(This essay was published in Hong Kong Economic Journal on 3 February 2016.)
Researchers and practitioners from Hong Kong’s startup scene offered much food for thought on the future roadmap for Hong Kong as a startup hub at the closing event of last week’s StartmeupHK Festival organized by InvestHK. The discussion stressed that each startup ecosystem has unique attributes. Hong Kong’s greatest asset is that it is a small city economy intimately connected to the global networked economy. This has already helped it to gain a presence on the innovation front even though it does not have to (and even could not) follow directly the path to success of other startup hubs, such as Silicon Valley.
According to a study by Compass, Innofoco and reseachers at the University of Hong Kong, Hong Kong is the 5th fastest growing startup ecosystem in the world and ranks overall 25th in the world. Silicon Valley is the leading startup ecosystem, New York City is second, Los Angeles is third, Tel-a-viv is fifth, Singapore is tenth, Bangalore is fifteenth. Startup hubs in Mainland China were not included in the analysis.
Understanding Hong Kong’s DNA in the Networked Economy: An Accelerator For Startups
The 21st century economy is a global network, where individuals, firms and governments are connected via hubs and spokes. An innovative business is one that creates a tipping point that spreads like an epidemic, emanating from a small niche but sweeping through the network and impacting and reconfiguring multitudes of relationships.
One of the most well-known successes in Hong Kong is DHL, which started by filling a small niche in the global market network and became a leader in international airfreight forwarding and express service without first owning a single airplane.
The success of Hong Kong as the world’s freest economy and a leading hub for financial services, trade and business, has been attributed to generations of entrepreneurs. Many of them were immigrants from China and others from all over the world, who were attracted to Hong Kong’s business friendly environment, breakneck speed at getting thingis done, its strong rule of law and protection of intellectual property rights, and its interesting lifestyle which appeals to people of different cultures.
Hong Kong has lost some of its lustre as an entrepreneurial hub in the last two decades, but in the past couple of years it has seen a remarkable resurgence of startup activities. There are encouraging signs that Hong Kong is set to embark on an entrepreneurial renaissance on the back of startups. Compass’s study shows this is indeed happening right now.
Talent and Funding Gaps in Perspective
Startup ecosystems go through a four-stage development process: emergence, activation, integration (with regional, national and international networks), and maturity. Compass’s study points out that Hong Kong is at the activation stage, and that to proceed to the integration and maturity stages it must address the resource factors of talent and funding.
While a good case can be made for Hong Kong to nurture and attract more startup talents, it should also be borne in mind that globalization and technology make it much easier for people from different locations to work and collaborate with one another. Hong Kong can easily tap into the global talent pool through human and digital connections. Moreover, the overseas Hong Kong diaspora, mostly in the English speaking world, numbers in the millions. Hong Kong startups could explore new and different ways to address their talent needs.
There is another perspective to the technology talent perspective. We live in a global marketplace of ideas. Through the trading of goods and services, countries are also trading and collaborating in patents, trademarks, copyrights, brands and other intellectual property. One study found that outside of the five leading research economies (the United States, Japan, the United Kingdom, Germany, and France), all other OECD countries obtain over 90 percent of their productivity growth from ideas that originated abroad.
Today it does not matter where scientific discoveries and breakthrough technologies originate — for national prosperity, the important thing is who commercializes them. From this perspective, Hong Kong needs not just more tech talents, but also designers, product development and marketing specialists as well as professionals who understand technology and innovation and are experts in commercialisation. Its talent needs should be understood in this context.
On funding needs, many stakeholders believe that the seeming lack of risk capital is just a symptom of the early stage development of Hong Kong’s startup ecosystem. There is no shortage of investors and more money will come – within or from outside Hong Kong – when Hong Kong begins to build up a critical mass of quality projects.
Indeed there are signs that the angel investment community has grown healthily in the past 12–18 months, especially among family offices and the second generations of high net worth individuals. The setting up of a $2 billion Innovation and Technology Venture Fund to co-invest in local start-ups with private venture capital funds on a matching basis might also help.
Positioning Hong Kong as a Startup Hub
The Silicon Valley model has been the dominant model of innovation-led growth. But it will be difficult for Hong Kong to emulate because of its lack of scale. Mainland China has scale but lacks the full range of other attributes required of an entrepreneur-friendly business and living environment.
Without scale, Hong Kong has to find niches in the global economic network and mobilize the talents, passion and connections of its people to build innovative businesses that can sell to everyone in the world. In addition, it will need to focus on the following qualities:
1. Play to Its Strengths as a Service Economy
The 21st century will be increasingly a service economy as the production of goods moves to low wage areas or uses robotic help. Service innovation that enriches customer experience, ensures performance quality, and mitigates risks more effectively will become the most important driver of value added.
Innovation (whether it is technology or non-technology related) is likely to accelerate within the service sector itself (e.g. financial services, education, health care, food and beverage, hospitality and logistics) as well as through the “servitisation” of the manufacturing industry. In the hospitality business, only Hong Kong has produced world class transnational companies that can compete with US brandnames; this is a proud thing.
Technology startups should therefore not be the only focus of development for Hong Kong. Hong Kong should also ride on its strengths in business model and process innovation, and further develop its capability in customer experience innovation.
2. More than a Gateway to China – A ‘Super Connector’ to the World
Connectivity is the new competitive advantage in a globalised, digitalised, knowledge economy. Hong Kong’s strength lies in implementing, adapting and scaling ideas. It is well positioned to play the role of a ‘Super Connector’ to link ideas, capital, talents, production facilities and markets which has brought companies like Brinc, a global accelerator and IoT platform, to Hong Kong.
“Hong Kong has been playing the role of a packager and integrator of goods and services in the last century. There is not much difference in the 21st century – only that Hong Kong needs to trade higher value added goods and services with a stronger component of technology and innovation. It is all about the infusion of new economy thinking into the old economy.” Manav Gupta, Founder & CEO, Brinc.io.
As a super connector, Hong Kong will shortchange itself if it confines its potential to being simply a gateway to China. Indeed more and more stakeholders believe that Hong Kong should not be a gateway to China nowadays, but an accelerator for startups to build and scale their international business and to realise their global ambitions.
3. As a Test Market
Innovation is a multifaceted activity. It obviously has scientific and technological dimensions, but it also has attitude and behavioral dimensions. New products and services can only be sold if there are willing venturesome customers to try them. Hong Kong is a cosmopolitan place that is very open to new ideas and at ease with both the East and the West. Despite a small domestic market, it has an intensely trend conscious and curious population. The crowd in Hong Kong craves to “be in” and “in the know”.
Hong Kong can serve as the perfect place to adapt new product and service offerings for either the Asian or European/American markets. The fact that Hong Kong is the largest tourist destination in the world also helps. Historically its main tourist activity was shopping (the sale of goods), but selling services will grow in future. Service innovation can increase the value. Starbucks is the leading global seller of a coffee experience, but it is not in Italy for a good reason. The Italian cafés sell an even better coffee experience, but sadly for Italy none of them have been able to scale up through sevice innovation, and are, therefore, still in the old era. But on their turf they still beat Starbucks.
A startup ecosystem is not built overnight and understandably it will take time for Hong Kong to catch up. Focusing effort on four directions would help.
1. Augment the global footprints and connections of Hong Kong.
Startups must begin to think beyond the domestic market. Universities should accelerate exchange programmes with other universities in leading startup hubs.
Government should launch a sustained global marketing campaign to brand Hong Kong as a super connector for startups and accelerators with global ambitions, and attract them to develop their home or second home here. It should ease immigration barriers to encourage more overseas talents to work in Hong Kong, including designers, marketers and product development people.
2. Create demand for innovation
The vibrancy of a startup ecosystem is largely dependent on the demand for innovation. One-off grants are not going to help startups much in building a sustainable business. Both the private and the public sectors need to see the value of working with startups. A few major corporations in Hong Kong have started to look into partnering with startups to build their innovation capacity. Such practices should be showcased and encouraged.
“I believe in a market-driven approach to grow the startup ecosystem. For startups and SMEs alike, it is most important to create demand for innovation from both the public and private sectors.” Chungya Geng, Founder of Time Rider Technology.
The government should be open to experimenting in such matters.
3. Government’s dual role as regulator and facilitator
Startups by their nature are disruptive and their business models do not necessarily follow the conventional and established paths. Policy makers and regulators have to understand the nature of startup businesses and strike a proper balance to enable and encourage disruption to happen and ensure that public interests are protected.
Given the rapid technological changes underway, the government should take a more progressive and proactive role in reviewing and updating the regulatory framework in sectors such as financial services to keep up with the changes. The immigration authorities should be particuarly sensitive to startups that require more flexible and faster approval measures.
There is a widespread feeling in Hong Kong that the city has lost some of its can-do spirit and the capacity to innovate. Part of the problem is that the labor force of young people is growing more slowly. Tightness of the labor market compels employers to pay top dollar for young talent. This is a disincentive to become a risk taking entrepreneur. Hong Kong has little choice but to look outside to attract a critical body of talent.
For the economy as a whole, startups are important engines that foster innovation. Changing from an efficiency-driven model of economic development to an innovation-driven model is going to take time. But this will not happen if the government fails to move quickly and decisively.
4. Mindset Change and Long Term Development
Hong Kong is lagging behind major startup hubs in the provision of STEM (science, technology, engineering, and mathematics) education at the primary and secondary school levels. The entrance requirements to universities is excessively biased against STEM learning, with English, Chinese and Liberal Studies being required public examination subjects. For many students this is already half of the total subjects tested in public examination. Rethinking the curriculum and university admission requirements in this area is urgent and necessary if we hope to effect change in the longer run.
Fundamentally, Hong Kong needs a mindset change across all segments of society if it is to become the epicenter of startup activities in Asia – from the government, businesses, investors, startups to parents and our younger generations. Hong Kong owes its success partly due to its fast, efficient, pragmatic and trading culture. Such culture should be harnessed to support innovation and entrepreneurial activities, not to hinder it.
Successful startups (and investors) seek to solve the world’s problems with passion and commitment. A proper understanding of Hong Kong’s DNA requires us to draw on its historical strengths as a trading hub to jumpstart its innovation and startup culture. Our eyes should be focused on the global market place and our global network connections, including of course those across the border.