Public Consultation on New Strategy of Innovation and Technology Development

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1 Public Consultation on New Strategy of Innovation and Technology Development Preamble Over the years, the Federation has been a strong advocate of promoting Hong Kong s innovation and technology development. In today s highly competitive global market, companies large and small are facing increasing pressure to improve productivity and add value to their products and services. The use of innovative ideas and the application of new technologies in their business operations are two important elements that help them achieve these targets. It has also been well documented that investment in innovation and technology will support industrial development and the long-term sustainable growth of an economy. In Hong Kong, the Government has been playing a supportive role in promoting innovation and technology development, mainly through its HK$5 billion Innovation and Technology Fund (ITF) and the provision of relevant infrastructure. Since its inception in 1999, ITF has supported 562 R&D projects, involving some HK$1.5 billion. However, much to our dismay, throughout these five years, few of the funded projects have succeeded in producing high potential deliverables suitable for commercialisation. As we see it, one major reason for this low commercialisation rate is the lack of focus on the part of ITF in screening R&D projects, which largely results from the Government s long-held policy of not picking winners. Obviously, ITF s fragmented and diffused funding approach is far from optimal, and does not provide a direction to develop Hong Kong s core R&D competencies for the benefit of industry. Therefore, we support reforming ITF s funding approach, with a view to deploying the resources in a more focused manner. In this regard, we welcome the new strategy proposed by the Innovation and Technology Commission and its five components, viz. focus, market relevance, industry participation, leverage on the Mainland and better co-ordination. We are hopeful that the new strategy would enable the better use of ITF s limited resources, particularly in areas where Hong Kong has comparative advantages. Focus Areas In the consultation paper, 13 technology areas have been proposed for focused development. We would like to suggest the inclusion of environmental technology as an additional focused area. The reasons are as follows: According to the Hong Kong Productivity Council s Consultancy Study on the Environmental Technology Industry in Hong Kong commissioned by ITC, the environmental markets in the Mainland and Southeast Asia are sizeable with long-term growth potential. As projected in the study, the Mainland 1

2 environmental market would reach US$85 billion for the period 2001 to As for Southeast Asia, the market size would increase from US$16.6 billion in 2000 to US$20.8 billion in Moreover, both markets are expected to continue to grow at an even faster rate during the five-year period from 2006 to With Hong Kong s close proximity and intimate links with the Mainland, together with its established business links to Southeast Asia, the local environmental technology industry is in a very advantageous position to tap into the rapidly growing market opportunities in the region. The strong development of the local environmental technology industry would benefit our society as a whole: in reducing the volume of waste to be permanently discarded (hence, reducing the burden on public funds and allocation of scare resources), preserving natural resources, and helping provide a cleaner environment for the general public to live and businesses to operate in. The benefits that the environmental technology industry brings to society would straddle generations. Likewise, if not addressed properly, the harmful effects caused by environmental deterioration would be felt even after generations. In our view, the Government has the ultimate responsibility to protect and preserve the environment of Hong Kong. A vibrant environmental technology industry in Hong Kong will provide an effective and flexible vehicle for the Government to achieve this policy objective. This is particularly important as our existing landfills are going to be used up in about ten years time and Hong Kong is running out of space to manage the growing volume of domestic and commercial waste it produces. With the construction of the Tuen Mun Recovery Park commencing next year, we expect many a local and international environmental technology company to be interested in setting up production facilities in the Park upon its completion. As today s waste recycling processes and development of new environmental products are heavily reliant on the use of advanced technologies, there is a need for a special centre to be established to support the R&D activities of these companies. Additionally, as printing is one of the largest manufacturing industries in Hong Kong, this sector should be covered under advanced manufacturing technologies as a focused area. R&D Centres The consultation paper proposes the establishment of R&D Centres to provide a focal point for conducting applied R&D in selected technology areas. While we find this proposal agreeable, we are worried that the establishment of too many R&D Centres would spread ITF s resources too thin and defeat the purpose of focused development. Hence, it might be desirable if some related focused technology areas could be grouped together and subsumed under one R&D Centre in order to achieve better synergy and cost-efficiency. 2

3 As regards the mode of operation of R&D Centres, we agree that there is a need to maintain a close relationship between the R&D Centres and their host institutions. However, it does not seem to us a very satisfactory arrangement for the Board of Directors of each Centre to be appointed by their respective host institution. Ideally, the composition of the Board of Directors of the R&D Centres should include representatives of the Government, industry and the host institution as well as renowned researchers in applicable fields. One of the key objectives of the Government s new strategy is to increase the market relevance of ITF-funded R&D projects. In order to achieve this target, the participation of industry in the R&D Centres decision-making process is crucial. When establishing the R&D Centres, the Government should appoint industry representatives to the Steering Committee and Technical Advisory Committee of each R&D Centre to ensure its research direction is relevant to the needs of industry and its projects can produce deliverables with commercial potential. In addition, the Government should use the percentage of R&D projects which can yield commercialised products as a benchmark to assess the success of each R&D Centre. The Government should consider reducing/eliminating funding for R&D Centres which fail to meet the benchmark set, and reward those with a high commercialisation rate. Other comments At present, ITF operates a number of funding schemes to support local companies in pursuing R&D projects. Some of these programmes are operated on a matching-grant basis. Although it has been indicated in the consultation paper that in future ITF would mainly be deployed to support the establishment and projects of the R&D Centres, there is no mention of the prospect of the existing funding schemes. We hope ITF will continue to provide funding support to R&D projects initiated by local companies through direct grants, and the Government will consider increasing the grant level to cover, say, 60% to 70% of a project s cost. Tax incentives If Hong Kong is to be successful in promoting innovation and technology development, government support and the participation of the private sector are equally important. So far, Hong Kong has been falling behind its major competitors, such as Singapore, South Korea and Taiwan, in terms of industry s input in R&D. According to Main Science and Technology Indicators published by OECD, the percentages of gross domestic expenditure on R&D financed by industry in Singapore, South Korea and Taiwan in 2002 were 50%, 72% and 63% respectively, whereas the corresponding figure in Hong Kong was only 33%. The much higher industry input in R&D in these economies is because their governments provide various forms of tax incentives to encourage the private sector to invest in R&D. On the contrary, Hong Kong is one of only a handful of developed 3

4 economies in the world that does not offer any incentive schemes on R&D. To many Hong Kong-based companies, this is certainly a major negative factor when deciding where to put their R&D investment. Against this background, we strongly recommend the introduction of triple tax deduction as an incentive to attract local companies to increase their R&D investment in Hong Kong. The merits of this scheme are as follows: It would not involve the controversial issue of winner-picking as the scheme would apply to companies from all sectors which undertake R&D activities; No direct government expenditure would be incurred; and This is essentially a result-driven scheme in that companies with successful and profitable projects would benefit most from extra tax deduction. At present, Singapore s Income Tax Act allows double deduction for R&D projects carried out in Singapore. Given the more favourable R&D environment in Singapore, Hong Kong must offer a higher deduction percentage if we are to compete with Singapore and attract more companies to set up R&D centres in Hong Kong. In addition, as Singapore s corporate profits tax rate is higher than Hong Kong s, the money saved from Singapore s double deduction would be higher if we offer the same extra deduction rate. To ensure that our incentive package is attractive enough, a triple tax deduction rate is thus necessary. Conclusion The importance of innovation and technology to economic development cannot be over-emphasised. They are essential both for maintaining the competitive edge of local companies and for Hong Kong s transformation into a knowledge-based, high value-added economy. A recent report by OECD entitled: Tax Incentives for Research and Development: Trends and Issues made the following statement: Both economic theory and empirical analysis underline the key role of R&D in economic growth. In theory, long-term economic growth is driven by the accumulation of knowledge-based factor of production such as R&D and human capital which prevent the marginal return to physical capital from falling below profitable levels. Empirical analysis affirms that R&D increases multi-factor productivity (MFP). Cross-country comparisons show that increases in private, public and foreign R&D all contribute to increases in MFP. With Cepa, our free flow of information and robust regime for IP protection, Hong Kong is in a favourable position to become a major R&D centre in China. We are 4

5 hopeful that the new strategy will steer Hong Kong s innovation and technology development in the right direction. Previously, the collaboration between industry and tertiary institutions has not been close enough. With the new strategy, we expect the links between these two sectors to be strengthened and Hong Kong s innovation and technology development to reach new heights. August