f o r e i g n investment i s summarized i n Table I I I - l . I t c l e a r l y r e v e a l s t h a t Hong Kong i s unique i n the r e g i o n . I t i s the o n l y country t h a t (i) makes no d i f f e r e n t i a t i o n between f o r e i g n and l o c a l b u s i n e s s , ( i i ) has no s p e c i f i c i n c e n t i v e s granted to f o r e i g n i n v e s t o r s , ( i i i ) has no o f f i c i a l r e s t r i c t i o n s i n f o r e i g n ownership, (iv) has no formal or i n f o r m a l r e g u l a t i o n s on employment of f o r e i g n n a t i o n a l s or on t r a i n i n g of l o c a l s t a f f , (v) has no exchange c o n t r o l and permits f r e e remittances of funds i n any form, i n any q u a n t i t y and a t any moment and (vi) has no g e n e r a l t a r i f f on imports and e x p o r t s . Furthermore, the tax system i n Hong Kong i s most simple and s t r a i g h t forward. D i s r e g a r d i n g the tax exemptions and r e d u c t i o n s granted to f o r e i g n c o r p o r a t i o n s which o b t a i n c e r t a i n s t a t u s i n other c o u n t r i e s , Hong Kong has the lowest c o r p o r a t e tax r a t e i n the r e g i o n and there i s o n l y one w i t h h o l d i n g tax ( i n t e r e s t t a x ) . F i n a l l y , Hong Kong and Singapore are the o n l y two c o u n t r i e s i n the r e g i o n which a s s e r t t a x a b l e income on a t e r r i t o r i a l b a s i s , i . e . , tax i s l e v i e d on income a r i s i n g i n or d e r i v e d from w i t h i n the country o n l y . In a d d i t i o n , they are the o n l y two which permit l o s s e s to be c a r r i e d forward i n d e f i n i t e l y . Overview o f F o r e i g n Investments i n Hong Kong Because of the complete l a c k of r e s t r i c t i o n s on f o r e i g n ownership, a l l economic s e c t o r s i n Hong Kong have e x t e n s i v e f o r e i g n investments. But the n o n - d i f f e r e n t i a t i o n p o l i c y TABLE I I I - l A Comparison between Hong Kong and Other Southeast A s i a n C o u n t r i e s i n T h e i r P o l i c i e s Towards F o r e i g n Investment General business r e g u l a t i o n s Ban on f o r e i g n ownership L o c a l e q u i t y p a r t i -c i p a t i o n Employment o f f o r e i g n n a t i o n a l s T r a i n i n g o f l o c a l s t a f f Exchange c o n t r o l s Investment i n c e n t i v e s f o r f o r e i g n corpo-r a t i o n s W ithholding taxes Du t i e s on imports Hong Kong Same f o r a l l p r i v a t e businesses Indonesia, M a l a y s i a , P h i l i p p i n e s Singapore, S. Korea, Taiwan T h a i l a n d D i f f e r e n t or a d d i t i o n a l r e g u l a t i o n s f o r f o r e i g n c o r p o r a t i o n s S p e c i f i c ban i n s e l e c t e d 'key' i n d u s t r i e s No s p e c i f i c ban No s p e c i f i c requirement Required i n s e l e c t e d i n d u s t r i e s No s p e c i f i c r e s t r i c t i o n Some formal o r i n f o r m a l r e s t r i c t i o n s No s p e c i f i c requirement Some formal or i n f o r m a l requirements No exchange c o n t r o l No s p e c i f i c i n c e n t i v e s On i n t e r e s t o n l y No general t a r i f f Exchange c o n t r o l s range from l i m i t e d to h i g h l y r e s t r i c t i v e c o n t r o l s S p e c i f i c investment i n c e n t i v e s granted i f f o r e i g n c o r p o r a t i o n s have a c q u i r e d c e r t a i n r e c o g n i z e d s t a t u s On most to a l l payments to non-r e s i d e n t s Duties l e v i e d on most imports Source: See note 3. 60 has a l s o r e s u l t e d i n no separate s t a t i s t i c s produced f o r f o r e i g n investment a c t i v i t i e s . Consequently, i t i s q u i t e impos-s i b l e to g i v e an accurate account of the extent of f o r e i g n investments i n the v a r i o u s s e c t o r s i n Hong Kong. Only a broad and g e n e r a l overview i s p o s s i b l e . I f we i n c l u d e the B r i t i s h and the mainland Chinese i n the ' f o r e i g n ' category (though Hong Kong i s a B r i t i s h colony on Chinese s o i l ) , then f o r e i g n investments are c r u c i a l i n a l l major economic s e c t o r s i n Hong Kong - t r a d i n g and d i s t r i b u t i o n , banking and i n s u r a n c e , u t i l i t i e s and manufacturing. The t r a d i n g and d i s t r i b u t i o n s e c t o r was where f o r e i g n i n v e s t o r s f i r s t p l a c e d t h e i r money. Hong Kong was annexed by the B r i t i s h to serve as i t s t r a d i n g post i n the Par E a s t . The t r a d i n g 'hongs' (merchant houses) e s t a b l i s h e d by the B r i t i s h were the e a r l i e s t d i r e c t f o r e i g n investments i n Hong Kong. Among these t r a d i n g hongs, the b i g g e s t and most powerful ones were Hutchison Whampoa, J a r d i n e Matheson, Swire P a c i f i c and Wheelock 4 Marden. But i n the p a s t y e a r s , they have d i v e r s i f i e d t h e i r o p e r a t i o n s and have become conglomerates engaging i n a v a r i e t y of b usiness a c t i v i t i e s a p a r t from t r a d i n g and d i s t r i b u t i o n such as manufacturing, s h i p p i n g , wharfing, i n s u r a n c e , r e a l e s t a t e s , r e s t a u r a n t s and r e t a i l i n g . A c t u a l l y , they have been so deeply entrenched i n Hong Kong t h a t they are more o f t e n regarded as l o c a l companies. 61 The c e n t r a l l o c a t i o n of Hong Kong i n the r e g i o n and i t s t r a d i t i o n a l l i n k with China have a l s o a t t r a c t e d o t h e r f o r e i g n i n v e s t o r s to s e t up t r a d i n g and d i s t r i b u t i o n companies i n Hong Kong. Many of them are r e g i o n a l c e n t r e s with business r e s p o n s i b i l i t i e s f o r Southeast A s i a . Most of these f o r e i g n investorsfchave come from P a c i f i c - r i m c o u n t r i e s and t h e i r number should be c l o s e to a thousand. T h i s i s deduced from the 5 government's r e c o r d of f o r e i g n branch o f f i c e s i n Hong Kong. (Table III-2) At March 31, 1977, 657 (73.3%) o f the 896 (945 minus 49) f o r e i g n branch o f f i c e s whose country source of investment was i d e n t i f i e d had t h e i r head o f f i c e s l o c a t e d i n P a c i f i c - r i m c o u n t r i e s . E x c l u d i n g the non-business o f f i c e s ( e d u c a t i o n a l , r e l i g i o u s and p r o f e s s i o n a l o r g a n i z a t i o n s ) , 202 (22.7%) o f the 890 (945 minus 55) branch o f f i c e s were d i r e c t l y engaged i n import and export a c t i v i t i e s . (Table II-3) But there were c e r t a i n l y many other f o r e i g n t r a d i n g and d i s t r i b u t i o n companies which e x i s t e d a t t h a t time, though not i n the form o f branch o f f i c e s . For example, a c c o r d i n g to the American Consulate's l i s t of American Firms, S u b s i d i a r i e s and A f f i l i a t e s i n Hong Kong, the U.S. alone had 244 companies engaged i n t r a d i n g and d i s t r i b u t i o n out of the 553 companies l i s t e d i n August 1976.^ A simple e x t r a p o l a t i o n i n d i c a t e s t h a t there ought to be ccLose to a thousand f o r e i g n t r a d i n g and d i s t r i b u t i o n 7 companies i n Hong Kong i n 1977. In the banking and insurance s e c t o r , f o r e i g n i n v e s t o r s TABLE TIT-2 F o r e i g n Branch O f f i c e s a t March 31, 197 7 (By N a t i o n a l i t y o f Head O f f i c e ) N a t i o n a l i t y o f Head O f f i c e Number of Branch O f f i c e s U n i t e d S t a t e s 240 U n i t e d Kingdom 123 Japan * 109 Panama 74 A u s t r a l i a 61 Singapore 56 S w i t z e r l a n d 31 Canada 25 China 22 M a l a y s i a . 22 P h i l i p p i n e s 19 Bahamas 15 L i b e r i a 13 France 12 Bermuda 10 Cayman I s l a n d s 9 West Germany 9 In d i a 9 T h a i l a n d 9 South Korea 8 Netherland 8 Taiwan 7 Indonesia 5 Others 49 T o t a l 945 Source: R e g i s t r a r General, Hong Kong Government, Annual Departmental Report 1976/77. TABLE TIT-3 F o r e i g n Branch O f f i c e s a t March 31, 1977 (By Nature of Business) Number of Nature of Business Branch O f f i c e s Import and export 202 Insurance 102 Sh i p p i n g , s h i p b u i l d i n g & breaking 65 E n g i n e e r i n g , e l e c t r i c a l & mechanical 62 Banking 61 M i s c e l l a n e o u s i n d u s t r i e s 54 A i r and l a n d c a r r i e r s 4 8 F i n a n c i e r s 44 Land & b u i l d i n g s 42 Chemical & pharmaceuticals 26 T e x t i l e k n i t t i n g , s p i n n i n g & weaving 19 A d v e r t i s i n g & p u b l i c c o n s u l t a n t s 18 Newspaper p r o p r i e t o r s & p u b l i s h e r s 17 P r o v i s i o n s & f o o d s t u f f s 14 Cinemas & t h e a t r e s 11 Garment manufacturers 9 T o u r i s t agents 8 Costumiers & t a i l o r s 7 Timber & paper merchants 6 H o t e l s & r e s t a u r a n t s 5 T e l e g r a p h i c & w i r e l e s s 3 Non-business o r g a n i z a t i o n s ( e d u c a t i o n a l p r o f e s s i o n a l & r e l i g i o u s ) Others 67 55 T o t a l 945 Source: R e g i s t r a r General, Hong Kong Government, Annual  Departmental Report 1976/7 7. 64 c l e a r l y , have the m a j o r i t y share of i n t e r e s t . Of the seventy-f o u r l i c e n s e d commercial banks o p e r a t i n g a t the end of 1977 i n Hong Kong onl y twenty-four had an o r i g i n a l l o c a l r e g i s t r a t i o n and the r e s t f o r e i g n as f o l l o w s : f i v e B r i t i s h , e l e v e n Communist Chinese, twelve overseas Chinese, s i x American, eleven A s i a n and f i v e n o n - B r i t i s h European. In other words, f o r e i g n banks numbered f i f t y or 67.6% of the t o t a l . But t h i s a l r e a d y understated f o r e i g n e r s ' share as the s i z e and business volume of f o r e i g n banks, e s p e c i a l l y ' the B r i t i s h and American banks, f a r exceeded those o f l o c a l banks. Furthermore, seven of the l o c a l banks were known to have m a j o r i t y f o r e i g n ownership and s e v e r a l o t h e r s had m i n o r i t y f o r e i g n i n t e r e s t . I f we i n c l u d e the former i n the f o r e i g n category, f o r e i g n banks then comprised f i f t y - s e v e n or 77.0% of the t o t a l l i c e n s e d commercial banks i n Hong Kong a t the end o f 1977. Apart from the l i c e n s e d commercial banks, there were a l s o one hundred r e p r e s e n t a t i v e o f f i c e s of f o r e i g n banks o p e r a t i n g i n HOng Kong a t the end of 1977. In a d d i t i o n , of the 201 f i n a n c e companies owned by banks and other non-bank f i n a n c i a l i n s t i t u t i o n s which accepted d e p o s i t s from the p u b l i c and were engaged i n v a r i o u s f i n a n c i n g a c t i v i t i e s , about o n e - t h i r d were owned or c o n t r o l l e d by f o r e i g n e r s . In the i n surance area, there were 164 f o r e i g n i n s u -rance companies (57.5%) out of the t o t a l 28 5 i n Hong Kong a t the end of March 1977. (Table III-4). The B r i t i s h took f i r s t p l a c e TABLE II1-4 Insurance Companies a t March 31, 1977 (By Country of Inc o r p o r a t i o n ) Country of I n c o r p o r a t i o n Number of Companies Hong Kong 121 U n i t e d Kingdom 60 United S t a t e s 38 A u s t r a l i a 8 Japan 8 Singapore 6 S w i t z e r l a n d 6 I n d i a 5 Canada 4 France 4 Bahamas 3 China 3 New Zealand 3 P h i l i p p i n e s 3 Bermuda 2 West Germany 2 M a l a y s i a 2 Netherlands 2 Brunei 1 Cayman I s l a n d s 1 Luxembourg 1 Panama 1 Sweden 1 T o t a l 285 Source: R e g i s t r a r General, Hong Kong Government, Annual Departmental Report 1976/7 7. wit h s i x t y companies, f o l l o w e d by the United S t a t e s w i t h t h i r t y -e i g h t , A u s t r a l i a and Japan wi t h e i g h t each and Singapore w i t h six . Again, among the 121 insurance companies o r i g i n a l l y 66 i n c o r p o r a t e d i n Hong Kong, some have f o r e i g n ownership i n t e r e s t today> but the extent i s unknown. U t i l i t i e s in'Hong Kong are p r i v a t e l y owned wit h the o n l y e x c e p t i o n of water supply and the r a i l w a y . The B r i t i s h dominate the u t i l i t i e s s e c t o r . Nearly a l l the p r i v a t e l y owned u t i l i t i e s companies i n Hong Kong p r o v i d i n g e l e c t r i c i t y , gas telephone, f e r r y and bus s e r v i c e s were i n i t i a l l y f i n a n c e d by B r i t i s h c a p i t a l ' . Though a l l these companies are now quoted i n the stock exchange and are s u b s c r i b e d to by numerous l o c a l i n v e s t o r s , the B r i t i s h s t i l l h o l d e f f e c t i v e management c o n t r o l of these o p e r a t i o n s . Manufacturing i s the o n l y important s e c t o r which f o r e i g n e r s do not dominate over l o c a l i n v e s t o r s . In terms o f number of e s t a b l i s h m e n t s f o r e i g n investments i n t h i s s e c t o r are a l s o r e l a t i v e l y fewer than those i n t r a d i n g and d i s t r i b u t i o n . However, f o r reasons a l r e a d y g i v e n i n the i n t r o d u c t o r y chapter, d i r e c t f o r e i g n investments i n manufacturing i n Hong Kong w i l l be analysed i n d e t a i l i n the f o l l o w i n g c h a p t e r s . 67 Notes 1. In Hong Kong, no c h i l d under the age 14 i s allowed to be employed i n i n d u s t r i e s and women and young workers under the age o f 18 are p r o h i b i t e d from working a t n i g h t , under-ground or i n dangerous t r a d e s . 2. The savings d e p o s i t r a t e on A p r i l 1, 1979 was 5 3/4%. 3. Government l e g i s l a t i o n s and r e g u l a t i o n s on f o r e i g n c o r p o r a t i o n s i n other Southeast A s i a n c o u n t r i e s are so complicated and v o l a t i l e t h a t i t i s extremely d i f f i c u l t to g i v e an a c c u r a t e d e s c r i p t i o n by one who i s not a l e g a l e xpert. For ge n e r a l d e s c r i p t i o n s o f investment c o n d i t i o n s and r e g u l a t i o n s f o r f o r e i g n i n v e s t o r s i n Indonesia, M a l a y s i a , the P h i l i p p i n e s , Singapore, South Korea, Taiwan and T h a i l a n d , see A l l e n , T.W., P o l i c i e s of ASEAN C o u n t r i e s Towards D i r e c t F o r e i g n Investment, Southeast A s i a Development A d v i s o r y Group of the A s i a S o c i e t y , New York, 1973. Kapoor, A., A s i a n Business and Environment i n T r a n s i t i o n : S e l e c t e d Readings and Essays, Darwin P r e s s , P r i n c e t o n , N.J., 1976. S.G.V. - Goh Tan Pte. L t d . , Comparative Investment I n c e n t i v e s :  Indonesia, Korea, M a l a y s i a , P h i l i p p i n e s , Singapore, Taiwan,  T h a i l a n d , Hong Kong, The SGV Group, Singapore, September, 1975. , Doing Business i n T h a i l a n d (1976) ; Taiwan, R.O.C. . (1977) ; Indonesia (1978); M a l a y s i a (1978), the P h i l i p p i n e s ^ (1978) ; Singapore (1978), The SGV Group, Singapore. Stevens, C.R., Le g a l Aspects of Doing Business i n Ea s t A s i a , P r a c t i s i n g Law I n s t i t u t e , New York, 1977. Vasey, L.R., ASEAN and a More P o s i t i v e S t r a t e g y f o r F o r e i g n  Investment, U n i v e r s i t y Press of Hawaii, Honolulu, 1978. Wilde, D., Investment i n South and Ea s t A s i a : A Comparative  Study of Law and T a x a t i o n P e r t a i n i n g to Investment i n  Indonesia/ the P h i l i p p i n e s , T h a i l a n d , M a l a y s i a , Singapore  and P a k i s t a n , Committee f o r Economic Development o f A u s t r a l i a , Melbourne, 1973. 4. These are the l a t e s t company names. They have changed i n the pa s t y e a r s . 5. A branch o f f i c e i s o f f i c i a l l y d e f i n e d as "companies i n c o r -porated o u t s i d e Hong Kong which have e s t a b l i s h e d a p l a c e of b usiness i n Hong Kong and r e g i s t e r e d documents under P a r t XI of the company ordinance". 6. Source: American Consulate's O f f i c e , L i s t of American Firms 68 Subsidiaries arid A f f i l i a t e s i n Hong Kong/ August 1976. 7. This i s calculated as follows: Estimated number of U.S. import and export branch o f f i c e s = 240 x 202/945 = 51 app. Estimated number of foreign trading and d i s t r i b u t i o n companies = 202 x 244/51 = 966 app. CHAPTER IV - INVESTMENTS IN MANUFACTURING T h i s chapter looks s p e c i f i c a l l y i n t o f o r e i g n investments i n the manufacturing s e c t o r : t h e i r emergence and growth, country source of investment and i n d u s t r y d i s t r i b u t i o n . Emergence arid Growth D i r e c t f o r e i g n investments i n the manufacturing s e c t o r became important i n Hong Kong on l y a f t e r the 1960s. (But s t r i c t l y speaking, t h i s i s the case o n l y i f the Chinese refugees who came to Hong Kong i n the e a r l y 1950s were not regarded as ' f o r e i g n ' . ) Even though no s t a t i s t i c s on f o r e i g n ownership i n t e r e s t were a v a i l a b l e b e f o r e 1970, the year o f e s t a b l i s h m e n t of the f o r e i g n manufacturers o p e r a t i n g a t the end of 1977 can c e r t i f y t h i s . Of the 328 f o r e i g n manufacturers whose year of e s t a b l i s h m e n t c o u l d be t r a c e d , 210 (64.0%) s t a r t e d o p e r a t i o n i n o r a f t e r 1970. Ninety-two, or more than one-quarter, represented new investments i n 1975-77. (Table IV-1)_ T h i s i s by no means s u r p r i s i n g i n the l i g h t o f the h i s t o r y of Hong Kong's i n d u s t r i a l development. Before the War, Hong Kong was a f i s h i n g and e n t r e p o t p o r t and there was l i t t l e manufacturing a p a r t from a few t r a d i t i o n a l i n d u s t r i e s a s s o c i a t e d w i t h t r a d i n g and f i s h i n g a c t i v i t i e s . The indigenous i n d u s t r i a l t r a n s f o r m a t i o n of Hong Kong came a f t e r the War i n the 1950s. F o r e i g n e r s ' r o l e i n t h i s 70 TABLE IV-1 Year of E s t a b l i s h m e n t of F o r e i g n Manufacturers Operating a t December 31, 1977 Year o f Number of E s t a b l i s h m e n t E s t a b l i s h m e n t s % of T o t a l Before 1960 21 6.4% 1960 - 1964 35 10.7% 1965 - 1969 62 18.9% 1970 - 1974 118 36.0% 1975 - 1976 42 12.8% 1977 _50 15.2% T o t a l 328 100.0% Note: The a c t u a l number of f o r e i g n manufacturers o p e r a t i n g at December 31, 1977 was 339. The year of establishment of the remaining eleven f o r e i g n manufacturers c o u l d not be t r a c e d . Source: Compiled from r e c o r d s kept by the Department of Trade, Industry and Customs, Hong Kong Government. t r a n s f o r m a t i o n was f o r obvious reasons p r a c t i c a l l y n e g l i g i b l e . Before 1960, Hong Kong's manufacturing was s t i l l very much at i t s i n f a n c y . Hong Kong's economic v i a b i l i t y had not y e t been s e r i o u s l y t e s t e d and i t s r e l a t i o n w i t h the new regime i n China was a l s o u n c e r t a i n . I t was not a s a f e harbour f o r long term commitments i n manufacturing f o r f o r e i g n e r s . The s i t u a t i o n improved somewhat i n the 1960s. Hong Kong's i n d u s t r i a l economy g r a d u a l l y demonstrated i t s v i a b i l i t y and v e r s a t i l i t y to the world. I t s p o l i t i c a l s t a t u s was a l s o c l a r i f i e d w i t h the Communist government which had then conso-) 71 l i d a t e d i t s r u l e i n the Chinese mainland. A status-quo was to be maintained and f o r e i g n i n v e s t o r s , r e l i e v e d of the p o l i t i c a l u n c e r t a i n t y , were a t t r a c t e d to Hong Kong by i t s l i b e r a l but secured business environment. The p o l i t i c a l chaos and m i l i t a r y c o n f l i c t s i n o t h e r c o u n t r i e s i n Southeast A s i a a l s o induced many f o r e i g n i n v e s t o r s to move t h e i r o p e r a t i o n s to Hong Kong. F o r e i g n investment c a p i t a l began to flow i n , i n t o manufacturing as w e l l as o t h e r s e c t o r s . By the end o f 1969, there were a l r e a d y about 14 0 f o r e i g n manufacturing f i r m s i n Hong Kong w i t h t o t a l c a p i t a l investments amounting to around HK$500 m i l l i o n . 1 The growth of f o r e i g n investments i n the manufact-u r i n g s e c t o r s i n c e 1970 has been dramatic. At December 31, 1971, f o r e i g n c a p i t a l investments t o t a l l e d HK$759.5 m i l l i o n . By the end o f 1977, t h i s f i g u r e had r i s e n to HK$1,978.5 m i l l i o n - a r i s e of 160.5%. T h i s percentage i n c r e a s e was the h i g h e s t when compared to Hong Kong's major i n d u s t r i a l s t a t i s t i c s . In t h i s same s i x -year p e r i o d , Hong Kong's domestic exports i n c r e a s e d by 154.6%; number of manufacturing e s t a b l i s h m e n t s , 101.8%; i n d u s t r i a l e l e c t r i c i t y consumption, 57.3% and i n d u s t r i a l employment, 33.8%. (Table IV-2) T h i s i n d i c a t e s t h a t i n the 1970s the growth of f o r e i g n investments i n the manufacturing s e c t o r outpaced Hong Kong's average i n d u s t r i a l growth. 72 TABLE IV-2  Hong Kong's I n d u s t r i a l Growth 1971-77 % Increase 1971 1977 i n P e r i o d F o r e i g n investments i n manufacturing a t end 760 1,979 160.5% of year ( i n HK$ m i l l i o n ) Domestic exports i n the 1 5 4 year ( i n HK$ m i l l i o n ) Number of manufacturing e s t a b l i s h m e n t s a t end 18,612 37,568 101.8% of year I n d u s t r i a l e l e c t r i c i t y consumption i n the year 2,031 3,194 57.3% ( i n m i l l i o n KWHs) I n d u s t r i a l employment a t 564,370 755,108 33.8% end of year Source: Department of Trade, Industry and Customs f o r f o r e i g n investments i n manufacturing. Others: Department of Census and S t a t i s t i c s , Hong Kong government, Monthly  D i g e s t o f S t a t i s t i c s , v a r i o u s i s s u e s . 73 Country Source of Investment At the end of 1977, there were a l t o g e t h e r twenty-six f o r e i g n c o u n t r i e s w i t h investment i n t e r e s t s i n manufacturing i n Hong Kong. A l l the important i n v e s t o r s came from i n d u s t r i a l i z e d c o u n t r i e s o f the West or Southeast A s i a . There was not a s i n g l e investment from any communist country i n c l u d i n g China.The number o f f o r e i g n manufacturers t o t a l l e d 339 o f which about t h i r t y were f o r e i g n e r s ' j o i n t ventures each i n v o l v i n g more than one overseas source of investment. The number of f o r e i g n - l o c a l j o i n t ventures was unknown. The U n i t e d S t a t e s was by f a r the most important f o r -e i g n i n v e s t o r i n manufacturing i n Hong Kong. I t s c a p i t a l commitment of HK$920.4 m i l l i o n represented about h a l f o f the t o t a l . (Table IV-3) U.S. investments a l s o had a very steady growth i n the years 1971-77, a t about 20% per annum. Japan was second, but was a l r e a d y a l o n g d i s t a n c e behind. I t s investments hovered near the q u a r t e r - b i l l i o n mark i n 1973-75, but t h e r e a f t e r t h e r e was an upsurge to HK$393.4 m i l l i o n by the end of 1977. U n i t e d Kingdom occupied t h i r d p o s i t i o n w i t h HK$148.6 m i l l i o n and i t s investments had a p p a r e n t l y stagnated s i n c e 197 3. The Netherlands was the on l y other country w i t h investments exceeding HK$100 m i l l i o n . I t s p o s i t i o n r ose s t r o n g l y i n the l a t e r y e a r s , jumping from the te n t h p o s i t i o n i n TABLE IV-3 D i s t r i b u t i o n of F o r e i g n Investments i n Manufacturing by Source Country ( Amount i n HK$ M i l l i o n a t End of Year ) (Excluding L o c a l I n t e r e s t i n J o i n t Ventures) % of T o t a l Average Investment Country 1971 1973 1975 1977 a t 31/12/77 a t 31/12/77 Un i t e d S t a t e s (110) 406. 0 589. 0 800.2 920.4 46.5% 8.4 Japan ( 88) 169.9 278. 9 261.3 393.4 19;. 9% 4.5 Un i t e d Kingdom ( 31) 85.9 151.0 159.0 148.6 7.5% 4.8 Netherlands ( 7) 17.4 9.9 22.7 102.8 5.2% 14.7 A u s t r a l i a ( 23) 31.5 47.4 93.8 90. 3 4.6% 3.9 S w i t z e r l a n d ( 12) 13.5 29.3 42.3 64. 8 3.3% 5.4 Singapore ( 16) 8.7 51.2 61.0 63.7 3.2% 4.0 T h a i l a n d ( 16) 2.5 140.5 134.5 52.4 2.6% 3.3 West Germany ( 15) 6.2 7.8 19.3 50.4 2.5% 3.4 France 0 2) 0.0 31-6 23.9 23.1 1.2% 11.6 Taiwan ( 13) 9.5 16.9 31.0 13.5 0.7% 1.0 P h i l i p p i n e s ( 3) 2.1 9.6 15.8 11.0 0.6% 3.7 Others ( 31) 6.3 29. 0 30.1 44.1 2*2% 11.; 4 T o t a l (367) 759.5 1,392.1 1,694.9 1,978.5 100.0% 5.4 Notes; The f i g u r e s i n b l a c k e t s represent the number of es t a b l i s h m e n t s as a t December 31, 1977. The a c t u a l t o t a l number of f o r e i g n manufacturers a t December 31, 1977 was 339. The apparent discrepancy arose because some es t a b l i s h m e n t s were j o i n t ventures i n v o l v i n g more than one f o r e i g n ownership i n t e r e s t . The amounts are cumulative. See Appendix I I I f o r t h e i r approximate e q u i v a l e n t s i n U.S. d o l l a r s . Source: Department of Trade, Industry and Customs, Hong Kong Government. 75 1975 to the f o u r t h i n 1977. A u s t r a l i a came f i f t h w i t h i n v e s t -ments of HK$90.3 m i l l i o n which was s l i g h t l y lower than i t s 1975 l e v e l . F o l l o w i n g A u s t r a l i a was S w i t z e r l a n d with HK$64.8 m i l l i o n . L i k e the U.S., S w i t z e r l a n d a l s o had a continuous and steady growth i n 1971-77. Singapore f o l l o w e d c l o s e l y behind with HK$63.7 m i l l i o n , but u n l i k e S w i t z e r l a n d , the major p o r t i o n of t h i s amount was i n v e s t e d i n 1971-7 3. The f i g u r e s f o r T h a i l a n d shows t h a t there were divestments of c l o s e to HK$80 m i l l i o n i n 1975-77, p u l l i n g i t down from the f o u r t h p o s i t i o n i n 1975 to the eighth i n 1977.West Germany, wi t h HK$50.4 m i l l i o n , was another country which had a notable i n c r e a s e i n 1975-77 a t a r a t e comparable to t h a t o f the Netherlands. The other c o u n t r i e s w i t h more than HK$10 m i l l i o n c a p i t a l investments a t the end of 1977 were France, Taiwan and the P h i l i p p i n e s . The f i g u r e s i n Table IV-3 r e v e a l t h a t f o r e i g n investments i n manufacturing i n Hong Kong were h i g h l y concen-t r a t e d on a country b a s i s . One country, the U.S., accounted f o r n e a r l y h a l f w h ile the l e a d i n g f i v e c o u n t r i e s took over 80% of the t o t a l i n d o l l a r terms. There was a l s o a wide d i s c r e p a n c y i n the average s i z e of c a p i t a l investment. I t ranged from HK$14.7 m i l l i o n f o r the Netherlands to HK$1.0 m i l l i o n f o r Taiwan. E v i d e n t l y , i n v e s t o r s from Southeast A s i a n c o u n t r i e s had a much sma l l e r investment per esta b l i s h m e n t . At any r a t e , the average investment per establishment o f HK$5.4 m i l l i o n was a s u b s t a n t i a l one by Hong Kong standards. 76 Industry D i s t r i b u t i o n Foreign investments i n manufacturing i n Hong Kong tend to concentrate i n technologically more advanced industries. In 1977, the industries i n which foreign investors had- most int e r e s t i n terms of number of establishments were ' t e x t i l e s ' , 'electronics', 'metal products', 'food manufactures', 'chemical products' and 'toys'. (Table IV-4) The other industries attracted less than ten foreign investors each. But i n terms of d o l l a r investments, 'electronics' took the place o f ' t e x t i l e s ' as the leading industry and by a wide margin. This r e f l e c t e d the greater c a p i t a l needs of the industry. However, 'chemical products', 'printing and publishing', 'metal r o l l i n g , extrusion and fa b r i c a t i o n ' and ' e l e c t r i c a l products' had an even higher average investment per establishment than 'electronics'. At any rate, a l l the industries s p e c i f i e d i n Table IV-4 according to governemtvclassification had a much higher average investment per establishment than the non-spedified industries with only HK$2.0 m i l l i o n each, compared to the average of HK$5.8 m i l l i o n . Looking at the o v e r a l l trend i n the l a s t few years, two industries are p a r t i c u l a r l y worthy of note: 'chemical products' and ' e l e c t r i c a l products'. While 'electronics' and ' t e x t i l e s ' , the leading two industries, steadied down i n 1975-77 and 1973-75 respectively, both 'chemical products' and 'elec-t r i c a l products' increased from less than HK$100 m i l l i o n to over TABLE IV-4 D i s t r i b u t i o n of F o r e i g n Investments i n Manufacturing by Type of Indu s t r y ( Amount i n HK$ M i l l i o n a t End of Year ) (Excluding L o c a l I n t e r e s t i n J o i n t Ventures) % of T o t a l Average Investment Industry 1971 1973 1975 1977 a t 31/12/77 a t 31/12/77 E l e c t r o n i c s ( 64) 264.7 304.0 587. 5 516.1 26.1% 8.1 T e x t i l e s ( 87) 160.9 306.5 253.1 312.7 15.8% 3.6 Chemical products ( 13) 11.6 124.5 96.5 236.1 11.9% 18.2 E l e c t r i c a l products ( 21) 16. 3 49.8 97.2 201.5 10.2% 9.6 P r i n t i n g & p u b l i - ( 9) 22.7 42. 7 61.5 140. 3 7.1% 15.6 shing Watches, c l o c k s & ( 25) 26.2 184.0 188.2 135.2 6.8% 5.4 a c c e s s o r i e s Metal products ( 26) 19.8 24.9 49.7 95.1 4.8% 3.7 Food manufactures ( 14) 5.4 58.5 59. 9 72. 5 3.7% 5.2 Toys ( 10) 36.4 74 .0 58.2 60. 6 3.1% 6.1 Metal r o l l i n g , ext-11.0 r u s i o n & f a b r i c a - ( 5) 18.6 43.0 46.8 54.9 2.8% t i o n B u i l d i n g & c o n s t r u - ( 5) n. a. 32.7 51. 9 34.5 1.7% 6.9 c t i o n m a t e r i a l s Others ( 60) 17 6.9 147.5 144. 4 119.0 6.0% 2.0 T o t a l (339) 759.5 1,392.1 1,694. 9 1,978.5 100.0% 5.8 Notes: n.a. - not a v a i l a b l e . The f i g u r e s i n b l a c k e t s r e p r e s e n t the number o f establishments a t December 31, 1977. The amounts are cumulative. See Appendix I I I f o r t h e i r approximate e q u i v a l e n t s i n U.S. d o l l a r s . . . - . •.. / • ' Source: Department of Trade, Industry and Customs, Hong Kong Government. 78 HK$200 m i l l i o n i n 1975-77. They s t i l l lagged very much behind ' e l e c t r o n i c s ' i n 1977 , but i n view of the i n c r e a s i n g quota r e s t r i c t i o n s faced by Hong Kong's t e x t i l e exports, i t i s q u i t e l i k e l y t h a t 'chemical products' o r ' e l e c t r i c a l p roducts' may overtake ' t e x t i l e s ' as the second l e a d i n g i n d u s t r y f o r f o r e i g n i n v e s t o r s i n Hong Kong i n the next few y e a r s . Of the eleven i n d u s t r i e s l i s t e d , o n l y f i v e ('elec-t r i c a l p r o d ucts', ' p r i n t i n g and p u b l i s h i n g ' , 'metal products', 'food manufactures' and 'metal r o l l i n g , e x t r u s i o n and f a b r i c a -t i o n ' ) had a r e c o r d of continuous growth i n the p e r i o d 1971-77. The remaining s i x i n d u s t r i e s had v a r i o u s degrees 6f set-backs i n c e r t a i n years though none had a c t u a l l y d e c l i n e d i n the whole p e r i o d . In 1975-77, ' e l e c t r o n i c s ' shed HK$71.4 m i l l i o n (-12.2%) which was the l a r g e s t s i n g l e d i s i n v e s t m e n t f o r an i n d u s t r y . But i n percentage terms, 'watches, c l o c k s and a c c e s s o r i e s ' and ' b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s ' had even h e a v i e r tumbles, from HK$188.2 m i l l i o n to HK$135.2 m i l l i o n (-28.2%) and HK$51.9 m i l l i o n to HK$34.5 m i l l i o n (-33.5%) r e s p e c t i v e l y . Other i n d u s t r i e s not s p e c i f i e d i n Table IV-4 a l s o had a heavy f a l l o f 17.6% from HK$144.4 m i l l i o n to HK$119.0 m i l l i o n i n 1975-77. On an i n d u s t r y b a s i s , the degree of c o n c e n t r a t i o n was not as high as t h a t on a country b a s i s . The f o u r l e a d i n g i n d u s t r i e s o n l y took up 64% of the t o t a l , and the number one l e a d e r , ' e l e c t r o n i c s ' , accounted f o r s l i g h t l y over one-quarter. 79 Table IV-5 matches the data f o r type of i n d u s t r y and country source of f o r e i g n investment as a t December 31, 2 1974. I t shows one i n t e r e s t i n g phenomenon: i n v e s t o r s from d i f f e r e n t c o u n t r i e s had d i f f e r e n t areas of i n t e r e s t , a p p a r e n t l y l i n k e d to the home country's i n d u s t r i a l p a t t e r n or market needs. T h a i l a n d , France and the Netherlands i n v e s t e d n e a r l y e x c l u s i v e l y i n 'watches, c l o c k s and a c c e s s o r i e s ' , 'chemical products' and ' e l e c t r o n i c s ' r e s p e c t i v e l y (over 90% of t h e i r investments i n d o l l a r terms), Singapore i n 'food manufactures' (around 8 5%), S w i t z e r l a n d i n ' t e x t i l e s ' (around 80%), the U.S. i n ' e l e c t r o n i c s ' and ' e l e c t r i c a l p r oducts' (around 70%) and A u s t r a l i a i n 'metal 1 products' and 'metal r o l l i n g , e x t r u s i o n and f a b r i c a t i o n ' (around 60%). Only Japan and the U n i t e d Kingdom had more d i v e r s i f i e d i n t e r e s t s and d i d not have a s i n g l e i n d u s t r y a ccounting f o r more than h a l f of t h e i r t o t a l investments. A l s o , some i n d u s t r i e s were very much dominated by one s i n g l e country i n v e s t o r , f o r example, the U.S. i n 'toys' and ' e l e c t r o n i c s ' and Singapore i n 'food manufactures' (around 90% i n each c a s e ) . TABLE IV^5 D i s t r i b u t i o n of Investments i n Manufacturing by Type of Industry & by Source Country ( Amount i n HK$ M i l l i o n a t End of 1974 T (Excluding L o c a l I n t e r e s t i n J o i n t Ventures) A u s t r - S i n g - S w i t z - Nethe-Industry T o t a l U.S. Japan U.K. T h a i l a n d a l i a apore Taiwan e r l a n d France r l a n d s Others E l 1 n i c s . 580. 2 512.4 45.0 4.1 0.0 0.1 0.3 0.0 0.0 0.8 16.8 0.8 T e x t i l e s 218.1 54.0 97.2 19.4 0.3 6.6 5.7 0.7 21.5 0.0 0.2 12.4 W.C. & A. 180.0 13.7 11.6 0.7 132. 9 0.0 0.0 0.0 4.9 0.0 0.0 16.3 Chem. 96. 5 41.2 8.3 23.1 0.0 0.9 0.0 0.0 0.0 23.0 0.0 0.0 E l ' c a l . 93. 9 73.4 18.5 0.0 0.0 0.0 0.9 1.1 0.0 0.0 v 0.0 0.0 P. & P. 61.6 15. 6 39.7 1.7 0.0 2.0 0.0 0.0 0.0 0.0 0.0 2.5 Toys 57.8 57.8 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0 0.0 0.0 Food Man. 56.7 0.0 3.1 0.0 0.0 0.0 53.5 0.0 0.0 0.0 0.0 0.0 B. & CM. 51.9 0.0 0.0 7.0 0.0 19.5 0.0 25.4 0.0 0.0 0.0 0.0 Metal P. 49.7 10.4 12.4: 1 0.0 0.0 23. 3 0.0 3.6 0.0 0.0 0.0 0.0 M.R. & E. 45.9 3.0 9.6 0.0 0.0 33.3 0.0 0.0 0.0 0.0 0.0 0.0 Others 141.1 31. 2 9. 2 8 2.0 1.3 4.5 0. 5 0.1 0.3 0.1 0.0 11. 9 T o t a l 1 ,633.2 812.7 254.7 138.0 134.5 90.1 60.9 31.0 26. 6 23.9 17. 0 43.9 Notes: E l ' n i c s . - e l e c t r o n i c s ; W.C. & A. - watches, c l o c k s & a c c e s s o r i e s ; Chem. - chemical products; E l ' c a l . - e l e c t r i c a l products; P. & P. - p r i n t i n g & p u b l i s h i n g ; Food Man. - food manufactures; B. & CM. - b u i l d i n g & c o n s t r u c t i o n m a t e r i a l s ; Metal P. -metal products; M.R. & E. - metal r o l l i n g , e x t r u s i o n & f a b r i c a t i o n . The f i g u r e s may not add up because of rounding. Source; Department of Trade, Industry and Customs, Hong Kong Government, Overseas Investment i n Hong Kong Manufacturing I n d u s t r i e s : I n d u s t r i a l Survey Report, August 1975. 00 o 81 Notes 1. Around US$90 m i l l i o n at a rate of exchange of US$1 to HK$5.5. The e a r l i e s t o f f i c i a l estimates by the government were for May 1970. At May 31, 1970, there were 161 manufacturing establishments with foreign ownership i n t e r e s t i n Hong Kong and t h e i r combined investments t o t a l l e d HK$595.1 m i l l i o n . 2. No such matching of country source of investment and type of industry has been given by the government except for December 31, 1974 which was contained i n the Industrial  Survey Report. See source of data, Table IV-5. 82 CHAPTER V - ECONOMIC SIGNIFICANCE The number of f o r e i g n manufacturers has never exceeded one p e r c e n t o f the t o t a l number of manufacturing e s t a b l i s h m e n t s i n Hong Kong. At December 31, 1977, there were 339 f o r e i g n manufacturers and t h i s f i g u r e r e p r e s e n t e d 0.9% of the t o t a l . 1 However, from a l l the a v a i l a b l e evidence, t h i s percentage f i g u r e tremendously understates the importance of f o r e i g n investments i n t h i s s e c t o r . T h i s i s mainly because of the d i f f e r e n c e i n s c a l e and type of o p e r a t i o n between the f o r e i g n manufacturers and the l o c a l manufacturers. The overwhelming m a j o r i t y of manufacturing establishments i n Hong Kong, as we have seen i n Chapter I I , are s m a l l ; but f o r e i g n manufacturers are much b i g g e r f i r m s . In terms of employment, over 80% of manufacturing establishments i n Hong Kong employ l e s s than twenty workers each, and over 90% have fewer than f i f t y workers. But a c c o r d i n g to the I n d u s t r i a l Survey Report by the Department of Trade, I n d u s t r y and Customs, out of the 236 f o r e i g n manufac-t u r e r s surveyed, o n l y twenty-nine (12.3%) had an employment of l e s s than twenty workers and seventy-three (30.9%) had fewer than f i f t y workers a t December 31, 1974. The comparative f i g u r e s f o r the v a r i o u s employment s i z e groups a t December 31, 1974 are shown i n Table V - l . I t c l e a r l y shows t h a t f o r e i g n manufacturers were much l a r g e r than t h e i r l o c a l c o u n t e r p a r t s . In terms of employment, the d i f f e r e n c e was wide as w e l l as s t a t i s t i c a l l y s i g n i f i c a n t . ^ 83 TABLE V - l S i z e of : Manufacturing Establishments 1 a t 31/12/74 (By Number o f Employees) A l l Manufacturing F o r e i g n Number of E s t a b l i s h m e n t s Manufacturers Employees Number % Of T o t a l Number % of T o t a l 1 - 9 19,558 67.8% 10 4.2% 10 - 10 4,182 14.5% 19 8.1% 20 - 49 2,864 9.9% 44 18.6% 50 - 99 1,180 4.1% 40 16.9% 100 - 199 610 2.1% 48 20.3% 200 - 499 344 1.2% 45 19.1% 500 - 999 83 0.3% 18 7.6% 1,000 - 1, 999 28 0.1% 9 3.8% 2,000 & over 8 0. 0% 3 1.3% T o t a l 28,857 100.0% 236 100.0% Note; The a c t u a l number of e s t a b l i s h m e n t s w i t h s i g n i f i c a n t f o r e i g n ownership (25% or more f o r e i g n ownership) a t December 31, 1974 was 247. Employment data on e l e v e n of these e s t a b l i s h m e n t s were not a v a i l a b l e . Source: Department.of T r a d e , I l n d u s t r y and Customs, Hong Kong Government, Overseas Investment i n Hong Kong Manufactu- r i n g I n d u s t r i e s : I n d u s t r i a l Survey Report, August, 1975. Department of Census and S t a t i s t i c s , Hong Kong Government, Monthly D i g e s t of S t a t i s t i c s , June, 1975. I In terms of c a p i t a l investment, the m a j o r i t y o f f o r e i g n manufacturers were a l s o medium to l a r g e f i r m s by Hong Kong standards. Only forty-two (17.8%) of the 236 f o r e i g n manu-f a c t u r e r s surveyed had a c a p i t a l investment of l e s s than HK$500,000 each a t the end of 1974. (Table V-2) Most of them had c a p i t a l investments ranging from HK$500,000 to HK$10 m i l l i o n . The t o t a l c a p i t a l investments of these 236 e s t a b l i s h m e n t s amounted to HK$2,151 m i l l i o n of which HK$1,633 m i l l i o n (75.9%) were 84 TABLE V-2 C a p i t a l Investments i n F o r e i g n Manufacturing : E s t a b l i s h m e n t s a t 31/12/74 : ; : Amount i n HK$'000 0 501 1,001 5,001 10,001 Over 500 1,000 5,000 10,000 20,000 20,000 T o t a l Number Establishment s 42 39 85 25 22 23 of T o t a l 17.8% 16.5% 36.0% 10.6% 9.3% 9.7% 236 100.0% Notes: T o t a l c a p i t a l investments of the 236 e s t a b l i s h m e n t s = HK$2,151 m i l l i o n . T o t a l f o r e i g n investments o f the 236 e s t a b l i s h m e n t s = HK$1,633 m i l l i o n . The a c t u a l number of establishments w i t h s i g n i f i c a n t f o r e i g n ownership a t December 31, 1974 was 247. C a p i t a l investment data on e l e v e n of these establishments were not a v a i l a b l e . Source: Department o f Trade, Industry and Customs, Hong Kong Government,Overseas Investment i n Hong Kong Manufac- t u r i n g I n d u s t r i e s : I n d u s t r i a l Survey Report, August, 1975. f o r e i g n owned. In other words, f o r e i g n e r s ' c a p i t a l investments i n these 236 e s t a b l i s h m e n t s averaged HK$6.9 m i l l i o n each. Again, t h i s was most l i k e l y much l a r g e r than the average c a p i t a l investment i n l o c a l manufacturing establishments even though no comparative s t a t i s t i c s were a v a i l a b l e . In t h i s chapter, the economic s i g n i f i c a n c e of f o r e i g n investments i n manufacturing i n Hong Kong i s analysed i n terms 8 5 of t h e i r c o n t r i b u t i o n to (i) i n d u s t r i a l employment, ( i i ) manu-f a c t u r i n g output and exports and ( i i i . ) t r a n s f e r of technology. The n o n - v e r i f i a b l e , non-measurable and i n d i r e c t e f f e c t s are excluded because there i s no o f f i c i a l data i n Hong Kong which 3 can be used to analyse these e f f e c t s . I n d u s t r i a l Employment There are three d i f f e r e n t s e t s of o f f i c i a l data which serve to show t h a t f o r e i g n manufacturers' share of cont-r i b u t i o n t o i n d u s t r i a l employment f a r exceeds t h e i r share i n terms of number of e s t a b l i s h m e n t s . The f i r s t data s e t and a l s o the e a r l i e s t s e t came from the Department of Census and S t a t i s t i c s 1 197 3 Census of 4 i n d u s t r i a l P r o d u c t i o n . In t h i s Census, some p r i n c i p a l s t a t i s t i c s were analysed by percent share of f o r e i g n ownership f o r a l l manufacturing establishments employing twenty or more workers. A c c o r d i n g to the f i n d i n g s of t h i s Census, among the 4,965 es t a b l i s h m e n t s , 253 (5.1%) had f o r e i g n ownership i n t e r e s t , and among the l a t t e r , 227 had a percentage share of f o r e i g n ownership exceeding 25%. I f we regard these 227 manufacturing e s t a b l i s h m e n t s as being ' f o r e i g n ' , then t h e i r employment accounted f o r 12.6% of t o t a l employment i n manufacturing i n Hong Kong at the end of 1973. (Table V-3) Even i f those establishments 86 TABLE V-3 Employment i n Manufacturing Establishments With 20 or: More Workers at 31/12/73 (by Percent Share of Foreign Ownership) Percent Share of Number of Workers Workers Per Foreign Ownership : Establishments Employed Establishments 0% 4,712 454,623 96 1-25% 26 5,026 193 26-50% 56 10,893 195 51-75% 30 9,796 327 76-99% 25 4,281 171 100% 116 41,649 3 59 Total 4,965 526,268 106 Source: Department of Census and S t a t i s t i c s , Hong Kong Government, 1973 Census of Industrial Production,1976. with 26-50% share of foreign ownership were excluded, the per-centage share s t i l l exceeded 10%. Also, Table V-3 shows that there was a wide discrepancy i n the size of employment between those establishments with foreign ownership and those without. The average size of employment was c l e a r l y related to the 5 percentage share of foreign ownership. The number of workers per establishment i n the 100% foreign owned establishments was close to four times higher than that of those with no foreign ownership. The second set of data came from a survey by the Department of Trade, Industry and Customs i n 1975. According to the survey, the responding 236 foreign manufacturers employed 87 a t o t a l of 56,750 workers a t the end of 1974. I n c l u d i n g e l e v e n establishments known to have s i g n i f i c a n t (over 25%) f o r e i g n ownership i n t e r e s t but which d i d not respond to the Survey, i t was estimated t h a t f o r e i g n manufacturers ( t o t a l l i n g 24 7) a l t o g e t h e r employed 58,823 workers which was 9.8% of Hong Kong's 7 t o t a l employment i n manufacturing. In 1977, the Hong Kong government a l s o began to produce employment f i g u r e s f o r f o r e i g n manufacturers i n Hong Kong by type of industryv. T h i s p r o v i d e s us w i t h the t h i r d s e t of o f f i c i a l data. At the end of 1977, the 339 f o r e i g n manufac-t u r i n g e s tablishments i n Hong Kong employed an average of 220 workers each. (Table V-4) T o t a l employment amounted to 74,758 workers which was 9.9% of t o t a l i n d u s t r i a l employment i n Hong Kong. On an i n d u s t r y b a s i s , ' e l e c t r o n i c s ' was the i n d u s t r y i n which the share of employment p r o v i d e d by f o r e i g n manufacturers was h i g h e s t - 44.2% o f t o t a l . 'Watches, c l o c k s and a c c e s s o r i e s ' and ' e l e c t r i c a l p r o d u c t s ' were two other i n d u s t r i e s i n which f o r e i g n manufacturers p r o v i d e d a s i g n i f i c a n t p o r t i o n of t o t a l g employment - more than one-quarter i n each case. Summing up, i t i s apparent t h a t f o r e i g n manufacturers have p r o v i d e d around 10% of t o t a l i n d u s t r i a l employment and labour income i n Hong Kong d e s p i t e the f a c t t h a t they o n l y comprise l e s s than 1% of the t o t a l number of e s t a b l i s h m e n t s . T h i s , however, may s t i l l be an underestimate because i t does not TABLE V-4 Employment i n Manufacturing Establishments w i t h F o r e i g n Ownership a t 12/31/77 by Type of Industry Number of Workers % of Employment Per T o t a l Employment (A)/(B) Industryd Establishments Employed (A) T o t a l Establishment.:; i n Hong Kong (B) -* E l e c t r o n i c s 64 29,620 39.6% 463 70,188, 42,2% T e x t i l e s 87 17,176 23.0% 197 102,461° 16.8% Toys 10 5,392 7.2% 539 42,369 12.7% E l e c t r i c a l Prod. 21 4,918 6.6% 234 19,337 25.4% W. C. & A. 25 4,894 6.5% 196 15,326 31.9% Metal Products 26 2,215 3.0% 85 70,931 3.1% P. & P. 9 1,777 2.4% 197 22,091 8.0% Food Manufact. 14 1,632 2.2% 117 15,274 10.7% M. R., E. & F. 5 910 1.2% 182 n. a. B. & C. Mat. 5 613 0.8% 123 n. a. Chemical Prod. 13 587 0.8% 45 5,822 10.1% Others 60 5,024 • 6.7% 84 391,309 — T o t a l 339 74,758 100.0% 220 755,108 9.9% Notes: W. C. & A. - watches, c l o c k s and a c c e s s o r i e s ; P. & P. - p r i n t i n g and p u b l i s h i n g ; M. R. , E. & F. - metal r o l l i n g , e x t r u s i o n and f a b r i c a t i o n ; B. & C. Mat. -b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s ; n.a. - not a v a i l a b l e . a — i n c l u d e s garmets; b — excludes garments; c — f o r p l a s t i c toys only; d — i n c l u d e s employment i n metal r o l l i n g , e x t r u s i o n and f a b r i c a t i o n and b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s . Sources: Compiled from records kept by the Department of Trade, Industry and Customs and the Department of Census and S t a t i s t i c s , Hong Kong government. CO 00 89 i n c l u d e the employment generated through work sub-contracted by f o r e i g n manufacturers. U n f o r t u n a t e l y , because of the l a c k o f o f f i c i a l r e c o r d s o f the amount o f sub-contracted work, th e r e i s no way to estimate i t s extent. Manufacturing Output and Exports The 1973 Census and the 1974 Survey Report a l s o p r o v i d e d i n d i c a t i o n s on f o r e i g n e r s ' share o f c o n t r i b u t i o n to manufacturing output and exports i n Hong Kong. The 1973 Census r e v e a l e d t h a t the combined gross output o f the 253 manufacturing establishments w i t h f o r e i g n ownership i n t e r e s t i n 1973 amounted to HK$38,606 m i l l i o n which was 14.7% of the t o t a l . ( ( T a b l e V-5) Even i f we exclude those e s t a b l i s h m e n t s i n which f o r e i g n ownership f e l l s h o r t o f m a j o r i t y , the 171 f o r e i g n manufacturers s t i l l c o n t r i b u t e d to more than 10% of t o t a l gross output. Table V-5 a l s o c l e a r l y shows t h a t the gross output per establishment was much g r e a t e r i n those establishments w i t h f o r e i g n ownership, p a r t i c u l a r l y i n those t h a t were f u l l y f o r e i g n owned - again n e a r l y f o u r times as much as those w i t h no f o r e i g n ownership. The average gross output 9 was a g a i n r e l a t e d t o the percentage share of f o r e i g n ownership. The amount of p r o d u c t i o n output r e l a t i v e to the 90 TABLE: V-5 Gross Output of Manufacturing E s t a b l i s h m e n t s ; With- 20 or More Workers i n 1973 (by Percent Share of F o r e i g n Ownership) Percent Share of Number of Gross Output i n Average Output F o r e i g n Ownership Establishments HK$ M i l l i o n : i n HK$ M i l l i o n 0% 4,712 22,406.2 4.8 1-25% 26 359.9 13.8 26-50% 56 694.1 12.4 51-75% 30 374.1 12.5 76-99% 25 258.6 10.3 100% 116 2,173.9 18.7 T o t a l 4,965 26,266.8 5.3 Note: The number of establishments represented f i g u r e s a t December 31, 1973. The gross output was f o r the y e a r 1973. In c a l c u l a t i n g the gross output per e s t a b l i s h -ment, the average number of establishments i n the year 1973 should be used, but the number of establishments by p e r c e n t share o f f o r e i g n ownership a t January 1, 1973 was not a v a i l a b l e . Source: Department of Census and S t a t i s t i c s , Hong Kong Government, 197 3 Census of I n d u s t r i a l P r o d u c t i o n , 1976. c a p i t a l investment by i n d u s t r y f o r 1974 i s g i v e n i n Table V-6, c a l c u l a t e d from f i g u r e s produced i n the 1974 Survey Report. Apparently, the p r o d u c t i o n output generated by each d o l l a r of f o r e i g n investment was not h i g h . I t was o n l y s l i g h t l y more than two d o l l a r s i n 1974. I f we i n c l u d e l o c a l investment, the p r o d u c t i o n output to investment m u l t i p l e was o n l y onerand-a-half times. The i n d u s t r i e s w i t h a h i g h e r output c a p i t a l r a t i o were 'toys' (2.7) and ' e l e c t r o n i c s ' (2.3). At the o t h e r end, 'food manufactures' (0.4), 'chemical products' (0.8), ' e l e c t r i c a l TABLE V-6 P r o d u c t i o n Output i n Manufacturing E s t a b l i s h m e n t s w i t h F o r e i g n ' Ownesrhip by Type of I n d u s t r y i n 1974 ~ (Amount i n HK$ M i l l i o n ) P r o d u c t i o n Output Number of s As a M u l t i p l e E s t a b l i - Amount of C a p i t a l Investment of F o r e i g n of T o t a l I n d u s t r y shments Fo r e i g n L o c a l T o t a l Amount Investment Investment E l e c t r o n i c s 52 580.2 19.0 599.2 1,400.5 2.4 2.3 T e x t i l e s 59 218.1 189.8 407.9 615.8 2.8 1.5 W. C. & A. 17 180.0 103.0 283.0 273.8 1.5 1.0 Chemical Products 11 96. 5 0.8 97. 3 82. 0 0.9 0.8 E l e c t r i c a l Prod. 10 93.9 23.5 117.4 103.9 1.1 0.9 P r i n t i n g & P u b l . 8 61.6 7.4 69.0 85.6 1.4 1.2 Toys 7 57 8 6.3 64.1 175. 9 3.0 2.7 Food Manufactures 4 56.7 50. 2 106.9 39. 7 0.7 0.4 B. & C. M a t e r i a l s 4 51.9 9.2 61.1 114.7 2.2 1.9 Metal Products 12 49.7 31.9 81. 6 93.2 1.9 1.1 M. R., E. & F. 4 45.9 56.9 102.8 157.1 3.4 1.5 Others 48 141.1 19.4 160.5 168.1 1.2 1.1 T o t a l 236 1,633.2 517.4 2,150.6 3,310.4 2.0 1.5 Notes: >'•;. W. C. & A. - watches, c l o c k s and a c c e s s o r i e s ; B. & C. M a t e r i a l s - b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s ; M. R., E. & F. - metal r o l l i n g , e x t r u s i o n and f a b r i c a t i o n . C a p i t a l investment f i g u r e s were as a t December 31, 1974. P r o d u c t i o n output f i g u r e s were f o r the year 1974. Ino.calculating the p r o d u c t i o n output m u l t i p l e , the average c a p i t a l investment i n the year 1974 should be used, but the c a p i t a l investment with f o r e i g n and l o c a l breakdowns a t January 1, 1974 was not a v a i l a b l e . Source: Compiled from records kept by the Department o f Trade, I n d u s t r y and Customs, Hong Kong government and those contained i n i t s Overseas Investment i n Hong  Kong Manufacturing I n d u s t r i e s : I n d u s t r i a l Survey Report, August 1975. 92 p r o d u c t s ' (0.9) and 'watches, c l o c k s and a c c e s s o r i e s ' (1.0) had t h e i r v alue of output i n the year f a l l i n g s h o r t of the c a p i t a l investment. In 1974, the 247 manufacturing e s t a b l i s h m e n t s w i t h f o r e i g n ownership i n t e r e s t exported a t o t a l of HK$2,498.8 m i l l i o n which was 10.9% of Hong Kong's t o t a l domestic exports i n t t h a t y ear. T h i s corresponded roughly to t h e i r share of c o n t r i b u t i o n i n terms of i n d u s t r i a l employment. 1 0 T r a n s f e r of Technology Technology i n a broad sense denotes the sum of knowledge - s c i e n t i f i c , e m p i r i c a l , a r t i s t i c , o r i n g e n e r a l , experience and s k i l l s necessary f o r manufacturing a product or products and f o r e s t a b l i s h i n g an e n t e r p r i s e f o r t h i s p u r p o s e . 1 1 Technology flows through embodiment of knowledge i n c a p i t a l equipment and i n t e r m e d i a t e goods, techniques or p r o c e s s e s , s k i l l e d manpower, and through the flow of p r o p r i e t o r y and n o n - p r o p r i e t o r y i n f o r m a t i o n . D i r e c t f o r e i g n investment i n manufacturing i s a well-known agent through which technology i s t r a n s f e r r e d t o the host country. T h i s i s a l s o t r u e i n the case of Hong Kong even though we do not have much q u a n t i t a t i v e data to support t h i s a s s e r t i o n . 93 Looking a t the h i s t o r y o f i n d u s t r i a l development i n Hong Kong, i t i s q u i t e obvious t h a t i n most i n s t a n c e s new i n d u s t r i e s were f i r s t e s t a b l i s h e d by f o r e i g n i n v e s t o r s , or as j o i n t ventures between l o c a l and f o r e i g n i n v e s t o r s w i t h the l a t t e r p r o v i d i n g the t e c h n i c a l knowhow. In the 1950s, the more modern t e x t i l e f a c t o r i e s which spearheaded Hong Kong's ind u s -t r i a l t r a n s f o r m a t i o n were e s t a b l i s h e d by the new immigrants from China. The s k i l l and technology i n t e x t i l e manufacturing were thus imported i n t o Hong Kong and the d i f f u s i o n i n course o f time generated the esta b l i s h m e n t of other t e x t i l e f a c t o r i e s by the l o c a l Cantonese. In the 1960s, f o r e i g n i n v e s t o r s were a l s o instrumen-t a l to Hong Kong's second stage of i n d u s t r i a l i z a t i o n - i n d u s t r i a l d i v e r s i f i c a t i o n . Even though the number of f i r m s e s t a b l i s h e d w i t h f o r e i g n c a p i t a l was r e l a t i v e l y s m a l l i n t h i s decade, f o r e i g n i n v e s t o r s helped to widen Hong Kong's i n d u s t r i a l base and gave another impetus to Hong Kong's manufacturing o p e r a t i o n s . T h i s was because t h e i r investments, u n l i k e most Chinese investments, were l e s s c o n c e n t r a t e d i n t e x t i l e s and r e l a t e d i n d u s t r i e s , but were spread i n s t e a d over a range o f more s o p h i s t i c a t e d i n d u s t r i e s such as e l e c t r i c a l products, metal products, p l a s t i c s , e l e c t r o n i c s and o p t i c a l and photographic equipment where theyhhad a g r e a t e r comparative advantage i n knowhow and where they c o u l d make use of Hong Kong's v a s t p o o l o f l a b o u r e r s . 94 Defined i n a broad sense, technology i s something more q u a l i t a t i v e than q u a n t i t a t i v e . I t does not l e n d i t s e l f to p r e c i s e measurements. Furthermore, the Hong Kong government does not keep separate r e c o r d s on the import o f c a p i t a l equip™ ment and component p a r t s or outward remittances of r o y a l t i e s and l i c e n s i n g fees by manufacturing e s t a b l i s h m e n t s . Thus, i t i s very d i f f i c u l t , i f not i m p o s s i b l e , to t r a c e how and to what extent 12 f o r e i g n i n v e s t o r s have brought technology i n t o Hong Kong. But i f we assume t h a t technology w i l l be t r a n s f e r r e d and r e c e i v e d m a t t e r - o f - f a c t l y through the use of technology embodied f i x e d a s s e t s and patented processes and through s i g n i n g o f management and l i c e n s i n g c o n t r a c t s , then we have three i n d i c a t o r s o f the extent of such t r a n s f e r . Table V-7 g i v e s the stock of f i x e d a s s e t s i n manufac-t u r i n g e s t a b l i s h m e n t s w i t h 20 or more workers a t the end of 1973 by percent share of f o r e i g n ownership. I t c l e a r l y shows t h a t e s t a b l i s h m e n t s with f o r e i g n ownership i n t e r e s t had a much b i g g e r (three to f o u r times) stock of f i x e d a s s e t s per e s t a b l i s h m e n t than those w i t h no f o r e i g n ownership. T h i s might suggest t h a t f o r e i g n manufacturers as a whole were more technology i n t e n s i v e i n t h e i r p r o d u c t i o n o p e r a t i o n s than t h e i r l o c a l c o u n t e r p a r t s . The average stock of f i x e d a s s e t s was s t a t i s t i c a l l y r e l a t e d to 13 the percentage share of f o r e i g n ownership. 95 TABLE V-7 Stock of F i x e d A s s e t s i n Manufacturing E s t a b l i s h m e n t s w i t h 20 o r More Workers a t 31/12/73 : : . (By Percent Share o f F o r e i g n Ownership) Stock of Average Per F i x e d A s s e t s E s t a b l i s h m e n t Percent Share o f Number of F o r e i g n Ownership : Establishments 1 i r i HK$ ' 000 0% 1-25% 26-50% 51-75% 76-99% 100% T o t a l 4,712 26 56 30 25 116 4,965 3,998,685 113,451 169,242 104,251 59,664 287,726 4,733,019 i n HK$'000 848.6 4,363.5 3,022 .2 3,475.0 2,386.6 2,480.4 953.3* Source: Department of Trade, Industry and Customs, Hong Kong Government, 1973 Census of I n d u s t r i a l P r o d u c t i o n , 1976, A breakdown of the a d d i t i o n a l p r o v i s i o n s i n f o r e i g n -l o c a l j o i n t ventures taken from the 1974 Survey Report i s g i v e n i n Table V-8. Of the 118 ( e x a c t l y h a l f of the 236 establishments surveyed) f o r e i g n - l o c a l j o i n t v entures, f i f t y - e i g h t (49.2%) had t e c h n i c a l knowhow arrangements, twenty-eight (23.7%) had management f a c i l i t i e s arrangements and t w e n t y - f i v e (21.2%) had l i c e n s i n g arrangements p r o v i d e d by the f o r e i g n v e n t u r e r s i n 1974, T h i s meant t h a t on average, each f o r e i g n - l o c a l j o i n t venture had about one arrangement r e g a r d i n g a d d i t i o n a l p r o v i s i o n s by the f o r e i g n v e n t u r e r i n t e c h n i c a l knowhow, management or l i c e n s i n g . In o t h e r words, they were a l l agents through which technology was t r a n s f e r r e d i n t o Hong Kong. TABLE V-8 P r o v i s i o n s i n F o r e i g n - L o c a l J o i n t Ventures i n 1974 by Type of Industry J o i n t Ventures w i t h P r o v i s i o n s on Number of T e c h n i c a l Management L i c e n s i n g I n d u s t r y 1 J o i n t Ventures Knowhow F a c i l i t y Arrangement T o t a l T e x t i l e s 37 14 9 9 32 E l e c t r o n i c s 11 6 3 5 14 Watches, c l o c k s & a c c e s s o r i e s 10 2 1 2 5 Metal products 5 4 1 0 5 E l e c t r i c a l products 4 1 ' 1 0 2 Food manufactures 4 4 2 2 8 P r i n t i n g & p u b l i s h i n g 4 3 2 1 6 Metal r o l l i n g , e x t r u s i o n & f a b r i c a t i o n 4 2 1 0 3 Chemical products 3 2 0 1 3 Toys 3 2 1 1 4 B u i l d i n g & c o n s t r u c t i o n m a t e r i a l s 2 2 2 1 5 Others 31 16 5 3 24 T o t a l 118 58 28 25 111 Source: Department of Trade, Industry and Customs, Hong Kong Government, Overseas Investment i n Hong Kong Manufacturing I n d u s t r i e s : I n d u s t r i a l gurvey Report, August, 1975. 9 7 On an i n d u s t r y b a s i s , ' t e x t i l e s ' was the i n d u s t r y i n which the l a r g e s t number of p r o v i s i o n s was made, but t h i s was o n l y because of the l a r g e number of j o i n t ventures i n t h a t i n d u s t r y . In terms of p r o v i s i o n s per j o i n t venture, the i n d u s t r i e s i n which more p r o v i s i o n s were made were ' b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s ' (2.5), ' e l e c t r i c a l p r o d u c t s ' (2.0), ' p r i n t i n g and p u b l i s h i n g ' (1.5), 'toys' (1.3) and ' e l e c t r o n i c s ' (1.3) . No s i m i l a r breakdowns by country source of investment were giv e n i n the Survey Report. Thus, we do not know the d i s t r i b u t i o n of such p r o v i s i o n s by n a t i o n a l i t y o f the f o r e i g n v e n t u r e r . At any r a t e , because such p r o v i s i o n s were giv e n o n l y f o r f o r e i g n - l o c a l j o i n t ventures but not f o r n o n - j o i n t ventures, i t i s i m p o s s i b l e to say which p a r t i c u l a r i n d u s t r y had r e c e i v e d most technology imports from foreigners„through such p r o v i s i o n s . The l a s t i n d i c a t o r i s the number of patents r e g i s t e r e d . There i s no o r i g i n a l r e g i s t r a t i o n of p a t e n t s i i n Hong Kong, but p a tents granted i n the U n i t e d Kingdom may be r e g i s t e r e d under the l e g i s l a t i o n of U n i t e d Kingdom Patents Ordinance. T h i s p r o v i d e s t h a t the grantee of a patent i n the U n i t e d Kingdom, or any person d e r i v i n g r i g h t from the grantee may, w i t h i n f i v e years from the date of i s s u e of the patent, apply to have i t r e g i s t e r e d i n Hong Kong, and t h a t such r e g i s t r a t i o n w i l l c o n f e r the same r i g h t s as though the patent had been i s s u e d i n the U n i t e d Kingdom wi t h an 98 e x t e n s i o n to Hong Kong. x s t Table V-9 shows the number of patents r e g i s t e r e d a c c o r d i n g to the home country of the grantees i n the p e r i o d A p r i l 1, 1970 to March 31, 1978. A l t o g e t h e r , there were 5,230 patents r e g i s t e r e d , i n c l u d i n g 102 whose country of d o m i c i l e of the grantees was Hong Kong. In other words, th e r e were 5,128 p a t e n t s r e g i s t e r e d by f o r e i g n c o r p o r a t i o n s d u r i n g t h i s e i g h t - y e a r p e r i o d . The f i g u r e s i n Table V-9 r e v e a l t h a t i f a patent r e g i s t r a t i o n denotes a r e g i s t r a t i o n o f a t e c h n o l o g i c a l innova-t i o n , then about 98% of such t e c h n o l o g i c a l i n n o v a t i o n s a p p l i e d to Hong Kong came from f o r e i g n c o r p o r a t i o n s . t h r o u g h t h e i r s u b s i d i a r i e s i n Hong Kong.1"* R e g i s t e r e d i n n o v a t i o n s by l o c a l manufacturers were p r a c t i c a l l y n e g l i g i b l e . N e a r l y a l l the patents r e g i s t e r e d i n Hong Kong by f o r e i g n c o r p o r a t i o n s had t h e i r home c o u n t r i e s i n the i n d u s t r i a l -i z e d Western world. E v i d e n t l y , t h i s had been the most important source of technology i n f l o w f o r Hong Kong. Patents r e g i s t e r e d by Southeast A s i a n c o u n t r i e s were minimal, t o t a l l i n g o n l y twenty-two f o r a l l Southeast A s i a n c o u n t r i e s i n the whole e i g h t - y e a r p e r i o d . 1 ^ T h i s was a r e f l e c t i o n o f the d i f f e r e n c e i n nature of investment and type o f manufacturing o p e r a t i o n s between i n v e s t o r s from the two groups o f c o u n t r i e s . TABLE V-9 Number of Patents R e g i s t e r e d / 1970/71 - 1977/78 Home Country 7 7/78 Sub- % of of Grantee 70/71 71/72 72/73 7 3/73 74/7 5 7 5/76 76/77 T o t a l T o t a l U n i t e d S t a t e s 194 227 264 574 382 310 260 196 2,407 46.0% Japan 27 57 55 55 73 72 136 112 587 11. 2% Un i t e d Kingdom 52 76 101 91 84 87 123 106 720 13.8% S w i t z e r l a n d 33 20 40 36 44 48 63 53 337 6.4% West Germany 48 53 82 36 44 64 75 51 453 8.7% Hong Kong 7 20 8 11 9 5 14 28 102 2.0% France 6 14 28 3 7 10 14 24 106 2.0% Canada 4 9 9 9 6 4 3 15 59 1.1% A u s t r a l i a 5 5 5 3 7 4 5 14 48 0.9% Netherlands 6 11 12 32 18 2 39 14 134 2.6% Others g 17 35 31 34 32 73 4 6 277 5.3% T o t a l 391 509 639 881 708 638 805 659 5,230 100.0% Notes: The year r e f e r s to the f i s c a l year of Hong Kong which i s A p r i l 1 to March 31. • Other c o u n t r i e s not s p e c i f i e d had l e s s than ten patents granted each d u r i n g 1977/78. Source: R e g i s t r a r General, Hong Kong Government, Annual Departmental Report, v a r i o u s i s s u e s . 100 By comparing Table V-9 and Table IV-3 (page 74), i t i s apparent t h a t the number of patents r e g i s t e r e d had a c l o s e c o r r e l a t i o n w i t h the d o l l a r amount of investments i n manufacturing. The c o e f f i c i e n t of c o r r e l a t i o n between the two was as h i g h as 17 0.939. The 11.S. which accounted f o r 46.5% of t o t a l d o l l a r s of f o r e i g n investments i n manufacturing i n 1977 was a l s o r e s p o n s i b l e f o r 46.9% of t o t a l ' f o r e i g n p a t e n t s ' i n 1970/71 to 1977/78. 1 8 A l l the l e a d i n g f o r e i g n i n v e s t o r s coming from Western Europe and Japan were a l s o important r e c i p i e n t s of patent r i g h t s . 101 Notes 1. The t o t a l number of manufacturing establishments i n Hong Kong a t December 31, 1977 was 37,568. Source: Hong Kong Government, Hong Kong Annual Report 1978. 2. The d i f f e r e n c e was found to be s t a t i s t i c a l l y s i g n i f i c a n t by u s i n g c h i - s q u a r e t e s t . 3. These e f f e c t s i n c l u d e , f o r example, d i s t r i b u t i o n of income, changing consumption h a b i t s , induced investment, balance of payments, the exchange r a t e and the terms of t r a d e . For a t h e o r e t i c a l d i s c u s s i o n of these e f f e c t s , see Bos, H.C., Sanders, M. and S e c c h i , C , P r i v a t e F o r e i g n Investment i n  Developing C o u n t r i e s : A Q u a n t i t a t i v e Study on the  E v a l u a t i o n of the Macroeconomic E f f e c t s , R e i d e l P u b l i s h i n g Co., Boston, 1974. 4. T h i s Census was conducted i n A p r i l 1974 to February 1975 and covered d i v i s i o n s 2 (mining and q u a r r y i n g ) , 3 (manufac-t u r i n g ) and 4 ( e l e c t r i c i t y , gas and water) of the United Nations I n t e r n a t i o n a l Standard I n d u s t r i a l C l a s s i f i c a t i o n of A l l Economic A c t i v i t i e s . The p e r i o d of r e f e r e n c e was the c a l e n d a r year 1973, but e s t a b l i s h m e n t s were allowed to r e p o r t on t h e i r b usiness year ending not e a r l i e r than June 30, 1973 and not l a t e r than June 30, 1974. A l l data c o l l e c t e d were i n r e s p e c t of one whole year except f o r e s t a b l i s h m e n t s which commenced or ceased p r o d u c t i o n d u r i n g 1973. The data s u p p l i e d by these establishments were o n l y i n r e s p e c t o f the p a r t o f 1973 which they were i n o p e r a t i o n . 5. The average s i z e of employment and the percentage share of f o r e i g n ownership were found to be s t a t i s t i c a l l y r e l a t e d by u s i n g c h i - s q u a r e t e s t . 6. Department of Trade, Industry and Customs, Hong Kong Government, Overseas Investment i n Hong Kong Manufacturing  I n d u s t r i e s : I n d u s t r i a l Survey Report, August 1975. T h i s survey was c a r r i e d out from February 3 to March 26, 1975 and covered a l l manufacturing establishments known to have s i g n i f i c a n t f o r e i g n ownership i n t e r e s t , d e f i n e d as 25% or more f o r e i g n ownership. Throughout t h i s t h e s i s , a f o r e i g n manufacturer i s used to denote a manufacturing f i r m which has 25% or more f o r e i g n ownership i n t e r e s t . 7. The t o t a l number of workers employed i n manufacturing i n Hong Kong a t the end of 1974 was 600,218. Source: Hong Kong Government, Hong Kong Annual Report 1975. T h i s percent i s much lower than the one d e r i v e d from the 102 proceeding data s e t because the l a t t e r had excluded the small manufacturing f i r m s employing l e s s than twenty workers. 8. The Department of Trade, Industry and Customs have d i f f e r e n t i n d u s t r y c l a s s i f i c a t i o n s f o r f o r e i g n investments i n manufacturing and f o r a l l manufacturing i n d u s t r i e s . Hence, the percentages c a l c u l a t e d i n Table V-4. may not be very a c c u r a t e . 9. The average gross output and the percentage share of f o r e i g n ownership were found to be s t a t i s t i c a l l y r e l a t e d by u s i n g c h i - s q u a r e t e s t . 10. T h i s was based on an estimate •, g i v e n i n the Survey Report, o f 73.7% of t o t a l p r o d u c t i o n output being exported i n these 24 7 manufacturing e s t a b l i s h m e n t s w i t h f o r e i g n ownership. T o t a l domestic exports of Hong Kong i n 1974 amounted to HK$22,911 m i l l i o n . Source: Hong Kong Government, Hong Kong  Annual Report 1975. 11. T h i s i s the d e f i n i t i o n used by the U n i t e d N a t i o n s . (United Nations, G u i d e l i n e f o r the A c q u i s i t i o n o f F o r e i g n Techno- logy i n Developing C o u n t r i e s , U n i t e d Nations, New York, 1973, page 1.) 12. For i n s t a n c e , Hughes, H. and You, P.S. i n t h e i r book on f o r e i g n investments i n Singapore (Foreign Investment and  I n d u s t r i a l i z a t i o n i n Singapore, The U n i v e r s i t y of Wisconsin Press, Madison, 1969) l i s t e d t r a n s f e r o f technology as one of the most important e f f e c t s o f d i r e c t f o r e i g n investments i n Singapore, but admitted t h a t they had not been a b l e to f i n d e m p i r i c a l proof t h a t a t r a n s f e r of technology had indeed o c c u r r e d . The reason may w e l l be t h a t s e r i o u s problems i n d e f i n i t i o n and measurement are i n v o l v e d , perhaps to the ex t e n t t h a t t r a n s f e r of technology i s a c t u a l l y something u n v e r i f i a b l e and unmeasurable. 13. The average stock of f i x e d a s s e t s and the percentage share o f f o r e i g n ownership were found to be s t a t i s t i c a l l y r e l a t e d by u s i n g c h i - s q u a r e t e s t . 14. With e f f e c t from November 16, 1977, the p r o v i s i o n s of the I n t e r n a t i o n a l Convention f o r the P r o t e c t i o n of I n d u s t r i a l P r o p e r t y (The P a r i s Convention) are extended t o Hong Kong. The Convention covers t r a d e marks and designs as w e l l as pa t e n t s . 15. I f a f o r e i g n manufacturer i n Hong Kong r e g i s t e r s a patent d i r e c t l y under i t s name, then the country of grantee would be Hong Kong. Hence, the assumption here i s t h a t the parent 103 c o r p o r a t i o n overseas r e g i s t e r s a patent under i t s name and then grants i t s use to i t s s u b s i d i a r y c o r p o r a t i o n i n Hong Kong. Of course, some patent r e g i s t r a t i o n s may have been p u r e l y p r o t e c t i v e i n nature and the patented products or processes may not be used a t a l l by the s u b s i d i a r y c o r p o r a t i o n s i n Hong Kong. 16. The home country o f grantee o f these twenty-two patents were as f o l l o w s : Taiwan 11, Singapore 7, M a l a y s i a 3 and P h i l i p p i n e s 1. 17. See Appendix II-5.1. 18. 'Foreign p a t e n t s ' here r e f e r to patents whose home country of grantee was not Hong Kong. T h e r e f o r e , the 102 'Hong Kong p a t e n t s ' were excluded i n the c a l c u l a t i o n of the U.S.'s share o f t o t a l ' f o r e i g n p a t e n t s ' . 104 CHAPTER VT -: OPERATIONAL CHARACTERISTICS When f o r e i g n i n v e s t o r s are not c o n s t r a i n e d by gover-nment r e s t r i c t i o n s , : t h e i r o p e r a t i o n a l c h a r a c t e r i s t i c s can a c c u r a t e l y r e f l e c t t h e i r investment motives. Hence, an examination of investment motives and o p e r a t i o n a l c h a r a c t e r i s t i c s w i l l r e v e a l the impact of the former on the l a t t e r as w e l l as determine the type o f investment most p r e v a l e n t i n a c e r t a i n country. At the same time, one may a l s o use the o p e r a t i o n a l c h a r a c t e r i s t i c s to t e s t the v a l i d i t y o f d i r e c t f o r e i g n investment t h e o r i e s . T h i s chapter e x p l o r e s the investment motives and o p e r a t i o n a l c h a r a c t e r i s t i c s o f f o r e i g n i i n i a n u f a c t u r e r s i n Hong Kong based upon data generated from the q u e s t i o n n a i r e survey. Motives and Type o f Investment Using the c l a s s i f i c a t i o n by Brooke and Remmers d e s c r i b e d i n Chapter I, the survey r e v e a l e d t h a t the investment motives behind f o r e i g n manufacturers i n Hong Kong were mostly 'aggressive' i n n a t u r e . 1 'To make use of l o c a l l a b o u r ' was the motive mentioned by the l a r g e s t number of responding f i r m s and t h i s confirmed the g e n e r a l b e l i e f t h a t the m a j o r i t y of f o r e i g n manufacturers came to Hong Kong to make use of i t s v a s t p o o l o f l a b o u r . However, t h i s motive was not as important as some might have thought because more than one q u a r t e r o f the 105 responding f i r m s d i d not have t h i s motive i n mind. They were a p p a r e n t l y not labour o r i e n t e d . (Table VI - 1 ) TABLE VI - 1 The Investment Motives Number of % of Motive Responses T o t a l To make use of l o c a l l a b o u r 77 71. 3% To take advantage of lower l o c a l taxes 68 63. 0% To g e o g r a p h i c a l l y d i v e r s i f y the company's o p e r a t i o n s 58 53. 7% To e l i m i n a t e o r reduce the c o s t of t r a n s p -o r t a t i o n i n s e l l i n g to the l o c a l market 54 50. 0% or i t s neighbouring markets To make use o f l o c a l p r o d u c t i o n s k i l l and technology 35 32. 4% To match c o m p e t i t i o n by l o c a l f i r m s or 33 30. 6% other f o r e i g n f i r m s To make the company's products more 31 28. 7% a c c e p t a b l e by l o c a l people To make use o f l o c a l c a p i t a l 23 21. 3% To manufacture a t o r near sources o f raw m a t e r i a l s u p p l i e s 21 19. 4% TO b e t t e r meet l o c a l product standards by 20 18. 5% manufacturing t h e r e i n To take advantage of conc e s s i o n s granted by 10 q 3% the l o c a l government to f o r e i g n companies The company has reached i t s l i m i t of expansion 10 Q 3% a t home j . •J o Tb ensure s u p p l i e s o f m a t e r i a l s e s s e n t i a l 7 c ^ & to the company's o p e r a t i o n s a t home / D • D % To get over import r e s t r i c t i o n s 4 3. 7% The company i s being i n v i t e d by the l o c a l 4 7% government 1 Others 6 5. 6% Note: T o t a l number of responding f i r m s = 108. Source: Q u e s t i o n n a i r e survey r e t u r n s . 106 In second p o s i t i o n was 'to take advantage of lower l o c a l taxes', mentioned by s i x t y - e i g h t (63.0%) of the 108 responding f i r m s . T h i s motive was d e f i n i t e l y a g g r e s s i v e i n nature and appeared to i n d i c a t e a f a v o u r a b l e response to the government's l i b e r a l economic p o l i c y . Only two other motives were mentioned by 50% or more of the responding f i r m s : 'to g e o g r a p h i c a l l y d i v e r s i f y the company's o p e r a t i o n s ' ( f i f t y - e i g h t responses) and 'to e l i m i n a t e or reduce the c o s t of t r a n s p o r t a t i o n i n s e l l i n g to the l o c a l market or i t s neighbouring markets' ( f i f t y - f o u r r e sponses). These two motives might be c o n s i d e r e d as d e f e n s i v e from a co r p o r a t e s t r a t e g y ' s p o i n t of view; but because they were not intended to preserve e x i s t i n g business i n t e r e s t i n the host country, they would look more a g g r e s s i v e than d e f e n s i v e a c c o r d i n g 2 to the c r i t e r i a l a i d down by Brooke and Remmers. 'To make use o f l o c a l p r o d u c t i o n s k i l l and technology 1 was another important motive, mentioned by around o n e - t h i r d of the f i r m s . T h i s to a c e r t a i n extent suggested t h a t p r o d u c t i o n s k i l l and technology i n some i n d u s t r i e s i n Hong Kong, probably the more 'developed' ones such as t e x t i l e s and garments, were p r e t t y advanced and c o u l d be an a t t r a c t i o n i n i t s e l f to f o r e i g n i n v e s t o r s . The o n l y other investment motive which had some 107. importance was * to make use of l o c a l c a p i t a l 1 mentioned by twenty-three or s l i g h t l y more than o n e - f i f t h of the f i r m s . The constant i n f l o w s o f c a p i t a l from nearby Southeast A s i a n c o u n t r i e s i n the pas t years had kept c a p i t a l funds i n Hong Kong 3 r e l a t i v e l y p l e n t i f u l and cheap. Consequently some f o r e i g n i n v e s t o r s , e s p e c i a l l y the s m a l l e r ones who were s h o r t of investment c a p i t a l , were a t t r a c t e d t o Hong Kong by the low c o s t of funds. The d e f e n s i v e motives were l e s s f r e q u e n t l y mentioned. The two most important ones were 'to match c o m p e t i t i o n by l o c a l f i r m s or o t h e r f o r e i g n f i r m s ' and 'to make the company's products more a c c e p t a b l e by l o c a l people'.with t h i r t y - t h r e e (30.6%) and t h i r t y - o n e (28.7%) responses r e s p e c t i v e l y . The f i r s t o f these two motives was c l o s e l y r e l a t e d to the product l i f e c y c l e theory and the theory o f o l i g o p o l i s t i c r e a c t i o n which p o s t u l a t e d i r e c t f o r e i g n investments as a d e f e n s i v e s t r a t e g y i n c o m p e t i t i v e markets. The l a t t e r seemed r e l a t e d more to market o r i e n t e d type of investments and t h i s suggested t h a t not a l l f o r e i g n investments i n manufacturing i n Hong Kong were export o r i e n t e d . T h i s was a l s o i n d i c a t e d by the motive 'to b e t t e r meet l o c a l product standards by manufacturing t h e r e i n ' which came t h i r d among the d e f e n s i v e motives. The other o b v i o u s l y d e f e n s i v e motive - 'to ensure s u p p l i e s o f m a t e r i a l s e s s e n t i a l to the company's o p e r a t i o n s a t 108 home' was answered by onl y seven responding f i r m s . In the responses, f o u r f i r m s b e l i e v e d t h a t 'the company was being i n v i t e d by the l o c a l government' w h i l e ten put down 'to take advantage of the concessions granted by the l o c a l government fo f o r e i g n companies' as a motive f o r them to come to Hong Kong. T h i s r e q u i r e s an e x p l a n a t i o n as i t seemed to be i n c o n s i s t e n t with the government's p o l i c y o f n o n - d i f f e r -e n t i a t i o n and n o n - i n t e r v e n t i o n . The f a c t i s t h a t the Hong Kong government has not a c t i v e l y i n v i t e d any p a r t i c u l a r f o r e i g n manufacturers to i n v e s t i n Hong Kong even though a few o f them may b e l i e v e so. In rec e n t y e a r s , the government has d i s p a t c h e d a number o f business promotion teams to v a r i o u s c o u n t r i e s , mostly i n d u s t r i a l c o u n t r i e s of the West, to p u b l i c i s e the i n d u s t r i a l c a p a b i l i t i e s o f Hong Kong and i t s a t t r a c t i o n s as an investment c e n t r e . T h i s has induced some f o r e i g n f i r m s to send e x p l o r a t i o n m i s s i o n s to Hong Kong and subsequently s e t up manufacturing o p e r a t i o n s . There are a l s o no s p e c i a l concessions granted t o f o r e i g n companies.The o n l y c o n c e s s i o n t h a t has ever been granted by the Hong Kong government to manufacturers i s s u b s i d i z e d i n d u s t r i a l l a n d l e a s e s , but these l e a s e s are granted to both l o c a l and f o r e i g n manufacturers. In view of the r a p i d l y r i s i n g and extremely expensive l a n d c o s t , the Hong Kong government has s i n c e 1977 o f f e r r e d to new i n v e s t o r s , l o c a l o r f o r e i g n , who 109 r e q u i r e l a r g e p i e c e s of f a c t o r y space c o n c e s s i o n a r y land l e a s e s at about o n e - f i f t h of market p r i c e i f t h e i r i n d u s t r i a l p r o j e c t s (i) r e s u l t i n the import of i n d u s t r i a l processes which are new to Hong Kong o f ' r e p r e s e n t a s i g n i f i c a n t upgrading of e x i s t i n g i n d u s t r i a l p r o cesses, ( i i ) p r o v i d e employment o p p o r t u n i t i e s a t a g e n e r a l l y h i g h e r l e v e l of s k i l l , ( i i i ) r e q u i r e the use of i n d u s t r i a l processes which by t h e i r very nature cannot be performed i n standard m u l t i - s t o r e y i n d u s t r i a l b u i l d i n g s and (iv) a re those which w i l l not otherwise be e s t a b l i s h e d o r developed i n Hong Kong. By the end of 1978, around f i f t e e n manufacturing companies had r e c e i v e d such c o n c e s s i o n a r y land l e a s e s i n the New T e r r i t o r i e s . Regarding the type of investment, the survey r e v e a l e d t h a t by f a r the m a j o r i t y o f f o r e i g n investments i n manufacturing i n Hong Kong belonged to the export o r i e n t e d type. As we s h a l l see i n the f o l l o w i n g s e c t i o n s , the f o r e i g n manufacturers on average exported 60% of t h e i r t o t a l s a l e s i n 1978. There was a s t r o n g p r e f e r e n c e f o r m a j o r i t y i f not f u l l ownership and u n d i v i d e d c o n t r o l . There were c l o s e l i n k s i n management, p r o d u c t i o n and marketing e s t a b l i s h e d between these f o r e i g n manufacturers and t h e i r overseas a f f i l i a t e s i n d i c a t i n g t h a t t h e i r o p e r a t i o n s were i n t e g r a t e d . Furthermore, they p l a c e d a heavy emphasis on the importance of p r o d u c t i o n i n p u t f a c t o r s and many o f them had been able to earn a high r e t u r n on t h e i r investments. These were f e a t u r e s t y p i c a l of export o r i e n t e d type of investment c h a r a c -t e r i s e d by Reuber and d e s c r i b e d i n Chapter I. 110 Ownership and Management C o n t r o l The complete l a c k o f government r e s t r i c t i o n s on f o r e i g n ownership i n Hong Kong has permitted maximum freedom to f o r e i g n e r s i n choosing the type of ownership, the p r o p o r t i o n of c a p i t a l h e l d and the degree of management c o n t r o l over t h e i r investments. Type of Ownership; F o r e i g n manufacturers i n Hong e x i s t e d n e a r l y e x c l u s i v e l y i n the form o f p r i v a t e l i m i t e d l i a b i l i t y companies which gave them the b e n e f i t o f p r i v a c y p l u s the p r o t e c t i o n o f l i m i t e d l i a b i l i t i e s . A c c o r d i n g to the survey, o n l y f i v e of the 108 responding f i r m s were not p r i v a t e l i m i t e d l i a b i l i t y companies i n 1978. (Table VI-2) The t h r e e p a r t n e r s h i p s TABLE VI-2  Type of Ownership Number Type of Ownership of Firms T o t a l (a) Sole p r o p r i e t o r s h i p 0 0.0% (b) P a r t n e r s h i p 3 2.8% (c) P r i v a t e l i m i t e d l i a b i l i t y company 103 95.4% (d) P u b l i c l i m i t e d l i a b i l i t y company 2 1.9% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . I l l a l l had t h e i r foreign c a p i t a l coming from Southeast Asian countries. Conceivably, the foreign partners were overseas Chinese subscribing funds to the business of t h e i r friends or r e l a t i v e s i n Hong Kong. There were only two foreign manufacturers which were public limited l i a b i l i t y companies quoted i n the stock exchange. One was a Japanese corporation engaged i n 'electronics' and the other was a 'watch, clocks and accessories' firm with Thai investment. The former was majority held by the Japanese; the l a t t e r ' s share of Thai investment was between 26% and 49% at the end of 1978V •  r .31, .''.-'7 Amount of Capital Investment: The amount of c a p i t a l investments as revealed by the survey was consistent with the findings of the Industrial Survey Report by the Department of Trade, Industry and Customs i n 1975 . The majority of foreign manufacturing establishments were medium sized firms with c a p i t a l investments ranging from HK$1 m i l l i o n to HK$10 m i l l i o n . (Table VI -3 ) Only f i f t e e n (13.9%) of the 108 responding firms had c a p i t a l investments of less than HK$500,000 each and could be regarded as small firms. At the opposite end, there were twelve firms with c a p i t a l investments exceeding HK$10 m i l l i o n which by Hong Kong standards would place them among the!large firms. The d i s t r i b u t i o n of firms among the various c a p i t a l investment size categories indicated that i f t h i s d i s t r i b u t i o n 11.2 TABLE VI-3  Amount of Capital Investment Capital Investment in HK$'000 at 31/12/78 Number of Firms % of Total (a) 500 or less 15 13.9% (b) 501 - 1,000 16 14.8% (c) 1,001 - 5,000 44 40.7% (d) 5,001 - 10,000 12 11.1% (e) 10,001 - 20,000 9 8.3% (f) More than 20,000 3 2.8% (g) No reply 9 8.3% Total 108 100.0% Source: Questionnaire survey returns. had remained unchanged from December 1974 to February 1979, then the 108 responding firms were a good representative sample of the population of 391 firms b e c a u s e o s t a t i s t i c a l l y there was no difference i n the d i s t r i b u t i o n of firms i n the d i f f e r e n t 4 c a p i t a l investment size groups. Share of Ownership: Foreign ownership p a r t i c i p a t i o n was on average very high. Eighty-eight (81.5%) had majority foreign ownershp at the end of 1978 and among them, sixty-nine (63.9%) were f u l l y owned by foreigners, defined as those with share of foreign ownership exceeding 95%. (Table VI-4) There were f i v e (4.6%) firms i n which the ownership sharing between the foreign investor(s) and the l o c a l investor(s) was exactly f i f t y - f i f t y . Ten firms (9.3%) had only minority foreign ownership 113 TABLE VI-4  Share o f F o r e i g n Ownership Share of F o r e i g n Number % of Ownership a t 31/12/78 of Firms T o t a l (a) Over 95% 69 63.9% (b) 76 - 95% 6 5.6% (c) 51 - 75% 13 12.0% (d) E x a c t l y 50% 5 4.6% (e) 26 - 49% 10 9.3% (f) 5 - 25% 3 2*8% (g) Less than 5% 0 0.0% (h) No r e p l y 2 1.9% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . of between 26% and 49%. The three (2.8%) f i r m s w i t h f o r e i g n ownership o f between 5% and 25% might be excluded from the ' f o r e i g n manufacturers' category; but because a l l these three f i r m s claimed t h a t they had a parent company overseas t h e i r responses were i n c l u d e d i n the a n a l y s i s . A l s o , there were o r i g i n a l l y f i v e f i r m s w i t h f o r e i g n ownership of l e s s than 5%, but they had a l r e a d y been excluded i n the l i s t o f e f f e c t i v e 5 responses. A breakdown of the f o r e i g n manufacturers by amount of c a p i t a l investments and percent share of f o r e i g n ownership showed t h a t the two were not u n r e l a t e d . S t a t i s t i c a l l y , t h e r e was a p o s i t i v e r e l a t i o n : the l a r g e r the amount o f c a p i t a l investment f j the higher the p e r c e n t share of f o r e i g n ownership. 114 Of the s e v e n t y - f i v e f i r m s w i t h f o r e i g n e r s ' share of ownership exceeding 75%, s i x t y - o n e had a p a i d up c a p i t a l o f more than HK$1 m i l l i o n at December 31, 1978. Only three of the twelve f i r m s w i t h c a p i t a l exceeding HK$10 m i l l i o n were not f u l l y owned by f o r e i g n e r s . (Table VI-5) On the other hand, nine of the t h i r t e e n f i r m s w i t h o n l y m i n o r i t y f o r e i g n ownership had c a p i t a l investments of l e s s than HK$1 m i l l i o n each. T h i s somehow i n d i c a t e d t h a t the l a r g e r f o r e i g n i n v e s t o r s p r e f e r r e d m a j o r i t y to f u l l ownership and c a p i t a l requirementswas not a c o n s t r a i n t i n t h e i r investment d e c i s i o n s . TABLE VI-5 Amount of C a p i t a l Investments and Percent Share of F o r e i g n Ownership a t 31/12/78 Number o f Firms  C a p i t a l Investment Share o f F o r e i g n Ownership i n HK$' 000 Over 95% 76-95% 50-75% Under 50% T o t a l (a) 1,000 or l e s s 14 0 8 9 31 (b) 1,001 to 10,000 46 5 2 3 56 (c) More than 10,000 9 _JL _1 _1 12 T o t a l 69 6 11 13 99 Note: There were nine f i r m s w i t h no r e p l y on the amount of c a p i t a l investments. Source: Q u e s t i o n n a i r e survey r e t u r n s . 115 Method of Ownership P a r t i c i p a t i o n : E x a c t l y t h r e e -q u a r t e r o f the 108 responding f i r m s were o r i g i n a l l y e s t a b l i s h e d w i t h f o r e i g n ownership. Only t h i r t e e n (12.0%) were o r i g i n a l l y l o c a l companies l a t e r absorbed f u l l y or p a r t l y by f o r e i g n e r s through s a l e of ownership i n t e r e s t . The remaining f o u r t e e n (13.0%) a c q u i r e d f o r e i g n ownership i n t e r e s t by i s s u e of new c a p i t a l to foreigners;: In other words, d i r e c t f o r e i g n investments i n manufacturing i n Hong Kong mostly took the form o f newly added investments, but not t r a n s f e r r e d investments from l o c a l i n v e s t o r s through a c q u i s i t i o n . T h i s should have brought more economic b e n e f i t s t o Hong Kong than would be the case otherwise. (Table VI-6) TABLE VI-6  Method o f Ownership P a r t i c i p a t i o n Number % of Method o f Firms T o t a l (a) Company formed w i t h f o r e i g n ownership (b) L o c a l company s o l d a l l i t s ownership i n t e r e s t to f o r e i g n e r s (c) L o c a l company s o l d p a r t o f i t s ownership i n t e r e s t to f o r e i g n e r s (d) L o c a l company enlarged i t s c a p i t a l to take i n f o r e i g n ownership i n t e r e s t T o t a l 81 75.0% 2 1.9% 11 10.2% 14 13.0% 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . 116 Use of J o i n t Ventures: In host c o u n t r i e s where l o c a l e q u i t y p a r t i c i p a t i o n are r e q u i r e d or where a l o c a l image i s important, j o i n t ventures with l o c a l i n v e s t o r s have a s t r o n g appeal to f o r e i g n i n v e s t o r s . But e v i d e n t l y , f o r e i g n i n v e s t o r s i n Hong Kong were not p a r t i c u l a r l y i n t e r e s t e d i n e n t e r i n g i n t o j o i n t v e ntures. Out of the 108 responding f i r m s , o n l y about o n e - t h i r d c o n s i d e r e d themselves as being j o i n t ventures w i t h l o c a l i n v e s t o r s . (Table VI-7) In a d d i t i o n , there were three Table VI-7 Use of J o i n t Ventures Number % of J o i n t Venture Status a t 31/12/78 of Firms T o t a l (a) Not a j o i n t venture 71 65.7% (b) A f o r e i g n - l o c a l j o i n t venture 34 31.5% (c) A f o r e i g n e r s ' j o i n t venture 3 2.8% (d) A j o i n t venture w i t h the government 0 0.0% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . f o r e i g n e r s ' j o i n t ventures, two wi t h two f o r e i g n i n v e s t o r s each and one with three f o r e i g n i n v e s t o r s . A l l these three f o r e i g n e r s ' j o i n t ventures had no l o c a l ownership i n t e r e s t . There was no j o i n t venture w i t h the government, a d i r e c t r e s u l t o f the l a t t e r ' s n o n - i n t e r v e n t i o n p o l i c y . 117 Ownership A f f i l i a t i o n : N e a r l y a l l f o r e i g n i n v e s t o r s i n manufacturing i n Hong Kong were c o r p o r a t e i n v e s t o r s and they had ownership a f f i l i a t i o n w i t h companies overseas. (Table VI-8) Table VI-8 Overseas Ownership A f f i l i a t i o n Overseas Ownership Number % of A f f i l i a t i o n S t atus a t 31/12/78 of Firms T o t a l (a) Company had ownership a f f i l i a t i o n 9 5 49. w i t h companies overseas . (b) Company had no ownership a f f i l i a t i o n ^ 4 6 & w i t h companiesvoverseas " T o t a l 108 100.0% Nature of Ownership A f f i l i a t e d Overseas Companies (a) Parent company 101 93.5% (b) S u b s i d i a r y company 15 11319% (c) S i s t e r company 29 26.9% Note: Some f o r e i g n manufacturers had more than one type of ownership a f f i l i a t e d overseas companies. Source: Q u e s t i o n n a i r e survey r e t u r n s . 101 (93.5%) of the f i r m s had parent companies overseas. A l l t h e . seven which d i d not were Southeast A s i a n i n v e s t o r s . T h i s i n d i c a t e d t h a t some investments from Southeast A s i a n c o u n t r i e s i n Hong Kong were of a p e r s o n a l r a t h e r than an i n s t i t u t i o n a l nature F i f t e e n (13.9%) f i r m s had s u b s i d i a r y companies i n f o r e i g n c o u n t r i e s and t h i s i m p l i e d t h a t they l a y i n the middle of a 118 v e r t i c a l c h a i n of companies. A l s o , twenty-nine (26.9%) f i r m s had ownership a f f i l i a t i o n w i t h some s i s t e r companies abroad; they e v i d e n t l y formed a p a r t of a m u l t i n a t i o n a l group. Of course, there c o u l d a l s o be some other f i r m s which had s i s t e r companies, but w i t h whom there were no d i r e c t inter-company s h a r e . h o l d i n g s . Management C o n t r o l : There was evidenly. a c l o s e l i n k i n management between the f o r e i g n manufacturers i n Hong Kong and t h e i r a f f i l i a t e d companies overseas. N e a r l y h a l f o f the 101 f i r m s with parent companies had an outposted e x e c u t i v e of the parent company as t h e i r c h i e f e x e c u t i v e . Again, f o r around h a l f of them, appointments a t management l e v e l r e q u i r e d a p p r o v a l by the parent company. (Table VI-9) Taking a l s o i n t o c o n s i d e r a t i o n those f o u r t e e n f i r m s which d i d not complete the q u e s t i o n n a i r e but i n d s t e a d s t a t e d t h a t they c o u l d not d i v u l g e i n f o r m a t i o n on t h e i r o p e r a t i o n s without the p r i o r approval o f t h e i r overseas parent companies, i t was q u i t e obvious t h a t the i n v e s t i n g c o r p o r a t i o n s had a p r e t t y t i g h t management c o n t r o l over t h e i r investments i n Hong Kong. However, the p r o p o r t i o n of e x e c u t i v e s employed a t management o r s u p e r v i s o r y l e v e l s w i t h an e x p a t r i a t e s t a t u s i n g these f o r e i g n manufacturing f i r m s was not p a r t i c u l a r l y h i g h . The n a t i o n a l i t y of the c h i e f e x e c u t i v e was o n l y about t h r e e -to-two between f o r e i g n and l o c a l , meaning t h a t f o r many m a j o r i t y f o r e i g n owned f i r m s , the person a t the top was a l o c a l manager. 119 TABLE VI- 9 Management C o n t r o l Number % o f N a t i o n a l i t y o f C h i e f E x e c u t i v e of Firms T o t a l (a) L o c a l 42 38. 9% (b) F o r e i g n 66 61. 1% T o t a l 108 100. 0% Status of C h i e f E x e c u t i v e (a) An outposted executive - of parent 45 41. 7% company (b) Not an outposted e x e c u t i v e of 56 51. 9% parent company (c) Company had no parent company 7 6. 5% T o t a l 108 100. 0% Appointments a t Management L e v e l _ (a) Required approval by parent company 49 45. 3% (b) Did not r e q u i r e approval by parent 52 48. 1% company (c) Company had no parent company 7 6. 5% T o t a l 108 100. 0% Percent of E x p a t r i a t e E x e c u t i v e s a t Management or Su p e r v i s o r y L e v e l s a t 31/12/78 (a) 0% 30 27. 8% (b) 1 1 - 10% 38 35. 2% (c) 11 - 30% 16 14. 8% (d) 31 - 50% 8 7. 4% (e) More than 50% 16 14. 8% T o t a l 108 100. 0% Source: Q u e s t i o n n a i r e survey r e t u r n s . T h i r t y f i r m s d i d not even employ any f o r e i g n e x e c u t i v e s and o n l y s i x t e e n (14.8%) f i r m s had a high e r p r o p o r t i o n o f f o r e i g n e x e c u t i v e s than l o c a l e x e c u t i v e s . Thus, on the whole, the 120-proportion of foreign executives employed i n these foreign manufacturing firms was r e l a t i v e l y low when compared to the share of foreign ownership. Production and Marketing It i s generally believed that the i n d u s t r i a l environment of Hong Kong i s conducive-- to manufacturing opera-tions that involve simple processing, that are unsophisticated and are un s k i l l e d labour intensive. This may be true for industries i n Hong Kong as a whole; but for foreign manufacturers, the survey revealed that i t was not quite true. Instead, they seemed to have a high degree of sophistication i n t h e i r production and marketing operations. Production A c t i v i t i e s Performed: Of the 108 responding firms, eighty-one or exactly three-quarters claimed that they were engaged i n the complete process of manufacturing, i . e . , the transformation of raw materials into f i n a l products for sale to customers. (Table V-10) Only fourteen firms (13.0%) were engaged exclusively i n assembly work - the least sophis-t i c a t e d work usually performed by un s k i l l e d workers. These fourteen firms were either i n 'electronics' or 'watches, clocks and accessories'. On the other hand, more than hal f of the firms had q u a l i t y testing and control and about one-third had 1 2 is TABLEVr-10 P r o d u c t i o n A c t i v i t i e s Performed Number % of A c t i v i t y o f Firms T o t a l (a) Complete process of manufacturing 81 75.0% (b) Q u a l i t y t e s t i n g and c o n t r o l 58 53.7% (c) Assembly 45 41.7% (d) P r o d u c t i o n r e s e a r c h and development 30 27.8% (e) Packaging and package d e s i g n 23 21.3% (f) Product d e s i g n 22 20.4% (g) Others 6 5.6% Notes: T o t a l number of responding f i r m s = 108 There were f o u r t e e n f i r m s which were engaged i n assembly work o n l y . Source: Q u e s t i o n n a i r e survey r e t u r n s . p r o d u c t i o n r e s e a r c h and development. In a s m a l l c i t y where r e s e a r c h f a c i l i t i e s are g r o s s l y inadequate, t h i s a l r e a d y r e p r e s e n t e d a h i g h degree of work s o p h i s t i c a t i o n . Product d e s i g n and package d e s i g n were a l s o performed by about o n e - f i f t h of the f i r m s . T h i s wide a r r a y of p r o d u c t i o n a c t i v i t i e s performed i n d i c a t e d t h a t f o r e i g n manufacturers were not simply engaged i n nut-and-bolt o p e r a t i o n s . S k i l l e d Workers Employed: The h i g h p r o p o r t i o n o f s k i l l e d manual workers employed a l s o showed t h a t f o r e i g n manufac-t u r e r s i n Hong Kong were o p e r a t i n g a t a r e l a t i v e l y h i g h l e v e l of work s o p h i s t i c a t i o n . Even though t h e r e i s no breakdown of the 122 d i f f e r e n t degrees of s k i l l f o r i n d u s t r i a l workers i n Hong Kong, there i s l i t t l e c o n t e n t i o n t h a t by f a r the m a j o r i t y (about t h r e e - q u a r t e r s ) of i n d u s t r i a l workers i n Hong Kong are u n s k i l l e d and s k i l l e d workers c o n s t i t u t e o n l y around 15% of the labour g f o r c e . But the survey showed t h a t f o r e i g n manufacturers made use o f a much high e r p r o p o r t i o n o f s k i l l e d workers. (Table VlSrll) TABLE VI-11  S k i l l e d Workers Employed Number % of Percent of S k i l l e d Workers a t 31/12/78 of Firms T o t a l (a) 0% 6 5.6% (b) 1 - 20% 28 25.9% (c) 21 - 40% 25 23.1% (d) 41 - 60% 7 6.5% (e) 61 - 80% 33 30.6% (f) 81 - 100% 9 8.3% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . C l o s e to 40% of the responding f i r m s had over 60% of t h e i r workers employed being s k i l l e d workers. Product L i n e C o n c e n t r a t i o n : The degree of product l i n e c o n c e n t r a t i o n i n these f o r e i g n manufacturing f i r m s was not hi g h by Hong Kong standards. Many manufacturing f i r m s i n Hong Kong devote themselves e n t i r e l y on the p r o d u c t i o n o f j u s t one 123 s i n g l e l i n e o f product, and f o r those which do not, the most important l i n e u s u a l l y takes up the l i o n ' s share (often i n excess o f 75%) i n terms of value of output. However, the survey r e v e a l e d t h a t f o r e i g n manufacturers d i d not have such a h i g h degree of product l i n e c o n c e n t r a t i o n . Only t h i r t y - o n e or l e s s than o n e - t h i r d of the 108 responding f i r m s produced one s i n g l e l i n e of product. (Table VI-12) But again t h i r t y - o n e f i r m s TABLE VI-12  Product L i n e C o n c e n t r a t i o n Number % of L i n e o f Products Produced i n 1978 o f Firms T o t a l (a) One 31 28.7% (b) Two to f i v e 46 42.6% (c) More than f i v e 31 28.7% T o t a l 108 100.0% Percent Share o f Most Important Product L i n e i n 1978 ' (a) 100% 31 28.7% (b) 81 - 99% 24 22.2% (c) 61 - 80% 22 20.4% (d) 41 - 60% 8 7.4% (e) 21 - 40% 22 20.4% (f) 20% or l e s s 1 0.9% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . produced more t h a n f f i v e l i n e s o f products which a l r e a d y r e p r e s e n t e d s i g n i f i c a n t product l i n e d i v e r s i f i c a t i o n by Hong 12 4 Kong standards. The remaining f o r t y - s i x f i r m s had two to f i v e l i n e s o f products produced. For the seventy-seven f i r m s w i t h more than one l i n e of products produced, the degree o f r e l i a n c e on the most important l i n e was o n l y modest. T h i s i n d i c a t e d t h a t f o r e i g n manufacturers i n Hong Kong had more product l i n e d i v e r s i f i c a t i o n than l o c a l manufacturers. manufacturers i n Hong Kong had c l o s e overseas l i n k s i n t h e i r p r o d u c t i o n o p e r a t i o n s . Of the 108 responding f i r m s , forty-two (38.9%) had products being produced under l i c e n s i n g agreements with overseas companies. (Table VI-13) In.most i n s t a n c e s , the l i c e n s o r companies overseas were the parent companies or s i s t e r Overseas L i n k s i n Production' Operations. F o r e i g n TABLE VI-13 L i c e n s e d P r o d u c t i o n P r o d u c t i o n Operation i n 1978 Number of Firms % of T o t a l (a) Had l i c e n s e d p r o d u c t i o n (b) H^d no l i c e n s e d p r o d u c t i o n T o t a l 42 66 38.9% 61.1% 100.0% 108 Nature o f L i c e n s o r Company (a) The parent Company (b) A s u b s i d i a r y company (c) A s i s t e r company (d) An u n a f f i l i a t e d company 30 0 32 8 27.8% 0.0% 29.6% 7.4% Note: Some f i r m s had l i c e n s i n g agreements w i t h more than one overseas company. Source: Q u e s t i o n n a i r e survey r e t u r n s . 125 companies. In a d d i t i o n , e i g h t f i r m s had p r o d u c t i o n l i c e n s i n g agreements wi t h u n a f f i l i a t e d companies overseas. The sources o f equipment and m a t e r i a l s u p p l i e s conformed very much to the gen e r a l p a t t e r n i n Hong Kong - a heavy r e l i a n c e on overseas s u p p l i e s . Not a s i n g l e responding f i r m r e l i e d s o l e l y on the l o c a l market f o r e i t h e r equipment or raw m a t e r i a l s u p p l i e s , but many d i d r e l y e x c l u s i v e l y on f o r e i g n sources. (Table VT-14) Furthermore, t h e r e was a c l e a r tendency f o r these f o r e i g n manufacturers to r e l y on the home country as a supply source b e f o r e t u r n i n g to oth e r c o u n t r i e s . For equipment and machinery s u p p l i e s , the home country was c i t e d by f i f t y - s i x (51.9%) f i r m s as the most important source, seventeen (15.7%) as the second most important and seven (6.5%) as the t h i r d most important. Only f o r twenty-eight (25.9%) of the responding firms was the home country not c i t e d as among the most important t h r e e . As f o r raw m a t e r i a l s , the home country was even more important as a supply source, c i t e d by s i x t y - f o u r (59.3%) f i r m s as the most important, seventeen (15.7%) as the second most important and f i f t e e n (13.9%) as the t h i r d most important. The a f f i l i a t e d companies overseas were important s u p p l i e r s . F o r t y - f o u r (40.7%) of the responding f i r m s had more than h a l f o f t h e i r f o r e i g n equipment and machinery s u p p l i e s coming from t h e i r f o r e i g n a f f i l i a t e s . Again, the l i n k was even 126 TABLE VI-14 Sources o f Equipment arid M a t e r i a l S u p p l i e s Sources o f C a p i t a l Equipment arid Machinery S u p p l i e s i n 1978 (a) A l l l o c a l (b) Mainly l o c a l (c) Mainly f o r e i g n (d) A l l f o r e i g n T o t a l (a) A l l l o c a l (b) Mainly l o c a l (c) Mainly f o r e i g n (d) A l l f o r e i g n T o t a l Home Country as a Supply Source f o r Raw M a t e r i a l s i n 1978 (a) (b) (c) (d) Overseas A f f i l i a t e d Compaby(ies) Supplying More than 50% of Number % of of Firms T o t a l 0 0.0% 18 16.7% 74 68.5% 16 14.8% 108 100.0% 56 51.9% 17 15.7% 7 6.5% 28 25.9% 108 100.0% 0 0.0% 4 3.7% 77 71.3% 27 25.0% 108 100.0% The most important 64 59.3% The second most important 17 15.7% The t h i r d most important 15 13.9% Not among the three most important 12 11.1% T o t a l 108 100.0% Home Country as a Supply Source f o r C a p i t a l Equipment arid Machinery i n 1978 (a) The most important (b) The second most important (c) The t h i r d most important (d) Not among the three most important T o t a l Sources o f Raw M a t e r i a l S u p p l i e s i n 1978 (a) F o r e i g n equipment and machinery s u p p l i e s 44 40.7% (b) F o r e i g n raw m a t e r i a l s u p p l i e s 57 52.8% Source: Q u e s t i o n n a i r e survey r e t u r n s . 127 closer for raw materials, with fif t y - s e v e n (52.8%) firms receiving more than half of t h e i r foreign raw material supplies from th e i r overseas a f f i l i a t e s . This suggested that many foreign manufacturing firms i n Hong Kong were v e r t i c a l l y integrated with t h e i r overseas a f f i l i a t e s . turers i n Hong Kong also performed a wide variety of marketing a c t i v i t i e s , again i n d i c a t i n g that t h e i r operations were more sophisticated than l o c a l manufacturers. (Table VI-15) Marketing A c t i v i t i e s Per formed: Foreign manufac-TABLE VI-15 Marketing A c t i v i t i e s Performed Marketing A c t i v i t y Number of Firms % of Total (a) D i s t r i b u t i o n and wholesaling (b) Export sales promotion (c) Advertising (d) Marketiand consumers research (e) After sales servising (f) R e t a i l i n g 59 50 49 45 33 14 54.6% 46.3% 45.4% 41.7% 30. 6% 13.0% Source: Questionnaire survey returns. D i s t r i b u t i o n and wholesaling was the most common, followed by export sales promotion and advertising. Surprisingly, many of them were also engaged i n market and consumers research which 128 was seldom performed by l o c a l manufacturers. Export Sales ' i The export s a l e s f i g u r e s i n Table VI-16 c o n f i r m the a s s e r t i o n t h a t f o r e i g n investments i n manufacturing i n Hong Kong are mostly export o r i e n t e d , but a t the same time TABLE VI-16  Export S a l e s Export S a l e s as a Percent Number % of of T o t a l S a l e s i n 1978 of Firms T o t a l (a) 0% ~: 12 11.1% (b) 1 - 20% 16 14.8% (c) 21 - 40% 12 11.1% (d) 41 - 60% 5 4.6% (e) 61 - 80% 8 7.4% (f) 81 - 100% 51 47.2% (g) No r e p l y 4 3.7% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . they r e v e a l t h a t the degree of export o r e i n t a t i o n i n 1978 was not as high as t h a t f o r i n d u s t r i e s i n Hong Kong as a whole. Of the 108 responding f i r m s ( i n c l u d i n g the f o u r w i t h no r e p l i e s on t h e i r s a l e s ) , f i f t y - o n e (47.2%) had over 80% of t h e i r t o t a l s a l e s i n 1978 as export s a l e s , and e i g h t (7.4%) had 61-80%. These f i f t y - n i n e f i r m s c o u l d d e f i n i t e l y be regarded as export o r i e n t e d . But f o r the remaining f o r t y - f i v e , the l o c a l market 129 was a t l e a s t as important as f o r e i g n markets. Twelve (11.1%) f i r m s devoted themselves e n t i r e l y t o the l o c a l market and twenty-eight (25.9%) s o l d more l o c a l l y than overseas. On average, the 104 f i r m s (excluding the f o u r no r e p l i e s ) exported around 60% of t h e i r s a l e s i n 1978. x^ T h i s export rationwas a l r e a d y h i g h enough to j u s t i f y the c l a i m the f o r e i g n investments i n manufacturing i n Hong Kong are export o r i e n t e d . Market C o n c e n t r a t i o n : The degree of market concen-t r a t i o n was not p a r t i c u l a r l y h i g h by Hong Kong standards. While many l o c a l manufacturers, e s p e c i a l l y the small ones, o f t e n r e l y on j u s t one or a few buyers, f o r e i g n manufacturers had a wider spread i n t h e i r s a l e s . In terms of f o r e i g n country markets, only s i x t e e n (14.8%) f i r m s had more than 80% of t h e i r s a l e s i n 1978 going to the same f o r e i g n country. (Table VI-17) The o t h e r f i r m s a l l seemed to have reasonably good market d i v e r s i f i c a t i o n . F o r t y - f o u r (40.7%) f i r m s d i d not have a s i n g l e country market accounting f o r 40% or more of t h e i r s a l e s , and among them, the percentage share of the most important f o r e i g n country market f o r t w e n t y - f i v e f i r m s was as low as 20% or l e s s . In terms of customer companies, again few f o r e i g n manufacturers r e l i e d on j u s t one or a couple of customers. The degree of c o n c e n t r a t i o n was a l s o low by Hong Kong standards even though no o f f i c i a l s t a t i s t i c s was a v a i l a b l e f o r comparison between the l o c a l manufacturers and the f o r e i g n manufacturers. 130 TABLE VI-17 Degree of Market C o n c e n t r a t i o n Sales to Most Important F o r e i g n Country Market as a % o f T o t a l S a l e s i n 1978 Number of Firms % o f T o t a l (a) No export s a l e s 12 11.1% (b) 1 - 20% 25 23.1% (c) 21 - 40% 19 17.6% (d) 41 - 60% 24 2 2*2% (e) 61 - 80% 8 7.4% (f) 81 - 100% 16 14.8% (g) No r e p l y 4 3.7% T o t a l = 108 100.0% Sa l e s to Most Important Customer Company as a % of T o t a l S a l es i n 1978 (a) 1 - 20% 29 26.9% (b) 21 - 40% 14 13.0% (c) 41 - 60% 31 28.7% (d) 61 - 80% 13 12.0% (e) 81 - 100% 17 15.7% (f) No r e p l y 4 3.7% T o t a l 108 100.0% Note: The most important customer company c o u l d be a f o r e i g n company or a l o c a l company. Source: Q u e s t i o n n a i r e survey r e t u r n s . Overseas L i n k s i n Marketing: The marketing l i n k between the f o r e i g n manufacturers i n Hong Kong and t h e i r home c o u n t r i e s was a l s o c l o s e even though i t was not as c l o s e as the p r o d u c t i o n l i n k . While the home country was o f t e n c i t e d as the main f o r e i g n source o f supply f o r equipment and raw m a t e r i a l s , i t was not as o f t e n c i t e d as the most important f o r e i g n country market. Only f o r twenty-four (22.2%) f i r m s was 131 the home country the most important f o r e i g n market, but f o r f o r t y - s e v e n (43.5%) f i r m s , o r twice as many as the former, the home country was not even among the three most important. (Table VI-18) E v i d e n t l y , many f o r e i g n i n v e s t o r s were u s i n g Hong Kong as a manufacturing base to produce f o r markets i n the r e g i o n , but not f o r the home country market. TABLE VI-18 Overseas L i n k s i n Marketing Number % of Home Country as a F o r e i g n Market i n 1978 of Firms T o t a l (a) The most important 24 22.2% (b) The second most important 13 12.0% (c) The t h i r d most important 8 7.4% (d) Not among the three most important 47 43.5% (e) No export s a l e s 12 11.1% (f) No r e p l y 4 3.7% T o t a l 108 100.0% Percent o f Export Sales Going to F o r e i g n A f f i l i a t e d Company(ies) i n 1978  (a) 0% 14 13.0% (b) 11 • - ?20% 29 26.9% (c) 21 - 40% 11 10.2% (d) 41 - 60% 5 4.68 (e) 61 - 80% 7 6.5% (f) 81 - 100% 26 24.1% (g) No export s a l e s 12 11.1% (h) No r e p l y 4 3.7% T o t a l 108 100.0% Source: Q u e s t i o n n a i r e survey r e t u r n s . 132 The l i n k between the foreign manufacturers i n Hong Kong and the i r overseas a f f i l i a t e s (including the parent company at home and other s i s t e r companies) was a close one too. Excluding the four 'no r e p l i e s ' and the twelve firms with no export sales, only fourteen firms (13.0%) did not s e l l to t h e i r foreign a f f i l i a t e s at a l l i n 1978. (But <Sut of these fourteen firms, f i v e i n fact did not have any foreign a f f i l i a t e s . ) Twenty-six firms (24.1%) had more than 80% of th e i r export sales going to overseas a f f i l i a t e s i n 1978. Among these twenty-six firms, twenty-one had products being produced under l i c e n s i n g agreements with t h e i r foreign a f f i l i a t e s . 133 Note s 1. Brooke, M.Z. and Remitters, H.L., The S t r a t e g y of M u l t i n a - t i o n a l E n t e r p r i s e s : O r g a n i z a t i o n and Finance, Longman, London, 1970, Chapter 9: " S t r a t e g i c C o n s i d e r a t i o n s i n the Move Abroad". A l s o see note 32, Chapter I, page 37. 2. The nature of these two motives are somewhat debatable. Brooke and Remmers c l a s s i f i e d tham as d e f e n s i v e , but they should be a g g r e s s i v e because they are not intended to p r e s e r v e e x i s t i n g business i n t e r e s t , i n the h o s t country. 3. For example, i n the p a s t few y e a r s , the bank r a t e i n Hong Kong had most o f the time been 2-3% lower than t h a t o f the U.S. or Canada. 4. See Appendix II-6.1. 5. See Table 1-1, Chapter I, page 9. 6. The amount of c a p i t a l and the percent share of f o r e i g n ownership were found to be s t a t i s t i c a l l y r e l a t e d by u s i n g c h i - s q u a r e t e s t . 7. S t r i c t l y speaking, whether or not a f i r m i s a j o i n t venture depends on whether managementiis m a t e r i a l l y shared between the i n v e s t o r s ; but the w r i t e r has the f e e l i n g t h a t some responding firms claimed themselves to be j o i n t ventures simply on the b a s i s t h a t the parent c o r p o r a t i o n d i d not f u l l y own the company. In o t h e r words, the 'true' number of f o r e i g n - l o c a l j o i n t ventures c o u l d be s m a l l e r than t h i r t y - f o u r . 8. Because of the p e c u l i a r p o l i t i c a l s t a t u s of Hong Kong, the meaning of a ' f o r e i g n e x p a t r i a t e ' i s , a c c o r d i n g to common usage and which i s a l s o used here, 'one who i s not of e t h n i c Chinese o r i g i n A . 9. The working d e f i n i t i o n used i n Hong Kong i s t h a t a s k i l l e d worker should have ob t a i n e d a g e n e r a l e d u c a t i o n standard of up to Form 3 (Grade 8) l e v e l and has t h r e e y e a r s ' s p e c i a l i z e d t r a i n i n g . Those wi t h one to three y e a r s ' t r a i n i n g are s e m i - s k i l l e d and those w i t h no formal t r a i n i n g are u n s k i l l e d . 10. The a c t u a l export r a t i o c o u l d be much hi g h e r i f i n d i r e c t exports were i n c l u d e d . For example, the w r i t e r d i s c o v e r e d t h a t some f o r e i g n manufacturing f i r m s s o l d to overseas markets through some t r a d i n g companies i n Hong Kong; but 134 they put these s a l e s as l o c a l s a l e s i n t h e i r r e t u r n s . At l e a s t one U.S. f i r m which s o l d t o overseas markets through i t s own marketing a f f i l i a t e i n Hong Kong a l s o c o n s i d e r e d the s a l e s as l o c a l s a l e s . T h i s was r e v e a l e d to the w r i t e r i n the i n t e r v i e w s . CHAPTER VII - ASSESSMENT OF INVESTMENT: CONDITIONS T h i s chapter p r e s e n t s the c o l l e c t i v e view of what investment f a c t o r s f o r e i g n manufacturers c o n s i d e r e d as important to t h e i r o p e r a t i o n s , how they assessed the business environment i n Hong Kong and evaluated t h e i r o r i g i n a l investment d e c i s i o n s . I n e v i t a b l y , d i f f e r e n t f o r e i g n manufacturers would have d i f f e r e n t views on a l l these, depending on t h e i r investment motives and needs and the type of i n d u s t r y they were i n ; but s t i l l , t h e i r c o l l e c t i v e view should help to sharpen the focus on the business environment f o r f o r e i g n i n v e s t o r s and to r e v e a l more c l e a r l y where Hong Kong's s t r e n g t h s and weaknesses l a y . The a n a l y s i s i n t h i s chapter i s again based upon data generated from the q u e s t i o n n a i r e survey. Importance of Investment F a c t o r s A l t o g e t h e r twenty investment f a c t o r s c o v e r i n g a l l the r e l e v a n t environmental elements were presented.to the f o r e i g n manufacturers f o r t h e i r assessment. Four d i f f e r e n t degrees of importance were s p e c i f i e d ? ' v i t a l l y important', 'important', 'not important' and 'completely i r r e l e v a n t ' . U sing a r t i f i c i a l s c a l i n g and a s s i g n i n g numerical weights of '2', ' l ' l , '0' and '0' r e s p e c t i v e l y to the four d i f f e r e n t degree 136 of importance s p e c i f i e d , Table VII-1 shows how the twenty investment f a c t o r s were being ranked by the f o r e i g n manufac-t u r e r s , i n descending order of importance a c c o r d i n g to t h e i r weighted s c o r e s . x E v i d e n t l y , the f o r e i g n manufacturers were extremely pragmatic. On the whole, they ranked the degree' of importance o f investment f a c t o r s mainly on how d i r e c t l y and immediately these f a c t o r s a f f e c t e d b usiness v i a b i l i t y and p r o f i t a b i l i t y . The twenty investment f a c t o r s c o u l d be b r o a d l y grouped together and arranged i n descending order of t h e i r 'intimacy' to manufac-t u r i n g o p e r a t i o n s as f o l l o w s : (i) P r o d u c t i o n i n p u t f a c t o r s ( ' a v a i l a b i l i t y of managerial s k i l l ' , 'cost of l a n d , o f f i c e and f a c t o r y space', 'labour supply, c o s t and p r o d u c t i v i t y ' , and 'raw m a t e r i a l ' s u p p l i e s ' ) , ( i i ) S t a b i l i t y f a c t o r s ('currency s t a b i l i t y ' , 'domestic economic s t a b i l i t y ' , 'labour-management r e l a t i o n s h i p ' and ' p o l i t i c a l s t a b i l i t y ' ) , ( i i i ) I n c e n t i v e f a c t o r s ('business laws and r e g u l a t i o n s ' , 'corporate taxes', 'exchange c o n t r o l s ' , a n d 'government p o l i c y towards f o r e i g n i n v e s t m e n t 1 ) , (iv) Marketing f a c t o r s ('geographical l o c a t i o n ' , ' l o c a l market p o t e n t i a l ' and 'trade r e s t r i c t i o n s on imports and exports') and (v) I n d i r e c t f a c t o r s ('education standard o f p o p u l a t i o n ' , TABLE VII -1  Degree of Importance of Investment F a c t o r s Number of Responses F a c t o r V i t a l l y Not Completely Weighted Important Important Important I r r e l e v e n t -'Score Labour supply, c o s t and p r o d u c t i v i t y 79 26 3 0 184 Cost of l a n d , o f f i c e and f a c t o r y space 69 35 4 0 173 A v a i l a b i l i t y o f managerial s k i l l 59 43 4 2 161 Currency s t a b i l i t y 44 45 18 11 133 Raw m a t e r i a l s u p p l i e s 43 41 19 5 127 Labour-management r e l a t i o n s h i p 32 61 11 4 125 Corporate taxes 38 48 19 3 124 Trade r e s t r i c t i o n s on imports and exports 37 50 17 4 124 Domestic economic s t a b i l i t y 26 69 13 0 121 P o l i t i c a l s t a b i l i t y 33 52 23 0 118 Business laws and r e g u l a t i o n s 17 68 21 2 102 Exchange c o n t r o l s 24 51 24 9 99 F i n a n c i a l m a t u r i t y 21 57 28 2 99 Government p o l i c y towards f o r e i g n investment 18 61 18 11 97 L o c a l market p o t e n t i a l 34 24 26 24 < 92 Government's i n t e g r i t y and e f f i c i e n c y 9 71 25 3 89 i n a d m i n i s t r a t i o n G e o g r a p h i c a l l o c a t i o n 20 42 28 18 82 General a t t i t u d e towards f o r e i g n e r s 12 53 25 18 77 and f o r e i g n compariiest. S o c i a l overhead f a c i l i t i e s 9 57 31 11 75 E d u c a t i o n standard o f p o p u l a t i o n 7 57 33 111 71 Note: Number of responding f i r m s = 108. Source: Qu e s t i o n n a i r e survey r e t u r n s . 138 ' f i n a n c i a l m a t u r i t y ' , 'general a t t i t u d e towards f o r e i g n e r s and f o r e i g n companies', 'government's i n t e g r i t y and e f f i c i e n c y i n a d m i n i s t r a t i o n ' and ' s o c i a l overhead f a c i l i t i e s ' ) . T able VII-1 shows t h a t these f a c t o r s were a c t u a l l y ranked i n t h e i r degree of importance a c c o r d i n g to t h e i r i n t i m a c y to manufacturing o p e r a t i o n s i n the same order as g i v e n i n above. The f o u r p r o d u c t i o n i n p u t f a c t o r s were a l l p l a c e d a t the top w i t h i n the f i r s t q u a r t i l e . 'Labour supply, c o s t and p r o d u c t i v i t y ' occupied the f i r s t p o s i t i o n w i t h seventy-nine (73.1%) f i r m s c o n s i d e r i n g i t as ' v i t a l l y important' and twenty-s i x (24.1%) as 'important'. T h i s r e s u l t was c l o s e l y r e l a t e d to the l e a d i n g investment motive - 'to make use of l o c a l l a b o u r ' which was responded by seventy-seven (71.3%) f i r m s . Only t h r e e (2.8%) f i r m s c o n s i d e r e d t h i s f a c t o r as 'not important'. A l l these t h r e e f i r m s were small f i r m s w i t h an employment of l e s s than twenty workers each a t the end of 1978. 'Cost o f l a n d , o f f i c e and f a c t o r y space' was second. T h i s might seem a b i t s u r p r i s i n g because as we saw i n Chapter I I , • r e n t a l and other payments' comprised o n l y 2.9% of the t o t a l manufacturing c o s t a c c o r d i n g to the 197 3 Census of I n d u s t r i a l  P r o d u c t i o n . Apparently, t h i s low percentage c o u l d not j u s t i f y so heavy an emphasis on t h i s f a c t o r e s p e c i a l l y when the o p e r a t i o n s of f o r e i g n manufacturers i n Hong Kong were not p a r t i c u l a r l y 139 l a n d - i n t e n s i v e . There was probably a p s y c h o l o g i c a l b i a s i n the response. The c o s t of l a n d , o f f i c e and f a c t o r y space had r i s e n very r a p i d l y i n the l a t e 1970s and the 1978's c o s t was about double to t r i p l e the 1973's c o s t (depending on l o c a t i o n ) . T h i s meant t h a t i f a census was conducted f o r 1978 and a breakdown of p r o d u c t i o n c o s t s made, then ' r e n t a l and o t h e r payments' c o u l d take up another three to s i x percent of the t o t a l . T h i s would q u i c k l y erode away the 'net o p e r a t i n g s u r p l u s ' which a c c o r d i n g to the 1973 Census was 8.3%. T h i s r a p i d l y r i s i n g c o s t of l a n d had f o r a long time been worrying manufacturers, l o c a l and f o r e i g n a l i k e , and t h i s worry might have a magnifying e f f e c t when the f o r e i g n manufacturers were being asked to assess the degree of importance o f t h i s investment f a c t o r . ' A v a i l a b i l i t y of managerial s k i l l ' was t h i r d . T h i s was another i n d i c a t i o n o f the f a c t t h a t many f o r e i g n manufacturers i n Hong Kong were engaged i n t e c h n o l o g i c a l l y more advanced and s o p h i s t i c a t e d o p e r a t i o n s ; hence, t h e i r v i a b i l i t y and p r o f i t a b i l i t y depended a g r e a t d e a l on e f f i c i e n t management and s u p e r v i s i o n . However, we should a l s o remember t h a t those who a c t u a l l y f i l l e d i n the q u e s t i o n n a i r e were managers themselves and i t was u n l i k e l y t h a t they would view t h e i r own r o l e i n the company as unimportant. The l a s t p r o d u c t i o n i n p u t f a c t o r was 'raw m a t e r i a l s u p p l i e s " which was ranked f i f t h a c c o r d i n g to the weighted s c o r e s . There was nothing unusual w i t h t h i s r e s u l t . N e a r l y a l l 140 of Hong Kong's material needs were imported or processed from imports and 'consumption of materials' represented.the. most important cost item (59.5% of t o t a l cost) according to the 197 3 Census. A l l the f i v e responding firms which considered 'raw material supplies' as being 'completely i r r e l e v a n t ' had the i r raw materials supplied by th e i r overseas a f f i l i a t e s . Next i n importance to the production input factors were those factors contributing to stable business conditions: 'currency s t a b i l i t y ' , 'labour-management rela t i o n s h i p ' , 'domestic economic s t a b i l i t y ' and ' p o l i t i c a l s t a b i l i t y ' . They occupied positions fourth, s i x t h , ninth and tenth respectively i n the rank order. Among these four factors, 'currency s t a b i l i t y ' received the heaviest emphasis and was the only factor which was placed within the f i r s t q u a r t i l e . This, however, might again be the r e s u l t of a psychological e f f e c t caused by the weakness of the Hong Kong d o l l a r i n 1978. In less than one year, the trade weighted Hong Kong d o l l a r exchange rate index (December 18, 1971 = 100) f e l l from 107 i n January 1978 to 91 i n October 1978, or at an annual rate of more than nineteen percent. From October 1978 to the end of May 1979, i t had been fluctuating between 90 arid 95. This weakness of the Hong Kong d o l l a r meant on one hand that manufacturers had to pay more for the import of materials and , on the other hand, face uncertainties i n quoting prices for t h e i r export sales which were i n the majority of cases contracted i n foreign currencies, the most common being 141 U.S. d o l l a r s . The incentive factors: 'business laws and regulations', 'corporate taxes', ^exchange controls' and "government po l i c y towards foreign investment' only occupied positions near the middle of the rank order despite the fact that they ware often the most important external p u l l factors that motivate i n t e r -national corporations to invest i n a certain country. The r e l a t i v e l y l i g h t emphasis which they received i n the assessment was probably because the responding foreign manufacturers were already operating i n Hong Kong, had committed themselves and had taken these factor conditions for granted. Thus, they were more concerned with production input factors and s t a b i l i t y factors which tended to be more v o l a t i l e than the incentive factors. Three factorswere related to marketing and d i s t r i b u -t i o n : 'geographical location', 'local market p o t e n t i a l ' and 'trade r e s t r i c t i o n s on imports and exports'. Among these three factors, 'trade r e s t r i c t i o n s on imports and exports' was ranked highest, i n the seventh position. This was understandable as manufacturers i n Hong Kong, foreign and l o c a l a l i k e j had to r e l y heavily on foreign supplies of equipment and materials for t h e i r production operations, as well as on foreign markets for t h e i r sales. 'Local market potential', being ranked at the bottom of the t h i r d q u a r t i l e i n fifteenthoposition, had the most evenly spread of responses among the twenty factors i n d i c a t i n g that the 142 f o r e i g n manufacturers d i f f e r e d i n t h e i r assessment most wi d e l y i n t h i s f a c t o r . T h i s appeared to be b a s i c a l l y determined by the r e l a t i o n s h i p between the type of investment and t h e i r market o r i e n t a t i o n . While the export o r i e n t e d f o r e i g n manufacturers would c o n s i d e r i t as 'not important 1 or 'completely i r r e l e v a n t ' , those which s o l d to the l o c a l market or r e l i e d h e a v i l y on i t would r e g a r d i t as 'important' or ' v i t a l l y important'. 'Geographical l o c a t i o n ' which had o f t e n been regarded as an important a t t r i b u t e to the i n d u s t r i a l development of Hong Kong d i d not r e c e i v e too much emphasis probably because these f o r e i g n manufacturers used Hong Kong as a manufacturing base r a t h e r than a d i s t r i b u t i o n and s e l l i n g base. The remaining f a c t o r s : 'education standard of p o p u l a t i o n ' , ' f i n a n c i a l m a t u r i t y ' , g e n e r a l a t t i t u d e towards f o r e i g n e r s and f o r e i g n companies', 'government's i n t e g r i t y and e f f i c i e n c y i n a d m i n i s t r a t i o n ' and ' s o c i a l overhead f a c i l i t i e s ' , though c o n c e i v a b l y might a l s o be important, were comparatively l e s s d i r e c t i n t h e i r impact on b u s i n e s s v i a b i l i t y and p r o f i t -a b i l i t y . As a group, they were c o n s i d e r e d by f o r e i g n manufacturers as the l e a s t important. A l l these f a c t o r s , w i t h the only e x c e p t i o n of ' f i n a n c i a l m a t u r i t y ' were p l a c e d i n the l a s t q u a r t i l e o f the rank o r d e r . N e v e r t h e l e s s , a l l of them s t i l l had more than h a l f of the responding f i r m s i n d i c a t i n g t h a t they were e i t h e r 'important' or ' v i t a l l y important'. 143 F a v o u r a b i l i t y of F a c t o r s The r a t i n g o f t h e . f a v o u r a b i l i t y of these investment f a c t o r s i n Hong Kong by the f o r e i g n manufacturers was even more e n l i g h t e n i n g . The r e s u l t s are g i v e n i n Table VII-2 where again they are p l a c e d i n descending order of t h e i r f a v o u r a b i l i t y r a t i n g s . Despite, i n c r e a s i n g complaints v o i c e d by manufacturers about Hong Kong's business environment i n r e c e n t y e a r s , o n l y one of the twenty investment f a c t o r s was a c t u a l l y r a t e d as being unfavourable by the f o r e i g n manufacturers. The mean of the averages was 1.815 w i t h i n a r a t i n g s c a l e of +5 which r e p r e s e n t e d the most f a v o u r a b l e r a t i n g t o -5, the most unfavourable r a t i n g . T h i s must be regarded as a very good o v e r a l l r a t i n g even though judging from our examination o f the Hong Kong economic system and the government's p o l i c y towards f o r e i g n investment, t h i s r e s u l t was not a s u r p r i s i n g one. However, the r e l a t i v e l y h i g h c o e f f i c i e n t of v a r i a t i o n f o r the i n d i v i d u a l investment f a c t o r s i n d i c a t e d t h a t there was a p r e t t y wide d i f f e r e n c e i n o p i n i o n among the f o r e i g n manufac-t u r e r s themselves on the degree of f a v o u r a b i l i t y o f these investment f a c t o r s . O n ly.four investment f a c t o r s had a c o e f f i c i e n t o f v a r i a t i o n of l e s s than 20% ('exchange c o n t r o l s ' , 'corporate taxes', 'trade r e s t r i c t i o n s on imports and e x p o r t s ' and ' f i n a n c i a l TABLE VII-2 Degree of Favourability of Investment Factors Number of Responses  Unfavourable Favourable Average Coef. Factor -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 Score Var. Exchange controls 0 0 Corporate taxes 0 0 Trade r e s t r i c t i o n s on imports 0 n and exports \j General attitude towards foreigners i 1 and foreign companies _l_ J-Business laws and regulations 0 0 Fin a n c i a l maturity 0 0 P o l i t i c a l s t a b i l i t y 1 1 Geographical location 0 1 Government policy towards foreign n 1 investment \j A v a i l a b i l i t y of managerial s k i l l 5 2 Labour-management relationship 0 1 Education standard of population 0 2 Social overhead f a c i l i t i e s 1 1 Domestic economic s t a b i l i t y 1 2 Government's i n t e g r i t y and i 1 e f f i c i e n c y i n administration Local market potential 6 8 Raw material supplies 4 9 Currency s t a b i l i t y 5 7 Labour supply, cost and productivity 6 5 Cost of land, o f f i c e and factory 65 10 space Notes: Coef. Var. - c o e f f i c i e n t of va r i a t i o n . 0 1 0 6 12 19 19 51 3.9 15. 5% 0 1 0 14 13 15 33 32 3.5 17.2% 1 0 2 12 9 19 33 32 3.5 15.8% 0 0 1 16 12 29 29 19 3.0 21.1% 1 2 2 14 8 34 29 18 3.0 20.3% 1 0 4 9 17 44 20 13 2.9 18.2% 0 1 2 14 19 40 18 12 2.7 21.7% 1 2 5 26 6 25 25 17 2.6 24.5% 0 1 4 23 19 34 13 13 2.5 21.7% 4 4 1 16 12 34 11 19 2.2 36.7% 1 1 7 21 33 24 14 6 2.1 23.2% 1 6 4 23 36 27 5 4 1.8 25.6% 1 0 7 48 22 17 8 3 1.6 24.4% 5 10 10 27 24 22 7 0 1.5 32.9% 9 8 10 13 13 41 8 4 1.4 37.2% 2 7 6 25 15 22 6 11 1.0 46.8% 3 15 11 11 20 26 7 2 0.6 49.3% 6 3 19 39 13 13 3 0 0.2 44.2% 8 10 16 27 16 17 3 0 0.1 48.0% 14 7 5 5 0 1 1 0 -3.8 21.5% Mean of average scores = 1.815. Source: Questionnaire survey returns. 145 maturity"). Those investment factors which had the widest discrepancies of opinion, as indicated by a c o e f f i c i e n t of v a r i a t i o n exceeding 30%, were also factors that were being rated as r e l a t i v e l y less favourable. The exceptions were ' a v a i l a b i l i t y of managerial s k i l l ' with a c o e f f i c i e n t of v a r i a t i o n of 36.7% but a r e l a t i v e l y favourable rating score of 2.2 and 'cost of- land, o f f i c e and factory space' with a more general consensus on i t s unfavourability. 'Cost of land, o f f i c e and factory space' was also the only factor which obtained a negative score, and a very bad one too (-3.8). This i s because Hong Kong has l i t t l e usable land and there i s no control on land prices either. Unquestionably, the cost of o f f i c e and factory space;(as well as r e s i d e n t i a l apartments) i n Hong Kong i s now one of the highest among major c i t i e s of the world, and i n the Asian P a c i f i c region, second only to Tokyo. At the end of 1978, o f f i c e space i n central business d i s t r i c t s rented for about HK$7 to HK$12 per square foot per 2 month depending on location and modernness of building. For i n d u s t r i a l premises, the monthly rental ranged from HK$1.5 per square foot i n upper f l o o r s to HK$5 i n ground f l o o r s . Hopefully, the government's po l i c y to grant concessionary land leases to q u a l i f i e d manufacturers may i n future help to a l l e v i a t e t h i s problem. 'Labour supply, cost and productivity' was the second 146 l e a s t f a v o u r a b l y r a t e d f a c t o r , but i t s t i l l managed to p u l l a p o s i t i v e average sco r e . I t was a l s o the f a c t o r which r e c e i v e d the second h i g h e s t c o e f f i c i e n t of v a r i a t i o n i n d i c a t i n g t h a t there was a wide d i f f e r e n c e i n o p i n i o n on i t s degree of f a v o u r -a b i l i t y . The f a c t i s t h a t Hong Kong's i n d u s t r i a l wages have i n c r e a s e d r a p i d l y i n r e c e n t y e a r s , but i t s workers are s t i l l b e ing c o n s i d e r e d as more s k i l l f u l by Southeast A s i a n standards 3 and t h i s p r o v i d e s some compensation f o r the h i g h e r l a b o u r c o s t . Furthermore, s i n c e most of the 108 responding f o r e i g n manufac-t u r e r s were from the U.S., Japan and o t h e r Western European c o u n t r i e s where wage r a t e s were even h i g h e r , t h i s f a c t o r was not c o n s i d e r e d as too unfavourable by them. Of course, l o c a l 4 manufacturers might h o l d e n t i r e l y d i f f e r e n t views. ' P o l i t i c a l s t a b i l i t y ' s u r p r i s i n g l y o b t a i n e d a p r e t t y f a v o u r a b l e r a t i n g o f 2.7 d e s p i t e the u n c e r t a i n t y of the p o l i t i c a l s t a t u s of Hong Kong beyond 1997. Probably, the f o r e i g n manufac-t u r e r s b e l i e v e d t h a t Hong Kong was a l r e a d y a s t a b l e investment c e n t r e when compared to other c o u n t r i e s i n the r e g i o n . The e i g h t e e n years between 1979 and 1997 s t i l l p r o v i d e them wi t h enough leeway i n t h e i r forward p l a n n i n g . Another p o s s i b l e reason was when the survey was conducted, the 'moderates' had c o n s o l i -dated t h e i r c o n t r o l i n China. The Communist government had on' a number o f o c c a s i o n s r e i t e r a t e d i t s i n t e n t i o n t o m a i n t a i n a status-quo i n Hong Kong. T h i s had generated more c o n f i d e n c e i n the minds of f o r e i g n i n v e s t o r s on the p o l i t i c a l f u t u r e of Hong 14 7. Kong and might have helped the r a t i n g of t h i s f a c t o r . Another somewhat s u r p r i s i n g s c o r e was t h a t one o b t a i n e d by ' l o c a l market p o t e n t i a l " . Even though i t i s g e n e r a l l y r e c o g n i z e d t h a t the s i z e o f the l o c a l market i n Hong Kong i s s m a l l , f o r e i g n manufacturers as a whole d i d not c o n s i d e r i t as a s e r i o u s handicap, probably because most of them were export o r i e n t e d . The h i g h c o e f f i c i e n t of v a r i a t i o n (46.8%), however, i n d i c a t e d t h a t there was a wide d i f f e r e n c e i n o p i n i o n . One i n t e r e s t i n g f i n d i n g which was not r e v e a l e d by the f i g u r e s i n Table VII-2 was t h a t by f a r the m a j o r i t y of those f i r m s ( t h i r t y - f o u r out o f f o r t y ) which s o l d 4 0% or more of t h e i r output i n the l o c a l market i n 1978 d i d not r a t e t h i s f a c t o r as unfavourable. In f a c t , with a gross n a t i o n a l income per c a p i t a which i s the second h i g h e s t i n the r e g i o n and a p o p u l a t i o n o f f i v e m i l l i o n which i s g e o g r a p h i c a l l y c o n c e n t r a t e d , the Hong Kong market should not be too unfavourable a f t e r a l l . Thus, perhaps the p o s i t i v e score of 1.0 which t h i s f a c t o r r e c e i v e d was a w e l l deserved one. The i n c e n t i v e f a c t o r s as a group were r a t e d most f a v o u r a b l y by the f o r e i g n manufacturers. T h i s r e s u l t was c e r t a i n l y a j u s t i f i a b l e one i f we r e c a l l how f a v o u r a b l e and unique Hong Kong i s i n i t s treatment o f p r i v a t e b u s i n e s s e s . A c t u a l l y , a t l e a s t -two i n c e n t i v e f a c t o r s - 'exchange c o n t r o l s ' and 'trade r e s t r i c t i o n s on imports and e x p o r t s ' should have 1.4-8 r e c e i v e d even b e t t e r r a t i n g s o r p e r f e c t r a t i n g s because t h e r e are p r a c t i c a l l y no such c o n t r o l s or r e s t r i c t i o n s i n Hong Kong. At any r a t e , these two were the l e a d i n g f a c t o r s i n the f a v o u r a b i l i t y r a t i n g s and they a l s o had the lowest c o e f f i c i e n t of v a r i a t i o n , meaning t h a t f o r e i g n manufacturers s u b s t a n t i a l l y agreed r e g a r d i n g t h e i r f a v o u r a b i l i t y . When compared to the other f o u r i n c e n t i v e f a c t o r s which were a l l p l a c e d i n the f i r s t q u a r t i l e , one apparent anomaly was t h a t 'government p o l i c y towards f o r e i g n investment' o n l y occupied the n i n t h p o s i t i o n w i t h a score o f 2.5. T h i s was probably because the government, i n f o l l o w i n g a p o l i c y o f n o n - i n t e r v e n t i o n i n the p r i v a t e s e c t o r , had not been g i v i n g f o r e i g n i n v e s t o r s any s p e c i a l c o n c e s s i o n s , but i n s t e a d had a p p l i e d the same s e t of r u l e s to a l l businesses whether they were l o c a l or f o r e i g n . T h i s p o l i c y was not c o n s i d e r e d by f o r e i g n manufacturers as p a r t i c u l a r l y f a v o u r a b l e and t h e r e were even s i x n e g ative r a t i n g s . When we compared the r e l a t i v e p o s i t i o n s of the investment f a c t o r s i n t h e i r importance rank order and f a v o u r a -b i l i t y r a t i n g order, there was one very important and i n t e r e s t i n g f i n d i n g - the negative c o r r e l a t i o n between the two. (Table VII-3.) Even though t a k i n g the i n d i v i d u a l f a c t o r s s e p a r a t e l y , the nega t i v e c o r r e l a t i o n was not s t a t i s t i c a l l y s i g n i f i c a n t , i t became s i g n i f i c a n t when we grouped the f a c t o r s together i n the TABLE VII-3 R e l a t i v e P o s i t i o n s of Importance arid F a v o u r a b i l i t y F a c t o r Labour supply, c o s t and p r o d u c t i v i t y Cost of l a n d , o f f i c e and f a c t o r y space A v a i l a b i l i t y of managerial s k i l l Currency s t a b i l i t y Raw m a t e r i a l s u p p l i e s Labour-management r e l a t i o n s h i p Corporate taxes Trade r e s t r i c t i o n s on imports and exports Domestic economic s t a b i l i t y P o l i t i c a l s t a b i l i t y Business laws and r e g u l a t i o n s Exchange c o n t r o l s F i n a n c i a l m a t u r i t y Government p o l i c y towards f o r e i g n investment L o c a l market p o t e n t i a l Government's i n t e g r i t y and e f f i c i e n c y i n a d m i n i s t r a t i o n G e ographical l o c a t i o n General a t t i t u d e towards f o r e i g n e r s and f o r e i g n companies S o c i a l overhead f a c i l i t i e s E d u c a t i o n standard o f p o p u l a t i o n P o s i t i o n of P o s i t i o n of Importance F a v o u r a b i l i t y 1 2 3 4 5 6 7, 7, 9 10 11 12. 12, 14 15 16 17 18 19 20 19 20 10 18 17 11 2, 2, 14 7 4, 1 6 9 16 15 8 4, 13 12 Source: Tables VII-1 and VII-2. 4^  150 same way as we d i d p r e v i o u s l y . The p r o d u c t i o n i n p u t f a c t o r s which f o r e i g n manufac-t u r e r s c o n s i d e r e d as most important were a t the same time r a t e d as the l e a s t f a v o u r a b l e . A l l these f a c t o r s were i n the f i r s t q u a r t i l e o f the importance ranking, but they were a l l i n the l a s t q u a r t i l e of the f a v o u r a b i l i t y r a t i n g . The s t a b i l i t y f a c t o r s which were next i n importance were a l s o r e l a t i v e l y p o o r l y r a t e d . In f a c t , the on l y s t a b i l i t y f a c t o r which was p l a c e d i n the f i r s t q u a r t i l e i n the importance rank i n g -'currency s t a b i l i t y ' - took the o n l y remaining p o s i t i o n i n the l a s t q u a r t i l e o f the f a v o u r a b i l i t y r a t i n g a l o n g s i d e the produc-t i o n i n p u t f a c t o r s . On the other hand, the i n c e n t i v e f a c t o r s which were p l a c e d near the middle of the importance rank order were being r a t e d as the most f a v o u r a b l e f a c t o r s w h i l e the mark-e t i n g and i n d i r e c t f a c t o r s were being c o n s i d e r e d as more s a t i s -f a c t o r y than the p r o d u c t i o n i n p u t and s t a b i l i t y f a c t o r s . T h i s n e g a t i v e c o r r e l a t i o n has an important i m p l i -c a t i o n : even though investment c o n d i t i o n s i n Hong Kong are on the whole f a v o u r a b l e , they are not s t r o n g e s t i n terms of what f o r e i g n manufacturers c o n s i d e r e d as most important. In other words, there i s s t i l l p l e n t y of scope f o r Hong Kong to improve i t s i n t e r n a t i o n a l image and a t t r a c t i v e n e s s as a manufacturing base. ^  151 Performance 1 and S e l f E v a l u a t i o n On the whole, f o r e i g n manufacturers performed very w e l l i n Hong Kong as measured by the r e t u r n on investment. Table VII-4 shows t h a t out of the eighty-seven f i r m s which r e p l i e d , o n l y s i x t e e n f i r m s earned l e s s than 6% a f t e r tax r e t u r n on investment a n n u a l l y i n the l a s t f i v e years or s i n c e the company's esta b l i s h m e n t . At the o t h e r end, f i f t e e n f i r m s earned a s p e c t a c u l a r 51% or more and s i x t e e n o t h e r s earned 21-50%. T h i s o v e r a l l r e s u l t should be regarded as h i g h l y s a t i s f a c t o r y by any standards. But a p p a r e n t l y , f o r e i g n manufacturers had even g r e a t e r ambitions and e x p e c t a t i o n s . Only nineteen f i r m s d i d not expect to earn as much as what they were a c t u a l l y e a r n i n g ; but f o r t y -f i v e f i r m s s a i d t h a t t h e i r a c t u a l r e t u r n was lower than what the company f i r s t expected. At the same time, f o r t y - s e v e n f i r m s thought t h a t the r e t u r n was not h i g h enough to compensate f o r the business r i s k i n v o l v e d . T h i s was a b i t s u r p r i s i n g as Hong Kong i s a l r e a d y one of the s a f e s t investment harbours i n the world. I t o n l y served to show t h a t many f o r e i g n i n v e s t o r s came to Hong Kong with extremely high hopes f o r p r o f i t s . At any r a t e , an overwhelming m a j o r i t y of the responding f i r m s b e l i e v e d t h a t t h e i r i n i t i a l d e c i s i o n to manufacture i n Hong Kong was, i n r e t r o s p e c t , a r i g h t d e c i s i o n . Only twelve f i r m s thought i t was probably a mistake and.'.not a s i n g l e one s a i d i t was d e f i n i t e l y 152 TABLE VII-4  Performance and S e l f E v a l u a t i o n Annual Rate of Return on Investment i n the L a s t F i v e Years or Since the Com- Number % of pany's Est a b l i s h m e n t (Annual 1, A f t e r Tax) of Firms T o t a l (a) Negative 4 3.7% (b) 1 - 5% 12 11.1% (c) 6 - 10% 13 12.0% (d) 11 - 15% 19 17.6% (e) 16 - 20% 8 7.4% (f) 21 - 50% 16 14.8% (g) 51 - 100% 13 12.0% (h) More than 100% 2 1.9% (i) No r e p l y 21 19.4% T o t a l 108 100.0% Compared to the Company's O r i g i n a l E x p e c t a t i o n s , the Return was (a) Higher 19 17.6% (b) Lower 45 41.7% (c) About the same 40 37.0% (d) No r e p l y 4 3.7% T o t a l 108 100.0% Was the Return High Enough to Compensate f o r the Business Risk? (a) Yes 57 52.8% (b) No 47 43.5% (c) No r e p l y 4 3.7% T o t a l 108 100.0% Company's I n i t i a l D e c i s i o n t o Manufacture i n Hong Kong was (a) D e f i n i t e l y a r i g h t d e c i s i o n 60 55. 6% (b) Probably a r i g h t d e c i s i o n 28 25.9% (c) Probably a wrong d e c i s i o n 12 11.1% (d) D e f i n i t e l y a wrong d e c i s i o n 0 0.0% (e) Too e a r l y to judge whether i t was 4 3.7% r i g h t o r wrong (f) No r e p l y 4 3.7% T o t a l 108 100.0% Note: Seventeen f i r m s which d i d not g i v e the r a t e of r e t u r n on investment but answered the ot h e r q u e s t i o n s had been i n c l u d e d . Source: Q u e s t i o n n a i r e survey r e t u r n s . 153 a wrong move. In c o n t r a s t , s i x t y f i r m s seemed to be extremely happy wit h t h e i r i n i t i a l d e c i s i o n s . Looking a t the o v e r a l l business environment f o r f o r e i g n i n v e s t o r s i n Hong Kong, twenty four f i r m s (22.2%) thought t h a t the c o n d i t i o n s had d e t e r i o r a t e d , but more than twice as many thought t h a t the c o n d i t i o n s had improved. (Table VII-5) But on the c h o i c e of country i n the r e g i o n i f the company had the chance to r e l o c a t e , the responses were not as f a v o u r a b l e . T h i r t y - o n e f i r m s or over one-quarter s a i d t h a t they would not have chosen Hong Kong again, and out of these f i r m s , n e a r l y h a l f s a i d t h a t they would move to Singapore i n s t e a d . The p r o p o r t i o n saying t h a t they would stay-put was, however, much hig h e r . At any r a t e , i t should be s t r e s s e d t h a t s i n c e answering t h i s q u e s t i o n d i d not i n v o l v e any r e a l commitments (nor c o u l d we expect the responding f i r m s to undertake an in-depth environmental a n a l y s i s of comparative investment c o n d i t i o n s b e f o r e they gave an answer), the r e l i a b i l i t y o f the responses to t h i s q u e s t i o n was somewhat dubious. 154 TABLE VII-5 Business 1 Environment 1 •and Choice f o r R e l o c a t i o n The Business Environment f o r F o r e i g n I n v e s t o r s i n the L a s t Ten Years : : ' of Firms T o t a l (a) Had improved 52 4 8.1% (b) Had d e t e r i o r a t e d 24 22.2% (c) Had remained about the same 28 25.9% (d) No r e p l y 4 3.7% T o t a l 108 100.0% I f the Company Had the Chance to Relocate, the Company Would (a) Have chosen Hong Kong again 73 67.6% (b) Not have chosen Hong Kong again 31 28.7% (c) No r e p l y 4 3.7% T o t a l 108 100.0% Country P r e f e r r e d to Hong Kong by Companies which would Relocate (a) Singapore 14 13.0% (b) Taiwan 8 7.4% (c) P h i l i p p i n e s 6 5.6% (d) M a l a y s i a 4 3.7% (e) South Korea 2 1.9% (f) T h a i l a n d 1 0.9% Note: A few companies which r e p l i e d t h a t they would not have chosen Hong Kong again put down more than one country p r e f e r r e d to Hong Kong. Source: Q u e s t i o n n a i r e survey r e t u r n s . Notes 1. The numerical weights were not g i v e n to the f o r e i g n manufacturers i n the q u e s t i o n n a i r e . 2. The r a t e o f exchange a t the end of 1978 was about HK$1 = US$0.21. 3. During the years 1973 to 1978, nominal wages i n Hong Kong i n c r e a s e d by approximately 9% per annum. There i s no o f f i c i a l data to compare the p r o d u c t i v i t y of i n d u s t r i a l workers i n Hong Kong with those of neighbouring c o u n t r i e s . But i n t a l k i n g to the managers i n the i n t e r v i e w s , many of the managers who a l s o had management experience i n other South-e a s t A s i a n c o u n t r i e s d i d say t h a t they f e l t t h a t Hong Kong i n d u s t r i a l workers had a higher p r o d u c t i v i t y and s k i l l . 4. Even though the . n a t i o n a l i t y o f the managers who f i l l e d i n the q u e s t i o n n a i r e was unknown, the w r i t e r had the f e e l i n g t h a t l o c a l Chinese managers gave t h i s f a c t o r a much l e s s f a v o u r a b l e r a t i n g than the e x p a t r i a t e managers. T h i s probably caused the wide d i f f e r e n c e i n o p i n i o n . 5. 'Trade r e s t r i c t i o n s on imports and ex p o r t s ' a p p a r e n t l y shared the second p o s i t i o n i n the f a v o u r a b i l i t y r a t i n g w i t h 'corporate taxes' simply because of rounding up of decimals. The former's t r u e average was 3.4 91 and the l a t t e r ' s was 3.472. 6. Taking the f a c t o r s i n d i v i d u a l l y , the c o e f f i c i e n t o f rank c o r r e l a t i o n between the two was -0.318 and the s i g n i f i c a n c e of observed c o r r e l a t i o n (t) was 1.423. (t = 2.101 a t l e v e l o f s i g n i f i c a n c e 0.05 and degrees o f freedom 18.) Taking the f a c t o r s i n groups, the c o e f f i c i e n t of rank c o r r e l a t i o n became -0.600 and the s i g n i f i c a n c e of observed c o r r e l a t i o n was 3.182. See Appendices II-7.1 and II-7.2. 7. I t was p o s s i b l e t h a t t h e r e was a p s y c h o l o g i c a l b i a s i n the responses which magnified the negative c o r r e l a t i o n . Even though there was no way the w r i t e r c o u l d prove i t , he had the f e e l i n g t h a t the responding managers c o u l d e a s i l y o v e r-emphasize the importance of an investment f a c t o r i f they c o n s i d e r e d i t as a 'problem', or i n other words, as unfavourable. But anyhow, the negative c o r r e l a t i o n was s t i l l worthy of note and important. 8. A c c o r d i n g t o Business I n t e r n a t i o n a l ' s Country Ratings f o r 1978 on t h e 1 i n t e n s i t y of investment r i s k ' , Hong Kong's o v e r a l l r a t i n g score (86 out of 100) was second ( a f t e r Singapore) among f i f t y - s e v e n c o u n t r i e s r a t e d . As f o r i n d i v i d u a l f a c t o r group s c o r e s , Hong Kong was f i r s t i n p o l i t i c a l - l e g a l - s o c i a l f a c t o r s , co-second i n commercial f a c t o r s (with Kuwait a f t e r Japan) and e i g h t h i n monetary-f i n a n c i a l f a c t o r s ( a f t e r Singapore, S w i t z e r l a n d , West Germany, Japan, M a l a y s i a , Kuwait and Saudi A r a b i a ) . See Business I n t e r n a t i o n a l C o r p o r a t i o n s , BI Country Ratings 1978, New York, 197 8. 157 CHAPTER V I I I - A COMPARATIVE ANALYSIS OF U.S. AND JAPANESE INVESTMENT CHARACTERISTICS T h i s chapter compares the investment c h a r a c t e r i s t i c s of U.S. and Japanese manufacturers. The purpose i s to analyse whether the s p e c i f i c case o f Hong Kong p r o v i d e s an example which supports or r e f u t e s the t h e o r e t i c a l models suggested as being r e p r e s e n t a t i v e o f U.S. or Japanese f o r e i g n investment behaviour. There i s a s e r i o u s d e a r t h of l i t e r a t u r e on compa-r a t i v e s t u d i e s of d i r e c t f o r e i g n investments i n the A s i a n P a c i f i c r e g i o n . 1 S t u d i e s f o c u s s i n g upon i n v e s t o r c o u n t r i e s have a l s o been few and are n e a r l y e x c l u s i v e l y c o n f i n e d to Japanese investments. Even though the U.S. i s not l e s s important than Japan as a f o r e i g n i n v e s t o r i n the r e g i o n , 3 a n a l y s e s of U.S. investments have been s p o t t y and fragmentary. N e v e r t h e l e s s , n e a r l y a l l the e x i s t i n g s t u d i e s can be i n t e r p r e t e d as a g r e e i n g s u b s t a n t i a l l y on one g e n e r a l i z a t i o n : Japan has investment motives and needs which are d i f f e r e n t from those o f the U.S. and consequently, i t s investment behaviour i s a l s o d i f f e r e n t . 158 Characterizations of the U.S. Model and the Japanese Model The theories of d i r e c t foreign investment described i n Chapter I evolve mostly around U.S. experience because the U.S. has been the most important source country i n the post-war years. Hymer1s monopolistic theory and the product l i f e cycle theory developed by Vernon, Hirsch and Wells together form the foundation of the U.S. model and provide a good account of the inte r n a l push factors behind U.S. investments i n manufacturing overseas. In essence, as summed up by Vernon, the U.S. trade and foreign investment position i s based heavily on the possession of production and marketing advantages and on the generation of innovation rather than on the more conventional notion of r e l a t i v e l y abundant and cheap c a p i t a l . 4 The rapid post-war increase i n U.S. foreign investments i n manufacturing has come about mainly i n industries associated with high l e v e l technology and innovation. The underlying motives are to ex p l o i t more f u l l y the investor's superior knowhow i n production and marketing or to counteract the pote n t i a l threat of l o c a l competition through market preemption. Consequently, the U.S. has invested abroad mostly i n those industries that rank at the top of i t s comparative advantages such as electronics, chemical products, machineries, transportation equipments and s c i e n t i f i c instruments. But the U.S. model i s not applicable to Japan. As pointed out by Ozawa, Japan's industries i n the post-war years have been, for the most part, interceptors of Western technologies. 159 They, have not i n t r o d u c e d any s i g n i f i c a n t i n n o v a t i o n s , a t l e a s t not u n t i l very r e c e n t years , t h a t would i n v i t e massive i m i -t a t i o n s overseas as envisaged by the product l i f e c y c l e theory. Furthermore, one s t a r t l i n g e m p i r i c a l d i f f e r e n c e between U.S. and Japanese investments abroad i s t h a t , w h i l e the former c o n c e n t r a t e upon technology-based and h i g h l y o l i g o p o l i s t i c i n d u s t r i e s , the l a t t e r have more t y p i c a l l y i n v o l v e d r e l a t i v e l y s t a n d a r d i z e d products and c o m p e t i t i v e i n d u s t r i e s . D i f f e r e n c e s i n the nature and d i r e c t i o n of i n t e r n a l push f a c t o r s are what l a r g e l y account f o r the divergence i n investment i n t e r e s t s . In a c e r t a i n sense, Japan's f o r e i g n investments i n manufacturing are s t i l l very much guided by the r a t i o n a l e of comparative c o s t s and f a c t o r endowments. To under-stand why t h i s has been the case, we need to take a look a t Japan's f o r e i g n investment experience and the economic f o r c e s behind. The h i s t o r y of Japan's f o r e i g n investments i n the post-war years can be d i v i d e d i n t o two d i s t i n c t p e r i o d s w i t h 1965 as the d i v i d i n g l i n e . Before 1965, Japan's investments overseas were s t r i c t l y c o n s t r a i n e d by i t s economic c a p a b i l i t i e s and the payment d e f i c i t s i t had been running i n t o s i n c e the end of World War I I . The War had p r a c t i c a l l y d evastated the Japanese economy and brought f o r t h the c o n f i s c a t i o n of n e a r l y a l l i t s f o r e i g n a s s e t s . When peace r e t u r n e d , the main task was economic 160 r e c o n s t r u c t i o n and r e e s t a b l i s h m e n t o f i t s i n d u s t r i e s and exp o r t s . But Japan immediately ran i n t o the problem of f i n d i n g and adapting to new export markets. Manchuria and China, which absorbed about 20% of Japan's exports i n the in t e r - w a r years were l o s t as export markets when f i g h t i n g broke out between the Communists and N a t i o n a l i s t s i n China which subsequently came under communist c o n t r o l . Taiwan and Korea, which accounted f o r another 20% o f Japan's pre-war exports, began to r e s t r i c t Japanese imports. A l s o , Japan's two t r a d i t i o n a l export commodi-t i e s , raw s i l k and c o t t o n t e x t i l e s , faced c o n s i d e r a b l e d i f f i -c u l t i e s . The i n v e n t i o n o f s y n t h e t i c nylon almost wiped out demand f o r raw s i l k and the import s u b s t i t u t i o n p o l i c y o f developing c o u n t r i e s i n Southeast A s i a was o f t e n f i r s t d i r e c t e d a t c o t t o n t e x t i l e s which was the obvious t a r g e t i n view of the r e l a t i v e l y l a r g e domestic demand and the simple technology r e q u i r e d f o r p r o d u c t i o n . F i n a l l y , the h a t r e d towards the Japanese i n many A s i a n c o u n t r i e s took time to mend and t h a t a l s o hindered Japan's export growth. Consequently, while Japan's a g r i c u l t u r a l and i n d u s t r i a l p r o d u c t i o n , per c a p i t a GNP and r e a l wages a l l r e t u r n e d to t h e i r pre-war l e v e l s i n 1952, i t s exports had o n l y r e c o v e r e d by o n e - t h i r d . I t was not u n t i l 1959 t h a t the pre-war l e v e l of exports was r e g a i n e d . 7 In these y e a r s , an important s t r a t e g y which Japan adopted i n order to i n c r e a s e exports was to take advantage o f i t s r e l a t i v e l y cheap but s k i l l f u l l a b o u r , and to focus much o f i t s 161 export e f f o r t towards the U.S. and Western Europe which had com p e t i t i v e disadvantages i n labour i n t e n s i v e p r o d u c t i o n . At the same time, w i t h the a i d of a comprehensive l i c e n s i n g e f f o r t , i t developed new l i n e s o f consumer goods i n d u s t r i e s , mostly u s i n g imported but s o p h i s t i c a t e d technology. T h i s c r e a t e d c o n s i d e r a b l e c o m p e t i t i v e advantages f o r Japanese products i n f o r e i g n markets e s p e c i a l l y i n Southeast A s i a n c o u n t r i e s . The s t r a t e g y p a i d o f f and by 1960, e l e c t r i c a l products, simple e l e c t r o n i c s products, s t e e l products, o p t i c a l and photographic products took the p l a c e o f raw s i l k and c o t t o n t e x t i l e s as i t s more important export commodities. There was a r a p i d r e v i v a l o f ex p o r t s . The improvement i n Japan's balance of payments i n the e a r l y 1960s was, however, o n l y modest because the Japanese government a l s o s t a r t e d to l i b e r a l i z e i t s imports d u r i n g t h i s p e r i o d . Around 60% of Japan's imports were s u b j e c t to quota p r i o r to 1960, but t h i s p r o p o r t i o n was reduced to o n l y around 10% i n A p r i l 1963. Accompanying t h i s programme of import l i b e r a l i z a t i o n was an i n c r e a s e i n imports. Consequently, Japan's c u r r e n t account continued to remain i n d e f i c i t i n the f i r s t h a l f o f the 1960s. Around 1965, the trade'balance changed to Japan's favour. In t h a t year, exports overtook imports , g i v i n g Japan i t s f i r s t post-war trade s u r p l u s o f about US$1 b i l l i o n . The gap widened r a p i d l y and Japan's i n t e r n a t i o n a l r e s e r v e s a l s o i n c r e a s e d s h a r p l y , from US$2 b i l l i o n i n 1967 to US$5 b i l l i o n i n 162 1970 and then US$20 b i l l i o n i n 1972. T h i s s u r p l u s not o n l y w o r r i e d the government, i t a l s o brought f o r t h complaints by Japan's t r a d i n g p a r t n e r s and induced the Japanese government to ease i t s c o n t r o l on investments abroad. Before 1969, a l l Japanese f o r e i g n investment p r o j e c t s r e q u i r e d government approval under the F o r e i g n Exchange and F o r e i g n Trade C o n t r o l Law (1949) and t h e i r approval was given o n l y a f t e r c a r e f u l s c r u t i n y . Beginning from October 1969, overseas investments of up to US$200,000 were granted automatic a p p r o v a l . T h i s l i m i t to automatic approval was r a i s e d to US$1 m i l l i o n i n the f o l l o w i n g year. F i n a l l y i n J u l y 1971, the l i m i t was a b o l i s h e d a l t o g e t h e r . The r e s u l t was a s u b s t a n t i a l i n c r e a s e i n Japan's d i r e c t f o r e i g n investments, from US$557 m i l l i o n i n the 1968 f i s c a l year to US$2,328 m i l l i o n i n 1972 - an i n c r e a s e of more o than 4 00% i n f o u r y e a r s . T h e r e a f t e r , the annual amount f l u c -t u a t e d between US$2.5 and US$3.5 b i l l i o n . By 1977, the cumulative v a l u e o f Japan's f o r e i g n investments (approved by the government s i n c e 1951) stood a t around US$22.2 b i l l i o n . Of t h i s cumulative t o t a l , over 80% were made i n the years 1972-1977. The r e l a x a t i o n of c o n t r o l was, of course, o n l y a secondary f a c t o r . There were some more fundamental f a c t o r s which motivated the Japanese manufacturers to venture overseas. 163 The f i r s t was r i s i n g labour c o s t s . For a c o n s i d e r a b l e p e r i o d of time, Japan had a labour s u r p l u s and was a cheap labour country. But as a r e s u l t of r a p i d economic growth, s i g n s of labour shortage began to appear i n 1960 and the problem became acute i n the f o l l o w i n g years when the pace of development a c c e l e r a t e d . Consequently, wages i n c r e a s e d , a t an average r a t e of around 10% per annum i n 1960-65, then jumping to over 20% i n 1970. T h i s was a s e r i o u s blow to the labour i n t e n s i v e i n d u s t r i e s , f o r c i n g them to look f o r manufacturing c e n t r e s overseas where labour c o s t s were cheaper. Otherwise, they would no longer have been able to compete w i t h the r a p i d l y expanding manufacturers i n d e v e l o p i n g Southeast A s i a n c o u n t r i e s i n f o r e i g n markets as w e l l as i n the l i b e r a t e d home market. The i n c r e a s e i n l a n d p r i c e s and the problem of p o l l u t i o n were the next inducements. I n d u s t r i e s i n Japan were h i g h l y c o n c e n t r a t e d g e o g r a p h i c a l l y , r e s u l t i n g i n r a p i d i n c r e a s e s i n l a n d p r i c e s which were s e v e r a l times more r a p i d than the i n c r e a s e s i n wages. Des p i t e the f a c t t h a t l a n d c o s t s u s u a l l y c o n s t i t u t e d a s m a l l p o r t i o n (4-5%) of t o t a l p r o d u c t i o n c o s t s , Japanese manufacturers, e s p e c i a l l y those which r e q u i r e d l a r g e p i e c e s of l a n d , were alarmed. The unfortunate Minamata i n c i d e n t of mercury p o i s o n i n g l e d to s t r i c t government r e g u l a t i o n f o r the i n d u s t r i a l environment and the treatment of i n d u s t r i a l waste. A l l these meant t h a t Japanese manufacturers c o n s t r u c t i n g new p l a n t s had to pay more f o r the l a n d , i n v e s t e x t r a money to 164 prevent p o l l u t i o n and might even have to undertake c o s t l y and lengthy n e g o t i a t i o n s with the surrounding community. Consequently, many of them looked f o r a l t e r n a t e s i t e s overseas i n s t e a d . " Another f a c t o r was the a p p r e c i a t i o n o f the yen. A f t e r the War, the exchange r a t e was f i x e d a t US$1 to 360 yen, i n r e t r o s p e c t a tremendous u n d e r v a l u a t i o n . I t was kept a t t h a t low l e v e l f o r more than two decades and t h i s was c e r t a i n l y an important a t t r i b u t e to Japan's r a p i d and s u c c e s s f u l r e c o n s t r u c -t i o n . But under both i n t e r n a l and e x t e r n a l p r e s s u r e , the yen was re v a l u e d to 308 yen per d o l l a r i n December 1971. Even t h i s was not f o r c e f u l enough and Japan continued to have balance o f payment s u r p l u s e s . F i n a l l y , the yen was allowed to f l o a t i n February 1973. I t has been f l u c t u a t i n g ever s i n c e , sometimes w i l d l y , but the o v e r a l l t r e n d has been an upward one. By the end of 1978, i t was around US$1 to 200 yen. T h i s a p p r e c i a t i o n had a t l e a s t two d i r e c t e f f e c t s on Japanese manufacturers. F i r s t l y , i t made home p r o d u c t i o n f o r exports l e s s c o m p e t i t i v e and l e s s a t t r a c t i v e ; secondly, i t made f o r e i g n investments, e i t h e r i n the form o f new ventures, or take-overs o f indigenous f i r m s , cheaper and more a t t r a c t i v e . The continuous l i b e r a l i z a t i o n o f imports s i n c e 1965 was a l s o an important f a c t o r . I t made Japan p e n e t r a b l e as a market f o r producers i n Southeast A s i a n c o u n t r i e s . P r e v i o u s l y , t a r i f f s and n o n - t a r i f f b a r r i e r s had been s e r i o u s o b s t a c l e s to 165 exports to Japan. When import controls were relaxed i n the late 1950s and early 1960s, t a r i f f s were revised i n 1961 to protect Japanese industries. They were rather high, e s p e c i a l l y for labour-intensive products. But after Japan signed the a. agreements of the Kennedy round, i t took steps to reduce i t s t a r i f f s . From July 1968 to A p r i l 1971, Japan reduced i t s t a r i f f s for about two thousand commodities by around 50%. In 1972, the t a r i f f for around nineteen hundred commodities was further lowered by 20%. After these reductions, the average Japanese t a r i f f l e v e l was no longer higher than that i n other developed countries. Non-tariff barriers were also relaxed along with reductions i n t a r i f f s . The import deposit system,which was an added in t e r e s t burden for importers, was abolished i n Hay 1970. Many import quotas were also removed. By the end of March 1970, the number of goods which came under quota r e s t r i c t i o n s was down to ninety-eight,comprising f i f t y - n i n e a g r i c u l t u r a l products, thirty-one manufactured goods and eight minerals. This number was further reduced to thirty-three i n 1972. Twenty-five were primary commodities and only eight were manufactured goods of which half were leather goods and the remainder being computer parts and integrated c i r c u i t s . F i n a l l y , the Japanese government also took active measures to encourage d i r e c t investments overseas. One important 166 i n c e n t i v e was low i n t e r e s t loans granted by the Export-Import Bank of Japan. S t a r t e d i n August 1960, these loans c o u l d be used to a c q u i r e shares or purchase machinery and equipment i n overseas a f f i l i a t e s . They u s u a l l y p r o v i d e d 50% to 60% of the r e q u i r e d c a p i t a l and were made a v a i l a b l e a t an i n t e r e s t r a t e of 6-7% per annum which was s e v e r a l percent lower than the p r e v a i l i n g market r a t e . Other i n c e n t i v e measures i n c l u d e d the s e t t i n g up o f a f o r e i g n investment insurance programme and an I n s t i t u t e of Developing Economies, r e s t r u c t u r i n g and expanding the i n f o r m a t i o n s e r v i c e of the Japan Export Trade O r g a n i z a t i o n and s u b s i d i z i n g the Japanese Chamber of Commerce and Industry or o t h e r business a s s o c i a t i o n s when they sent investment survey m i s s i o n s abroad. Tax i n c e n t i v e s were a l s o granted, such as those which allowed deductions from p r o f i t s as a r e s e r v e a g a i n s t l o s s e s a r i s i n g from f o r e i g n investments, c r e d i t s f o r taxes p a i d abroad and tax s p a r i n g on f o r e i g n income i n cases where tax was reduced or exempted i n c o u n t r i e s with which Japan had concluded tax t r e a t i e s . Summing up, wage i n c r e a s e s , l a n d p r i c e i n c r e a s e s , a p p r e c i a t i o n of the yen, government i n c e n t i v e s and r e d u c t i o n of import b a r r i e r s s i n c e the l a t t e r h a l f of the 1960s have been the economic f o r c e s u n d e r l y i n g Japan's investments overseas. They have made overseas manufacturing f o r e i t h e r the Japanese market i t s e l f or other export markets more p r o f i t a b l e and a t t r a c t i v e . They are the i n t e r n a l push f a c t o r s which prompted 167 the Japanese manufacturers to search f o r overseas manufacturing bases where wages were lower, land p r i c e s cheaper and exports encouraged. These are the reasons why Japan's f o r e i g n investments i n manufacturing, as d e s c r i b e d by Kojima, have been mostly i n t r a d i t i o n a l i n d u s t r i e s such as t e x t i l e s , c l o t h i n g and p r o c e s s i n g of s t e e l i n which Japan i s l o s i n g i t s comparative advantage, or the assembly of motor v e h i c l e s , p r o d u c t i o n o f p a r t s and components o f r a d i o s and other e l e c t r o n i c s products, i n which cheaper labour c o s t s i n f o r e i g n c o u n t r i e s are achieved and the Japanese f i r m s can i n c r e a s e exports, s u b s t i t u t i n g f o r exports of f i n a l products with exports o f machinery and equipment f o r the f a c t o r y and t e c h n o l o g i c a l knowhow. 1 0 In t h i s sense, Japan's d i r e c t f o r e i g n investments are s t i l l b eing guided by comparative c o s t c o n s i d e r -a t i o n s . I t i s b e t t e r f o r Japan, as i t has done, to t r a n s f e r out of those i n d u s t r i e s i n which i t i s l o s i n g i t s comparative advantage and to i n v e s t i n f o r e i g n c o u n t r i e s which are g a i n i n g a comparative advantage i n these same i n d u s t r i e s . That i s why c l o s e to 70% of Japan'.s f o r e i g n investments i n manufacturing have been made i n Southeast A s i a n and L a t i n American c o u n t r i e s (39.5% and 29.7% r e s p e c t i v e l y a t March 1976) where both labour and l a n d c o s t s are much lower. I t a l s o e x p l a i n s why i t i s t h a t the more c o m p e t i t i v e the i n d u s t r y , the g r e a t e r has been the need f o r Japanese manufacturing f i r m s to r e s o r t to overseas p r o d u c t i o n - a phenomenon which appears incompatible w i t h the m o n o p o l i s t i c 168 theory and with the U.S. m o d e l . ± ± H y p o t h e t i c a l P r o p o s i t i o n s A number of h y p o t h e t i c a l p r o p o s i t i o n s can be d e r i v e d from the above e x p o s i t i o n o f the c h a r a c t e r i z a t i o n s of the U.S. and Japanese f o r e i g n investment models. These p r o p o s i t i o n s s p e l l out the d i f f e r e n c e s i n the investment and o p e r a t i o n a l c h a r a c t e r i s t i c s o f the U.S. and Japanese manufacturers i n f o r e i g n c o u n t r i e s and we s h a l l use the data c o l l e c t e d to t e s t whether or not these p r o p o s i t i o n s h o l d i n the case of Hong Kong. The f i r s t h y p o t hesis i s t h a t "the i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d are d i f f e r e n t from, and are t e c h n o l o g i c a l l y l e s s advanced than the i n d u s t r i e s i n which U.S. c o r p o r a t i o n s i n v e s t e d " . T h i s h y p o t h e s i s comes d i r e c t l y from, the t h e s i s t h a t whereas the U.S. t r a n s f e r s abroad those i n d u s t r i e s which rank a t the top of i t s comparative advantages, Japan s h i f t s overseas i t s manufacturing o p e r a t i o n s which have l o s t t h e i r comparative advantages at home. I t has nothing to do with the d i f f e r e n c e i n the l e v e l : of technology i n these two c o u n t r i e s . A c c o r d i n g to a study on U.S. and Japanese economic growth by Jorgenson and N i s h i m i z u , there has been no s i g n i f i c a n t d i f f e r e n c e i n the l e v e l of technology between the U.S. and Japan 12 s i n c e 1974. The gap between the two had been wide before 1960, 169 when Japan's l e v e l of technology was o n l y around one-quarter (at 1952) to one-half (at 1959) of the corresponding U.S. l e v e l , but the dramatic advance i n Japanese technology i n the 1960s had r a p i d l y pushed i t up to a l e v e l a t par with t h a t o f the U.S. i n around ten y e a r s ' time. The next hypothesis i s t h a t "Japanese manufacturing o p e r a t i o n s abroad are more labour i n t e n s i v e than U.S. f o r e i g n o p e r a t i o n s " . T e c h n o l o g i c a l l y l e s s advanced i n d u s t r i e s tend to be more labour i n t e n s i v e ; but the more important reason f o r s e t t i n g up t h i s h ypothesis i s because r i s i n g labour c o s t a t home has been a much more important i n t e r n a l push f a c t o r f o r Japan than f o r the U.S. In f a c t , t h i s labour o r i e n t e d motive behind Japanese f o r e i g n investments has been c i t e d i n many s t u d i e s as being more important than the s e c u r i n g and p r o t e c t i n g o f f o r e i g n 13 markets behind t a r i f f w a l l s . T h i s hypothesis r e q u i r e s one f u r t h e r c l a r i f i c a t i o n . C o n ceivably, i f the i n t e n t i o n i s to make use of cheap f o r e i g n l a b o u r , an i n v e s t o r may d e l i b e r a t e l y readapt the p r o d u c t i o n process i n the f o r e i g n country so as to make i t more labour i n t e n s i v e . But the assumption here i s d i f f e r e n t : he w i l l i n v e s t i n i n d u s t r i e s t h a t are by t h e i r very nature more labour i n t e n s i v e . Put i n another way, the p r o p o s i t i o n i s t h a t i f r i s i n g labour -c o s t a t home i s the i n t e r n a l push f a c t o r , the labour i n t e n s i v e i n d u s t r i e s w i l l be the i n d u s t r i e s t h a t are being pushed overseas. 170 The t h i r d h y p o thesis concerns market o r i e n t a t i o n . A c c o r d i n g to the product l i f e c y c l e model, many U.S. f o r e i g n investments i n manufacturing are d e f e n s i v e i n nature. They are undertaken to c o u n t e r a c t p o s s i b l e l o c a l c o m p e t i t i o n and to p r o t e c t the i n v e s t o r ' s market p o s i t i o n i n the f o r e i g n country or i n the r e g i o n by s u b s t i t u t i n g exports from the U.S. wit h l o c a l l y produced outputs. On the other hand, Japanese investments are c o s t pushed and export o r i e n t e d , induced by the a t t r a c t i v e n e s s o f overseas manufacturing f o r export back to Japan or to some othe r c o u n t r i e s . Hence, we can hypothesize t h a t "Japanese manufacturers have a higher degree of export o r i e n t a t i o n and t h e i r exports back to Japan are p r o p o r t i o n a t e l y g r e a t e r than U.S. manufacturers e x p o r t i n g back to the U.S.". These three hypotheses r e p r e s e n t major p r o p o s i t i o n s embodied i n the t h e o r e t i c a l models and d e s c r i b e some of the d i f f e r e n c e s i n f o r e i g n investment c h a r a c t e r i s t i c s between the U.S. and Japan. Apart from these t h r e e , two o t h e r s can a l s o be d e r i v e d . Both o f these two hypotheses are more r e l a t e d to management p o l i c y than to the investment p a t t e r n . The f i r s t concerns the type of technology t h a t i s being used i n f o r e i g n o p e r a t i o n s . The hypothesis i s t h a t "Japanese f i r m s use unadapted home country technology more o f t e n 14 than U.S. f i r m s " . There are two reasons f o r s e t t i n g up t h i s h y p o t h e s i s . In the f i r s t p l a c e , because the U.S. has i n v e s t e d 171 abroad mostly i n those industries that rank at the top of i t s comparative advantages, the home country technology may be too advanced for the host country and some adaptations may be required to s u i t the factor endowment position. On the other hand, the industries i n which the Japanese manufacturers have invested are technologically less advanced, more standardized, more competitive and more labour intensive. The technology i s thus, as argued by Kojima, more i n l i n e with host country 15 factor endowments and requires l i t t l e or no adaptation. In the second place, there i s a difference i n market orientation. Because the U.S. manufacturers' target markets are more often the host country or neighbouring countries i n the region, adaptations i n the quality of product and i n the production process to meet l o c a l needs and tastes may be necessary. But such adaptations w i l l not be as important for the Japanese manufacturers with the Japanese consumers i n mind. They can use the same production process, the same machines and even the same materials which they have been using i n Japan, thus making i t possible to substitute for exports of f i n a l products with exports of machinery, equipment and knowhow.1^ The second hypothesis which i s more managerial i n nature relates,to ownership and control. The hypothesis i s that "there i s a higher incidence of minority holdings and j o i n t ventures being used by Japanese manufacturers than by U.S. manufacturers". A number of reasons as well as empirical supports 172 (from outside Hong Kong) have been put forward for t h i s h y p o t h e s i s : 1 7 (a) There has been a greater proportion of Japanese foreign investments i n manufacturing being undertaken by small to medium sized firms, and smaller firms prefer minority holdings to reduce the size of t h e i r i n i t i a l investments, 18 or j o i n t ventures to achieve better economies and synergy. Small to medium sized firms play a more important role i n the Japanese economy. Their share of employment and output of the t o t a l i n manufacturing are about 65% and 50% respectively. In the U,S., they are only about 40% i n both cases. Furthermore, these small to medium sized firms i n Japan s p e c i a l i z e more often i n labour intensive operations. They have been the ones which have been hardest h i t by the r i s i n g labour cost. (b) The overwhelming majority of Japan's foreign investments in manufacturing are i n less developed countries where, even though labour i s p l e n t i f u l and cheap, p o l i t i c a l and business conditions are far from stable. The preference for minority holdings and j o i n t ventures i s a deliberate and 19 conscious r i s k reduction strategy. (c) The advantages which the Japanese manufacturers possess l i e more i n marketing and trading and not i n technology and management. Entering into j o i n t ventures i s thus a strategy 20 to supplement their inadequacies. On the other hand, the U.S. manufacturers' advantages which they want to 173 f u l l y e x p l o i t are more g e n e r a l . - i n p r o d u c t i o n t e c h -nology, marketing and management. Thus, U.S. manufacturers are more r e l u c t a n t to share the ownership and c o n t r o l of t h e i r o p e r a t i o n s as t h i s may r e s u l t i n s h a r i n g of the economic r e n t w i t h l o c a l p a r t n e r s or even a p p r o p r i a t i o n o f 21 the advantages i n the long run. (d) The i n d u s t r i e s i n which the Japanese manufacturers i n v e s t i n f o r e i g n c o u n t r i e s are more c o m p e t i t i v e such as t e x t i l e s , s t e e l products, l e a t h e r p roducts, machine p a r t s , household a p p l i a n c e s and the l i k e . I t i s more l i k e l y t h a t they w i l l run i n t o d i r e c t c o m p e t i t i o n with l o c a l manufacturers. The j o i n t venture i n t h i s case may serve.the purpose of p r o t e c t i v e c o l l a b o r a t i o n . In c o n t r a s t , U.S. f o r e i g n investments i n manufacturing are mostly i n more s o p h i s t i -c a t e d , ^ t e c h n o l o g i c a l l y advanced and o l i g o p o l i s t i c i n d u s t r i e s . There i s l i t t l e need f o r them to seek p r o t e c t i v e c o l l a b o r a r . t i o n through j o i n t ventures. Having s p e l l e d out the hypotheses, we now proceed to t e s t these hypotheses w i t h the e m p i r i c a l evidence which we have gathered. 174 Testing of Hypotheses Industry D i s t r i b u t i o n : The f i r s t hypothesis i s that "industries i n which Japanese corporations invested are d i f f e r e n t from, and are technologically less advanced than industries i n which U.S. corporations invested". Table VIII-1 gives the TABLE' VIII-1  Industry D i s t r i b u t i o n at February 28, 197 9 No. of Firms & % of Total Industry U.S. Japan Electronics 42 ( 33. 9%) 20 ( 20 .4%) Te x t i l e s 19 ( 15. 3%) 21 ( 21 .4%) Metal products 10 ( 8. 1%) 13 ( 13 .3%) E l e c t r i c a l products 9 ( 7. 3%) 6 ( 6 .1%) Chemical products 8 ( 6. 4%) 2 ( 2 .0%) Toys 8 ( 6. 4%) 0 ( o .0%) Watches, clocks & accessories 3 ( 2. 4%) 4 ( 4 .1%) Food manufactures 1 ( o. 8%) 8 ( 8 .2%) Prin t i n g & publishing 2 ( 1. 6%) 4 ( 4 .1%) Metal r o l l i n g , extrusion & f a b r i c a t i o n 2 ( 1. 6%) 2 ( 2 . 0%) Building fi construction materials 0 ( 0. 0%) 0 ( o .0%) Others 20 ( 16. 1%) 18 ( 18 .4%) Total 12 4 (100. 0%) 98 (100 .0%) Source; Compiled from records.kept by the Department of Trade, Industry and Customs, Hong Kong government. industry d i s t r i b u t i o n of U.S. and Japanese manufacturing firms operating i n Hong Kong at the end of February 1979. S t a t i s t i c a l l y , based upon the industry c l a s s i f i c a t i o n used by the government, 175 there was a s i g n i f i c a n t d i f f e r e n c e between the two. A l s o , there was evidence to suggest t h a t i n d u s t r i e s i n which U.S. c o r p o r a t i o n s i n v e s t e d were t e c h n o l o g i c a l l y more advanced than those i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d . I f we b r o a d l y i d e n t i f y ' e l e c t r o n i c s 1 , ' e l e c t r i c a l products' and 'chemical products' as t e c h n o l o g i c a l l y more advanced than the other i n d u s t r i e s c l a s s i f i e d , then the percentage share of U.S. manufacturing f i r m s o p e r a t i n g i n these t e c h n o l o g i c a l l y more advanced i n d u s t r i e s was 47.6% as compared to Japan's 28.5%. The d i f f e r e n c e was again 23 s t a t i s t i c a l l y s i g n i f i c a n t . Looking a t the i n d i v i d u a l i n d u s t r i e s , U.S. manufac-t u r e r s ' number one i n t e r e s t was i n ' e l e c t r o n i c s ' , o f t e n regarded as the most t e c h n o l o g i c a l l y advanced consumer goods i n d u s t r y . On the other hand, Japanese manufacturers' number one i n t e r e s t was i n 1 t e x t i l e s ' , probably the most t r a d i t i o n a l . But as f a r as the number of f i r m s was concerned,Japan's investments i n ' t e x t i l e s ' o n l y exceeded i t s investments i n ' e l e c t r o n i c s ' by one f i r m . Indeed, Japan's investments i n ' e l e c t r o n i c s ' were a l s o substan-t i a l , amounting to o n e - f i f t h of i t s t o t a l . However, we should remember t h a t ' e l e c t r o n i c s ' i s an i n d u s t r y comprising many i n d u s t r i e s . ( T e x t i l e s i s the same.) W i t h i n the i n d u s t r y , t h e r e can be wide v a r i a t i o n s i n the technology i n v o l v e d . U n f o r t u n a t e l y , no f u r t h e r breakdowns are a v a i l a b l e from the government. Thus, w h i l e we can conclude from the i n d u s t r y d i s t r i b u t i o n s t a t i s t i c s t h a t the i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d are 176 d i f f e r e n t from those of the U.S., there have to be some r e s e r v a -t i o n s when c l a i m i n g t h a t the former are l e s s t e c h n o l o g i c a l l y advanced than the l a t t e r . The p r o p o r t i o n of s k i l l e d manual workers employed may be r e l a t e d to the l e v e l of technology i n v o l v e d i n o p e r a t i o n s . The assumption here i s t h a t a t e c h n o l o g i c a l l y higher l e v e l o p e r a t i o n employs a g r e a t e r p r o p o r t i o n of s k i l l e d workers. However, the data i n Table VIII-2 based upon the survey r e t u r n s do not y i e l d anything c o n c l u s i v e i n t h i s r e s p e c t . Even though on the whole there was a g r e a t e r p r o p o r t i o n o f s k i l l e d workers employed by U.S. manufacturing f i r m s a t the end of 1978, the l d i f f e r e n c e was not s t a t i s t i c a l l y s i g n i f i c a n t enough to warrant 24 support o f the h y p o t h e s i s . TABLE VIII-2  S k i l l e d Workers Employed a t December 31, 1978 S k i l l e d Workers as a % of No. of Firms & % of T o t a l T o t a l Workers Employed U.S. Japan (a) 0% 0 ( 0.0%) 1 ( 6.7%) (b) 1 - 20% 11 ( 26.8%) 4 ( 26.7%) (c) 21 - 40% 9 ( 22.0%) 4 ( 26.7%) (d) 41 - 60% 4 ( 9.8%) 1 ( 6.7%) (e) 61 - 80% 13 ( 31.7%) 4 ( 26.7%) (f) 81 - 100% 4 ( 9.8%) 1 ( 6.7%) T o t a l 41 (100.0%) 15 (100.0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . 177 The nature and v a r i e t y o f p r o d u c t i o n a c t i v i t i e s performed can a l s o be an i n d i c a t i o n o f the l e v e l o f technology. Table VIII-3 shows t h a t there was across-the-board a g r e a t e r p r o p o r t i o n o f U.S. manufacturing firms o p e r a t i n g the l i s t e d p r o d u c t i o n a c t i v i t i e s i n Hong Kong than Japanese manufacturing f i r m s . Amongst the f i v e types of a c t i v i t i e s , the widest d i f f e r e n c e s e x i s t e d i n 'product d e s i g n ' , ' q u a l i t y t e s t i n g and c o n t r o l ' and 'production r e s e a r c h and development'. In percentage terms, there were a t l e a s t twice as many U.S. as Japanese f i r m s which claimed t h a t they were i n v o l v e d i n these a c t i v i t i e s i n Hong Kong. T h i s suggested t h a t Japanese manufacturing f i r m s were engaged i n a more l i m i t e d number of p r o d u c t i o n a c t i v i t i e s than t h e i r U.S. c o u n t e r p a r t s . Thus, .the••.•data i n Table VIII-3 tend to TABLE VIII-3 P r o d u c t i o n A c t i v i t i e s Performed No. of Firms & % of T o t a l P r o d u c t i o n A c t i v i t y U.S. Japan (a) Assembly 32 ( 78.0%) 9 ( 60.0%) (b) Packaging and package d e s i g n 11 ( 26.8%) 3 ( 20.0%) (c) Product d e s i g n 11 ( 26.8%) 2 ( 13.3%) (d) P r o d u c t i o n r e s e a r c h and . c o X _ . n_ _ o N development 1 5 ( 3 6 ' 6 ^ 2 ( 1 3 - 3 « > (e) Q u a l i t y t e s t i n g and c o n t r o l 30 ( 73.2%) 4 ( 26.7%) Note: Source: T o t a l number o f f i r m s : U.S. = 41, Japan = Q u e s t i o n n a i r e survey r e t u r n s . 15. 178 g i v e support to the hypothesis t h a t the i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d are t e c h n o l o g i c a l l y l e s s advanced 25 than those of the U.S. F a c t o r I n t e n s i t y : The second hypothesis i s t h a t "Japanese manufacturing o p e r a t i o n s are more labour i n t e n s i v e than U.S. o p e r a t i o n s " . Without breakdowns on c o s t composition, which were not a v a i l a b l e f o r t h i s survey, i t i s i m p o s s i b l e to c a l c u l a t e f a c t o r i n t e n s i t y to t e s t t h i s h y p o thesis d i r e c t l y . We can o n l y do so somewhat i n d i r e c t l y by comparing the c a p i t a l investment and the number o f workers employed i n the U.S. and Japanese manufacturing f i r m s . Looking a t Table V I I I - 4 , we can see t h a t the average s i z e o f U.S. manufacturing f i r m s i n Hong Kong a t the end o f 1978 was on the whole b i g g e r than t h a t o f the Japanese. In terms of c a p i t a l investment, o n l y 17% of the U.S. f i r m s had l e s s than HK$1 m i l l i o n . Medium s i z e d f i r m s w i t h c a p i t a l i n v e s t -ment ranging from HK$1 m i l l i o n to HK$10 m i l l i o n comprised more than 60% of the t o t a l . Over o n e - f i f t h (22.0%) had a c a p i t a l investment of more than HK$10 m i l l i o n which by Hong Kong standards would p l a c e them among the l a r g e f i r m s . In comparison, more than 70% o f the Japanese f i r m s responding were s m a l l f i r m s w i t h a c a p i t a l investment of HK$1 m i l l i o n o r l e s s a t the end of 1978. The remainder were medium s i z e d f i r m s and there was not a s i n g l e f i r m with c a p i t a l investment exceeding HK$10 m i l l i o n . 179 TABLE VIII-4 C a p i t a l Investment and Number of Workers Employed a t December 31, 1978 No. of Firms & % of T o t a l C a p i t a l Investment i n HK$'000 (a) Less than 500 (b) 501 - 1,000 (c) 1,001 - 5,000 (d) 5,001 - 10,000 (e) 10,001 - 20,000 (f) More than 20,000 T o t a l Number o f Workers Employed (a) 1 - 9 (b) 10 - 19 (c) 20 - 49 (d) 50 - 99 (e) 100 - 199 (f) 200 - 499 (g) 500 - 999 (h) 1,000 - 1,999 (i) 2,000 & over T o t a l Source: Q u e s t i o n n a i r e survey U.S. Japan 1 ( 2. 4%) 3 ( 20. 0%) 6 ( 14. 6%) 8 ( 53. 3%) 14 ( 34. 1%) 3 ( 20. 0%) 11 ( 26. 8%) 1 ( 6. 7%) 7 ( 17. 1%) 0 ( o. 0%) 2 ( 4. 9%) 0 ( 0. 0%) 41 (100. 0%) 15 (100. 0%) 0 ( 0. 0%) 0 ( o. 0%) 1 ( 2. 4%) 2 ( 13. 3%) 2 ( 4. 9%) 3 ( 20. 0%) 9 ( 22. 0%) 3 ( 20. 0%) 17 ( 41. 5%) 4 ( 26. 7%) 8 ( 19. 5%) 2 ( 13. 3%) 1 ( 2. 4%) 0 ( 0. 0%) 2 ( 4. 9%) 1 ( 6. 7%) 1 ( 2. 4%) 0 ( o. 0%) 41 (100. 0%) 15 (100. 0%) e t u r n s . In terms of the number o f workers employed, there was a l s o a d i f f e r e n c e . I f we use the same y a r d s t i c k o f ' l e s s than f i f t y workers' f o r i d e n t i f y i n g s m a l l i n d u s t r i e s , as we have used i n Chapter I I , then l e s s than 10% of the U.S. f i r m s were s m a l l . The corresponding p r o p o r t i o n f o r Japan was e x a c t l y o n e - t h i r d . Most o f the remaining f i r m s , both U.S. and Japan, employed from 50 to 4 99 workers. There were o n l y f o u r U.S. f i r m s 180 and one Japanese f i r m which employed 500 or more workers. The important p o i n t here i s t h a t , i n percentage terms, t h i s d i f f e r e n c e was not as wide as t h a t f o r c a p i t a l investment. In f a c t , w h i le the number of workers employed by Japanese f i r m s and U.S. f i r m s r e s p e c t i v e l y was not s t a t i s t i c a l l y d i f f e r e n t , 2 6 the l e v e l of c a p i t a l investment was. In other words, Japanese manufacturing f i r m s i n Hong Kong appear to have a higher l a b o u r to c a p i t a l investment r a t i o arid t h i s suggests t h a t they are r e l a t i v e l y more labour i n t e n s i v e i n t h e i r o p e r a t i o n s than U.S. f i r m s . Market O r i e n t a t i o n : The hypothesis on market o r i e n t a t i o n can be t e s t e d by the l e v e l and importance of export s a l e s and the r e l a t i v e s i g n i f i c a n c e of the home country market f o r f o r e i g n owned manufacturing f i r m s . Table VIII-5 c l e a r l y shows t h a t the m a j o r i t y of both U.S. and Japanese manufacturing investments i n Hong Kong are export o r i e n t e d . However, even though the d i f f e r e n c e was not s t a t i s t i c a l l y s i g n i f i c a n t , Japanese f i r m s s t i l l exported a. higher, .proportion of t h e i r s a l e s than U.S. 27 f i r m s i n 1978. For example, whereas a t l e a s t ten (24%) of the responding U.S. f i r m s had the l o c a l market i n mind more than overseas markets, o n l y two (13%) of the Japanese f i r m s s o l d more than 60% of t h e i r output i n Hong Kong i n 1978. At the same time, w h i l e 60% of Japanese f i r m s exported over 80% of t h e i r s a l e s , the cor r e s p o n d i n g p r o p o r t i o n of U.S. f i r m s was 48.8%. 181 TABLE VIII-5 E x p o r t Sales' i n 1978 Nov of Firms & % of T o t a l Exports as a % o f T o t a l S a les U.S. Japan (a) 0% 2 ( 4.9%) 1 ( 6.7%) (b) 1 - 20% 3 ( 7.3%) 1 ( 6.7%) (c) 21 - 40% 5 ( 12.2%) 0 ( 0.0%) (d) 41 - 60% , 7 ( 17.1%) 2 ( 13.3%) (e) 61 - 80% 4 ( 9.6%) 2 ( 13.3%) (f) 81 - 100% 20 ( 4 8.8%) 9 ( 60.0%) T o t a l 41 (100.0%) 15 (100.0%) Home Country as a F o r e i g n Market (a) The most important (b) The second most important (c) The t h i r d most important (d) Not among the three most important (e) No export s a l e s T o t a l 13 ( 31. 7%) 10 ( 66. 7%) 7 ( 17. 1%) 2 ( 13. 3%) 2 ( 4. 9%) 2 ( 13. 3%) 17 ( 41. 5%) 0 ( 0. 0%) 2 ( 4. 9%) 1 ( 6. 7%) 41 (100. 0%) 15 (100. 0%) Source; Q u e s t i o n n a i r e survey r e t u r n s . Regarding export d e s t i n a t i o n , the home market was e v i d e n t l y more important f o r Japanese f i r m s . E x a c t l y two-thirds of the responding Japanese f i r m s named Japan as the most important f o r e i g n market. The corresponding f i g u r e f o r U.S. f i r m s was l e s s than o n e - t h i r d . Furthermore, over 40% of U.S. f i r m s d i d not put down the U.S. as one o f the t h r e e most important f o r e i g n markets. T h i s was not the case f o r any of the Japanese f i r m s which had export s a l e s i n 1978. The d i f f e r e n c e was s t a t i s t i c a l l y s i g n i f i c a n t and too wide to be adequately e x p l a i n e d by the r e l a t i v e geogra-182 p h i c a l p r o x i m i t y o f Japan.*° The f i g u r e s i n Table VIII-5 appear to i n d i c a t e t h e r e f o r e , t h a t both U.S. and Japanese manufacturing f i r m s i n Hong Kong have a highi degree of export o r i e n t a t i o n . There i s no c o n c l u s i v e s t a t i s t i c a l evidence to v e r i f y t h a t the l a t t e r ' s degree o f export o r i e n t a t i o n i s high e r than the former's. However, the evidence appears to support the hyp o t h e s i s t h a t Japanese manufacturing f i r m s export a g r e a t e r p r o p o r t i o n of t h e i r s a l e s back to t h e i r home country than do U.S. f i r m s . The c o r o l l a r y to t h i s argument i s th a t whereas most U.S. manufacturing investments i n Hong Kong are geared to serve markets i n the r e g i o n , Japanese manufacturing investments are geared more to serve the home country market. Use o f Unadapted Home Country Technology: There i s good evidence t o support the hyp o t h e s i s t h a t "Japanese f i r m s use unadapted home country technology more o f t e n than U.S. f i r m s " . I t comes from t h e i r supply sources f o r c a p i t a l equipment, machinery and raw m a t e r i a l s . Table VIII-6 shows t h a t even though both U.S. and Japanese manufacturing f i r m s i n Hong Kong had to import from o u t s i d e most of t h e i r c a p i t a l equipment and machinery i n 1978, the degree o f r e l i a n c e on the home country and on 29 overseas a f f i l i a t e d companies d i f f e r e d s i g n i f i c a n t l y . J u s t over h a l f o f the U.S. f i r m s had the U.S. as t h e i r number one f o r e i g n supply source f o r c a p i t a l equipment and machinery i n 1978. On 183 TABLE VIIT-6 Import of C a p i t a l Equipment, Machinery and Raw M a t e r i a l s i n 1978 Sources o f C a p i t a l Equipment and M a t e r i a l S u p p l i e s  (a) A l l l o c a l (b) Mainly l o c a l (c) Mainly f o r e i g n (d) A l l f o r e i g n Home Country as a Supply Source For C a p i t a l Equipment & Machinery (a) The most important (b) The second most important (c) The t h i r d most important (d) Not among the three most important A f f i l i a t e d Companies Supplying More than 50% of F o r e i g n C a p i t a l Equipment & Machinery S u p p l i e s Sources o f Raw M a t e r i a l S u p p l i e s (a) A l l l o c a l (b) Mainly l o c a l (c) Mainly f o r e i g n (d) A l l f o r e i g n Home Country as a Supply Source For Raw M a t e r i a l s NO . of Firms & % of T o t a l U.S. Japan 0 ( 0. 0%) 0 ( 0.0%) 4 ( 9. 8%) 1 ( 6.7%) 30 ( 73. 2%) 8 ( 5 3 3 %) 7 ( 17. 1%) 6 ( 40.0%) 41 (100. 0%) 15 (100.0%) 24 ( 58. 5%) 13 ( 86.7%) 8 ( 19. 5%) 1 ( 6.7%) 8 ( 19. 5%) 1 ( 6.7%) 1 ( 2. 4%) 0 ( 0.0%) 41 (100. 0%) 15 (100.0%) 15 ( 36. 6%) 11 ( 73.3%) 0 ( o. 0%) 0 ( 0.0%) 2 ( 4. 9%) 1 ( 6.7%) 31 ( 75. 6%) 8 ( 53.3%) 8 ( 19. 5%) 6 ( 40.0%) 41 (100. 0%) 15 (100.0%) (a) The most important (b) The second most important (c) The t h i r d most important (d) Not among the three most important T o t a l A f f i l i a t e d Companies Supplying More than 50% of F o r e i g n Raw M a t e r i a l S u p p l i e s  15 ( 36. 6%) 10 ( 66? 7%) 9 ( 22. 0%) 2 ( 13. 3%) 10 ( 24. 4%) 3 ( 20. 0%) 7 ( 17. 1%) 0 ( 0. 0%) 41 (100. 0%) 15 (100. 0%) 13 ( 31. 7%) 12 ( 80. 0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . 184 the other hand, on l y two out of f i f t e e n Japanese f i r m s had a country other than Japan as t h e i r main s u p p l i e r . A l s o the percentage of Japanese f i r m s which r e c e i v e d more than 50% of such s u p p l i e s from t h e i r a f f i l i a t e d companies overseas was twice as g r e a t as t h a t o f U.S. f i r m s . The s i t u a t i o n r e g a r d i n g raw m a t e r i a l sources was 3 s i m i l a r and the d i f f e r e n c e was again s t a t i s t i c a l l y s i g n i f i c a n t . While more than 90% of the responding f i r m s had to r e l y on f o r e i g n sources, the home country was d e f i n i t e l y the most important source f o r Japanese f i r m s i n 1978. S i m i l a r l y , the overseas a f f i l i a t e s were i n the m a j o r i t y o f cases t h e i r number one s u p p l i e r company. For U.S. f i r m s , the r e l i a n c e on the home country o r on overseas a f f i l i a t e d companies was not p a r t i c u l a r l y heavy. The r e l a t i o n s h i p between the use o f home country technology and the need to import c a p i t a l equipment, machinery and raw m a t e r i a l s from the home country was confirmed by the f i r m i n t e r v i e w s . A l l the seven Japanese f i r m s i n t e r v i e w e d s t r e s s e d t h a t they used the same technology as t h e i r parent companies and had imported t h e i r machines from Japan. F i v e f i r m s even mentioned t h a t they had to 'import' Japanese t e c h n i c i a n s to operate and s e r v i c e these machines or send l o c a l s t a f f to Japan f o r t r a i n i n g . S i m i l a r l y , raw m a t e r i a l s and component p a r t s were mostly imported from Japan. In c o n t r a s t , nine out of eleve n 185 U.S. f i r m s i n t e r v i e w e d d e c l a r e d t h a t they had m o d i f i e d t h e i r technology or p r o d u c t i o n process and there was no p a r t i c u l a r need f o r them to import c a p i t a l equipment, machinery and raw m a t e r i a l s d i r e c t l y from the U.S. f o r t h e i r o p e r a t i o n s i n Hong Kong. Instead, they had a c q u i r e d a s u b s t a n t i a l p o r t i o n o f these s u p p l i e s from nearby c o u n t r i e s . Share o f Ownership and Use of J o i n t Ventures: Apparently, there i s l i t t l e d i f f e r e n c e i n ownership p o l i c y between the U.S. and Japanese i n v e s t o r s i n Hong Kong. The hypothesis t h a t " t h e r e . i s a hig h e r i n c i d e n c e o f m i n o r i t y h o l d i n g s and j o i n t ventures being used by Japanese manufacturers than by U.S. manufacturers" c a n n o t , t h e r e f o r e , be supported. Table VIII-7 c l e a r l y shows t h a t m a j o r i t y ownership, i f not f u l l ownership, i s p r e f e r r e d by both U.S. and Japanese i n v e s t o r s . Of the t o t a l f i f t y - s i x responding f i r m s , o n l y f i v e (8.9%) were not m a j o r i t y h e l d by the U.S. parent companies or the Japanese parent companies. In c o n t r a s t , a l t o g e t h e r f o r t y f i r m s (71.4%) were f u l l y owned, as a t December 31, 1978. Two f i r m s were 50-50 j o i n t ventures. Only three mad m a j o r i t y l o c a l ownership, but i n no case d i d the m i n o r i t y f o r e i g n (U.S. or Japanese) i n t e r e s t f e l l s h o r t o f 25%. Ne v e r t h e l e s s , there were s t i l l some d i f f e r e n c e s between the U.S. and Japan. The p r o p o r t i o n o f f i r m s which were f u l l y owned (over 95%) was higher (75.6% vs 60.0%) and m i n o r i t y 186 TABLE VIII-7 Share of Ownership and Use o f J o i n t Ventures No. of Firms & % of T o t a l % Share o f F o r e i g n Owner-s h i p a t December 31, 197 8 U.S. Japan (a) Over 95% 31 ( 75.6%) 9 ( 60. 0%) (b) 76 - 95% 3 ( 7.3%) 2 ( 13. 3%) (c) 51 - 75% 4 ( 9.8%) 2 ( 13. 3%) (d) E x a c t l y 50% 1 ( 2.4%) 1 ( 6. 7%) (e) 26 - 49% 2 ( 4.9%) 1 ( 6. 7%) (f) 0 - 25% 0 ( 0.0%) 0 ( 0. 0%) T o t a l 41 (100.0%) 15 (100. 0%) Status o f Firm • (a) Not a j o i n t venture 31 ( 75.6%) 9 ( 60. 0%) (b) A j o i n t venture with l o c a l 8 ( 19.5%) ( 33. i n v e s t o r 5 3%) (c) A j o i n t venture with another „ . . f o r e i g n i n v e s t o r z 1 A' 3*> 1 ( 6 ' 7 % ) T o t a l 41 (100.0%) 15 (100.0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . h o l d i n g s were lower (.4.9% vs 6.7%) f o r the U.S. than f o r Japan. Furthermore, because a l l the responding f i r m s which were not f u l l y owned by the overseas parent c o n s i d e r e d themselves to be j o i n t ventures, the p r o p o r t i o n of f i r m s c l a s s i f i e d as j o i n t ventures was seemingly higher f o r Japan (4 0.0% vs 24.4%). However, even though these d i f f e r e n c e s were a l l compatible w i t h the h y p o t h e s i s , they were not wide and s i g n i f i c a n t enough to .. 31 v e r i f y i t . The p r e f e r e n c e f o r f u l l ownership was a l s o confirmed 187 by the i n t e r v i e w s . A l l the eighteen f i r m s s e l e c t e d f o r i n t e r -view were 100% U.S. or Japanese owned and a l l o f them claimed t h a t t h e i r ownership p o l i c y was a d e l i b e r a t e and p r e f e r r e d p o l i c y o f the parent c o r p o r a t i o n . Furthermore, a l l the companies s a i d t h a t , a t l e a s t f o r the time being, they would not c o n s i d e r i n v i t i n g l o c a l p a r t n e r s . Other S i m i l a r i t i e s and D i f f e r e n c e s There were other s i m i l a r i t i e s and d i f f e r e n c e s i n the investment c h a r a c t e r i s t i c s o f U.S. and Japanese manufact-u r i n g firms which were r e v e a l e d by the survey and the i n t e r v i e w s . Investment Motives: D e s p i t e the d i f f e r e n c e s i n the i n t e r n a l push f a c t o r s suggested by t h e o r e t i c a l models, the s p e c i f i c investment motives (the e x t e r n a l p u l l f a c t o r s ) mentioned by the U.S. and Japanese manufacturers were fundamentally the same. 'To make use of l o c a l l a b o u r ' , 'to take advantage of lower l o c a l taxes', 'to g e o g r a p h i c a l l y d i v e r s i f y the company's o p e r a t i o n s ' and 'to e l i m i n a t e o r reduce the c o s t of t r a n s p o r t a -t i o n i n s e l l i n g to the l o c a l market or i t s neighbouring markets' were the no t a b l e f a c t o r s which i n i t i a l l y a t t r a c t e d them to come to Hong Kong i n s t e a d o f to oth e r c i t i e s i n the r e g i o n (Table V I I I - 8 ) . Nearly a l l the f i r m s i n t e r v i e w e d mentioned these f a c t o r s , though with v a r y i n g degrees of emphasis which appeared to be 188 TABLE VIII-8 Investment Motives No. of Firms & % o f T o t a l Motive U.S. Japan (a) To make use o f l o c a l labour 29 (70.7%) 12 (80.0%) (b) To take advantage of lower l o c a l taxes •', • (c) To g e o g r a p h i c a l l y d i v e r s i f y the company's o p e r a t i o n s (d) To e l i m i n a t e or reduce the c o s t of t r a n s p o r t a t i o n i n 0_. , r , , 0 , . _,0 N s e l l i n g to the l o c a l market or i t s neighbouring markets v (e) To match c o m p e t i t i o n by l o c a l (26.7%) fi r m s or other f o r e i g n f i r m s (f) Others 31 (75.6%) 11 (73.3%) Notes: T o t a l number of f i r m s : U.S. = 41, Japan = 15. Other motives i n c l u d e 'to make use of l o c a l p r o d u c t i o n s k i l l and technology', 'to make the company's products more ac c e p t a b l e by l o c a l people', 'to make use of l o c a l c a p i t a l ' , 'to manufacture a t o r near sources o f raw m a t e r i a l s u p p l i e s ' , 'to b e t t e r meet l o c a l product standards by manufacturing t h e r e i n ' , 'to take advantage o f concessions granted by the l o c a l government t o f o r e i g n companies', 'the company has reached i t s l i m i t of expansion a t home', 'to ensure s u p p l i e s o f m a t e r i a l s e s s e n t i a l to the company's o p e r a t i o n s a t home', 'to get over import r e s t r i c t i o n s ' and 'the company i s being i n v i t e d by the l o c a l government'. Each o f these motives i n d i v i d u a l l y has l e s s than a 20% response from both the U.S. and Japanese manufacturers. Source: Q u e s t i o n n a i r e survey r e t u r n s . 189 r e l a t e d more to the type o f i n d u s t r y than to anything e l s e . For example, a l l the nine e l e c t r o n i c s f i r m s i n t e r v i e w e d put the number one motive as 'to make use of l o c a l l a b o u r " , but t h i s was not the case f o r any of the three chemical products f i r m s . Type of Ownership: With o n l y one e x c e p t i o n , a l l the responding U.S. and Japanese manufacturing f i r m s e x i s t e d i n the form of p r i v a t e l i m i t e d l i a b i l i t y companies. The e x c e p t i o n was an e l e c t r o n i c s f i r m which was a p u b l i c l i m i t e d l i a b i l i t y company m a j o r i t y h e l d by the Japanese. Method of Investment: The method of investment was aga i n more s i m i l a r than d i f f e r e n t . In both cases, more than 85% of the f i r m s were o r i g i n a l l y e s t a b l i s h e d with U.S. or Japanese ownership - t h i r t y f i v e out of f o r t y - o n e f o r the U.S. (85.4%) and t h i r t e e n out of f i f t e e n f o r Japan (86.7%). Overseas Ownership A f f i l i a t i o n : With no e x c e p t i o n , a l l the U.S. and Japanese manufacturers i n Hong Kong had parent companies i n the U.S. or Japan. In other words, a l l of them were c o r p o r a t e i n v e s t o r s . But i n a d d i t i o n , twelve (29.3%) U.S. f i r m s a l s o had e i t h e r s i s t e r companies or s u b s i d i a r y companies overseas with which they had ownership a f f i l i a t i o n . None of the Japanese manufacturers had any such a f f i l i a t i o n . 190 Th i s appeared to i n d i c a t e t h a t the U.S. i n v e s t o r s i n Hong Kong were more m u l t i n a t i o n a l i n t h e i r network of o p e r a t i o n s than the Japanese. Management C o n t r o l : The degree of management c o n t r o l e x e r c i s e d by the parent c o r p o r a t i o n and the t o o l s f o r c o n t r o l used were markedly d i f f e r e n t . Table VIII-9 shows the n a t i o n a l i t y o f the c h i e f e x e c u t i v e , h i s s t a t u s and the company's d e c i s i o n autonomy i n appointments a t management l e v e l s i n the U.S. and Japanese f i r m s . The d i f f e r e n c e s i n a l l these t h r e e aspects were wide as w e l l as 32 s t a t i s t i c a l l y s i g n i f i c a n t . Only two (13.3%) o f the f i f t e e n Japanese f i r m s had a l o c a l manager as the c h i e f e x e c u t i v e ; but f o r the f o r t y - o n e U.S. f i r m s , the corresponding f i g u r e was seventeen (41.5%). By f a r the m a j o r i t y (73.3%) o f the c h i e f e x e c u t i v e i n Japanese f i r m s were headquarters manager outposted from Japan; f o r U.S. f i r m s , the p r o p o r t i o n was o n l y about one-t h i r d . In a d d i t i o n , e x a c t l y two-thirds o f the Japanese f i r m s , i n c l u d i n g a l l the seven f i r m s i n t e r v i e w e d which were 100% Japanese owned, s a i d t h a t appointments a t management l e v e l r e q u i r e d approval from headquarters company. In c o n t r a s t , more than 70% o f the f o r t y - o n e U.S. f i r m s had autonomy i n r e c r u i t i n g s e n i o r s t a f f . T h i s meant t h a t a t l e a s t as f a r as s t a f f i n g and re c r u i t m e n t was concerned, Japanese f i r m s i n Hong Kong were more 33 ' e t h n o c e n t r i c ' whereas U.S. fi r m s were more ' p o l y c e n t r i c ' . 191 TABLE VIII-9 Management C o n t r o l by Headquarters Company No. of Firms & % of T o t a l N a t i o n a l i t y o f C h i e f E x e c u t i v e U.S. Japan (a) L o c a l 17 ( 41.5%) 2 ( 13.3%) (b) F o r e i g n 24 ( 58.5%) 13 ( 86.7%) (a) An outposted e x e c u t i v e of headquarters company (b) Not an outposted e x e c u t i v e of headquarters company Appointments a t Management L e v e l (a) Required approval by headquarters company (b) Did not r e q u i r e approval by headquarters company T o t a l 41 (100.0%) 15 (100.0%) Status o f C h i e f E x e c u t i v e 14 ( 34.1%) 11 ( 73.3%) 27 ( 65.9%) 4 ( 26.7%) T o t a l 41 (100.0%) 15 (100.0%) 12 ( 29.3%) 10 ( 66.7%) 29 ( 70.7%) 5 ( 33.3%) T o t a l 41 (100.0%) 15 (100.0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . The t o o l s f o r c o n t r o l a l s o d i f f e r e d . From the i n t e r -views, the w r i t e r got to know t h a t Japanese f i r m s depended more on c o n t r o l through p e r s o n a l c o n t a c t s whereas U.S. f i r m s p l a c e d more emphasis on budgets and r e p o r t s . Of the seven Japanese f i r m s i n t e r v i e w e d , s i x claimed t h a t they had headquarters s t a f f coming from Japan r e g u l a r l y f o r p l a n t v i s i t s , or the c h i e f e x e c u t i v e i n Hong Kong, or h i s deputy, had to go back to the headquarters company i n Japan to r e p o r t on h i s company's performance. In 192 c o n t r a s t , U.S. f i r m s ' main c o n t r o l t o o l appeared to be more impersonal i n t h a t the s u b s i d i a r y f i r m s i n Hong Kong were o f t e n g i v e n r a t h e r r i g i d performance budgets and standards and they had to submit q u a r t e r l y or even monthly r e p o r t s to headquarters companies. V i s i t s from headquarters company s t a f f were much l e s s f r equent, u s u a l l y about once or twice i n the year. Geographical p r o x i m i t y might be a reason f o r the more frequent use of d i r e c t p e r s o n a l c o n t r o l s by Japanese i n v e s t o r s , but probably the d i f f e r e n c e i n t r a d i t i o n a l management s t y l e s between the Americans and the Japanese was the main f a c t o r . T r a d i t i o n a l l y , the Japanese management s t y l e was more 'organic' and p l a c e d a g r e a t e r v a l u e on harmony and human r e l a t i o n s i n o r g a n i z a t i o n s . On the other hand, the Americans put 3 the emphasis more on systematic management and work e f f i c i e n c y . The d i f f e r e n c e i n c o n t r o l methods used appeared to be l a r g e l y a r e f l e c t i o n o f t h i s u n d e r l y i n g d i f f e r e n c e . The more frequent use of unadapted home country technology by the Japanese manufacturers c o u l d a l s o have been a reason. Because Japanese f i r m s o f t e n used the same technology as t h e i r parent c o r p o r a t i o n s , i t became p o s s i b l e , or might even have been necessary, f o r them to r e l y on Japanese managers to c o n t r o l t h e i r o p e r a t i o n s i n Hong Kong. 193 Product L i n e C o n c e n t r a t i o n : There was no n o t a b l e d i f f e r e n c e between the U.S. manufacturers and the Japanese manufacturers i n the degree of product l i n e c o n c e n t r a t i o n . T h e i r g e n e r a l p a t t e r n conformed very much to the o v e r a l l p a t t e r n f o r a l l f o r e i g n manufacturers as a whole. In both cases, there were around o n e - t h i r d o f the f i r m s s p e c i a l i z i n g i n one s i n g l e product l i n e , and another o n e - t h i r d producing more than f i v e l i n e s o f products. (Table VIII-10) The percentage share of the most important l i n e a l s o showed l i t t l e d i f f e r e n c e between the two. TABLE VIII-10 Product L i n e C o n c e n t r a t i o n No. of Firms & % of T o t a l L i n e o f Products Produced i n 1978 U.S. Japan (a) One 12 ( 29.3%) 5 ( 33.3%) (b) Two to f i v e 14 (34.1%) 6 ( 40.0%) (c) More than f i v e 15 ( 36.6%) 4 ( 26.7%) T o t a l 41 (100.0%) 15 (100.0%) Percent Share of Most Important Product L i n e i n 1978 (a) 100% 12 ( 29.3%) 5 ( 33.3%) (b) 81 - 99% 8 ( 19.5%) 3 ( 20.0%) (c) 61 - 80% 7 ( 17.1%);' 3 ( 20.0%) (d) 41 - 60% 3 ( 7.3%) 1 ( 6.7%) (e) 21 - 40% 10 ( 24.4%) 3 ( 20.0%) (f) 20% or l e s s 1 ( 2.4%) 0 ( 0.0%) T o t a l 41 (100.0%) 15 (100.0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . 194 S a l e s to A f f i l i a t e d Companies Overseas: Both . the U.S. and Japanese f i r m s had s i g n i f i c a n t p o r t i o n s of t h e i r export s a l e s r e g i s t e r e d as intercompany t r a n s f e r s to t h e i r overseas a f f i l i a t e s i n 1978 (Table VIII-11); Looking a t the percentages, there w a s : a p p a r e n t l y - l i t t l e d i f f e r e n c e . However, TABLE VI11-11 Sa l e s to F o r e i g n A f f i l i a t e d Companies No. of Firms & % of T o t a l S a l e s to F o r e i g n A f f i l i a t e d Cos as a % of T o t a l Export S a l e s i n 1978 " U.S. Japan (a) No export s a l e s 2 ( 4.9%) 1 ( 6.7%) (b) 0% 2 ( 4.9%) 0 ( 0.0%) (c) 1 - 20% 4 ( 9.8%) 0 ( 0.0%) (d) 21 - 40% 4 ( 9.8%) 2 ( 13.3%) (e) 41 - 60%' 3 ( 7.3%) 2 ( 13.3%) (f) 61 - 80% 10 ( 24.4%) 4 ( 26.7%) (g) 81 - 100% 16 ( 39.0%) 6 ( 40.0%) T o t a l 41 (100.0%) 15 (100.0%) Source: Q u e s t i o n n a i r e survey r e t u r n s . there was a s i g n i f i c a n t ' q u a l i t a t i v e ' d i f f e r e n c e which was l a t e r d i s c o v e r e d by the w r i t e r i n the i n t e r v i e w s . Most of the i n t r a -company s a l e s of the Japanese f i r m s were to t h e i r Japanese headquarters companies; but the t r a n s f e r s from the U.S. f i r m s went mostly to t h e i r overseas marketing a f f i l i a t e s o u t s i d e the U.S. T h i s was c o n s i s t e n t w i t h the f i n d i n g t h a t d e s p i t e the f a c t t h a t the U.S. and Japanese manufacturers had l i t t l e d i f f e r e n c e 195 in the degree of export orientation, there was a s i g n i f i c a n t difference i n the degree of importance of the home country as a foreign market. Marketing 1 A c t i v i t i e s Performed. Table VIII-12 shows the marketing a c t i v i t i e s performed by the U.S. and Japanese firms i n Hong Kong. There seemed to be a wide difference between the two. In four out of the six a c t i v i t i e s l i s t e d , there were in percentage terms about twice as many U.S. as Japanese firms performing the a c t i v i t i e s . This, to a certain extent, indicated that the U.S. firms on the whole were more sophisticated i n t h e i r marketing operations. 2_ TABLE VIII-12  Marketing A c t i v i t i e s Performed No. Of Firms & % of Total A c t i v i t y U.S. Japan (a) Advertising 18 ( 43.9%) 4 ( 26.7%) (b) After sales servising 11 ( 26.8%) 2 ( 13.3%) (c) D i s t r i b u t i o n and wholesaling 17 ( 41.5%) 6 ( 40.0%) (d) Export sales promotion 23 ( 56.1%) 3 ( 20.0%) (e) Market and consumers research 14 ( 26.8%) 2 ( 13.3%) (f) R e t a i l i n g 4 ( 9.8%) 4 ( 26.7%) Total (41) (100.0%) (15) (100.0%) Source: Questionnaire survey returns. 196 Notes 1. The only study of th i s nature which the writer i s aware of i s the one on South Korea by CH. Lee. (Lee, CH. , "United States and Japanese Direct Investment i n Korea: A Comparative Study", Hi to tsuba shi Journal of Economics, Vol. 20, No. 2, February, .1980.) This work compares the market orientation, motivating factors and impact on the Korean economy of U.S. and Japanese d i r e c t investments based upon some foreign investment s t a t i s t i c s (1962-74) kept by the Economic Planning Board of the Korean government. There i s also a discussion paper by Kohlhagen, but i t i s b a s i c a l l y a descriptive l i t e r a t u r e survey rather than a comparative study. (Kohlhagen, S.W., "The Charact-e r i s t i c s , Motivations and Ef f e c t s of Japanese and United States Direct Investments i n the P a c i f i c Basin", Explorations i n Economic Research, Vol. 2, No.4, 1976.) 2. The more important books published i n English on Japanese investments are: Katano, H., Murakami, A. and Ikemoto, K., Japan's Direct Investment to ASEAN Countries, Research Inst i t u t e for Economics and Business Administration, Kobe University, Kobe, 1978. Kojima, K., Direct Foreign Investment: A Japanese Model of Multinational Business Operations, Croom Helm, London, 1978. Ozawa, T., Multinationalism, Japanese Style: The P o l i t i c a l Economy of Outward Dependency, Princeton University Press, Princeton, N.J., 1979. Tsurumi, Y., The Japanese are Coming: A Multinational Interaction Of Firms and P o l i t i c s , Ballinger Publishing Company, Cambridge, Mass., 1976. Sandhu, K.S. and Tang, P.T. (eds.), Japan as an Economic Power arid i t s Implications for Southeast Asia, In s t i t u t e for Southeast Asian Studies, Singapore, 1974. Yoshihara, K., Japanese Investment i n Southeast Asia, The Uriiversity Press of Hawaii, Honolulu, 1978. Yoshino, N.Y., Japanese Multinational Enterprises, Harvard University Press, Cambridge, Mass., 1976. 3. The U.S. and Japan are by far the two most important foreign investors i n manufacturing i n the Asian P a c i f i c region. In d o l l a r terms, the U.S.'s position i s f i r s t i n Hong Kdng, the Philippines and South Korea, second i n Indonesia, Malaysia, Taiwan and Singapore and t h i r d i n Thailand. Japan i s number one i n Indonesia, Singapore, Taiwan and Thailand, second i n Hong Kong, the Philippines and South Korea and fourth i n Malaysia. 197 4. Vernon, R., "The Economic Consequence of U.S. F o r e i g n D i r e c t Investment", U n i t e d S t a t e s I n t e r n a t i o n a l Economic  P o l i c y i n an Interdependent World, Papers I, Washington, D.C., J u l y , 1971. 5. A d e t a i l e d examination of U.S. f o r e i g n investments i s not given here because t h e i r t y p i c a l f e a t u r e s have been w e l l d e s c r i b e d i n many i n t e r n a t i o n a l business l i t e r a t u r e . For example, see Hymer, S., "United S t a t e s Investment Abroad" i n D i r e c t  F o r e i g n Investment i n A s i a and the P a c i f i c e d i t e d by P. Drysdale, A u s t r a l i a n N a t i o n a l U n i v e r s i t y P r e s s , Canberra, 1972. K i n d l e b e r g e r , C P . , American Business Abroad: S i x L e c t u r e s  on D i r e c t Investment, Y a l e U n i v e r s i t y P r e s s , New Haven, 1969. Rhodes, J.B., "Foreign D i r e c t Investment by U.S. C o r p o r a l '.o:::f, ; t i o n s " , Columbia J o u r n a l o f World Business, J u l y -August, 1972. U.S. Department o f Commerce, "Trends i n D i r e c t Investments Abroad by U.S. M u l t i n a t i o n a l C o r p o r a t i o n s , 1960 to 1970", The M u l t i n a t i o n a l C o r p o r a t i o n : S t u d i e s on U.S. F o r e i g n  Investment, V o l . 1., 1972. Vernon, R., Sovereignty a t Bay: The M u l t i n a t i o n a l Spread of  of U.S. E n t e r p r i s e s , B a s i c Books, New York, 197i. W i l k i n s , M., The Maturing of M u l t i n a t i o n a l E n t e r p r i s e :  American Business Abroad from 1914 to 1970, Harvard U n i v e r s i t y P r e s s , Cambridge, Mass., 1974. 6. Ozawa, T., M u l t i n a t i o n a l i s m , Japanese S t y l e : The P o l i t i c a l Economy of Outward Dependency, P r i n c e t o n U n i v e r s i t y P ress, P r i n c e t o n , N.J., 1979, page 50. 7. The pre-war l e v e l r e f e r s t o the 1934-36 l e v e l . 8. Source: M i n i s t r y of I n t e r n a t i o n a l Trade and Industry, Japanese government. The f i s c a l year of Japan i s A p r i l 1 to March 31. 9. Source: M i n i s t r y of Labour, Japanese government, Yearbook  of Labour S t a t i s t i c s , v a r i o u s i s s u e s . 10. Kojima, D i r e c t F o r e i g n Investment: A Japanese Model of  M u l t i n a t i o n a l Business Operations, Croom Helm, London, 1978, page 86. A l s o , a c c o r d i n g to the M i n i s t r y of I n t e r -n a t i o n a l Trade and Industry, among the t o t a l accumulated Japanese f o r e i g n investments i n manufacturing of US$96 3 m i l l i o n between 1951 and 1970, pulp and wood (resource-o r i e n t e d ) accounted f o r 22.1%, t e x t i l e s 19.7%, s t e e l and metals 14.3%, t r a n s p o r t machinery 19.6%, e l e c t r i c a l a p p l i a n c e s 7.4%, other machinery 7.0%, f o o d s t u f f s 6.3%, 198 chemicals 6.2% and others 6.4%. 11. According to Ozawa, there i s , however, an emerging pattern of overseas investments by large Japanese companies that x i f i t s the monopolistic model. These ventures are located mostly i n advanced countries, e s p e c i a l l y i n the U.S., and i n high technology sectors that require f i r m - s p e c i f i c advantages. But t h i s type of d i r e c t investments accounts for only a small portion of Japan's overseas investments in manufacturing and are s t i l l non-existent i n Southeast Asia. 12. Jorgenson, D.W. and Nishimizu, M., "U.S. and Japanese Economic Growth;. 1952-1974: An International Comparison", The Economic Journal, Cambridge University Press, Vol. 88, No. 352, December, 1978. 13. For example, see A l l e n , T.W., Direct Investment of Japanese Enterprises i n  Southeast Asia, Economic Cooperation Centre for the Asian P a c i f i c Region, Bangkok, 1973. Kohlhagen, S.W., "The C h a r a c t e r i s t i c s , Motivations and Eff e c t s of Japanese and United States Direct Investments i n the P a c i f i c Basin", Explorations i n Economic Research, Vol. 2, No. 4, 1976. Landes, J.E., "Japanese Direct Investment i n Developing ECAFE Countries", Foreign Investment arid Economic  Development i n Asia,edited by N.K. Sarkar, Orient ' Longman Ltd., Bombay, 1976. 14. A related hypothesis on the qua l i t y of technology and i t s appropriateness to the host country can also be put up. I t i s not done here because the writer believes t h i s subject i s beyond the scope of t h i s study. 15. Kojima,:.K. , "Transfer of Technology to Developing Countries: Japanese Type versus American Type", Hitotsubashi Journal of Economics, Vol.u-17, No. 2, February, 197 7 16. According to the Second Questionnaire Survey (1968) under-taken by the Export-Import Bank of Japan, 90% of Japanese manufacturing firms overseas use Japanese technology, 8 6 % of them import Japanese machinery and equipment and th e i r imports of Japanese raw materials and intermediate goods account for 58% of t h e i r total.imports of these materials. 17. For example, according to a survey by Tsurumi ron ownership patterns, the majority of Japanese manufacturing operations (58%;);uinof oreign countries were i n the form of minority holdings i n January 1971. (Tsurumi, Y, The Japanese are  Coming: A Multinational Interaction of Firms arid P o l i t i c s , 199 B a l l i n g e r P u b l i s h i n g Co., Cambridge, Mass., 1976, page 203, Table 8-3.) Another survey by Yoshino on f i f t y Japanese e n t e r p r i s e s w i t h manufacturing s u b s i d i a r i e s overseas r e v e a l e d t h a t of t h e i r 417 f o r e i g n s u b s i d i a r i e s , 342 were j o i n t ventures and 304 had m i n o r i t y Japanese share h o l d i n g s . (Yoshino, M.Y., Japan's M u l t i n a t i o n a l  E n t e r p r i s e , Harvard U n i v e r s i t y P r e s s , Cambridge, Mass., 1976, page 143.) 18. A c c o r d i n g to r e c o r d s kept by the Japanese government's Small and Medium E n t e r p r i s e Agency, 41.8% of the t o t a l number of Japanese manufacturing investments overseas a t the end o f 1975 were made by small and medium s i z e d f i r m s (those with fewer than 300 employees or paid-up c a p i t a l of l e s s than 100 m i l l i o n yen). T h i s i s a much higher percentage than t h a t of the U.S. See Ozawa, T., M u l t i n a t i o n - a l ism, Japanese S t y l e : The P o l i t i c a l Economy of Outward  Dependency, P r i n c e t o n U n i v e r s i t y P r e s s , P r i n c e t o n , N.J., 1979, pages 25-28. 19. See Tsurumi, Y., " M u l t i n a t i o n a l Spread of Japanese Firms and A s i a n Neighbours Reaction", Paper presented to Yale U n i v e r s i t y Conference on the M u l t i n a t i o n a l C o r p o r a t i o n as an Instrument of Development - P o l i t i c a l C o n s i d e r a t i o n s , May, 1974. 20. See C l a r k , G., "Japanese D i r e c t Investment Overseas", F o r e i g n Investment and Japan e d i t e d by B a l l o n , R.J. and Lee, E.H., Kodansha, Tokyo, 1972. 21. See K i n d l e b e r g e r , C P . , American Business Abroad: S i x  L e c t u r e s on D i r e c t Investment, Yale U n i v e r s i t y P r e s s , New Haven, 1969. 22. See Appendix II-8.1. 23. See Appendix II-8.2. 24. See Appendix.I1-8.3. 25. Using c h i - s q u a r e t e s t s , however, the p r o p o r t i o n of U.S. and Japanese f i r m s o p e r a t i n g these p r o d u c t i o n a c t i v i t i e s was o n l y s i g n i f i c a n t l y d i f f e r e n t (at a l e v e l of s i g n i f i c a n c e 0.05) f o r ' q u a l i t y t e s t i n g and c o n t r o l ' but not f o r the remaining f o u r a c t i v i t i e s . See Appendix II-8.4. 26. See Appendices II-8.5 and II-8.6. 27. See Appendix II-8.7. 28. See Appendix II-8.8. 200 29. See Appendix II-8.9. 30. See Appendix II-8.10. 31. See Appendices II-8.11 and II-8.12. 32. See Appendix II-8.13. 33. These 'management a t t i t u d e s ' or ' s t a t e s of mind' (ethno-c e n t r i c , p o l y c e n t r i c and g e o c e n t r i c ) are taken from Pe r l m u t t e r , H.V., "The Tortuous E v o l u t i o n o f the M u l t i -n a t i o n a l C o r p o r a t i o n " , Columbia J o u r n a l o f World Business, January - February, 1969. 34. For a d i s c u s s i o n on the d i f f e r e n c e i n t r a d i t i o n a l American and Japanese management s t y l e s , see Yang, C.Y., "Management S t y l e s : American v i s - a - v i s Japanese", Columbia J o u r n a l o f  World Business, F a l l , 1977. 201 CHAPTER IX - SUMMARY AND CONCLUSION In t h i s l a s t chapter, we s h a l l conclude by g i v i n g a s h o r t summary of the f i n d i n g s and a d i s c u s s i o n of t h e i r importance and i m p l i c a t i o n s . Summary of F i n d i n g s The main f i n d i n g s of t h i s t h e s i s a r e : (1) Hong Kong has an extremely l i b e r a l economic p o l i c y and there i s very l i t t l e government i n t e r v e n t i o n i n p r i v a t e business a c t i v i t i e s . T h i s p o l i c y i s extended to i t s treatment of f o r e i g n i n v e s t o r s . The o u t s t a n d i n g f e a t u r e i s t h a t i t does not d i f f e r e n t i a t e between f o r e i g n and l o c a l c o r p o r a -t i o n s . Consequently, t h e r e i s no s p e c i a l r e s t r i c t i o n on f o r e i g n investment, but n e i t h e r i s any c o n c e s s i o n g i v e n . Compared to those of neighbouring Southeast A s i a n c o u n t r i e s , t h i s p o l i c y i s unique and d i s t i n c t . (2) F o r e i g n i n v e s t o r s , however, f i n d t h i s p o l i c y most agreeable. In t h e i r assessment of investment c o n d i t i o n s i n Hong Kong, they g i v e the h i g h e s t scores to those f a c t o r s which are d i r e c t l y r e l a t e d to the government's economic p o l i c y 202 and i t s p o l i c y towards f o r e i g n investment. T h i s suggests t h a t a p o l i c y of n o n - i n t e r v e n t i o n and n o n - d i f f e r e n t i a t i o n between f o r e i g n and l o c a l c o r p o r a t i o n s would be viewed by f o r e i g n i n v e s t o r s as a p o s i t i v e i n c e n t i v e r a t h e r than a negative impediment. (3) There i s i n t e n s i v e and d i v e r s i f i e d f o r e i g n investment i n t e r e s t i n Hong Kong. With the o n l y e x c e p t i o n of manufacturing, f o r e i g n i n v e s t o r s now h o l d dominating p o s i t i o n s i n a l l major economic s e c t o r s . T h i s i s a g a i n an unusual phenom-enon, but t h i s f o r e i g n domination has not generated open c o n f l i c t s between f o r e i g n i n v e s t o r s and the government or l o c a l i n v e s t o r s . (4) F o r e i g n i n v e s t o r s do not have m a j o r i t y c o n t r o l i n the manufacturing s e c t o r , but the r o l e they p l a y i s s t i l l v ery important. The number of f o r e i g n manufacturers comprises only about one percent of the t o t a l number of manufacturing f i r m s i n Hong Kong, but t h e i r c o n t r i b u t i o n s i n terms of p r o v i d i n g i n d u s t r i a l employment and domestic exports are approximately ten times as much. More s i g n i f i c a n t l y , t h e i r investments have helped Hong Kong very much i n i t s e f f o r t s to upgrade and d i v e r s i f y i t s i n d u s t r i e s . They are an important agent f o r t r a n s f e r r i n g technology i n t o Hong Kong. Without these investments, i t i s u n l i k e l y t h a t Hong Kong c o u l d have a t t a i n e d i t s p r e s e n t l e v e l of i n d u s t r i a l growth. 203 (5) Foreign manufacturers have come mostly from the U.S., Japan, Western Europe and Asian P a c i f i c countries. The industries i n which they have invested most are elec t r o n i c s , t e x t i l e s , chemical products and e l e c t r i c a l products. This pattern conforms with the global pattern i n which the investor corpora-tions are mostly from developed countries or nearby countries and the manufacturing industries i n which they invest tend to be technologically more advanced. (6) The overwhelming majority of foreign manufac-turers are majority or f u l l y owned by the parent corporations. There are close l i n k s i n management, production and marketing established between these foreign manufacturers and t h e i r overseas a f f i l i a t e s . These indicate that t h e i r operations are integrated and there i s a strong preference for undivided ownership and control to f a c i l i t a t e the integration. (7) Foreign manufacturers on the whole appear to have a higher degree of sophistication and d i v e r s i f i c a t i o n i n th e i r production and marketing operations than l o c a l manufac-turers. This may be an ind i c a t i o n as well as a r e s u l t of the fact that they possess competitive advantages over t h e i r l o c a l counterparts which i s an important hypothesis i n Hymer's monopolistic theory of d i r e c t foreign investment. (8) The high proportion of export sales shows that 204 f o r e i g n investments i n manufacturing i n Hong Kong are mostly o f the export o r i e n t e d type and are t h e r e f o r e , a c c o r d i n g to Reuber," aimed more a t p r o t e c t i n g or improving the i n v e s t o r ' s c o m p e t i t i v e p o s i t i o n a t home or i n t e r n a t i o n a l l y than a t d e v e l o p i n g the Hong Kong market. The s p e c i f i c motives mentioned by the f o r e i g n manufacturers suggest t h a t the m a j o r i t y of them were i n i t i a l l y a t t r a c t e d to i n v e s t i n Hong Kong by i t s abundant labour and by i t s l i b e r a l economic p o l i c y . A s i g n i f i c a n t number of them a l s o mention g e o g r a p h i c a l d i v e r s i f i c a t i o n or matching c o m p e t i t i o n by other f i r m s as the i n i t i a l motive. These r e p l i e s p r o v i d e e m p i r i c a l support t o d i r e c t f o r e i g n investment t h e o r i e s based upon the product l i f e c y c l e (Vernon, H i r s c h and W e l l s ) , p o r t f o l i o d i v e r s i f i c a t i o n (Levy and Sarnat) and o l i g o p o l i s t i c r e a c t i o n ( Knickerbocker). (9) F o r e i g n manufacturers are very pragmatic i n t h e i r investment a t t i t u d e s . They r a t e the importance of i n v e s t -ment f a c t o r s mainly a c c o r d i n g to how immediately and d i r e c t l y these f a c t o r s a f f e c t t h e i r o p e r a t i o n s . They s u b s t a n t i a l l y agree t h a t investment c o n d i t i o n s i n Hong Kong are f a v o u r a b l e ; but a c c o r d i n g to t h e i r assessment, Hong Kong's g r e a t e s t a t t r a c t i o n does not r e s t i n the f a c t o r s which they themselves c o n s i d e r as' most important. The heavy emphasis they p l a c e on the p r o d u c t i o n f a c t o r s f i t s s q u a r e l y w i t h Reuber 1s c h a r a c t e r i z a t i o n of the export o r i e n t e d type of investment. 205 (10) F o r e i g n manufacturers are doing very w e l l i n Hong Kong and many of them have ob t a i n e d a high r e t u r n on t h e i r investments. T h i s h i g h r e t u r n on investment i s again charac-t e r i z e d by Reuber as t y p i c a l o f export, o r i e n t e d investments i n the s h o r t run. A l s o , the m a j o r i t y o f f o r e i g n manufacturers b e l i e v e t h a t they made the r i g h t d e c i s i o n i n i n v e s t i n g i n Hong Kong and t h a t the business environment i n Hong Kong i n the l a s t ten years has not d e t e r i o r a t e d . Apparently, Hong Kong has been able t o m a i n t a i n i t s image and a t t r a c t i v e n e s s as a manufacturing base d e s p i t e the r a p i d l y r i s i n g labour wages and land c o s t s i n rec e n t y e a r s . (11) A comparison between U.S. and Japanese investment c h a r a c t e r i s t i c s shows t h a t four out o f f i v e hypothe-t i c a l p r o p o s i t i o n s d e r i v e d from t h e o r e t i c a l U.S.- and Japanese f o r e i g n investment models are supported. There i s enough evidence to i n d i c a t e t h a t the i n d u s t r i e s i n which Japanese c o r p o r a t i o n s i n v e s t e d are d i f f e r e n t and are t e c h n o l o g i c a l l y l e s s advanced, t h a t Japanese manufacturing o p e r a t i o n s are more labour i n t e n s i v e , t h a t Japanese f i r m s use unadapted home country technology more o f t e n and t h a t Japanese f i r m s export back to Japan a g r e a t e r p r o p o r t i o n o f t h e i r s a l e s than U.S. fi r m s do to the U.S. Thus, one can conclude t h a t U.S. and Japanese manufac-t u r i n g investments overseas are a c t u a l l y u n d e r l a i n by d i f f e r e n t economic f o r c e s as hypothesized by t h e o r e t i c a l models. 206 (12) The o n l y one of the hypotheses examined which cannot be supported i s t h a t there i s a higher i n c i d e n c e of m i n o r i t y h o l d i n g s and j o i n t ventures being used by Japanese manufacturers abroad. E m p i r i c a l l y , both Japanese and U.S. manufacturers have opted f o r m a j o r i t y or f u l l ownership. Appa r e n t l y , the p r e f e r e n c e f o r u n d i v i d e d ownership and c o n t r o l has been so s t r o n g t h a t i t has overshadowed the b e n e f i t s of e n t e r i n g i n t o j o i n t ventures w i t h l o c a l p a r t n e r s even i n the case o f Japan. (13) There are o t h e r s i m i l a r i t i e s and d i f f e r e n c e s . On the whole, U.S. and Japanese manufacturers are more s i m i l a r than d i f f e r e n t i n t h e i r investment motives i n Hong Kong, i n the degree of export o r i e n t a t i o n , i n the type o f ownership used, i n the method of investment and i n the degree of product l i n e c o n c e n t r a t i o n . On the o t h e r hand, n o t a b l e d i f f e r e n c e s are found i n the degree o f management c o n t r o l , c o n t r o l methods used, s a l e s channels employed and the marketing a c t i v i t i e s performed. importance and I m p l i c a t i o n s o f F i n d i n g s T h i s t h e s i s r e p r e s e n t s a f i r s t attempt to p r e s e n t a comprehensive a n a l y s i s of d i r e c t f o r e i g n investments i n the manufacturing s e c t o r i n Hong Kong. The a v a i l a b l e b i t s and p i e c e s have been put together to p r o v i d e a broad p i c t u r e of the 207 investment p a t t e r n of the f o r e i g n manufacturers. T h e i r opera-t i o n a l c h a r a c t e r i s t i c s as w e l l as t h e i r motives and needs have a l s o been e x p l o r e d to g i v e b e t t e r i n s i g h t s i n t o t h e i r a c t i v i t i e s and to t e s t the v a l i d i t y o f d i r e c t f o r e i g n investment t h e o r i e s . The f i n d i n g s h e r e i n should be u s e f u l f o r r e l a t e d s t u d i e s and f u t u r e r e s e a r c h on, f o r example, the i n t e r a c t i o n s between government p o l i c i e s , c o r p o r a t e s t r a t e g i e s of f o r e i g n i n v e s t o r s and economic development. A r i s i n g from the f i n d i n g s , t h e r e i s an important i s s u e which the w r i t e r would l i k e to d i s c u s s and a c l a r i f i c a t i o n which he would l i k e to make. The former i s on host government p o l i c y towards f o r e i g n investment and the l a t t e r concerns the u s e f u l n e s s o f e x i s t i n g d i r e c t f o r e i g n investment t h e o r i e s i n e x p l a i n i n g and p r e d i c t i n g f o r e i g n investment c h a r a c t e r i s t i c s . Host Government P o l i c y Towards F o r e i g n Investment; De s p i t e the many t h e o r i e s and p l a u s i b l e e x p l a n a t i o n s o f the u n d e r l y i n g economic f o r c e s behind f o r e i g n investments, the p r o f i t making o b j e c t i v e i s c l e a r l y d e c i s i v e and u l t i m a t e . B e t t e r e x p l o i t a t i o n o f the advantages possessed, access to f o r e i g n p r o d u c t i v e " r e s o u r c e s , p r o t e c t i o n of markets f o r example are e s s e n t i a l l y o n l y d i f f e r e n t means to achieve t h i s g o a l . Hence, un l e s s a country has p r o f i t o p p o r t u n i t i e s to o f f e r to f o r e i g n i n v e s t o r s , i t cannot expect the l a t t e r to come and s t a y . M u l t i n a t i o n a l c o r p o r a t i o n s (the common ' g l o b a l brand name' f o r 208 foreign i n s t i t u t i o n a l , investors) are business organizations and not foreign aid agencies. The reason why so many foreign investors have come to Hong Kong i s precisely because of i t s p r o f i t opportunities. With only a small l o c a l market and no mineral resources, the p r o f i t opportunities which Hong Kong of f e r s to foreign investors come mainly from i t s : abundant and cheap labour, established business and government i n s t i t u t i o n s and a l i b e r a l business environment which gives foreign investors maximum freedom i n t h e i r operations. But with rapidly r i s i n g labour wages and land prices i n recent years, Hong Kong i s gradually losing, or may even have already l o s t much of i t s cost advantage. This means that Hong Kong w i l l have to r e l y more on i t s two remaining attractions i f i t wants to keep or increase the present l e v e l of foreign investments which are so v i t a l to i t s economy. This i s d e f i n i t e l y a j u s t i f i c a t i o n for continuing the present p o l i c y of non-intervention and non-differentiation between foreign and l o c a l corporations. In t h i s respect, Hong Kong perhaps provides a lesson to be learned for the less developed countries. In international business l i t e r a t u r e , the most controversial subject of debate i n recent years has been the policy issue, centering around the i n t e r a c t i o n between multinational corporations and national governments - es p e c i a l l y those of less developed countries. I t 209 i s a t the same time the s u b j e c t about which most has been w r i t t e n . 1 But i n s p i t e o f the v a s t volume of work, the i s s u e i s f a r from being r e s o l v e d . Instead, there i s s t i l l a wide d i s c r e p a n c y o f o p i n i o n and a c o n f u s i o n of a t t i t u d e s , o b s e r v a t i o n s , 2 t h e o r i e s and p o l i t i c a l p o s i t i o n s . The c o n t r o v e r s y , however, appears to a r i s e not so much from disagreements about data and methods of a n a l y s i s as from disagreements about fundamental values and o b j e c t i v e s . On one s i d e , the "business p r a g m a t i s t s " camp s t r e s s e s the v i r t u e s of open c o m p e t i t i o n and b e n e f i t s o f i n c r e a s e d economic a c t i v i t i e s . I t favours a f r e e e n t e r p r i s e and l i b e r a l business system conducive to f o r e i g n investments which can channel i n c a p i t a l , develop n a t u r a l r e s o u r c e s , improve u t i l i z a t i o n of p r o d u c t i v e f a c t o r s , widen the l o c a l i n d u s t r i a l base and generate income and employment. A t the o p p o s i t e end, the " n a t i o n a l i s t s " camp empha-s i z e s the importance of economic s o v e r e i g n t y and the adverse e f f e c t s o f c o n f l i c t i n g i n t e r e s t s between f o r e i g n i n v e s t o r s and the host country. I t advocates p l a c i n g d i r e c t i v e s and r e s t r i c t i o n s on f o r e i g n investments so as to prevent the country's economy from being c o n t r o l l e d by f o r e i g n e r s which i n t u r n may induce c a p i t a l o utflows, weaken the country's balance o f payment p o s i t i o n , render the l o c a l government's economic p o l i c i e s i n e f f e c t i v e and hamper the development of l o c a l i n d u s t r i e s . Hong Kong serves as a case i n support o f the former 210 camp. I t has shown to the world t h a t a pragmatic approach can b e n e f i t both p a r t i e s as w e l l as m a i ntain harmony between the two. Despite a dominating p o s i t i o n h e l d by f o r e i g n i n v e s t o r s i n i t s economy, Hong Kong has been able to achieve a whole range of economic goals - r a p i d growth, i n d u s t r i a l i z a t i o n , p r i c e s t a b i l i t y and f u l l employment. T h i s c l e a r l y i n d i c a t e s t h a t a l l o w i n g maximum freedom to f o r e i g n i n v e s t o r s to e x e r c i s e t h e i r ownership r i g h t s and management s o v e r e i g n t y does not n e c e s s a r i l y r e s u l t i n c o n f l i c t s between t h e i r investment i n t e r e s t and the host country's economic o b j e c t i v e s . E q u a l l y important, Hong Kong has demonstrated to the l e s s developed c o u n t r i e s t h a t a country need not be resource abundant to be a t t r a c t i v e , nor i s i t necessary to r e l y upon co n c e s s i o n s . In f a c t , as argued by Kohlhagen, the o f f e r of a r t i f i c i a l investment i n c e n t i v e s can o n l y l e a d to unnecessary c o m p e t i t i o n among the l e s s developed c o u n t r i e s a t t h e i r own 3 expense and s o l e l y to the advantage of f o r e i g n i n v e s t o r s . Some people may argue t h a t the example of Hong Kong i s too unique a h i s t o r i c a l a c c i d e n t to be r e l e v a n t . I t s geogra-p h i c a l s e t t i n g , i t s cosmopolitan h e r i t a g e and i t s p e c u l i a r p o l i t i c a l (or l a c k of a p o l i t i c a l ) s t a t u s form an a t t r a c t i v e combination which cannot again be reproduced. Yet, w h i l e t h i s may be t r u e , the i n s t i t u t i o n a l set-up and the l i b e r a l economic p o l i c y are f e a t u r e s which are d e f i n i t e l y not a c c i d e n t a l and 211 are what f o r e i g n i n v e s t o r s c o n s i d e r as most a p p e a l i n g i n Hong Kong. Furthermore, the c o n s t i t u e n t elements such as 'exchange c o n t r o l s ' , ' c o r p o r a t e taxes' and 'business laws and r e g u l a t i o n s ' are f a c t o r s over which a l l n a t i o n a l governments can e x e r c i s e some c o n t r o l . Hong Kong i s a s m a l l and semi-autonomous c i t y s t a t e w i t h no n a t u r a l r e s o u r c e s . S e l f s u f f i c i e n c y i s i m p o s s i b l e and dependence on f o r e i g n c a p i t a l and overseas markets i s i n e v i t a b l e . Perhaps i t s p r e s e n t p o l i c y i s to i t the o n l y v i a b l e one. However, the w r i t e r s t i l l b e l i e v e s t h a t t h i s p o l i c y i s e q u a l l y v i a b l e and d e s i r a b l e f o r other l e s s developed c o u n t r i e s . I t would be unwise and u nfortunate i f they should l e t p o l i t i c a l i d e o l o g i e s , r e l i g i o u s b e l i e f s , e t h n i c h e r i t a g e or n a t i o n a l p r i d e i n s t e a d of economic r e a l i t i e s d i c t a t e t h e i r p o l i c i e s . U s efulness of D i r e c t F o r e i g n Investment T h e o r i e s : On the whole, the e m p i r i c a l evidence from Hong Kong has p r o v i d e d support to the t h e o r i e s which we have examined. Thus, these t h e o r i e s appear to be v a l i d and u s e f u l i n t h e i r a b i l i t y to e x p l a i n and p r e d i c t f o r e i g n investment c h a r a c t e r i s t i c s . But we need a few words of c a u t i o n and c l a r i f i c a t i o n . The s t a r t i n g p o i n t of n e a r l y a l l e x i s t i n g t h e o r i e s of the determinants of d i r e c t f o r e i g n investment i s the investment motives and needs of the i n v e s t o r . In other words, they evolve mostly, i f not e x c l u s i v e l y around the i n t e r n a l push f a c t o r s . But without i n c o r p o r a t i n g the e x t e r n a l p u l l f a c t o r s , these t h e o r i e s 212 are g r o s s l y inadequate i n e x p l a i n i n g and p r e d i c t i n g f o r e i g n investment c h a r a c t e r i s t i c s . The f a c t i s t h a t investment charac-t e r i s t i c s are not s o l e l y determined by the i n t e r e s t o f f o r e i g n i n v e s t o r s alone; i n s t e a d , they are the r e s u l t s o f the i n t e r a c t i o n s between the i n v e s t o r s ' motives and needs and the host government's p o l i c y towards f o r e i g n investment. Gone are the day when i n v e s t o r s have a b s o l u t e freedom i n choosing where to go, what to produce, how to make, or even when to p u l l out. One may argue t h a t the two se t s o f f a c t o r s have to be compatible f o r an investment to take p l a c e . For example, a search f o r labour (the investment motive) may mesh wit h a wish to c r e a t e employment (the government o b j e c t i v e ) or a d e s i r e to e x p l o i t a p r o d u c t i o n advantage with the need to import technology. T h i s argument, however, i s too s t a t i c and f a i l s to comprehend the p o t e n t i a l v o l a t i l i t y of government o b j e c t i v e s and p o l i c i e s , e s p e c i a l l y i n the l e s s developed c o u n t r i e s . Whereas a f o r e i g n i n v e s t o r ' s primary o b j e c t i v e i s p r o f i t making, a country may have m u l t i p l e and sometimes d i v e r g e n t economic o b j e c t i v e s t h a t range from import s u b s t i t u t i o n to export d i v e r s i f i c a t i o n , from a c c e l e r a t i n g economic growth to r e d u c i n g payment d e f i c i t s , from f i g h t i n g r e c e s s i o n to checking i n f l a t i o n o r from r a i s i n g employ-ment to a v o i d i n g f o r e i g n economic domination. Government p o l i c i e s towards f o r e i g n investment w i l l vary a c c o r d i n g l y and f o r e i g n i n v e s t o r s may a l s o have to make changes i n t h e i r s t r a t e g i e s and plans so as to adapt themselves to the new r u l e s o f the game. 213 Hence, the investment c h a r a c t e r i s t i c s they display may not i accurately r e f l e c t t h e i r o r i g i n a l investment motives and needs. What this means i s that a theory of d i r e c t foreign investment which i s based e n t i r e l y on investment motives and needs has limited power i n predicting investment c h a r a c t e r i s t i c s . S i m i l a r l y , using c h a r a c t e r i s t i c s to detect motives and needs may be an equally f u t i l e exercise. We have to incorporate the host government p o l i c y , or i n broader terms, the environmental constraints into the theory before we can draw any meaningful conclusions. Right now, there s t i l l does not e x i s t a theory 4 which integrates a l l the relevant elements. This i s exactly why the case of Hong Kong i s so unique. The analyses i n the previous^chapters have revealed ho surprising r e s u l t s coming out of the empirical findings. The U.S. manufacturers and Japanese manufacturers a l l seem to be behaving just as t h e o r e t i c a l models would predict. There are no contradictions or even s i g n i f i c a n t deviations from the hypothe-t i c a l propositions. The only finding which appears to be incon-s i s t e n t with a t h e o r e t i c a l proposition i s the high proportion of majority holdings by the Japanese manufacturers. But t h i s apparent inconsistency only serves to i l l u s t r a t e the general argument. Despite the various motives and needs that have been put forward to explain the frequent use of j o i n t ventures by Japanese investors i n foreign countries, the strongest one i s 214 probably because the host country government r e q u i r e s them. In Hong Kong where th e r e i s no requirement f o r l o c a l e q u i t y p a r t i c i p a t i o n , the Japanese i n v e s t o r s , l i k e the U.S. and other f o r e i g n i n v e s t o r s , show a c l e a r p r e f e r e n c e f o r m a j o r i t y or f u l l ownership and u n d i v i d e d management c o n t r o l . In other words, i f Hong Kong has had s t r i c t r e s t r i c t i o n s and l i m i t a t i o n s on what f o r e i g n i n v e s t o r s can do, then we may f i n d the investment c h a r a c t e r i s t i c s d i s p l a y e d by the f o r e i g n i n v e s t o r s to be very much a l i k e i r r e s p e c t i v e of the f a c t t h a t they may have come from d i f f e r e n t c o u n t r i e s and have d i f f e r e n t investment motives. The i n d u s t r i e s i n which they i n v e s t , the technology they use, the degree of export o r i e n t a t i o n , the m a t e r i a l sources, the ownership and management c o n t r o l p a t t e r n and the l i k e may a l l be very s i m i l a r . In c o n c l u s i o n , the w r i t e r would l i k e t o emphasize t h a t because of the government's l a i s s e z f a i r e p o l i c y , Hong Kong's case i s unique and l a b o r a t o r y l i k e . I t p r o v i d e s an i d e a l p l a c e f o r t e s t i n g d i r e c t f o r e i g n investment t h e o r i e s . However, the f a c t t h a t a theory has found support i n the case of Hong Kong does not n e c e s s a r i l y mean t h a t i t can r e l i a b l y be used elsewhere to e x p l a i n and p r e d i c t f o r e i g n investment c h a r a c t e r -i s t i c s . Only an i n t e g r a t e d theory can. We badly need one. 215 Notes 1. Out of the some three thousand t i t l e s l i s t e d i n the i n t e r n a t i o n a l business b i b l i o g r a p h y by Brooke, Black and N e v i l l e (Brooke, M.Z., Black, M. and N e v i l l e , P., I n t e r - n a t i o n a l Business B i b l i o g r a p h y , Macmillan, London, 1977) more than seven hundred and f i f t y , o r about one-quarter, are concerned with government-company r e l a t i o n s . 2. A d i s c u s s i o n of the i n t e r a c t i o n between the m u l t i n a t i o n a l c o r p o r a t i o n s and n a t i o n a l governments i s beyond the scope of t h i s study. See Barnet, R.J. and M u l l e r , R.E., G l o b a l Reach; The Power of  M u l t i n a t i o n a l C o r p o r a t i o n s , Simon and Schuster, New York, 1974. B i e r s t e k e r , T.J., D i s t o r t i o n or Development?: Contending  P e r s p e c t i v e on the M u l t i n a t i o n a l C o r p o r a t i o n , M.I.T. Pres s , Cambridge, Mass., 1978. Boarman, P.M. and Schollhammer, H. (eds.), M u l t i n a t i o n a l  C o r p o r a t i o n s and Governments: Business-Government  R e l a t i o n s i n an I n t e r n a t i o n a l Context, Praeger, New York, 1975. Curzon, G., The M u l t i n a t i o n a l E n t e r p r i s e i n a H o s t i l e World, Macmillan, London, 1977. Murray, R., M u l t i n a t i o n a l Companies and N a t i o n S t a t e s , B e rtrand Russel Peace Foundation, Nottingham, 1975. Stephenson, H., The Coming C l a s h : The Impact of M u l t i n a t i o n a l C o r p o r a t i o n s on N a t i o n S t a t e s , Saturday Review P r e s s , New York, 1973. Vernon, R., Storm Over the M u l t i n a t i o n a l s , Harvard U n i v e r s i t y P r e s s , Cambridge, Mass., 1977. 3. Kohlhagen, S.W., "Host Country P o l i c i e s and MNCs" The P a t t e r n of F o r e i g n Investment i n Southeast A s i a " , Columbia J o u r n a l of World Business, S p r i n g , 1977 4. A work which has taken an i n t e g r a t e d approach and comes c l o s e i n t h i s d i r e c t i o n i s the one by Y. Tsurumi. (Tsurumi, Y., The Japanese are Coming: A M u l t i n a t i o n a l I n t e r a c t i o n of Firms and P o l i t i c s , B a l l i n g e r P u b l i s h i n g Co., Cambridge, Mass., 1976.) 5. 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L a l l , S., "Less Developed C o u n t r i e s and P r i v a t e F o r e i g n I n v e s t -ment: A Review A r t i c l e " , World Development, A p r i l - May 1974. , F o r e i g n investment, T r a n s n a t i o n a l s and Developing C o u n t r i e s , Macmillan, London, 197 7 Lee, C.H., "United S t a t e s and Japanese D i r e c t Investment i n Korea: A Comparative Study", H i t o t s h i b a s h i J o u r n a l of  Economics, February, 1977. Levy, H. and Sarnat, M., " I n t e r n a t i o n a l D i v e r s i f i c a t i o n and Investment P o r t f o l i o s " , American Economic Review, September, 1970. Mason, R.H., " C o n f l i c t s Between Host C o u n t r i e s and the M u l t i -n a t i o n a l E n t e r p r i s e " , C a l i f o r n i a Review, F a l l , 1974. M i l l e r , R.R. and Weigel, D.R., "The M o t i v a t i o n f o r F o r e i g n D i r e c t Investment", J o u r n a l of I n t e r n a t i o n a l Business  S t u d i e s , F a l l , 1972. Murray, R., M u l t i n a t i o n a l Companies and Nation S t a t e s , B e r t r a n d Russel Peace Foundation, Nottingham, 1975. Ozawa, T., M u l t i n a t i o n a l i s m , Japanese S t y l e : The P o l i t i c a l Economy of Outward Dependency, P r i n c e t o n U n i v e r s i t y P r e s s , P r i n c e t o n , N.J., 1979. P e r l m u t t e r , H.V., "The Tortuous E v o l u t i o n of the M u l t i n a t i o n a l C o r p o r a t i o n " , Columbia J o u r n a l of World Bu s i n e s s , January - February, 196 9. Ragazzi, G., "Theories Of the Determinants of D i r e c t F o r e i g n Investment", I n t e r n a t i o n a l 1 Monetary Fund S t a f f Papers, J u l y , 1973. Reuber, G.L., C r o o k e l , H., Emerson, M. and Gallais-Hammonno, G., P r i v a t e F o r e i g n Investment i n Development, Clarendon P r e s s , Oxford, 1973. 2*20 Roemer, J.E., U.S.- Japanese Competition i n I n t e r n a t i o n a l Markets: A Study of t h e Trade-Investment C y c l e i n  Modern C a p i t a l i s m , I n s t i t u t e of I n t e r n a t i o n a l S t u d i e s , U n i v e r s i t y o f C a l i f o r n i a , Berkeley, 1975. Rugman, A.L., I n t e r n a t i o n a l D i v e r s i f i c a t i o n arid: the Mult 1-n a t i o n a l E n t e r p r i s e , Lexington Books, Lexington, Mass., 1979. Sandhu, K.S. and Tang, P.T. (eds.), Japan as an Economic Power and i t s I m p l i c a t i o n s f o r Southeast A s i a , I n s t i t u t e of Southeast A s i a n S t u d i e s , Singapore U n i v e r s i t y P r e s s , Singapore, 1974. Sherk, D.R., " F o r e i g n Investment i n A s i a : Japan vs the U.S.", Columbia J o u r n a l of World Business, F a l l , 1974. Siddayao, CM., ASEAN and the M u l t i n a t i o n a l C o r p o r a t i o n s , I n s t i t u t e of Southeast A s i a n S t u d i e s , Singapore, 1978. Stephenson, H., The Coming C l a s h : The Impact of M u l t i n a t i o n a l C o r p o r a t i o n s on the N a tion S t a t e , Saturday Review Pr e s s , New York, 1973. Stobaugh J r . , R.B., "How to Analyse F o r e i g n Investment C l i m a t e s " , Harvard Business Review, September - October, 1969. Szczepahik, E., The Economic Growth of Hong Kong, Oxford U n i v e r s i t y P r e s s , London, 1958. Tsurumi, Y., The Japanese are Coming: A M u l t i n a t i o n a l I n t e r a c t i o n  of Firms and P o l i t i c s , B a l l i n g e r P u b l i s h i n g Company, Cambridge, Mass., 1976. U n i t e d Nations, M u l t i n a t i o n a l C o r p o r a t i o n s i n World Development, New York, 1973. Vernon, R., " I n t e r n a t i o n a l Investment and I n t e r n a t i o n a l Trade i n the Product C y c l e " , Q u a r t e r l y J o u r n a l of Economics, February, 1967. , "The Economic Consequence of U.S. F o r e i g n D i r e c t I n v e s t -ment", U n i t e d S t a t e s I n t e r n a t i o n a l Economic P o l i c y i n an Interdependent World, Papers 1, Washington, D.C., 1971. , S o v e r e i g n t y at Bay:; The M u l t i n a t i o n a l Spread of U.S. E n t e r p r i s e s , B a s i c Books, New York, 1971. , Storm Over the M u l t i n a t i o n a l s , Harvard U n i v e r s i t y P r e s s , Cambridge, Mass., 1977. Wells J r . , L.T., The Product L i f e C y c l e and I n t e r n a t i o n a l Trade, Harvard Business School, D i v i s i o n o f Research, Boston, 1972. Yang, C.Y., "Management S t y l e s : American v i s - a - v i s Japanese", Columbia Journal- o f World Business, F a l l , 1977. Yoshihara, K., Japanese Investment i n Southeast A s i a , The U n i v e r s i t y Press of Hawaii, Honolulu, 1978. Yoshina, M.Y., Japanese M u l t i n a t i o n a l E n t e r p r i s e s , Harvard U n i v e r s i t y P ress, Cambridge, Mass., 1976. APPENDIX I QUESTIONNAIRE ON FOREIGN MANUFACTURERS IN HONG KONG 223 T h i s q u e s t i o n n a i r e c o n t a i n s 50 ques t i o n s and i s d i v i d e d i n t o t h r e e p a r t s : (I) Ownership and c o n t r o l (questions 1 to 15), (II) P r o d u c t i o n and marketing (questions 16 to 40) and (III) Investment c h a r a c t e r i s t i c s and assessment of investment c o n d i t i o n s i n Hong Kong, (questions 41 to 50) . Ple a s e answer or mark with an 'X' the c o r r e c t answer i n the space p r o v i d e d . The type of ownership of the company i s (a) s o l e p r o p r i e t o r s h i p (b) p a r t n e r s h i p (c) p r i v a t e l i m i t e d l i a b i l i t y company (d) p u b l i c l i m i t e d l i a b i l i t y company (e) o t h e r s (please s p e c i f y ) 2. The year of establishment of the company was The amount of paid-up c a p i t a l a t time of establishment was (please g i v e f i g u r e i n approximate HK$'000) $ 3. The year i n which f o r e i g n e r s shared i n the e q u i t i e s o f the company was (This may be the same as the year o f establishment.) 4. The percentage share o f paid-up c a p i t a l h e l d by f o r e i g n e r s i n t h a t year was (a) over 95% . (b) 76 - 95% (c) 51 - 75% (d) e x a c t l y 50% (e) 26 - 49% (f) 5 - 25% (g) l e s s than 5% 5. How d i d f o r e i g n e r s p a r t i c i p a t e i n the e q u i t i e s of the company? (a) The company was o r i g i n a l l y e s t a b l i s h e d w i t h f o r e i g n ownership i n t e r e s t (b) The company was p r e v i o u s l y a l o c a l company and s o l d a l l i t s ownership i n t e r e s t to f o r e i g n e r s (c) The company was p r e v i o u s l y a l o c a l company and s o l d p a r t of i t s ownership i n t e r e s t to f o r e i g n e r s (d) The company was p r e v i o u s l y a l o c a l company and enlarged i t s c a p i t a l to take i n f o r e i g n ownership i n t e r e s t 224 The amount of paid-up c a p i t a l o f the company a t the end of 1978 was (please g i v e f i g u r e i n approximate HK $'0 0 0) $ The percentage share of paid-up c a p i t a l h e l d by f o r e i g n e r s a t the end of 1978 was (a) over 95% (b) 7 6 - 9 5 % (c) 51 - 75% (d) e x a c t l y 50% (e) 26 - 49% . (f) 5 - 2 5 % (g) l e s s than 5% The n a t i o n a l i t y o f f o r e i g n ownership i n t e r e s t i s / a r e D i s r e g a r d i n g the percentage share of f o r e i g n ownership i n t e r e s t , do you c o n s i d e r the company as b a s i c a l l y a j o i n t venture? (a) No, not a j o i n t venture (b) Yes, a j o i n t venture with l o c a l p r i v a t e i n t e r e s t (c) Yes, a j o i n t venture w i t h the l o c a l government (d) Yes, a j o i n t venture w i t h more than one f o r e i g n country source of investment (a f o r e i g n e r s 1 j o i n t venture) Is the company a f f i l i a t e d w i t h , by ownership, some oth e r company(ies) i n f o r e i g n c o u n t r i e s ? (a) Yes (b) No I f your answer to q u e s t i o n (10) i s 'yes', what i s the nature of t h a t a f f i l i a t e d company(ies)? (please mark a l l t h a t apply) (a) The parent company (b) S u b s i d i a r y company(ies) • (c) S i s t e r company(ies) of equal s t a t u s ' (For companies with a parent company overseas;only) Are a l l or most appointments a t management l e v e l r e q u i r e approval by the parent company? (a) Yes (b) No 225 13. (For companies wi t h a parent company overseas only) Is the p r e s e n t c h i e f e x e c u t i v e ( p r e s i d e n t , managing d i r e c t o r or ge n e r a l manager who makes the f i n a l d e c i s i o n i n the company) an out-posted e x e c u t i v e of the parent company? (a) Yes (b) No 14. The n a t i o n a l i t y of the c h i e f e x e c u t i v e i s (a) l o c a l (b) f o r e i g n 15. The approximate percentage of e x e c u t i v e s employed by the company a t management or s u p e r v i s o r y l e v e l s being f o r e i g n e x p a t r i a t e s i s 16. The type of manufacturing i n d u s t r y to which the company belongs i s (a) b u i l d i n g and c o n s t r u c t i o n m a t e r i a l s (b) chemical products (c) e l e c t r i c a l products and a p p l i a n c e s ' (d) e l e c t r o n i c s (e) food and beverages (f) metal products (excluding toys) (g) metal r o l l i n g , e x t r u s i o n and f a b r i c a t i o n (h) p r i n t i n g and p u b l i s h i n g (i) t e x t i l e s (j) t o y s (k) watches, c l o c k s and a c c e s s o r i e s (1) o t h e r s (please s p e c i f y ) 17. The p r o d u c t i o n o p e r a t i o n s performed by the company i n c l u d e (please mark a l l t h a t apply) (a) the complete process o f manufacturing (b) assembly (c) product d e s i g n (d) q u a l i t y t e s t i n g and c o n t r o l (e) p r o d u c t i o n r e s e a r c h and development ' (f) packaging and package design (g) o t h e r s (please s p e c i f y ) 18. How many l i n e s o f products does the company produce? (a) One _ (b) Two to f i v e (c) More than f i v e — 226 19. I f the company produces more than one l i n e s of products, the percentage share of the most important product l i n e i n terms of output i s (a) over 80% . (b) 61 - 80% _ _ _ (c) 41 - 60% (d) 21 - 40% _ _ _ (e) 20% or l e s s 20. The products produced by the company are (please mark a l l t h a t apply) (a) consumer products ready f o r use by f i n a l consumers (b) i n d u s t r i a l products ( i n c l u d i n g component p a r t s ) f o r i n d u s t r i a l buyers (c) s e m i - f i n i s h e d products ' Are the company 1s products (a) made a c c o r d i n g to buyers' s p e c i f i c a t i o n (order made) (b) made from the company's own designs (standard made) (c) p a r t l y order made and p a r t l y standard made Are any of the company's products being produced under l i c e n s i n g agreement(s) with another company overseas? (a) Yes (b) No 23. I f your answer to q u e s t i o n (22) i s 'yes', what i s the nature o f t h i s overseas company? (a) The parent company (b) A s u b s i d i a r y company (c) A s i s t e r company (d) An u n a f f i l i a t e d company 24. The sources of the company's c a p i t a l equipment and machinery s u p p l i e s are (a) a l l l o c a l (b) mainly l o c a l (c) mainly f o r e i g n '  (d) a l l f o r e i g n 25. I f the company has f o r e i g n c a p i t a l equipment and machinery s u p p l i e s , t h e . t h r e e most important country sources i n descending order are (please name the c o u n t r y ( i e s ) ) And the percentage share o f such c a p i t a l equipment and machinery s u p p l i e s coming from a f f i l i a t e d companies (the parent company, s u b s i d i a r y company or s i s t e r company) i s %. 21. 22. 227 ~ 26. The sources of the company's raw m a t e r i a l s u p p l i e s ( i n c l u d i n g component p a r t s ) are (a) a l l l o c a l (b) mainly l o c a l (C) mainly f o r e i g n (d) a l l f o r e i g n 27. I f the company has f o r e i g n raw m a t e r i a l s u p p l i e s , the t h r e e most important country sources i n descending order are (please name the c o u n t r y ( i e s ) ) And the percentage share of such raw m a t e r i a l s u p p l i e s coming from a f f i l i a t e d companies (the parent, s u b s i d i a r y or s i s t e r companies) i s %. 28. The number of workers employed by the company i n manufac-t u r i n g o p e r a t i o n s d i r e c t l y (mannual workers, foremen included) i s . T o t a l wage payments to these workers amount to $ per month (please g i v e approximate f i g u r e ) . 29. The number of e x e c u t i v e s and o f f i c e employees (managers included) employed by the company i s T o t a l s a l a r y payments to these employees amount to $ p e r month (please g i v e approximate f i g u r e s ) . 30. The approximate percentages of mannual workers i n the company being s k i l l e d , s e m i - s k i l l e d and u n s k i l l e d are (a) S k i l l e d (b) S e m i - s k i l l e d (c) U n s k i l l e d 31. Has the company had subcontracted work to other f i r m s i n the p a s t f i v e years? (a) Yes (b) No 32. I f your answer to q u e s t i o n (31) i s 'yes', the main reason(s) f o r s u b c o n t r a c t i o n i s / a r e (please mark a l l t h a t apply) (a) The company c o u l d not handle the s i z e of the buyers' o r d e r s (b) The company c o u l d not handle some s p e c i f i c order requirements (e.g., design) (c) I t was more p r o f i t a b l e to s u b c o n t r a c t (d) Others (-please d e s c r i b e b r i e f l y ) 228 How many p r o d u c t i o n stoppages (periods o f th r e e working days or more wit h no p r o d u c t i o n o p e r a t i o n s ) the company has had i n the past f i v e years? (a) 0 • _ _ (b) 1 t o 3 (C) 4 to 6 (d) 7 to 9 (f) 10 o r more : I f the company has had p r o d u c t i o n stoppages i n the p a s t f i v e y e a r s , the cause(s) was/were (please mark a l l t h a t apply) (a) labour d i s p u t e s (on wages, terms of employment, hours of work and working c o n d i t i o n s e t c . ) ' (b) machine breakdowns (c) i n d u s t r i a l a c c i d e n t s (d) i n s u f f i c i e n t work or d e r s (e) o t h e r s (please d e s c r i b e b r i e f l y ) The company's s a l e s i n the year 1978 was (please g i v e f i g u r e i n approximate HK$'000) $ . Export s a l e s as a percentage of the company's t o t a l s a l e s i n 1978 was ' % approximately. The t h r e e most important f o r e i g n country markets and t h e i r approximate percentage shares o f the company's t o t a l s a l e s ( l o c a l and export s a l e s ) i n 1978 were Country % Share (a) (b) (c) The approximate percentage shares of export s a l e s (excluding l o c a l s a l e s ) to overseas a f f i l i a t e d companies (the parent, s u b s i d i a r y or s i s t e r companies) i n 1978 was _ %. 229 39. The approximate percentage shares o f the three most important customer of the company ( l o c a l and f o r e i g n ) i n 1978 were (a) Most important % (b) Second most important % (c) T h i r d most important % 40. The marketing a c t i v i t i e s performed by the company i n c l u d e (please mark a l l t h a t apply) (a) market and consumers r e s e a r c h (b) a d v e r t i s i n g (c) d i s t r i b u t i o n and w h o l e s a l i n g (d) r e t a i l i n g (e) export s a l e s promotion ' (f) a f t e r s a l e s s e r v i s i n g (g) o t h e r s (please s p e c i f y ) 41. The f o l l o w i n g i s a l i s t o f p o s s i b l e reasons f o r i n t e r n a t i o n a l c o r p o r a t i o n s to manufacture i n a f o r e i g n country. P l e a s e mark a l l those which i n i t i a l l y induced the company to manufacture i n Hong Kong. (a) To manufacture a t or near sources o f raw m a t e r i a l s u p p l i e s (b) To make use of l o c a l labour (c) To make use of l o c a l p r o d u c t i o n s k i l l and technology (d) To make use of l o c a l c a p i t a l (e) To take advantage of lower l o c a l taxes (f) To take advantage of the concessions granted by the l o c a l government to f o r e i g n companies (e.g., tax h o l i d a y s , cheaper land s i t e s , t a r i f f p r o t e c t i o n ) (g) To e l i m i n a t e o r reduce the c o s t o f t r a n s p o r -t a t i o n i n s e l l i n g to the l o c a l market and i t s neighbouring markets (h) To make the company's products more a c c e p t a b l e by l o c a l customers (i) To g e o g r a p h i c a l l y d i v e r s i f y the company's o p e r a t i o n s (j) To get over import r e s t r i c t i o n s (k) To match co m p e t i t i o n by l o c a l f i r m s or oth e r f o r e i g n f i r m s (1) To ensure s u p p l i e s o f m a t e r i a l s e s s e n t i a l to the company;s o p e r a t i o n s a t home (country i n which the headquarter company i s located) (m) The company has a l r e a d y reached i t s l i m i t o f expansion a t home (Cont.) (h) The company i s being i n v i t e d by the l o c a l government (o) The company can b e t t e r meet l o c a l product standards by manufacturing t h e r e i n (p) Others (please d e s c r i b e b r i e f l y ) The f o l l o w i n g i s a l i s t of f a c t o r s which a f f e c t b usiness v i a b i l i t y and p r o f i t a b i l i ( B r i e f e x p l a n a t i o n s o f these f a c t o r s are g i v e n i n the Annex.) P l e a s e i n d i c a t e w i t h an 'X' the degree of importance of these f a c t o r s to the company's o p e r a t i o n s . V i t a l l y Not Completely F a c t o r s Important Important Important I r r e l e v a n t (a) A v a i l a b i l i t y of managerial s k i l l (b) Business laws and r e g u l a t i o n s (c) Corporate taxes ' ' (d) Cost of land, o f f i c e and f a c t o r y - space . (e) Currency s t a b i l i t y (f) Domestic economic s t a b i l i t y ' ' (g) Education standard of p o p u l a t i o n (h) Exchange c o n t r o l s (i) F i n a n c i a l m a t u r i t y ______.. (j) General a t t i t u d e towards I f o r e i g n e r s and f o r e i g n companies ' • -(k) Geographical l o c a t i o n (1) Government's i n t e g r i t y and e f f i c i e n c y i n a d m i n i s t r a t i o n ' " ' (m) Government p o l i c y towards f o r e i g n investment . . . . . ^ ^ ^ ^ ^ (n) Labour supply, c o s t and p r o d u c t i v i t y '  (o) Labour-management r e l a t i o n s h i p ...... (p) L o c a l market p o t e n t i a l _ _ _ _ __ ' ' (q) P o l i t i c a l s t a b i l i t y . (r) Raw m a t e r i a l s u p p l i e s _________ (s) S o c i a l overhead f a c i l i t i e s _______ _______ (t) Trade r e s t r i c t i o n s on imports and exports . _ Please i n d i c a t e with an 'X' the degree to which these f a c t o r s are f a v o u r a b l e or unfavourable i n Hong Kong. The s c a l e ranges from -5 which r e p r e s e n t s the most unfavourable r a t i n g to +5 which r e p r e s e n t s the most f a v o u r a b l e r a t i n g . (Please use your s u b j e c t i v e judgment and do not bother with numerical accuracy.) F a c t o r A v a i l a b i l i t y of managerial s k i l l Business laws and r e g u l a t i o n s Corporate taxes Cost of land, o f f i c e and f a c t o r y soace Currency s t a b i l i t y Domestic economic s t a b i l i t y E d u c a t i o n standard of p o p u l a t i o n Exchange c o n t r o l s F i n a n c i a l m a t u r i t y General a t t i t u d e towards f o r e i g n e r s and f o r e i g n companies Geographical l o c a t i o n Government's i n t e g r i t y and e f f i c i e n c y i n a d m i n i s t r a t i o n Government p o l i c y towards f o r e i g n investment Labour supply, c o s t and p r o d u c t i v i t y Labour-management r e l a t i o n s h i p L o c a l market p o t e n t i a l P o l i t i c a l s t a b i l i t y Raw m a t e r i a l s u p p l i e s S o c i a l overhead f a c i l i t i e s Trade r e s t r i c t i o n s on imports and exports Unfavourable Favourable -5 -4 -3 -2 -1 +1 +2 +3 +4 +5 2 3 3 44. What i s the approximate average r a t e of r e t u r n on i n v e s t -ment (paid-up c a p i t a l ) i n the p a s t f i v e years or s i n c e the company's establishment? % (annual, a f t e r tax) 45. Compared to the company's o r i g i n a l e x p e c t a t i o n s , i s t h i s r a t e (a) h i g h e r (b) lower (c) about the same 46. Do you t h i n k t h i s r a t e i s high enough to compensate f o r the business r i s k i n v o l v e d ? (a) Yes (b) No 47. In r e t r o s p e c t , do you t h i n k t h a t the company made the r i g h t d e c i s i o n i n e s t a b l i s h i n g manufacturing o p e r a t i o n s i n Hong Kong? (a) D e f i n i t e l y yes . (b) Probably yes (c) Probably no (d) D e f i n i t e l y no (e) I t i s too e a r l y to t e l l 48. Do you t h i n k t h a t the business, .environment f o r f o r e i g n i n v e s t o r s as a whole i n Hong Kong has improved i n the p a s t ten years? (a) Has improved (b) Has d e t e r i o r a t e d (c) Has remained about the same 49. I f the company has the chance to r e l o c a t e i n the r e g i o n , would i t have chosen Hong Kong again? (a) Yes (b) No 50. I f your answer to q u e s t i o n (49) i s 'no', which other c o u n t r y ( i e s ) i n the r e g i o n the company would have chosen? (Please name the c o u n t r y ( i e s ) ) Name of Company: P o s i t i o n of Respondent: P l e a s e i n d i c a t e whether or not you are w i l l i n g to accept follow-up i n t e r v i e w s i f such are requested: Yes ' ' No 2 3 4 Annex: Exp l a r i a t i ons of : Investment F a c t o r s A v a i l a b i l i t y of managerial s k i l l : A v a i l a b i l i t y and q u a l i t y of v a r i o u s types of management and t e c h n i c a l s k i l l . Business laws arid r e g u l a t i o n s : Q u a l i t y and degree of e n f o r c e -ment of government laws and r e g u l a t i o n s r e l e v a n t to business such as those concerning r e g i s t r a t i o n , ownership, pat e n t , f i n a n c i n g , p r i c i n g , employment, compensation and r e p o r t i n g . Corporate tax e s : Types of taxes and tax r a t e s a p p l i c a b l e to b usiness c o r p o r a t i o n s . Cost of l a n d , o f f i c e and f a c t o r y space: Purchase or r e n t a l c o s t of l a n d , o f f i c e and f a c t o r y space used f o r business o p e r a t i o n s . Currency s t a b i l i t y : Extent of f l u c t u a t i o n s i n the exchange r a t e and r i s k of d e v a l u a t i o n . Domestic economic s t a b i l i t y : V u l n e r a b i l i t y of domestic economy to c y c l i c a l and e r r a t i c f l u c t u a t i o n s and f o r e i g n d e p r e s s i o n s ; domestic p r i c e s t a b i l i t y and growth s t a b i l i t y . E d u c a t i o n standard of p o p u l a t i o n : Comprehension a b i l i t i e s of people, l i t e r a c y l e v e l and f o r e i g n language (English) p r o f i c i e n c y . Exchange c o n t r o l s : . R e s t r i c t i o n s on inward and outward rem i t t a n c e s of c a p i t a l and p r o f i t s . F i n a n c i a l m a t u r i t y : A v a i l a b i l i t y and q u a l i t y of banking and insurance f a c i l i t i e s and c a p i t a l markets. General a t t i t u d e towards f o r e i g n e r s and f o r e i g n companies: The c o l l e c t i v e p u b l i c f e e l i n g towards f o r e i g n e r s and f o r e i g n companies as evidenced by o v e r t behaviour. Geographical l o c a t i o n : L o c a t i o n i n r e g i o n and ease of access to markets and sources of m a t e r i a l s u p p l i e s . Government's i n t e g r i t y and e f f i c i e n c y I n a d m i n i s t r a t i o n : A b i l i t i e s o f government o f f i c i a l s , t h e i r work e f f i c i e n c y and extent of bureaucracy, c o r r u p t i o n , u n c e r t a i n t y or c o n f u s i o n i n d e a l i n g s w i t h government. 2 3 5 Government p o l i c y towards f o r e i g n investment: Nature and extent of o f f i c i a l i n c e n t i v e s and helps g i v e n t o , or r e s t r i c t i o n s on f o r e i g n owned or c o n t r o l l e d companies and t h e i r o p e r a t i o n s . Labour supply, c o s t and p r o d u c t i v i t y : A v a i l a b i l i t y of s k i l l e d and u n s k i l l e d labour; the a b s o l u t e and r e l a t i v e wage l e v e l s and work e f f i c i e n c y o f i n d u s t r i a l workers. Labour-management r e l a t i o n s h i p : Extent and frequency of l a b o u r management c o n f l i c t s , s t r i k e s and labour turnover; s t r e n g t h and a g g r e s s i v e n e s s of unions. L o c a l market p o t e n t i a l : Present and p r o j e c t e d s i z e of l o c a l market. P o l i t i c a l s t a b i l i t y : Frequency of changes i n the form of government; v i o l e n c e of coups; extent of p o l i t i c a l s u b v e r s i o n and e f f e c t i v e n e s s of i n t e r n a l s e c u r i t y . Raw m a t e r i a l s u p p l i e s : A v a i l a b i l i t y or ease of access to raw m a t e r i a l s . . S o c i a l overhead f a c i l i t i e s : A v a i l a b i l i t y and q u a l i t y of commu-n i c a t i o n s e r v i c e s , t r a n s p o r t and warehousing f a c i l i t i e s , h e a l t h and e d u c a t i o n , power and water s u p p l i e s e t c . \ Trade r e s t r i c t i o n s on imports and e x p o r t s : Number and c a t e g o r i e s of commodities s u b j e c t to import t a r i f f s o r quotas and export d u t i e s and l e v e l of duty r a t e s . APPENDIX II STATISTICAL TESTS 237 Appendix 11-1.1: Response r a t e by Type of Industry N u l l h y p o t h e s i s : (Hn) A l t e r n a t i v e h y p o thesis (Ha): C r i t e r i o n f o r d e c i s i o n : The e f f e c t i v e response r a t e does not d i f f e r by type of i n d u s t r y . The e f f e c t i v e response r a t e d i f f e r s by type of i n d u s t r y . R e j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 19.675. '(Level of s i g n i f i -cance =0.05; degree of freedom = 11) Number of Firms A c t u a l (A) Expected (E) o In d u s t r y P o p u l a t i o n Responses Responses (A-E) V E E l e c t r o n i c s 70 25 19.3 1.68 T e x t i l e s 95 19 26.2 1.98 Metal products 30 13 8.3 2.66 Watches, c l o c k s & 28 8 7.7 0.01 a c c e s s o r i e s E l e c t r i c a l products . 26 6 7.2 0.20 Chemical products 19 5 5.2 0.01 P r i n t i n g & p u b l i s h i n g 10 5 2.8 1.73 Food manufactures 17 2 4.7 1. 55 Metal r o l l i n g , e x t r u - 5 2 1.4 0.26 s i o n & f a b r i c a t i o n Toys 11 2 3.0 0.33 B u i l d i n g & c o n s t r u c - 5 1 1.4 0.26 t i o n m a t e r i a l s Others 75 20 20.7 0.02 391 108 108.0 10.69 C h i square = 10.69. Th e r e f o r e , the e f f e c t i v e response r a t e does not d i f f e r by type of i n d u s t r y . Note: The p o p u l a t i o n f i g u r e s r e p r e s e n t the number of f i r m s at February 28, 1979. Sources: Table 71-2 and Department of Trade, Industry and Customs, Hong Kong government. 238 Appendix I I - l . 2: Response r a t e by Country Source o f Investment N u l l h y p o t h e s i s : (Hn) A l t e r n a t i v e h ypothesis (Ha) C r i t e r i o n f o r d e c i s i o n : The e f f e c t i v e response r a t e does not d i f f e r by country source of investment. The e f f e c t i v e response r a t e d i f f e r s by country source of investment. R e j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 14.067. (Level of s i g n i f i -cance = 0.05; degree o f freedom = 7) A c t u a l (A) Expected (E) 2 Country P o p u l a t i o n Responses Responses ••(A-E) . U n i t e d S t a t e s 124 41 32.6 2,16 U n i t e d Kingdom 37 17 9.7 5.49 Japan 98 15 25.8 4. 52 West Germany 16 8 4.2 3.44 A u s t r a l i a 24 7 6.3 0.08 S w i t z e r l a n d 16 3 4.2 0.34 T h a i l a n d 19 3 5.0 0.80 Others 92 18 24.2 1.59 426 112 112.0 18.42 C h i square = 18.42. T h e r e f o r e , the e f f e c t i v e response r a t e d i f f e r s by country source o f investment. Note: The p o p u l a t i o n f i g u r e s r e p r e s e n t the number of f i r m s a t February 28, 1979. The a c t u a l t o t a l number was 391 and t o t a l responses 108. The apparent d i s c r e p a n c y arose because some establishments were j o i n t ventures i n v o l v i n g more than one f o r e i g n ownership i n t e r e s t . Sources: Table 1-2 and Department o f Trade, I n d u s t r y and Customs, Hong Kong government. Appendix TI-5.1: Percent Shares of Investment arid Patents Registered % Share of % Share of 7 o Country Investment (X) Patents (Y) xz Y_ XY United States 46.5 47.1 2,162.25 2, 218.41 2,190.15 Japan 19.9 11.5 396.01 132.25 228.85 United Kingdom 7.5 14.1 56.25 198.81 105.75 Switzerland 3.3 6.6 10.89 43.56 21.78 West Germany 2.5 8.9 6.25 79.21 22.25 France 1.2 2.1 1.44 4.41 2.52 Austr a l i a 4.6 0.1 21.16 0.01 0.46 Netherlands 5.2 2.6 27.04 6.76 13.52 Others 9.3 7. 0 8 6.49 49.00 65.10 100.0 100. 0 2,767.78 2, 732.42 2,650.38 Coe f f i c i e n t of corr e l a t i o n (r) n.IxY - I X . I Y = 0.939 Jin.1 x 2 - (Ix) z) (n.LYZ - ( I Y ) Z ) Significance of observed correlation (t) = = 7.232. Notes: In calcul a t i n g the percent share of patents registered, patents whose home country of grantee was Hong Kong had been excluded, t = 2.365 at le v e l of significance 0.05 and degree of freedom 7. Sources: Table IV-3 and Table V-9. 240 Appendix II-6.1: : Amount1 Of C a p i t a l Investment N u l l hypothesis (Hn) A l t e r n a t i v e h y p o thesis (Ha) C r i t e r i o n f o r d e c i s i o n : The p r o p o r t i o n of responding f i r m s i n the d i f f e r e n t c a p i t a l investment s i z e groups does not d i f f e r from t h a t o f the p o p u l a t i o n . The p r o p o r t i o n of responding f i r m s i n the d i f f e r e n t c a p i t a l investment s i z e groups d i f f e r s from t h a t o f the p o p u l a t i o n . R e j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 11.070. (Level o f s i g n i f i -cance = 0.05; degree o f freedom =5) Amount o f C a p i t a l Investment i n HK$'000 500 or l e s s 501 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 20,000 More than 20,000 Number of Firms A c t u a l Expected Responses (A) Responses (E) 15 16 44 12 9 3 99 17.6 16.3 35. 6 10.5 9.2 9.6 99.0 (A-E) V E 0. 384 0.006 1.982 0.214 0.004 4,538 7,128 Chi square = 7,128. T h e r e f o r e , the p r o p o r t i o n of responding f i r m s i n the d i f f e r e n t c a p i t a l investment s i z e groups does not d i f f e r from t h a t of the p o p u l a t i o n . Note: The expected responses were c a l c u l a t e d from the percentages g i v e n i n Table V-2. Sources: Table V-2 and Table VI-3. 241 Appendix I I - 7 . 1 : Importance and F a v o u r a b i l i t y o f Investment F a c t o r s • Rank Order of Rank Order of 2 importance (X) F a v o u r a b i l i t y (Y) X-Y (X-Y) 1 19 -18 324 2 20 -18 324 3 10 - 7 49 4 18 -14 196 5 17 -12 144 6 11 - 5 25 7.5 2.5 5 25 7.5 2.5 5 25 9 14 - 5 25 10 7 3 9 n : , 4.5 6.5 42. 25 12.5 1 11.5 132. 25 12.5 6 6.5 42. 25 14 9 5 25 15 16 - 1 1 16 15 1 1 17 8 9 81 18 4.5 13.5 182. 25 19 13 6 36 20 12 8 64 210 210 1,753. 00 C o e f f i c i e n t o f rank c o r r e l a t i o n (r„) = 1 - 6_(X-Y)2 n(n -1) = -0.318. S i g n i f i c a n c e o f observed c o r r e l a t i o n (t) = r = 1.423, Note: t = 2.101 a t l e v e l of s i g n i f i c a n c e 0.05 and degree o f freedom 18. Source: Table VII-3. Appendix IT.7.2; Importance arid F a v o u r a b i l i t y o f Investment F a c t o r Groups F a c t o r Groups P r o d u c t i o n input f a c t o r s S t a b i l i t y f a c t o r s I n c e n t i v e f a c t o r s Marketing f a c t o r s I n d i r e c t f a c t o r s Average Importance Rank Order of Score Importance (X) 161.25 124.25 105.50 99. 33 82. 20 2 3 4 5 Average F a v o u r a b i l i t y Rank Order of Score - 0.225 1.625 3.225 2. 367 2.140 F a v o u r a b i l i t y (Y) 4 1 2 3 (X-Y) 16 4 4 4 4 C o e f f i c i e n t o f rank c o r r e l a t i o n (r ) = 0.600, S i g n i f i c a n c e of observed c o r r e l a t i o n (t) = 3.182, Note: See t e x t page 135-7 f o r grouping of investment f a c t o r s , Source: Table VII-1 and Table VII-2. to 243 Appendix I1-8.1: Industry D i s t r i b u t i o n N u l l hypothesis: (Hn) The i n d u s t r y d i s t r i b u t i o n of Japanese investments does not d i f f e r from t h a t of the U.S. A l t e r n a t i v e h y p o t h e s i s (Ha) C r i t e r i o n f o r d e c i s i o n : The i n d u s t r y d i s t r i b u t i o n of Japanese investments d i f f e r s from t h a t o f the U.S. R e j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 19.675. (Level of s i g n i f i -cance = 0.05; degree of freedom = 11) Industry. U.S. Number of Firms Japan T o t a l E l e c t r o n i c s 42 (34. 6) 20 (27. 4) 62 T e x t i l e s 19 (22. 3) 21 (17. 7) 40 Metal products 10 (12. 8) 13 (10. 2) 23 E l e c t r i c a l products 9 ( 8. 4) 6 ( 6. 6) 15 Chemical products 8 ( 5. 6) 2 ( 4. 1) 10 Food manufactures 1 ( 5. 0) 8 ( 4. 0) 9 Watches, c l o c k s & a c c e s s o r i e s 3 ( 3. 9) 4 ( 3. 1) 7 Toys 8 ( 4. 5) 0 ( 3. 5) 8 P r i n t i n g & p u b l i s h i n g 2 ( 3. 4) 4 ( 2. 6) 6 Metal r o l l i n g , e x t r u -s i o n & f a b r i c a t i o n 2 ( 2. 2) 2 ( 1. 8) 4 B u i l d i n g & c o n s t r u c -t i o n m a t e r i a l s 0 ( 0. 0) 0 ( o. 0) 0 Others 20 124 (21. 2) 18 98 (16. 8) 38 222 C h i square = 23.685. T h e r e f o r e , the i n d u s t r y d i s t r i b u t i o n of Japanese investments d i f f e r s from t h a t o f the U.S. Note: F i g u r e s i n b r a c k e t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. Source: Table V I I I - 1 . 24 4 Appendix II-8.2: Technology L e v e l N u l l hypothesis: (Hh) A l t e r n a t e h y p othesis (Ha) C r i t e r i o n f o r d e c i s i o n : The i n d u s t r i e s i n which Japan i n v e s t e d are not t e c h n o l o g i c a l l y l e s s advanced than those of the U.S. The i n d u s t r i e s i n which Japan i n v e s t e d are t e c h n o l o g i c a l l y l e s s advanced than those ; of the U.S. Re j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 3.841. (Level o f s i g n i f i -cance = 0.05; degree of freedom = 1) Ind u s t r y T e c h n o l o g i c a l l y advanced Others U.S. 59 (48.6) 65 (75.4) 124 Number of Firms Japan T o t a l 28 (38.4) 87 70 (59.6) 135 98 222 C h i square = 8.300. Th e r e f o r e , the i n d u s t r i e s i n which Japan i n v e s t e d are t e c h n o l o -g i c a l l y l e s s advanced than those of the U.S. Notes: F i g u r e s i n b r a c k e t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. The t e c h n o l o g i c a l l y advanced i n d u s t r i e s are ' e l e c t r o n i c s 1 ' e l e c t r i c a l p r oducts' and 'chemical p r o d u c t s ' . Source: Table V I I I - 1 . 245 Appendix 11-8.3: S k i l l e d Workers Employed The proportion of s k i l l e d workers employed by Japanese manufacturing firms does not d i f f e r from that of the U.S. The proportion of s k i l l e d workers employed by Japanese manufacturing firms d i f f e r s from that of the U.S. Reject (Hn) and accept (Ha) i f c h i square i s greater than 11.070. (Level of s i g n i f i -cance = 0.05; degree of freedom = 5) Number of Firms S k i l l e d Workers as a % of Total Workers Employed U.S. Japan Total 0% 0 ( 0.7) 1 (0.3) 1 1 - 20% 11 (11.0) 4 (4-0)..; 15 21 - 40% 9 ( 9.5) 4 (3.5) 13 41 - 60% 4 ( 3.7) 1 (1.3) 5 61 - 80% 13 ' (12.4) 4 (4.i6) ' 17 80 - 100% _4 ( 3.7) _1 (1.3) _5 41 15 56 Chi square = 2.723. Therefore, the proportion of s k i l l e d workers employed by Japanese manufacturing firms does not d i f f e r from that of the U.S. Note: Figures i n brackets represent the expected frequencies used to calculate the chi square. Source: Table VIII-2. Null hypothesis (Hn) Alternate hypothesis (Ha) C r i t e r i o n for decision: 246 Appendix IT-8.4: P r o d u c t i o n A c t i v i t i e s Performed Number- of Firms U. S •: Japan T o t a l (A) Assembly 16 (15.4) 5 ( 5.6) 21 No assembly 25 (25.6) 10 ( 9.4 35 41 15 56 (B) Packaging & package d e s i g n No packaging & package design 11 (10.2) 3 ( 3.7). 14 30 (30.8) 12 (11.2) 42 41 15 56" (C) Product design 11 ( 9.5) 2 ( 3.5) 13 No product d e s i g n 30 (31.5) ' 13 "(11.5) 43 41 15 56 (D) P r o d u c t i o n r e s e a r c h & development No p r o d u c t i o n r e s e -a r c h & development (E) Q u a l i t y t e s t i n g & c o n t r o l No q u a l i t y t e s t i n g & c o n t r o l 15 (12.4) 2 ( 4.6) 17 26 (28.6) 13 (10.4) 39 41 15 56" 30 (24.9) 4 ( 9.1) 34 11 (16.1) 11 ( 5.9) 22 4T 15 56" (A) C h i square = 0.152. (B) Chi square = 0.273. (C) C h i square = 1.122. (D) C h i square = 2.808. (E) C h i square = 9.957. Th e r e f o r e , the p r o p o r t i o n o f Japanese manufacturing f i r m s engaged i n ' q u a l i t y t e s t i n g and c o n t r o l ' d i f f e r s from t h a t of the U.S. The p r o p o r t i o n s do not d i f f e r f o r the other f o u r a c t i v i t i e s . Note: The hypothesis to be t e s t e d i n each case i s t h a t the . p r o p o r t i o n of Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. The c r i t e r i o n f o r d e c i s i o n i s to r e j e c t the hypothesis i f c h i square i s g r e a t e r than 3.841. ( l e v e l of s i g n i f i c a n c e = 0.05; degree of freedom = 1) Source: Table V I I I - 3 . 247 Appendix II-8.5; Workers Employed N u l l h y p o t h e s i s : The number of workers employed i n Japanese (Hn) manufacturing f i r m s does not d i f f e r from t h a t of the U.S. A l t e r n a t i v e The number of workers employed i n Japanese hy p o t h e s i s (Ha): manufacturing f i r m s d i f f e r s from t h a t o f the U.S. C r i t e r i o n f o r R e j e c t (Hn) and accept (Ha) i f c h i square d e c i s i o n : i s g r e a t e r than 15.507 (Level o f s i g n i f . cance = 0.05; degree o f freedom = 8) Number of Firms Number of Workers Employed U.S. Japan T o t a l 1 - 9 0 ( 0.0) 0 (0.0) 0 10 - 19 1 ( 2.2) 2 (0.8) 3 20 - 49 2 ( 3.7) 3 (1.3) 5 50 - 99 9 ( 8.8) 3 (3.2) 12 100 - 199 17 (15.4) 4 (5.6) 21 200 - 499 8 ( 7.3) 2 (2.7) 10 500 - 999 1 ( 0.7) 0 (0.3) 1 1,000 - 1, 999 2 ( 2.2) 1 (0.8) 3 2,000 and over 1 ( 0.7) 0 (0.3) 1 41 15 56 Chi square = 6.722. Th e r e f o r e , the number o f workers employed i n Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. Note: F i g u r e s i n br a c k e t s r e p r e s e n t the expected f r e q u e n c i e s used t o c a l c u l a t e the c h i square. Source: Table V I I I - 4 . 248 Appendix II-8.6; Capital Investment N u l l hypothesis (Hn) The c a p i t a l investment by Japanese manufac-turing firms does not d i f f e r from that of the U.S. Alternative hypothesis (Ha) C r i t e r i o n for decision: The c a p i t a l investment by Japanese manufac-turing firms d i f f e r s from that of the U.S. Reject (Hn) and accept (Ha) i f chi square i s greater than 11.070. (level of s i g n i f i -cance = 0.05; degree of freedom = 5) Capital Investment Number of Firms i n HK$'000 U .S. Japan Total Less than 500 1 ( 2.9) 3 (1.1) 4 501 - 1,000 6 (10.3) 8 (3.7) 14 1,000 - 5,000 14 (12.5) 3 (4.5) 17 5,001 - 10,000 11 ( 8.8) 1 (3.2) 12 10,001 - 20,000 7 ( 5.1) 0 (1.9) 7 More than 20,000 2 ( l.i5) 0 (0.5) 2 41 15 56 Chi square = 17.4 22. Therefore, the c a p i t a l investmentby Japanese manufacturing firms differs.from that of the U.S. Note: Figures i n brackets represent the expected frequencies used to calculate the chi square. Source: Table VIII-4. 249 Appendix II-8 . 7: Export 1 Sales N u l l h y p o t h e s i s : The share of export s a l e s by Japanese (Hn) manufacturing f i r m s does not d i f f e r from t h a t of the U.S. A l t e r n a t i v e The share of export s a l e s by Japanese hy p o t h e s i s (Ha).: manufacturing f i r m s d i f f e r s from t h a t o f the U.S. C r i t e r i o n f o r R e j e c t (Hn) and accept (Ha) i f c h i square d e c i s i o n : i s g r e a t e r than 11.070. (Level of s i g n i f i -cance = 0.05; degree of freedom = 5) Number o f Firms Export S a l e s as a % of T o t a l S a l e s U.S. Japan T o t a l 0% 2 ( 2.2) 1 (0.8) 3 1 - 2 0 % 3 ( 2 . 9 ) 1 (1.1) 4 21 - 40% 5 ( 3.7) 0 (1.3) 5 4 1 - 6 0 % 7 ( 6.6) 2 (2.4) 9 61 - 80% 4 ( 4.4) 2 (1.6) 6 81 - 100% 20 (21.2) _9 (7.8) 29 41 15 56 Chi square = 2.226. T h e r e f o r e , the share o f export s a l e s by Japanese manufacturing f i r m s does not d i f f e r from t h a t of the U.S. Note: F i g u r e s i n b r a c k e t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. Source: Table V I I I - 5 . 250 Appendix 11-8 .8 : Exports 1 to Home Country N u l l hypothesis (Hn) The degree of importance o f the home country as a f o r e i g n market to Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. A l t e r n a t i v e h y p o t h e s i s (Ha) The degree o f importance o f the home country asua f o r e i g n market to Japanese manufacturing f i r m s d i f f e r s from t h a t o f the U.S. C r i t e r i o n f o r d e c i s i o n : R e j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 7.815. (Level of s i g n i f i -cance 0.05; degree Number of of freedom = Firms 3) Home Country as a F o r e i g n Market U .S. Japan T o t a l The most important 13 (16. 9) 10 (6.1) 23 The second most important 7 ( 6. 6) 2 (2.4) 9 The t h i r d most important 2 ( 2. 9) 2 (1.1) 4 Not among the three most important 17 41 (12. 5) 0 15 (0.0) 17 56 C h i square = 10.619. Th e r e f o r e , the degree o f importance of the home country as a f o r e i g n market to Japanese manufacturing f i r m s d i f f e r s from t h a t o f the U.S. Notes: F i g u r e s i n bracke t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. The three f i r m s (two U.S. and one Japanese) with no export s a l e s were excluded i n the c a l c u l a t i o n s . Source: Table V I I I - 5 . 251 Appendix TP- 8 . 9 : Import o f C a p i t a l Equipment and Machinery (A) Home Country as a Supply Number of Firms Source f o r C a p i t a l Equipment arid Machinery "U.S. Japan T o t a l i • The most important 24 (27 .1) 13 (9 .9) 37 Not the most important 1 7 (13 .9) _2 (5 .1) 19 41 15 56 (B) Share o f F o r e i g n C a p i t a l Equipment and Machniery S u p p l i e d by Overseas Af f 1 1 i a t e s More than 50% 15 (19 .0) 11 (7 .0) 26 50% or l e s s _26 (22 .0) __4 (8 .0) 3J) 41 15 56 (A) C h i square = 3 . 8 7 7 . (B) C h i square = 5 . 9 6 3 . T h e r e f o r e , the degree o f importance o f the home country and of overseas a f f i l i a t e s as a supply source f o r c a p i t a l equipment and machinery f o r Japanese manufacturing' f i r m s d i f f e r s from t h a t of the U.S. Note: The hypothesis to be t e s t e d i n each case i s t h a t the degree o f importance f o r Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. The c r i t e r i o n f o r d e c i s i o n i s to r e j e c t the hypothesis i f the c h i square i s g r e a t e r than 3 . 8 4 1 . (Level of s i g n i f i c a n c e = 0 . 0 5 ; degree o f freedom = 1) Source: Table V I I I - 6 . 252 Appendix 11-8.10: Import o f Raw M a t e r i a l s Number of Firms (A) Home Country as a Supply Source f o r Raw M a t e r i a l s : U.S. Japan T o t a l The most important 15 (18.3) 10 (6.7) 25 Not the most important 2€_ (22.7) _5 (8.0) 31_ 41 15 56 (B) Share of F o r e i g n Raw M a t e r i a l s S u p p l i e d by Overseas A f f i l i a t e s More than 50% 13 (18.3) 12 (6.7) 25 50% or l e s s 28 (22.7) _3 (8.3) 31 41 15 56 (A) Chi square = 4.021. (B) Chi square = 10.364. Th e r e f o r e , the degree o f importance of the home country and of overseas a f f i l i a t e s as a supply source of raw m a t e r i a l s f o r Japanese manufacturing f i r m s d i f f e r s from t h a t of the U.S. Note: The hypothesis to be t e s t e d i n each case i s t h a t the degree o f importance f o r Japanese manufacturing f i r m s does not d i f f e r from t h a t of the U.S. The c r i t e r i o n f o r d e c i s i o n i s to r e j e c t the hypothesis i f the c h i square i s g r e a t e r than 3.841. (Level of s i g n i f i c a n c e = 0.05; degree of freedom = 1) Source: * Table V I I I - 6 . 253 Appendix I1-8.11: Share of Ownership N u l l h y p o t h e s i s : (Hn) The share of ownership i n Japanese manufac-t u r i n g f i r m s does not d i f f e r from t h a t of the U.S. A l t e r n a t i v e h y p o thesis (Ha) C r i t e r i o n f o r d e c i s i o n : The share of ownership i n Japanese manufac-t u r i n g f i r m s d i f f e r s from t h a t of the U.S. Re j e c t (Hn) and accept (Ha) i f c h i square i s g r e a t e r than 3.841. (Level o f s i g n i f i -cance = 0.05; degree of freedom = 1) Number of Firms Share of Ownership Less than 50% 50% or more U.S. 2 ( 2 . 2 ) 39 (38.8) 41 Japan 1 (-10.8) 14 (14.2) 15 T o t a l 3 5_3 56 Ch i square = 0.069. Th e r e f o r e , the share o f ownership i n Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. Note: F i g u r e s i n b r a c k e t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. Source: Table V I I I - 7 . 254 Appendix TI-8.12: Use o f J o i n t Ventures N u l l h y p o t h e s i s : The p r o p o r t i o n of j o i n t ventures i n Japan-(Hn) ese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S. A l t e r n a t i v e The p r o p o r t i o n of j o i n t ventures i n Japan-hypothesis (Ha): ese manufacturing f i r m s d i f f e r s from t h a t of the U.S. C r i t e r i o n f o r R e j e c t (Hn) and accept (Ha) i f c h i square d e c i s i o n : i s g r e a t e r than 3.841. (Level o f s i g n i f i -cance = 0.05; degree of freedom = 1) Number of Firms Company Status U.S. Japan T o t a l A j o i n t venture Not a j o i n t venture 10 (11, 31 (29, 41 7) 3) 6 _9 15 ( 4, (10, 3) 7) 16 40 56 Chi square = 1.311. Th e r e f o r e , the p r o p o r t i o n of j o i n t ventures i n Japanese manufacturing f i r m s does not d i f f e r from t h a t o f the U.S, Note: F i g u r e s i n brack e t s r e p r e s e n t the expected f r e q u e n c i e s used to c a l c u l a t e the c h i square. Source: Table V I I I - 7 . 255 Appendix II-8.13: : Management Control (A) Nationality of Chief Executive Local Foreign (B) Status of Chief Executive Number of Firms U.S. 17 (13.9) 24 (27.1) 41 Japan 2 (5.1) 13 (9.9) 15 Total 19 37 56 An outposted executive of headquarter 14 (18.3) 11 (6.7) 25 company Not an outposted executive of 27 (22.7) 4 (8.3) 31 headquarter company (C) Appointments at Management Level Require approval by headquarter company Do not require approval by headquarter company (A) Chi square = 3.877 (B) Chi square = 6.824, (C) Chi square = 6.440. 41 15 56 12 (16.1) 10 (5.9) 22 29 (24.9) 5 (9.1) 34 41 15 56 Therefore, (i) the na t i o n a l i t y of chief executive, ( i i ) the status of chief executive and ( i i i ) the decision autonomy in appointments at management l e v e l i n Japanese manufacturing firms d i f f e r from those of the U.S. Notes: Figures i n brackets represent the expected frequencies used i n ca l c u l a t i n g the chi square. The hypothesis to be tested i n each case i s that the proportion of Japanese manufacturing firms does not d i f f e r from that of the U.S. The c r i t e r i o n for decision i s to rej e c t the hypothesis i f the chi square i s greater than 3.841. (Level of significance = 0.05; degree of freedom = 1) Source: Table VIII-9. APPENDIX I I I Exchange Value o f the Hong Kong D o l l a r Approximate Value of End of Year HK$1 i n US$ 1970 0.165 1971 0.179 1972 0.177 1973 0.197 1974 0.203 1975 0.198 1976 0.214 1977 0.216 1978 0.209 Source: Department of Census and S t a t i s t i c s , Hong Kong Government, Hong Kong Monthly D i g e s t  of S t a t i s t i c s , v a r i o u s i s s u e s . 

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