The New Economy - Has Hong Kong Got What It Takes?

It was important to realise, said Dr Westland, how much was involved in the New Economy. In the US, over the last couple of years, there had been much study and public discussion of the "digital divide" – the fact that access to digital technology and the related knowhow was important for the citizen’s well-being and that lack of such access meant relative poverty. The US Government was committing substantial sums bridge the digital divide – for example, he understood that US$2 billion was now being devoted annually to promote the use of the web. It was an updating of the original telecoms concept of the universal service standard.

Asia was three to four years behind the US in awareness. Recently Sachs, Krugman and others had commented on how such lack of awareness would slow down Asia’s growth rates.

New Economy is different
But how was the new economy different from the old? In the old economy, products were stable, tangible items like steel and property. These products did not change much over time; in the year 2000 they were not very different from what they had been in 1950. However, in the new economy, typical products were software and services. A product like software changed radically over relatively short timescales. Microsoft today made its money from PC-based software, Windows. But just 10 years ago there was no Windows. And software was not regarded as something that resided on a PC. Twenty years ago, in 1980, there was no PC. Software was something that resided on a mainframe and was given away with the machine. And in 1950, there was no software. Change in the product had been taking place on an accelerated basis.

"In today’s economy, the most important resource is no longer labour, capital or land; it is knowledge".

Management of firms in the new economy was different. Planning, control, hierarchy and optimisation were out. Observation, positioning, flat organisations, missions, teams and psychology were in. Dr Westland quoted Peter Drucker: "In today’s economy, the most important resource is no longer labour, capital or land; it is knowledge". What was important about New Economy firms was content. Consumers viewed the world through browsers that focused on content: the organisation of the firms providing the content were not visible. The consumer knew nothing about Amazon: it had no physical presence; the firm itself could not be observed anywhere, only its services could be seen.

IT automated work, said Dr Westland. IT made simple analyses and decisions quickly, accurately and reliably; it organised, stored, maintained and retrieved large quantities of data; it communicated both quickly and widely. However, IT also "informated" work. It forced production, marketing, logistics into rigidly scheduled, textually-based formal roles. This made the work process vastly more efficient. However, it also made it less robust and more prone to costly errors and failures.

A new development paradigm
Dr Westland quoted a recent paper by Jeffery Sachs on the digital divide. Although the old ideological divisions of the cold war were over, a more intractable division was taking hold based on technology. According to this view, all technological innovation was driven by 15% of the world’s population, located mainly in North America and Western Europe. It was almost a new form of colonialism. A further part, perhaps half of the world’s population – including the East Asian rim, South Asia, the southern part of South America - was able to adopt these technologies in production and consumption. The remainder, about one-third of the population, was technologically disconnected, neither innovating at home nor adopting foreign technologies. Such technologically-excluded regions did not always conform to national borders. Examples were most of tropical Brazil, most of the former Soviet Union aside from the areas nearest to the European and Asian markets, the deep interior areas of China.

Technology changed the development model, said Dr Westland. Development had traditionally been seen as a matter of accumulating physical and human capital. Poor countries, if they were well-governed, were assumed to have an advantage in this: where capital was scarce, the returns on new investments ought to be high, which ought to promote savings and attract flows of capital from abroad. The gap between rich and poor therefore narrowed – a process known as convergence.

But technology was less likely to converge than capital. Innovation showed increasing returns to scale. Innovators created their own monopoly: there was almost no competitor to Microsoft. Regions already possessing advanced technology were best placed to innovate further. New ideas were typically produced from a recombination of existing ideas. Hence, environments rich in ideas would produce chain reactions of innovation. But a critical mass oof ideas and technology was needed ffirst. Hence, the traditional "trickle down" development model would no longer function. The haves would get richer and the have nots would not be able to afford their innovations.

Ideas had a public good aspect: the fact that they could be used again and again without depletion. Given this public good aspect, free markets were not enough to generate ideas. Successful innovation required supporting institutions. Commercial innovation was the product of both basic scientific insight (based mainly on ideas in the public domain) and applied engineering (backed by patents). The first of these factors relied upon universities; the second on private profit-driven firms.

Countries that did not innovate themselves could import technology, as embodied in capital and consumer goods such as cell phones, PCs, immunisations. They could license technology from patent holders. They could attract foreign direct investment so that a multinational enterprise with proprietary technology set up production inside their borders. However, in all cases countries had to be successful exporters to pay for their imports of technology, or to pay dividends on foreign investment.

Countries would either keep up with global technology or collapse. Vulnerable countries usually depended on a narrow range of exports that lost their profitability in the world economy. For example, copper was replaced by fibre optics; natural rubber and jute were displaced by new synthetic materials. The long term decline in the terms of trade of many primary commodities was a side effect of innovation.

Consequently, IT was one of the greatest threats to the global balance of power. It offered huge opportunities to overcome many of the disadvantages of distance. A landlocked region such as Mongolia could have a comparative advantage in IT-based service exports, such as software, data transcription, telemarketing, as against export-oriented manufactures.

Hong Kong’s position
So where did Hong Kong stand? Dr Westland quoted Chief Executive Tung’s aim, "to make Hong Kong a leader, not a follower, in the information world of tomorrow"¹. But what had been done?

One problem was the low understanding of the dynamics of the new economy. For example, there was talk of making Hong Kong an Internet hub for Asia in the 21^st century. This sounded reasonable - after all, Hong Kong was a hub for air traffic, ocean cargo shipments, electronics assembly, so why not Internet traffic? But unlike cargo and air traffic, the Internet had no hub, said Dr Westland. Hubs, gateways and other metaphorical locations did not exist in cyberspace. The US military deliberately designed the Internet without a centre in order to make it virtually indestructable under attack. "Fault tolerant" and "distributed" were the watch words of computer science. Cyberspace was everyplace and no place at the same time.

The traditional "trickle down" development model would no longer function. The haves would get richer and the have nots would not be able to afford their innovations.

Because there was no realistic vision, nothing had been done. Five years after web take off in the US, two years after the Digital 21 paper, Hong Kong had made little progress towards competing in cyberspace. Until this year, Hong Kong’s information technology community dithered, preparing for the Y2K bug – a menace that predictably failed to appear, and was probably inflated by former Cobol software engineers who hoped to earn some consultancy fees. The Y2K effort was at the expense of an agenda that would promote electronic commerce.

Hong Kong in fact had the connectivity. In terms of bandwidth it was one of the leaders in Asia. And in terms of the sites they visited, the popular ones were of a similar profile to the leaders in the US. But people lacked interest in getting on the web. A recent survey found that only around 25% of the adult population used the Internet, as compared with over 45% in Singapore². 60% of its 207,000 businesses did not have email at all, and 93% of those businesses said that they had no intention of investing in email systems. People in Hong Kong were probably more comfortable doing business face to face; that was the way they had always done it³.

Hong Kong Internet sites were entirely "advertising" sites. 50% accepted credit card payment; 50% cash only. Few products were offered; an average of four product lines and 50 products per site. Most customers were university students and white collar professionals with free Internet access⁴.

The Government’s IT thinking was in terms of large physical property-related investments such as parks, ports and harbours. Hong Kong’s core industries – property, shipping, civil service and mortgage banking – were long-cycle businesses with investments extending over decades. In contrast, e-commerce was inherently short-cycle. E-businesses operated in Web years, i.e. 3-month business cycles. Unlike the traditional Hong Kong core business model, e-business was dynamic, interactive, immediate and responsive. To move from physical space to cyberspace required a leap of the imagination, eschewing traditional measures of investment, work and labour. In cyberspace, ideas and ideas alone were important, generating revenues, customers and investors. Property, plant and equipment were just costs of doing business.

The Internet had become the world’s premier vehicle for transport, communication and implementation of ideas. However, Hong Kong’s core industries were not used to thinking in terms of web years, empowerment, creative destruction, and innovative, participative management. Yet such an environment was essential to keep creative people. It was the hallmark of innovative firms in Silicon Valley and other high technology venues.

Dr Westland referred to Bill Gates’ concept of the three stages of e-commerce: an initial "advertising" phase, marked by catalogues and search portals; a "transaction processing phase, where business is transacted online; and the third stage of seamless "integration and sharing of knowledge" across firms and governing bodies. In Dr Westland’s view, Hong Kong was having difficulty finding a presence even in the initial "advertising" phase. Because Hong Kong had no institutions that could effectively handle online payments, it might be many years before Hong Kong entered the "transaction processing" phase.

Singapore’s interventionist Government had done an excellent job of adjusting its laws, immigration policies, industry focus and education towards the New Economy.

It was noteworthy that IMD had downgraded Hong Kong to 14^th place in its annual competitiveness rankings – although this was due mainly to factors other than e-commerce. Singapore ranked second after the US. In Dr Westland’s view, Singapore’s interventionist Government had done an excellent job of adjusting its laws, immigration policies, industry focus and education towards the New Economy. Hong Kong would continue to languish until it recognised that the competitive foundations of the New Economy were knowledge, information and innovation. Only these mattered in cyberspace – not feudal notions of parks, ports, property, land and gentry.

Seven steps for success
Dr Westland concluded by outlining seven steps for success in the new economy.

• Think multinational/multicultural. The US led Asia by 3-5 years. So one should find out what the leaders do and plan for when it happens here. English is the world language of commerce.
• Think California. California high-tech means garage production and administration; carry out food; operations and production focus; passion, passion, passion. Hong Kong hi-tech means lavish offices, gala kick-off dinner (with speeches and toasts); deal-making and alliance focus; fads and short attention span.
• Think different. Not everyone can be Bill Gates; not everyone can be Microsoft. What is your niche? What do you do well? What do you want – world domination? A better seat at your favourite restaurant? Neat technology? Customers?
• Think locally; act globally. Hong Kong is a small country. Everyone needs to participate for a healthy economy. This demands universal access to the tools of e-commerce; not just access for a few select tycoons. The increasing reach and speed of communications converging on the Internet enabled the restructuring of space, time and money.
• Think demographics. An industrial-age business is typically commodity-based, heavy on resources, light on know-how. In the post-industrial age, the leader can lock in his position. There will be fat profits for global players. Services and other hybrids cannot scale and require different levels of management. However, services are increasingly software-based.
• Think out-of-the-box. Learning the classics is to ensure business failure. Killing the messenger if you don’t like the message is a sure way to extinction. This is a real concern in Asia.
• Show a passion for thinking. What do you want? How will you get it? How much are you prepared to give up? Will you like it when you get it? Be careful what you wish for and follow your wishes with passion. Without passion you cannot overcome the difficulties you will encounter.

The above does not necessarily represent the views of the Foundation