More than 9,000 foreign firms operate in Hong Kong, among them 1,300 from the United States. So when the Chinese legislature recently passed a new security law intended to prevent “secession, subversion, terrorism and foreign interference” in Hong Kong, many CEOs and top executives began wondering about the business implications. The U.S. State Department added to the uncertainty last month by declaring that Hong Kong is no longer autonomous enough to warrant special treatment.
Between us we have researched in and about China and Hong Kong for many years, and we know that there’s no single answer to this question. That’s in part because because the implications of these two developments for firms will depend in large part on why they are in Hong Kong in the first place. Most are there for one of three main reasons, so let’s consider each:
For Hong Kong
These firms want access to Hong Kong’s upstream resources and downstream opportunities. They tend to be relatively small service firms focused on specialized areas such as finance. (Hong Kong was recently ranked the #3 financial center in the world after New York and London.) Part of the reason companies in this category tend to be smaller is that Hong Kong is a relatively small economy, with a GDP in 2019 of just U.S. $352 billion, which ranks about 35th in the world. Most of these firms are in the service sector because that sector represents nearly 93% of Hong Kong’s GDP.
Because of the dominant role of services in Hong Kong’s economy, any movement up or down in GDP has a direct and significant effect on the revenues of this first category of foreign firms. As political tensions in Hong Kong increased in the second half of 2019, Hong Kong’s GDP dropped 1.2% for the year, and the country officially slipped into recession. More worrisome, foreign direct investment (FDI) into Hong Kong fell a staggering 47% in 2019 to $55 billion. In the process Hong Kong fell from the #3 destination globally, just behind China, to #5. It will take months and even years to learn how China’s new security law will affect Hong Kong, and how countries around the world will react, but it is hard to imagine the specifics helping GDP and FDI. First that are in Hong Kong for Hong Kong will feel the pain immediately and directly.
If this weren’t enough, brain drain could also hurt these firms. Countries such as the U.S., UK, and Canada have all indicated their willingness to adjust their immigration or citizenship rules to allow, as the U.S. Secretary of State Pompeo put it, “Hong Kong people…[to] bring their entrepreneurial creativity to our country.” Firms in Hong Kong for Hong Kong rely heavily on local talent, and a loss of the best and brightest to other countries could be devastating to them.
I believe that Hong Kong looks much more promising than Detroit)) Especially if your business is related to digital technologies. My older brother says things are going so well that he hired a virtual company secretary. I'm not surprised by this. My brother did a lot to develop and support his company during this difficult period.