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Barriers to Small Business

11 June 1997  

Mike Rowse  
Director of Business and Services Promotion Unit  
Room 1502-1504  
Edinburgh Tower  
Landmark  
15 Queen's Road  
Central, Hong Kong  

Dear Mr. Rowse  

BARRIERS TO SMALL BUSINESS  

We understand that your Group is reviewing the possible barriers created by Government to enterprises in Hong Kong. As an organization whose membership consists in great part of small businessmen, we would like to draw certain issues to the attention of your Group.  

Most of the issues we highlight below are of a macro nature. We appreciate that your Group may be mainly concerned with micro factors, such as reducing bureaucracy and burdensome procedures. Nonetheless we believe the issues below have at least as much impact on business, and are worthy of your attention.  

First of all, we would like to make clear that we do not support the giving of financial or other subsidies to the small business sector. Such subsidies, although currently being proposed by some individuals, amount to a tax on the rest of the business community, and are quite contrary to the free market philosophy that has served Hong Kong so well.  

However, we believe that small business does face significant barriers in the Hong Kong environment, and we list certain of these barriers below. We also suggest solutions where these are evident.  

1. High land price policy  

There is a growing recognition that the Hong Kong Government has been pursuing deliberate policies that keep land prices higher than they need be.  

*  The Government has a clear interest in keeping land prices as high as 
    possible, so as to maximize the revenues from land sales, rezoning premia, 
    rates, profits tax on land transactions, etc. Such income has made up       
    one-quarter to one-third of Government revenues in recent years.  

*  In addition to the incentive, the Government also has the means to keep land 
    prices high. It is the monopoly supplier of land, and thus able to manage the 
    timing and amount of release so as to maintain prices at a high level. Annex 
    III to the Joint Declaration has restricted land release to 50 hectares per year, 
    and although in practice such limit had not been strictly adhered to, it has 
    enabled the Government to avoid pressure that would otherwise have arisen 
    for more land release.  
  
*  Finally, from observation it is clear that the Government has actually followed 
    its interest and used its means to keep land price high. This is evident from 
    the extraordinarily high prices now obtaining for property in Hong Kong, and 
    the unmet demand. Most tellingly, the Government's deliberate policy of 
    pursuing high land prices is evident from its preference for administrative 
    measures to manage or suppress demand temporarily (used in 1994, and 
    again currently) rather than to work on increasing supply.  

The effect of this high land price policy is to burden all business with unnecessarily high costs. However, small business suffers relatively more because its margins, especially in the crucial start up stage, are relatively lower. Many big businesses enjoy good connections to the major property developers, or are at least in a stronger position to negotiate more favorable rents.  

Solutions to the problem of high land prices are obvious. The Government must acknowledge the problem, forge a new consensus on the role of land-related taxes in the Government's revenues, and vigorously release more land.  

2. Monopolistic practices  

The report recently released by the Consumer Council on the need for a competition policy and Competition Authority in Hong Kong highlights the anticompetitive nature of many areas of business in the territory. We believe that this is a major problem that affects small and especially start up business severely.  

The areas of business that are governed by franchises or other restrictions imposed by the Government are well-known. They include, electric power; container terminal operation; telephone; rail; airline services; airport services; bus and other forms of transport; banking services; hospital services; public housing; rice important; and gambling. All of these Government-imposed restrictions bar newcomers from entering the sector. They also increase costs for business. For example, electricity prices are set to cover the cost of 50% excess capacity. IDD call charges set by the incumbent operator were 100% higher than those found to be viable by its now emerging competitors. Again small businesses, unable to negotiate special discounts, are hit particularly hard by these monopolies.  

However, in addition to these overt monopolies, there are also monopolistic or oligopolistic practices that affect other areas of business. So, for example, the Consumer Council found that the property development market, although not governed by any explicit franchise, is "not very contestible". Such practices again result in barriers to entry for smaller businesses that wish to enter such sectors, and higher prices for the rest of the business community.  

3. Tolerance of triad activity  

Triad activity is a significant burden faced by smaller businesses in certain sectors  These include, the entertainment sector (films, bars, restaurants, karaoke lounges and other leisure centres), public light bus and similar private transport operations, mid-stream container barge operators, and many enterprises in the rural New Territories. Although the Government has taken some steps to address the problem, in our view it is far too tolerant of these activities.  

Such Government tolerance may derive in part from the respect of a colonial government for what were regarded as "traditional" practices. It may also derive from deference to the perceived views of the Chinese authorities (in 1992, the Minister of Public Security, Tao Siju, referred to Hong Kong triads as "good people" and "patriotic". However, such tolerance is totally unacceptable.  

There are no doubt a range of measures that the Government could take to more effectively combat triad pressure on business. However, we believe that the most important step would be for the Government to make clear its intention that triad activities will not be tolerated. The Chinese Government should be pressed for clarification of its stance in this matter and support for law and order in the territory. The Hong Kong Government should cease entertaining political groups with triad affiliations. In its own interface with areas of the business community affected by triads the Government should vigorously combat triad involvement.  

4. Intellectual property rights  

The recently published MIT study "Made by Hong Kong" highlights the difficulty faced by an entrepreneur with an innovative idea protecting it from piracy during the development stage. While we do not necessarily agree with the interventionist stance of this study as a whole, we do feel that this particular issue is a significant problem faced by emerging growth companies. Respect for intellectual property rights is low in Hong Kong, and given the cost and delays of the court system, it is difficult for the entrepreneur to enforce his rights himself.  

Disrespect for intellectual property rights in Hong Kong has already brought the territory to the attention of the US authorities. The Hong Kong Government must give much higher priority to this issue, to the benefit of both Hong Kong's external trade and its internal business development. Measures in this regard would obviously include tougher enforcement, and initiatives to educate business and individuals to respect intellectual property.  

The Government itself competes with business in certain respects. Government-funded enterprises such as the Trade Development Council (which organises trade shows) and the Post Office (which is introducing a letter shop business) are cases in point. With the increasing emphasis on cost recovery and trading funds, such commercial activity is likely to increase even among Government departments. We believe that such activity can amount to unfair competition - unfair because the government enterprise benefits from subsidised resources, statutory authority, etc. - that is particularly prejudicial to the small business sector. Overall, there is a need for the commercialisation of Government to be reviewed.  

5. Other points  

Overall, we believe that Government policies and certain cultural features of the Hong Kong environment work together to make it difficult for small businesses to prosper and grow without coming to an accommodation with existing big business. The barriers, in terms of monopolistic practices, high prices, and the predations of triads and intellectual property pirates, are in many cases too great for a small businessman to overcome alone. We believe that a healthy and independent small business sector, some of whose members grow successfully to become large businesses in their own right, is vital for the long term health of the Hong Kong economy.  

I hope that our comments are helpful.  

Yours faithfully,  

Alan Lung  
Chairman