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Concrete steps needed to boost I&T development
The economy in the next 20 years will be driven by innovation and technology (I&T). I would like to put forward four recommendations for Hong Kong's I&T development.
First, we should increase the research and development (R&D) investment from 0.99 percent to 1.5 percent of GDP.
One of the achievements of Mrs Carrie Lam Cheng Yuet-ngor's government in promoting I&T was the increase of R&D expenditures from 0.74 to 0.99 percent of GDP during her term, though it still has not reached the original goal of 1.5 percent. The government did step up its financial support to develop I&T, but the investment is far from enough to enable us to be ranked among the top in the global competition.
The success of Israel, nicknamed "startup nation", is mainly due to its continuous investment in R&D of innovative and high technology over the past five decades. Since the 1970s, the country has been keen on developing I&T. In 1991, its R&D spending accounted for about 2.5 percent of GDP, and has been increasing steadily, nearly doubling to 4.94 percent in 2018, over twice the Organization for Economic Cooperation and Development average of 2.26 percent.
Years of investment have yielded remarkable results. Especially under the COVID-19 pandemic, a modest adverse impact was seen in Israel compared with other developed countries. Today, high-tech companies account for 40 percent of Israel's Tel Aviv Stock Exchange 35 Index, and contribute more than 40 percent of the country's exports. Though workers in high tech companies account for only 10 percent of the labor force, they provide 25 percent of Israeli income taxes.
Shenzhen also drives economic growth through R&D in I&T. In 2009, the local R&D expenditures accounted for more than 3 percent of GDP at 27.9 billion yuan ($4.13 billion); it steadily grew to 5.46 percent in 2020. When then-chief executive Carrie Lam said that the investment of HK$150 billion ($19.1 billion) over the past few years showed our commitment to I&T development, Shenzhen spent over 151 billion yuan in R&D in 2020 alone.
If we want to have breakthroughs in the field, investment in R&D must be persistent and intensified. I hope Chief Executive John Lee Ka-chiu can increase R&D spending to at least 1.5 percent of GDP during his term of office. Otherwise, in today's fierce global competition in I&T, a slow advance means to drop back. If we do not continue to match others in investing in the field, we may lag behind others and waste much of our efforts.
Second, we need to have a more-diversified investment.
The government identified four key areas in the 2018-19 budget; namely, biotechnology, artificial intelligence (AI), smart city, and financial technology (fintech). In the face of the pandemic, it is logical for Hong Kong to focus on the development of life and health sciences, while AI and robotics are the major technology trends. However, if the biotechnology development fails to achieve results in the short term, it looks like our HK$150 billion investment fails and there is no way out, and it will be difficult to secure the public's support in future.
Among Hong Kong's four key areas, fintech should have great potential. As an international financial center, we have a large pool of financial talent, and a deep understanding of the market needs and wants, together with a well-established legal system. According to The Economist, China has far fewer fintech unicorns than the world average. The magazine looks at the distribution of unicorns in the four major areas — namely, software, deep technology, fintech and consumers — and China's fintech companies account for only about 5 percent of its total unicorns, much less than the global average. Can Hong Kong ride on its own advantages to make up for the deficiency?
Third, it is crucial that Hong Kong uplift the quality of its talent.
The success of a smart-city development depends on the ability to build a strong technology talent base. It's especially important to attract academic high-achievers to pursue degree programs related to science, technology, engineering and mathematics (STEM) in universities. However, many top students opt for medicine, business or law, but not STEM subjects.
At the same time Hong Kong is transforming into an advanced smart city, there is a mismatch between local degree graduates and higher-skilled job positions. According to analysis from the Legislative Council Secretariat, the unemployment rate of graduates of research postgraduate has been higher than that of graduates of bachelor's degree programs over the past 20 years. The former recorded 5 percent jobless rate in 2019, while the latter was 2.8 percent, and Hong Kong overall was 2.9 percent. Because of unfavorable employment prospects, the number of local research postgraduate students funded by the University Grants Committee dropped by 41 percent, from 2,575 to 1,510 between 2002-03 and 2019-20.
It's a chicken-and-egg problem. If there is no booming ecosystem, why would parents encourage their high-achieving children to take science and engineering courses? That's why I started a business after graduation 25 years ago.
What can be done now, apart from continuing to subsidize companies to employ STEM graduates or considering a substantial reduction in tuition fees, is that the authority needs to review how graduate degree programs can match the market demand, and actively collaborate with companies to launch on-the-job training courses to improve the quality of talents.
Last but not the least, setting up an appropriate key performance indicator (KPI) to track the effectiveness of the R&D spending is also critical to the long-term development of I&T.
The government has invested HK$10 billion in the InnoHK clusters, a flagship project of Hong Kong's I&T, recruiting 28 research laboratories from 11 economies. This has strengthened our capability in basic scientific research. The question is, how do these clusters benefit the society at large? To ensure we have a reasonable return on investment, we must set up a KPI and timetables, while at the same time taking into account sustainable development in the future.
The KPI not only evaluates the effectiveness of R&D, it can also be used to compare with other places, allowing the authority to understand whether their R&D investment in the current market sentiment and competitive context is fruitful, and whether they are achieving their goals over time. It also helps people understand whether public funds are used properly.
At the same time, the KPI should be simple and easy to understand. According to consulting firm McKinsey & Co, there are two conversion metrics as KPI. One is the ratio of how the R&D spending is converting into new-product sales, that is, the average revenue from new product sales for every dollar spent on R&D; the second one is product sales-to-margin conversion ratio, which looks at each dollar of new-product sales and sees how much gross margin is generated. Besides, the years each industry takes varies. The innovation cycle of consumer products is generally shorter, a three-year period is suitable for measuring gains and losses; however, for specialties such as chemicals or specialty materials, a five-year period is more common.
The COVID-19 pandemic has accelerated the development of science and technology. Hong Kong has a solid foundation in basic scientific research, which must be used wisely so that it will not become a white elephant. After all, the ultimate goal of I&T is to boost the economy, improve people's livelihoods and solve problems. John Lee pointed out that the next five years will be crucial for Hong Kong to transform from good governance to prosperity. We hope that through effectively promoting I&T, we can open a new chapter for Hong Kong.
Dr. Winnie Tang
Adjunct Professor, Department of Computer Science, Faculty of Engineering; Department of Geography, Faculty of Social Sciences; and Faculty of Architecture, The University of Hong Kong