INNOVATION POLICY FORENSICS: AN ANALYSIS OF BIOTECHNOLOGY IN HONG KONG*

Transcription

1 Paper to be presented at the DRUID Tenth Anniversary Summer Conference 2005 on DYNAMICS OF INDUSTRY AND INNOVATION: ORGANIZATIONS, NETWORKS AND SYSTEMS Copenhagen, Denmark, June 27-29, 2005 Track : Systems of Innovation, Institutions and Public Policies INNOVATION POLICY FORENSICS: AN ANALYSIS OF BIOTECHNOLOGY IN HONG KONG* Erik Baark Division of Social Science Hong Kong University of Science & Technology Clearwater Bay, Kowloon Hong Kong Tel: Fax: sobaark@ust.hk Date of submission: June 1, 2005 Abstract: Innovation system research serves as a useful tool for policy learning. Borrowing the metaphor of forensics, this paper seeks to formulate a simple approach for analyzing the cause of death for innovation policy initiatives. This analytical framework is applied to an analysis of the fate of biotechnology in Hong Kong. The paper investigates one specific initiative, The Hong Kong Institute of Biotechnology. Based on the available evidence, it is argued that the policy pursued in Hong Kong has consistently ignored key issues of market failure, systemic failure as well as learning failure. Keywords: Policy learning, systems failure, forensic analysis, biotechnology, Hong Kong JEL - codes: L52, O38, O53 * The empirical data for the present paper is partially based on research related to the Hong Kong Institute of Biotechnology prepared by Raymond Y.N. Ma, and research conducted with Naubahar Sharif on Hong Kong s innovation system. I am grateful for their assistance, but take full responsibility for all mistakes and omissions. 1

2 We have just heard that our baby boy called biotechnology is dying because of neglect. Would any good heart doctor render his/her assistance to save the baby as the baby could be one of the leaders in Hong Kong in future Entry by The babysitter August 04 at Hong Kong Biotechnology Association s Member s Forum < 1. Introduction The importance of innovation for economic growth and competitiveness in advanced industrialized countries has led to a search for the right mix of policies that would facilitate widespread and effective development of new technologies. This search involves the identification of successful policy measures and effective institutional arrangements that will foster innovation in the economy. The concept of policy learning provides one very fruitful approach to understanding the processes that are required in order to initiate and sustain improvements in the environment for innovation. Policy learning essentially envisages that governments become able to learn more about intended as well as unintended effects of policies, and through process of experimentation, evaluation and adaptation of various policy instruments are able to refine their approaches (OECD, 2002, p ). In many cases, policy learning is inspired by comparative cases of success where the experience obtained in a different context (for instance, another country or region) will be used as a point of departure for emulating specific policies. Comparison of innovation policies for the purpose of benchmarking policy changes and identifying best practices has, for example, been prominent in the "European Trend Chart on Innovation" initiative sponsored by the European Commission (Löwe, 2003). Moreover, policy learning in relation to innovation systems development has been receiving considerable support from academic research. The development of innovation theory since the 1970s has contributed significantly to the evolution of innovation policy ideas in terms of conceptualization of policy targets and in the design of instruments available to policy-makers (Mytelka and Smith, 2002). The introduction of a more sophisticated and complex understanding of the innovation process than the traditional linear model has provided an important impetus for analysis and evaluation of interaction among different policy measures. At the same time, the interest of policy makers in the utility of innovation systems analysis has provided new incentives for academic and intellectual development of the field. The result is a kind of co-evolutionary process that has allowed policy learning to exploit academic research on innovation systems to utilize the concept of systemic failure and to increasingly rely on indicators of innovation for benchmarking on the one hand, and has stimulated problem driven exploration of new ideas in innovation systems research on the other moving beyond conventional approaches to market or government failures. Even if the researchers working within the new innovation paradigm have been successful in influencing the design and redesign of innovation policies, their insistence on the contextually specific nature of innovation processes and the lack of a unified theory have reduced their ability to translate their insights into concise and clear-cut proposals for policies (Mytelka and Smith, 2002, p. 1477). Among policy makers, the main trend has naturally been to focus on what has been perceived as successful examples of innovation policy even if the criteria for success or failure have seldom been made quite explicit. For example, at the level of 2

3 specific policies, the Bayh-Dole University and Small Business Patent Procedures Act of 1980 has often been held forth as a very successful effort to improve technology transfer from academia to industry by means of a new ownership paradigm of intellectual property (e.g., Henderson and Smith, 2002). The Bayh-Dole Act served to provide a clear, predictable framework for grantee/contractor retention of patent rights for non-profit and small business concerns, allowing individuals and entities to plan technology transfer activities earlier in the development process, and thus facilitating their success. Recent research has offered a more detailed scrutiny of the actual effects of the Bayh-Dole Act, and in general considered the effects less dramatic. Thus the empirical evidence does not show clear causal linkages between the adoption of the act and increased rates of effective technology transfer (Mowery et al., 2004). Nevertheless, the ostensible achievements of the Bayh-Dole Act in the United States have inspired other countries to implement similar legislation in the hope to reap substantial economic benefits from university research (Mowery and Sampat, 2004). There has been less concern with innovation policies that have failed (and obviously little incentive to replicate failures). One instructive exception is Hendry (1989), who shows that British government policy for the development of computers failed to overcome the reluctance of corporations involved in the field. Such analysis of policy failure is frequently lacking is in spite of the fact that a systematic analysis of failure can yield no less interesting and vital inputs to a policy learning process. In order to learn effectively, I would argue, we need a forensic approach to innovation policy learning. To do this, we need to move beyond the definitions of market failure or government failure that are used in mainstream economic research, where the empirical aspects of the real world is contrasted with abstract optimal features of markets in general equilibrium models (Edquist, 2001). The approach that will be proposed in this paper is to refine concepts of failures in innovation systems in order to develop a forensic analytical tool for understanding the outcome of an innovation process, and to apply these concepts to an evaluation of the process of policy learning related to biotechnology innovation in Hong Kong. The structure of the paper is as follows. In the next section, the key concepts of forensic analysis for innovation policy are outlined, drawing primarily on innovation systems literature. Subsequently, the paper gives an overview of Hong Kong s innovation system and the various efforts to promote biotechnology. The penultimate section presents the fate of the Hong Kong Institute for Biotechnology while the conclusions of the analysis are discussed in the final section. 2. Forensic Analysis of Innovation Policy: A Conceptual Framework Employing the metaphor of forensic analysis to policy making naturally requires a bit of imagination and indulgence on part of the reader. Wikipedia dictionary webstite defines the terms as follows: Forensics or forensic science is the application of science to questions which are of interest to the legal system. The term appear to have been derived originally from the Latin word 'forensic', meaning a forum or market place at which legal disputes would have been settled in the Roman era. Therefore, the concept of forensics is also applied to the study of argumentation. In its current usage, forensic science is conventionally described as the application of scientific methods and analysis of scientific data to support the law enforcement 3

4 community in the investigation, apprehension and prosecution or vindication of individuals involved in criminal activities. Based on a combination of natural sciences, medical science and laboratory skills together with various social sciences or legal research, forensic scientists seek to scientifically analyze evidence and explain its meaning in a justice system setting. The basic purpose is to assemble all available evidence to determine the factors that led to a certain event. A similar objective is characteristic of the new discipline of forensic analysis in computer science, which has witnessed the emergence of virtual archeology and digital detective work as a professional occupation. Although this discipline has been deeply concerned with cybercrime and computer security, it is also utilized more generally to investigate incidents of compromised information systems (Broucek and Turner 2001). Another popular use of the term forensics has been associated with the study of rhetoric and argumentation. In many US liberal arts colleges, forensics is an educational activity primarily concerned with using an argumentative perspective in examining problems and communicating with people (McBath, 1984, p. 5). Obviously, this meaning of the term maintains a focus on investigation and presentation of evidence, but lacks the direct linkage with crime. Farmer and Venema (2005: 5) formulate it this way: The forensic analysis of a system involves capturing data and then processing the information gathered. The more accurate and complete the data, the better and more comprehensive the evaluation can be. In addition, they argue pertinently that a forensic analysis has to peel away layer after layer of illusions and images are perceived in relation to systems and their components (Farmer and Venema, 2005: 8). In the present paper, I shall use the concept of forensic analysis specifically in relation to innovation policy. Forensic analysis here means the investigation of the fate of a failed innovation policy in a sense, the death of a policy initiative. This usage of the concept shares with conventional forensic methodologies the concern with uncovering events leading to a particular incident/outcome, but takes a more qualitative, longitudinal approach to the "detective work". To borrow another metaphor, we need a different set of "coroner's tools." The fundamental method will be to assemble available evidence (which is unfortunately limited) to delineate the relationship between policy objectives and actual achievements, and the environmental and institutional factors that caused the failure to achieve these objectives. The factors will be identified in three broad categories: market failure, systemic failure and learning failure. As Edquist has reminded us, the reasons for public policy intervention in relation to innovation rests on two important conditions: first, the market mechanism and capitalist actors must fail to achieve objectives formulated, i.e., a problem must exist; secondly, the state and its public agencies must have the ability to solve or mitigate the problem (Edquist, 2001). The existence of a problem may be related to a market failure or a systems failure, while the issue of the government s ability to solve problems is related to the concept government failure. In many debates on government intervention, it is the balance of the effects of failure in markets or systems vis-à-vis the effects of failure in government that becomes the core issue (Wallis and Dollery, 1999). For public choice theorists, the existence of potential government failure provides a strong rationale for government by the market (Tullock et al, 2002). There is a vast and expanding literature on rent-seeking that 4

5 adopts sophisticated game theory to understand the economic costs of lobbying and similar rent-seeking behavior (e.g, Lockard and Tullock (2001). At the same time, slimming the state entails measures to reduce the relative size and growth of public expenditure and to cut down the range of functions that government performs, and such approaches are frequently guided by a new ideology seeking to import market concepts and incentives into the operations of government itself (Self, 1993). Market failure in relation to technological innovation is usually seen as the result of two characteristics of knowledge. On the one hand, the public-good character of R&D and the creation of new knowledge lead to greater social returns than private return for innovation and, therefore, reduce private investment in such knowledgegenerating activities. The classical argument is that markets do not allow appropriability of private returns from the generation of new knowledge for instance, by means of basic research and that the financing of such research therefore becomes an important priority for public funding. Moreover, a legal framework providing a temporary space for appropriability of the benefits from R&D investments, such as the enforcement of intellectual property rights, becomes essential for public policy. On the other hand, the inherent uncertainty of basic research and new knowledge generation will create a sub-optimal level of private investment by risk-averse capitalists. This is another vital rationale for public policy initiatives in the perspective of market failure thinking, where government intervention may take the form of research subsidies (Hauknes and Nordgren, 1999). The market failure indicators that we will be investigating relate to inadequate financial support for essential basic and applied scientific research, or the lack of protection of intellectual property rights leaving a fragmented and weak regime for appropriability of benefits from R&D. The systemic failures can be conceptualized in terms of several taxonomies. The core idea is that knowledge generation and flow are non-trivial activities that often face constraints that are related to non-market aspects such as the structure of the innovation system, linkages between actors (such as firms or research institutes), or legal and cultural institutions. One useful typology proposed by Keith Smith (2000), includes the following major categories: Failures in infrastructural provision and investment: Firstly, failures occur in the provision of adequate physical infrastructures usually related to energy and communications; and secondly, failures appear with insufficient provision of science and technology infrastructures such as universities, publicly-supported technical institutes, regulatory agencies, libraries and databanks, or even government ministries. `Transition Failures : Innovation is a dynamic process, and it is important for firms particularly small firms to be able to adapt to critical transitions between one technological regime and another. Such transitions often call for complementary capabilities and long-term technological horizons. Firms can seldom maintain broad technological opportunities intelligence gathering activities or a wide range of generic capabilities. Lock-in failures: With increased complexity to technological systems or the appearance of network externalities, firms tend to get locked in into more narrow technological path or regime. Even when challenged by competition, many firms are unable to emerge from a lock-in on their own. 5

6 Institutional failures: Given that innovation systems approaches emphasize the institutional context as a defining and structuring element of a system, it is important that such institutions do not contradict or impede innovative activities or firms. Institutional failures may arise with counter-productive intellectual property rights, standards, risk-management rules, or health and safety regulation and even with innovation adverse contexts such as political culture and social values. Other researchers such as Staffan Jacobsson and Bo Carlsson have added network failures to the list of challenges that innovative agents in an economy face. Innovative firms increasingly rely on external networks in their efforts to develop and implement new technology. Network failures means that organizations in a system interact poorly, and therefore lose externalities associated with pooled resources such as a common knowledge base, exchange of human resources, or common vision of future technological change (Carlsson and Jacobsson, 1997). Many of the aspects highlighted in the discussion of network failures can be related to the extensive research that has been conducted on clusters and their role in regional or national economic development (OECD 2002). The key indicators for systemic failures can thus be summarized as: 1) the inadequate access (as perceived by key innovation actors) to infrastructure in the form of physical services or organizations for research or regulation; 2) limited transition capabilities and short-term horizons of innovative agents, and lack of external services designed to assist in transition to new technological regimes; 3) lock-in of firms in existing technological path or regime, without potential for dynamic development; 4) contradictory and/or constraining institutional framework which does not facilitate innovation. Likewise, we will be concerned with a low level of external collaboration arrangements and sourcing of external knowledge as an indicator of network failure. With the recognition of learning as a crucial component of innovation that has followed advances in evolutionary thinking in the social sciences, it becomes possible to conceptualize learning failures as a key problem of weak innovation systems. Learning economic systems are characterized by cumulative circular causation where the selection of more learning-oriented employees by employers and the market selection of change-oriented firms will accelerate further innovation and change (Lundvall, 2001). Similarly, the development of policy should be seen as an evolutionary, dynamic process. Policy initiatives are better conceptualized as trial and error experiments, and their evaluation is essential in order to ensure adaptive policy change and selection of improved approaches. Hence if the policy maker is to learn and adapt, considerable emphasis must be given to policy trials and their evaluation (Metcalfe and Georghiou, 1998). Without such evaluation, there is a large risk that policies may fail; even with formalized, independent evaluation exercises, there is no guarantee that policies will change especially if proposed adaptations go against values and assumptions, or significant vested interests. The key indicator of policy learning failure is absence of serious evaluation and the result is continuation of past policies despite evidence of ineffectiveness. In a report on innovation policy in a globalising learning economy, Lundvall and Borrás (1997: 72) point out: Politico-administrative tradition tend to develop policies which reinforce existing industrial and productive processes. In this sense, continuity 6

7 in policy decisions and objectives might result in policy lock-ins were alternatives and change are problematic and slow. It is therefore important to identify possible policy lock-ins in a system, given the importance of capacity to adapt that is envisaged in an evolutionary innovation systems perspective. Table 1: The Innovation Policy Analyst Coroner's Toolbox TYPES OF FAILURE Market Failures Insufficient investment in knowledge creation Uncertainty of new knowledge generation INNOVATION POLICY INSTRUMENTS! Provide public funding of R&D, tax incentives, facilitating venture capital investment! Development of strategic "vision", market analysis and commercial intelligence Systems Failures Lack of infrastructure! Development of organizations for research and commercialization Inadequate capacity in firms for transition Lock-in into existing trajectory or regime Inadequate institutional framework Weak networks and flow of knowledge! Creation of new capabilities for transition, especially in small firms! Assistance for shift to new system or network! Removal of counterproductive intellectual property rights, standards, safety regulations! Create incentives for knowledge sharing and flow of human resources Learning Failures Lack of evaluation! Regular in-depth analysis and evaluation of performance and effects INDICATORS - Level and priorities of public funding - Processes of strategic analysis and planning - Number and scope of research support organizations - Schemes for small firm support, e.g. incubation - Public and private initiatives - IPR and regulation: status, implementation and updating - Extent and nature of knowledge flows - Existence and character of evaluations No adaptation of measures! Follow-up action - Changes in priorities and new initiatives Policy lock-in! Systematic consideration of viable alternatives - Continuation vs. dynamic change in policies 3. Hong Kong s Innovation System In order to understand the contours of current innovation in Hong Kong, it is imperative to include an awareness of the precarious route to industrialization and economic modernization that characterized the territory s development. Before World 7

8 War II, most of the industrial development was based on small-scale enterprise set up by an entrepreneurial, but politically marginalized, class of Chinese manufacturers. These manufacturers not only provided opportunities for Chinese entrepreneurs to accumulate technical and managerial skills that could be successfully deploying in subsequent stages of development, but they also gave Chinese firms opportunities to practice organizational modes that supported networking, sub-contracting relationships, and international search for markets elements that rehearsed critical features of subsequent innovative modes in Hong Kong, prevalent to this day. The capabilities that kept the businesses competitive, even after much of the manufacturing activities had moved to the Chinese Mainland after the 1980s, included the capacity to absorb technology from global knowledge sources, an ability to recombine knowledge in new productive configurations, and agile sensitivity to changing market demands, supported by imitative speed and often creative imitation. In their strategies for international competitiveness, Hong Kong firms have increasingly targeted niche markets for products that are time-sensitive and influenced by fashion cycles, such as garments, fur, handbags, toys, etc. These types of markets allow them to exploit their knack for opportunistic entrepreneurship and agile sensitivity to changing demand. On the other hand, few of the industries in which Hong Kong has gained strong international competitiveness are research intensive. In fact, the total R&D expenditure by the private sector in Hong Kong in 1995 was HK$1.3 billion, or 0.12 per cent of GDP, and the proportion remained similar during 1996 and 1997 (CSD, 2001). During most of the 1990s, R&D expenditures of the public as well as private sector have been estimated to be less than 0.30 per cent of GDP. More recently, R&D intensity (defined as R&D expenditure as a percentage of GDP) in Hong Kong has been growing, but remains small in comparison with other countries with a similar GDP per capita, only attaining a rate of 0.60 per cent in Statistical data for R&D expenditures was not systematically collected in Hong Kong until the mid- 1990s, but have shown a moderate growth rate during recent years (see Table 2). Table 2: Hong Kong s R&D Expenditure by Sector, 1995 to 2002 Year/Sector BERD 0.12% a 0.14% a 0.11% a 0.12% b 0.11% b 0.09% b 0.16% b 0.20% b HERD 0.25% d 0.27% d 0.29% d 0.31% b 0.35% b 0.38% b 0.38% b 0.38% b GOVERD 0.01% c 0.01% c 0.01% c 0.01% b 0.01% b 0.01% b 0.01% b 0.02% b Total (GERD) 0.38% 0.42% 0.41% 0.44% b 0.47% b 0.48% b 0.55% b 0.60% b a Figures from Feature Article, published in the Hong Kong Monthly Digest of Statistics, July 2001, p. FC5 b Figures from Table 2 Feature Article, Research and Development Statistics of Hong Kong, , published in the Hong Kong Monthly Digest of Statistics, May 2004, p. FD4 c Estimates based on 1998 and onward figures, Census and Statistics Department d Percentage figures calculated from Feature Article, Government Funding of R&D, Innovation and Technology Upgrading, 1995/ /02, published in the Hong Kong Monthly Digest of Statistics, July 2003, p. FD9 Over the period for which figures are available, higher education R&D (HERD) constitute well over half (60 per cent or more) of total R&D espenditure, followed by firms (BERD) and then the government sector (GOVERD). Higher education R&D 8

9 activities are governed by the University Grants Committee (UGC), a governmentappointed body that funds the eight institutes for higher education in Hong Kong. However, as HERD constitutes such a large proportion of overall GERD well over 60 per cent - it can reflect a fairly accurate and complete picture. Most of the expenditure for the higher education sector from 1998 to 2002 is in the fields of physical sciences (between 23 per cent and 25 per cent), engineering and technology (between 23 per cent and 22 per cent), and medicine, dentistry and health (between 18 per cent and 19 per cent). The fields of arts and humanities as well as social sciences each have a 10 per cent share. In 2000 and 2001 a negligible amount of HERD (less than 1 per cent of the total amount) was from parties outside of Hong Kong. Therefore, it can be said that all of the HERD activity is funded by and conducted by domestic actors. There are no figures available for the breakdown of R&D expenditures between domestic and foreign actors in the business sector, despite some examples of foreign firms such as 3M and Motorola known to conduct R&D activities in Hong Kong. In any event, the R&D activities of multinational firms in the territory can be assumed to be small because of the relatively few technological advantages Hong Kong can provide especially compared with the inexpensive human resources for R&D available in neighbouring localities such as Shenzhen on the Chinese Mainland. Along with other science and technology statistical indicators, data on patents can be regarded as a performance indicator of R&D output. There are two types of patents in Hong Kong, i.e. the standard patent and the short-term patent. Subject to payment of a renewal fee, a standard patent in Hong Kong has a term of protection of up to 20 years, whereas a short-term patent has a maximum protection of eight years. The number of patent applications increased from 1,092 in 1991 to 9,226 in 2001 (see Table 3), representing an annual growth of 24 per cent (HKSAR, Census and Statistics Department, Science and Technology Statistics Section 2003). 1 Table 3: Number of Patent Applications in Hong Kong by type of patent application, Type of Patent Application/Year Standard Patent Application 1,179 (49%) 19,139 a (99%) 6,040 (97%) (97%) 8,914 (97%) 9,130 (97%) Short-term Patent Application 30 (1%) 113 (1%) 175 (3%) 274 (3%) 312 (3%) 333 (3%) Patent applications filed under repealed 1,092 (100%) 1,259 (100%) 1,195 (100%) 1,640 (100%) 1,961 (100%) 2,100 (100%) 1,215 (50%) Registration of Patents Ordinance Total 1,092 1,259 1,195 1,640 1,961 2,100 2,424 19,252 6,215 8,569 9,226 9,463 1 The patent system in Hong Kong was previously based on the Registration of Patents Ordinance. This was essentially a re-registration system based on a first registration taking effect in the United Kingdom. With the transfer of Hong Kong s sovereignty to the PRC on 1 July 1997, Hong Kong has localised its patent law and has introduced its own patent system. The Patents Ordinance came into force on 27 June The Ordinance provides for the establishment of an independent patents regime and the grating of standard patents and short-term patents. 9

10 a The surge of standard patent applications in 1998 was mainly due to the large number of applications filed under the Patent (Transitional Arrangements) Rules Figures in brackets represent the percentages to total Source: Feature Article, Patent Statistics for Hong Kong, , published in the Hong Kong Monthly Digest of Statistics, January 2003, p. FC6 Another R&D output measure consists of research publications, not directly related to teaching, from the eight higher education institutions in Hong Kong. 2 Since 1997, research output has been above 20,000 annually (see Table 4). With respect to the pattern of scientific and technological specialisation, what can be discerned for the Higher Education sector is that the investments in humanities, social science and business studies have resulted in a steady stream of publications, while publication biology and medicine has grown considerably, together with engineering. However, physical science has not witnessed a similar growth in publication output. The rise in biology and medicine is noteworthy, considering that these fields are essential for the development of a biotechnology sector. Table 4: Number of Research Output by Eight Higher Education Institutions by Broad Subject Area Broad Subject Area/Year Biology and Medicine Physical 1993/ / / / / / /2002 3,070 3,959 4,722 4,900 5,336 6,149 6,529 1,092 1,749 1,894 1,910 1,951 2,649 2,764 Sciences Engineering 2,495 4,056 4,608 4,829 5,234 6,644 6,309 Humanities, social sciences, and business studies All subject areas 6,484 8,811 10,366 9,247 10,570 11,238 11,494 13,141 18,575 21,589 20,886 23,091 26,680 26,996 Source: Table 6.7, Hong Kong Annual Digest of Statistics, 2003, p. 128 Given that countries with a comparable level of per capita GDP to Hong Kong spend 1.5 per cent - 3 per cent of GDP on R&D, Hong Kong has thus often been dismissed as the odd-one-out among the successful Asian Newly Industrialized Economies (see, for example, Lall 1996). Consultants engaged by Hong Kong to identify new directions for economic development have also lamented the low level of formal investments in R&D. For example, a high profile team of American academics who produced the influential report Made by Hong Kong (Berger and Lester 1997) advocated that a more serious effort to raise R&D investments was necessary for 2 Research output categories generally include: scholarly books and monographs; journal articles, book chapters and other published papers; conference and working papers; works of fiction, consulting reports, and case studies; reviews, translations, and other written outputs; editorships and high-level service external to the institution; and other creative work not listed above. 10

11 future competitiveness. In 1993, the Hong Kong Government Industry Department had launched various funding schemes, including the Industrial Support Fund (ISF) and the Applied Research Fund, to promote the technology-intensive economic development (Innovation and Technology Commission 2004). They can be characterized as follows: Industrial Support Fund (ISF): Established in 1994, the ISF financed projects that were seen as beneficial to the development of Hong Kong's manufacturing industry and technology in general. In practice, the great majority of funded projects were related to the latter. Projects were mostly undertaken by industry support agencies, tertiary institutions, or trade and industry associations. From 1994 to 1998, the ISF had committed HK$1.2 billion to some 340 projects. These projects sought to introduce new technologies, to enhance infrastructural support, or to improve productivity in specific industries. The amount of money provided for the ISF in was HK$278 million. The Legislative Council would approve the money available for use by the ISF each year. Under this arrangement, the ISF had to compete for resources annually in the Government's central resource allocation exercise and any provision not spent at the end of a financial year lapsed. Services Support Fund (SSF): In 1996, the Government established the SSF to finance projects beneficial to the development and competitiveness of Hong Kong's service industry. The SSF committed $50 million in 1996 to finance projects to benefit, for example, the wholesale and retail, tourism and professional service sectors. After this amount was fully committed, a further $50 million was injected into the SSF in late 1997 Applied Research Fund (ARF): The ARF provided venture capital for technological ventures or R&D activities that have good commercial potential undertaken by local firms, either on their own or with non-local partners, say, a Mainland research institution. The ARF has a total working capital of $750 million, derived from three separate capital injections into it. However, recent economic problems, in particular the Asian Financial Crisis that began in 1997, had a lasting effect on Hong Kong s innovation system. The crisis contributed to a dramatic bursting of the property speculation asset bubble that underlay much of Hong Kong s economy and triggered the territory s most acute economic recession. As a result, Hong Kong was no longer able to rely on its traditional methods of accruing wealth, such as serving as a niche for the trading of Chinese goods, and asset inflation. Additionally, China itself has been changing dramatically. With its economic liberalization and reforms following the Open Door Policy, including its accession into the World Trade Organization, there is less need for trade to be conducted through Hong Kong. Combined, these two factors have forced Hong Kong to find a new role for itself and a new engine for economic growth (Chen and Ng, 2001). In response to these conditions, the Hong Kong Government formed the Committee of Innovation and Technology (CIT) in As the CIT was of the opinion that, there is a weak R&D culture in industry (HKSAR 1999), it identified Hong Kong s new role as one being based explicitly on science, technology and innovation. Based 11

12 on the commissions recommendations, the Hong Kong government has instituted measures to increase the amount spent on R&D beginning in the year Most notable among these measures was the establishment of the Innovation and Technology Fund (ITF), set up with HK$5 billion earmarked, funding projects that contribute to innovation and technology upgrading in industry. This fund replaced the existing Industry Support Fund. The CIT reports also laid the groundwork for a re-organization of the Industry Department into the Commerce and Industry Bureau and in January 2000, a new Applied Science and Technology Research Institute (ASTRI). ASTRI is seen as solving the problem of moving ideas from academia to industry. Continuing in the spirit of the CIT s recommendations, in 2000, the Innovation and Technology Commission (ITC) was set up with a mission to spearhead Hong Kong s drive to become a world-class knowledge-based society. The ITC manages the Innovation and Technology Fund (ITF) and the Applied Research Fund (ARF) and supports such infrastructure projects as the Hong Kong Science Park. Table 5 shows the distribution of projects receiving ITF funding under various programmes over a variety of technology fields. Table 5: Innovation and Technology Fund: Distribution of Approved Projects among Different Technology Areas (as at 28/2/2005) Innovation and Technology Support Programme No. of HK$mn Projects University-Industry Collaboration Programme Small Entrepreneur Research Assistance Programme Technology Area No. of HK$mn No. of HK$mn Projects Projects Biotechnology Chinese Medicine Electrical and Electronics Environmental Technology Information Technology Manufacturing Technology Materials Science Nanotechnology Others Total Source: HKSAR Government Innovation and Technology Fund Website < The largest number of projects was related to information technology and electronics; 12

13 in terms of approved funding amount, these two fields also occupy approximately two-thirds of the total funding allocated. Note, however, that few projects in the fields of biotechnology and Chinese medicine received support from the fund. In fact, the fund had only spent less than HK$1.5 billion on project funding and various schemes during the first five years of its existence ( ). The Hong Kong Science Park provides an environment to nurture clusters, through making available sustainable land or buildings for lease to technology-based enterprises to carry out R&D work. The first phase of the park has been completed, and phase II is under construction. A range of high technology firms have either set up research facilities or moved their operations to the park. A vigorous marketing campaign by InvestHK has been launched to attract overseas high tech firms to the park, presumably because the range of local firms that were willing or qualified to move to the park have been limited. Meanwhile the Applied Research Fund (ARF) is a government-sponsored venture capital fund to provide funding support to technology ventures and R&D projects that have commercial potential, with the long term aim to increase technological capability and to enhance the competitiveness of local industry (thereby promoting high valueadded economic development in Hong Kong). The ARF has a capital of HK$750 million. In November 1988, two private sector venture capital firms were appointed to manage the investments. Figure 1: Projects Funded by the ARF, Broken Down by Industry Sector (as at 31 March 2004) As of the end of March 2004, the ARF has supported 23 projects with approved 13

14 funding of HK$387 million. Again, the notable dominance of projects related to information technology is clearly discernible, as shown in Figure 1. In contrast, only around 3 per cent of the projects that received funding aimed to develop new biotechnology. To provide a forensic analysis of the fate of biotechnology in Hong Kong s innovation system, one should first recognize that the Hong Kong government has provided very limited public funding for R&D undertaken by research institutions outside the university system, and although investments in R&D by the private business sector has been growing, it is still a fraction of public funding. In other words, the existence of a market failure for biotechnology R&D was recognized, but not to the extent that the government committed adequate funding for the generation of new knowledge. Towards the turn of the century, the rate of R&D investment to GDP was raised, but it is clear that compared with other high-income regions, investments are very meagre. Moreover, biotechnology has received a very small share of the finance available from public funding schemes. In terms of scientific output, medicine and biology has witnessed growth, but much of the productive research in Hong Kong evidently has tended to specialize in humanities, social science and business studies. The market failure that organization in Hong Kong faced in terms of uncertainty of commercial prospects and support were not alleviated in a sustained manner. The Hong Kong Government has not formulated or implemented a sustained vision for the development of the industry, in sharp contrast to for instance Singapore (Tsui-Auch, 1999), as we shall further discuss in the next section. With reference to systemic failures, the Hong Kong commitments have been weak both in terms of financial resources and in terms of the creation of infrastructure. Hong Kong biotechnology continues to suffer from the small share of support from public as well as private sources. 4. Biotechnology Policy in Hong Kong The ambition of develop a strong biotechnology industry has been articulated for more than a decade by Government and local interest groups in Hong Kong. During the late 1980s, the colonial administration responded to calls for promotion of biotechnology, energetically voiced by faculty members at the Chinese University of Hong Kong, by undertaking several studies of international trends and markets in the sector. Although the government did not take any significant action adhering strictly to its policy of laissez-faire, or positive non-interventionism as it was called by the Financial Secretary in 1980 (Yam, 1998) it persuaded the semi-public Royal Hong Kong Jockey Club Trust to grant HK$300 million for the development of two separate biotechnology research institutes in Hong Kong. Most of the funding was spent on the construction in 1988 of the Hong Kong Institute of Biotechnology (HKIB) located near the Chinese University of Hong Kong (CUHK). Another portion was provided for the Biotechnology Research Institute (BRI) that operates as a part of the Hong Kong University of Science and Technology (HKUST) (Berger and Lester 1997). In 1992, a Biotechnology Committee was set up by the government to keep a close contact with tertiary research institutes and business organizations. However, this committee was only an advisory group without any control over financial resources 14

15 (Tsui-Auch, 1999). Meanwhile, sectors utilizing biotechnology for development and production of biological and diagnostic reagents, drug delivery, and food technology had been identified as very promising for Hong Kong in a technological roadmap project sponsored by the Industry Department of Hong Kong (Kao and Young, 1991). The promotion of biotechnology in Hong Kong during the 1990s was, however, limited to the expression of (rather lukewarm) interest from the government s side and a few initiatives launched by the Jockey Club and universities. As indicated in the preceding section, there were few recurrent resources available outside the university system. Funding from the ISF increased slightly during the period , but then declined in (see Table 6). Table 6: Biotechnology Projects Supported by the Industry Support Fund ( ) Year of Number of Expenditure Funding Projects (HK$ Billion) Total Source: BC Biotech, Enter the Dragon: Opportunities in the Asian Biotech Market The biotechnology industry was rather small, and although statistics are scarce, one source listed 53 companies, including 3 public and 50 private companies. As shown in Figure 2, the majority of biotechnology-related firms were engaged in production of pharmaceutical products, with smaller sectors engaged in manufacture of food products and Chinese medicine and health products. In fact, however, the vast majority of these firms are using low levels of technology, for instance for production of off-license generic drugs. 15

16 Figure 2: Hong Kong Biotechnology Industry (as of 1999) 5% 15% 42% Beverages Chinese Medicine and Health Food Equipment 16% Food Products Pharmaceutical Products 22% Source: BC Biotech, Enter the Dragon: Opportunities in the Asian Biotech Market More recently, there have been initiatives undertaken by the Innovation and Technology Fund and the Hong Kong Jockey Club to support the application of biotechnology to upgrade research and development related to Chinese medicine. For example, the Hong Kong Jockey Club Institute of Chinese Medicine (HKJCICM) was established in 1998 to steer, co-ordinate and strengthen the modernization and further development of Chinese medicine. The HKJCICM is a subsidiary company of the Hong Kong Applied Science and Technology Research Institute Co. Ltd. (ASTRI). It has received a pledged donation of HK$500 million from the Hong Kong Jockey Club to support R&D projects and specific activities of the Institute. A study that was carried out by consultants for the Hong Kong Science and Technology Park Corporation in 2004 (Belfrage, 2004) indicated that Hong Kong universities had produced an increasing number of high-quality papers and thus had achieved international status in biomedical science. Annual number of publications from Hong Kong University and the Chinese University of HK had grown from around 175 in 1997 to around 300 in Other universities such as HKUST had also increased their publication rate, but in addition had maintained very high quality, with more than 50% published in the best journals. Moreover, Hong Kong universities had maintained a lead over prominent universities in the Chinese Mainland such as Beijing University, both in terms of quantity and quality. In fact, the consultants argued that Hong Kong resources for upstream research in biotechnology-related fields were comparable to (but lower than) European clusters such as Medicon Valley. However, the consultants also pointed out that the biotechnology industry in Hong Kong was very weak, and that the venture capital resources required for fostering a viable local cluster of new biotechnology firms was lacking. Most of the public funding had been allocated to upstream research projects, with little capital 16

17 available for mid-stream and downstream commercialization of the research results. The most recent initiative undertaken in 2004 to launch strategic focus areas of support and set up research centers with the funds remaining in the ITF only emphasized Chinese medicine and medical diagnostic devices as two areas of focus. The report did not explicitly propose support for biotechnology, but only mentioned the area in connection with the development of diagnostic technologies and identification of active elements in Chinese medicine (Innovation and Technology Commission, 2004). Consequently, the new ITC strategy was widely perceived as ignoring the potential of biotechnology for Hong Kong, as the quote introducing this paper shows. 5. The Development of the Hong Kong Institute of Biotechnology (HKIB) The Hong Kong Institute of Biotechnology forms one important initiative, and expectations were high that it could help generate a flourishing biotechnology industry. We shall analyse its establishment and development, focusing in particular on its incubation activities. The institute was founded in 1988, through a one-time donation of HK$130 million from the Hong Kong Jockey Club Charities Trust, to function as a non-profit making and self-financed organization for promoting the local biotechnology industry development. Yet, the funding for the establishment of HKIB from the Jockey Club was spent mostly for buildings, infrastructure and equipments, leaving very little money left for actually undertaking research work or for other activities related to promoting local biotechnology development (HKIB 1992). Moreover, the research and innovation culture and atmosphere in late 1980s and early 1990s was very weak, as revealed by reports on unoccupied floors of the HKIB building, in a documentary TV programme run by the Radio Television Hong Kong in early 1990 entitled Hong Kong Collection. In 1993 the HKIB was provided with additional funds by the Industrial Support Fund and the World Health Organization (WHO) to establish a pilot-scale manufacturing plant, i.e. the Manufacturing Technology Centre (MTC), as shown in Figure 3. This became the first major initiative created under the institute. Since then, the HKIB has focused on its downstream processing research. The MTC was soon certified for Good Manufacturing Practice (GMP) and the the institute started to focus on optimization research for producing clinical trial material. 17

18 Figure 3 Founding of the HKIB (1988) Development Milestones of HKIB Establishment of GMP Manufacturing Facilities (1993) Development of Downstream Processing Expertise Network Expansion and Product Diversification R&D support # Contract R&D # Contract Manufacturing # Technical Advices Hong Kong Pharmaceutical Technology Centre Incubation Service # Infrastructure # Technical Advices # Business Advices Service Diversification and Network Expansion Reliance on public funding Clinical Trial Monitoring # Satisfy FDA requirements Building up Human Capital # Degree Programme and Training Courses Role in Innovation System R&D Support, Incubation Services and Human Resources Building (1999) In comparison with the upstream cell-related research, downstream processing is relatively less risky and production optimization work less demanding than complex processes utilizing advanced biotechnology techniques. Therefore, the HKIB devoted all its effort on the downstream processing research and in several years after 1993, the HKIB became an expert organization in downstream processing (Figure 3). Soon, the HKIB commercialized several hormones, regulatory factors and enzymes such as urine trypsin inhibitor and follicle-stimulating hormone in several years after After the HKIB developed its expertise in downstream processing, it started to provide research and development support, such as contract R&D service, contract manufacturing service and technical advice services to biotechnology firms. For example, the HKIB has established connections with foreign organizations on the downstream research, such as collaboration with the giant drug company, Hoffmann- La Roche Ltd., to scale up a recombinant protein, aspartic proteinase-plasmepsin I. In 1999, the Government announced a 10-year plan to promote Traditional Chinese Medicine Industry in the territory. As part of this initiative, the HKIB received 18