(This essay was published in Hong Kong Economic Journal on 12 November 2014.)

 

Thirty years ago people watched programs produced by TVB and listened to Canto-pop. These creative products were Hong Kong’s great export to the Chinese-speaking world. Today, people prefer to watch imported Korean television series and listen to Gangnam style, which has made it to the world’s charts.

 

What has happened to Hong Kong’s creativity?

 

Many believe that creativity in the entertainment industry (television, movies, and popular music) took a dive in Hong Kong after the 1980s. Creativity is of course needed in all industries and not only in the entertainment industry. It is an essential element in the formation of all new businesses and in fostering economic growth.

 

So has the formation of new businesses slowed down in Hong Kong in general, not just in the entertainment industry? There is some indirect evidence for this. The percentage of employers in the labor force (excluding domestic helpers) rose from 2.6% in 1971 to a peak of 6.7% in 1996, and fell to 4.8% in 2011.

 

New businesses need not introduce game-changing technologies. A great deal of creativity simply involves adapting products and techniques of production to a new production environment and to meeting the idiosyncrasies of a new market.

 

Many songs in Hong Kong’s Canto-pop were adapted from other sources – some were foreign sources and others came from Chinese folk music, for example, James Wong’s use of the Lingnan tradition. Many television series and movies were also adaptations from history or folklore. But they were all creative because they were new products that pleased large numbers of customers.

 

Five factors have often been cited to account for the prevalence of entrepreneurial activity. They are education, market experience, property rent, skilled work force and financing.

 

Individuals with more education learn faster and are often the first to adopt new technologies. Studies of the adoption of new seeds (for example, hybrid corn and miracle rice) show that more educated farmers are more likely to adopt them earlier. Likewise, the use of contraceptives to control birth is also earlier among more educated women.

 

Market experience acquired through on-the-job training helps individuals to acquire production skills and market knowledge at work that are essential for founding new businesses.

 

Most new businesses need to experiment before getting the right business model necessary for success. Sustaining initial success may also require repeated experimentation with new products and processes. The high cost incurred in renting space or hiring skilled workers will deter innovation. Some businesses thrive by being close to each other because of the presence of spillover effects. For example, shopping centers need contiguous space, start-ups need incubation centers, and Silicon Valley benefits from attracting the world’s most talented skilled labor force.

 

New businesses need innovative financing methods. Banks are unwilling to lend to entrepreneurs, and even if they did, their onerous lending rules would impose harsh conditions on start-ups, for example, with a demand to collateralize all of their assets. Venture capital firms, micro financing, and other forms of innovative financing can provide not only funding, but often also management and marketing know-how advice to new innovators.

 

These factors are all well known, but one that is often ignored is the age composition of the work force. This was recently emphasized by Liang, Wang, and Lazear (2014) in their highly significant work on entrepreneurship and demographics. Using a sample of 83 countries, they found a decrease in the median age by 3.5 years resulted in a 2.5% increase in the entrepreneurship rate. These are very large effects given that the average rate is only 6.1% in these countries.

 

In the last 50 years, most of the developed world has experienced a dramatic demographic shift. Japan is a case in point. Almost immediately after World War II, Japan’s fertility rate fell rapidly and dropped below the replacement level in the 1960s. Currently, Japan’s fertility rate is one of the lowest in the world at 1.3, which means each generation will shrink by 40%.

 

Similarly, the fertility rates of the European countries also fell in the 1950-60s and currently are around 1.6 on average, which means each generation will shrink by 20%. The U.S. is the only major developed country with replacement-level fertility. Some major developing countries, like China, also have fertility rates below replacement level. In the near future, an aging and shrinking workforce likely will be the norm for most of the world.

 

Japan’s “lost decades” has been attributed to its “entrepreneurship vacuum” since the 1990s. The median decade for the founding of the 300 largest listed companies in Japan is the 1930s; that for the U.S. is the 1980s. But what causes this vacuum? Age structure is an important part of the answer. A worker in a country with a younger workforce, like the U.S., will be more entrepreneurial than a worker in a country with an older workforce, like Japan.

 

Following Japan, Hong Kong is also aging rapidly with a fertility rate of 1.2. By contrast South Korea’s workforce is still young. The median age of the population between the ages 20-64 is 43 in Japan, 41 in Hong Kong, and 34 in South Korea. It is not surprising that South Korea’s Samsung has emerged as one of the world’s most innovative companies in household digital electronics and has overtaken Japan’s aging Sony.

 

Entrepreneurial capability depends on two types of abilities: creativity and business acumen. Creativity declines with age, but business skills increase with experience in high-level positions. The very young do not have the requisite human capital and the very old have lost their creativity.

 

Workers who are placed in roles that give them high-level decision making authority in an organization acquire experience that could be useful in starting an enterprise. The probability of being in top positions depends on the age structure of the labor force.

 

If a firm has an old workforce, it is less likely that younger workers will be given much management opportunity because the more senior workers already occupy these slots. In young firms, relatively young people hold even top positions. It is for that reason that the age structure of a country is potentially an important determinant of entrepreneurship.

 

A young society provides more opportunity for the young and the most creative to acquire the skills necessary for entrepreneurship. Having too many older workers in society slows entrepreneurship. Not only are older workers less innovative, but more significantly, when they occupy key positions, they reduce the opportunities for younger workers to accumulate business skills.

 

Hong Kong’s demographic structure is unique because a very large proportion of its population arrived in the post-war years. The population increased from 600,000 in 1945 to 2.3 million in 1951. The post-war baby boom greatly expanded Hong Kong’s young workforce beginning in the 1960s and was a major cause of the rise of entrepreneurial activity in the 1970s and 1980s.

 

But the fertility rate of the baby boom generation dropped precipitously, in part because a large proportion of women were attracted by the job opportunities in the labor market. As a consequence, the median age of the population aged 20-64 became progressively higher, rising from 32 in 1981 to 40.6 in 2011 . The resulting aging of the working population has been an important cause of the subsequent decline in the rate of entrepreneurial activity in the economy since the 1990s.

 

This declining trend will now end as the baby boom generation enters into retirement and the working population will not age further.

 

Many young people in Hong Kong today feel that their job and upward mobility opportunities are limited. Their pessimism is driven to a large extent by Hong Kong’s unusual post-war demographic pattern. But the future will become brighter soon. Figure 1 contains projections of the median age and the percentage of employers in the adult working population to the year 2041.

The median age of the working population is projected to stop rising and level out. I have used a simple model to forecast the percentage of employers in the workforce based on the sex, schooling and age composition of the workforce. This percentage is projected to rise to 7% by 2025 and will maintain at that level based on schooling and demographic trends alone.

 

There is tightness in the Hong Kong labor market and there is considerable temptation to postpone the retirement age. But a better solution is to invest in more education, introduce innovative financing arrangements to foster start-ups, and increase the supply of space at affordable rents by converting old buildings and constructing new ones, and systematically tap the wisdom of the retired to provide advice and training for start-ups.  The future will become brighter.

 

A huge opportunity also beckons in the Pearl River Delta – the median age of Shenzhen’s official population of 8.38 million between the ages of 20-64 is only 27.9.

 

I am optimistic for the future of Hong Kong’s young people because of the return of positive demographics in the workforce.

 

References

 

James Liang, Hui Wang, and Edward Lazear, “Demographics and Entrepreneurship”, National Bureau of Economic Research, Working Paper 20506, 2014.

 

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