For centuries, Hong Kong has been known as the city “where East meets West,” its advantageous location transforming it into a global hub for trade and commerce. And modern Hong Kong has many other attractions – tax regime, rule of law, financial expertise and educated workforce. These may not seem that exciting, but are highly desirable prerequisites for any international company looking to set up their regional headquarters (RHQs).
RHQs bring many benefits for a city, from increased investment and employment to high-calibre talent. The associated prestige also helps attract more global businesses.
But Hong Kong is not the only city sparring to attract RHQs. Our perennial rival Singapore is, unsurprisingly, our chief competitor. But as Mainland China continues its reform process, and several ASEAN countries enjoy rapid growth, could they threaten Hong Kong’s title as Asia’s best RHQs destination?
The current picture for Hong Kong looks pretty healthy. We continue to attract increasing numbers of RHQs, and there is also a growing trend of entrepreneurs from overseas launching start-ups in Hong Kong. According to the latest report from the Census and Statistics Department, in 2018 there were 1,530 regional headquarters in Hong Kong, up from 1,389 in 2014.
John Siu, Managing Director of Cushman & Wakefield in Hong Kong, summarised the city’s main advantages for global companies.
“First of all, Hong Kong has a very simple and low tax system. That is one of the key attractions,” he said. “Secondly, Hong Kong is a truly international city: it is well connected with the rest of the world and the rest of the region by almost all modes of transport.
“The third thing is that the legal system here is very transparent and fair, and the rights of companies and business interests are well protected under the law.”
The city’s financial system is another plus point. Stan Kwong, Regional Head of Finnair, pointed to Hong Kong’s “efficient, secure, safe and easy user-friendly banking” for companies of all sectors and sizes as a crucial draw.
In fact, Finnair recently significantly expanded its base here, increasing staff numbers by around 60% and doubling its flight capacity. Seventeen years after launching its operations in Hong Kong, the company has decided to increase its capacity from seven flights weekly to 14, to more than 100 destinations in Europe.
“With such an expansion, we also needed to increase the local staffing size in order to improve our service and business development,” Kwong said.
For airlines like Finnair, the huge global flight network and top-notch reputation of Hong Kong International Airport is a key factor. And Hong Kong’s location provides other benefits for travel companies.
“I personally believe that Hong Kong’s geographical location is one of the most unique benefits,” Kwong said, adding that the new bridge to Macao and Zhuhai, and the Express Rail Link, mean that passengers can now travel easily to the Mainland. “We are just one hour away from the PRD.”
Siu from Cushman & Wakefield also said that proximity to Mainland China is important for many businesses, especially those with customers, markets and suppliers in the Mainland. “So Hong Kong does have that competitive advantage over the other cities in the entire region.”
The source countries of companies with RHQs in Hong Kong have remained stable in recent years, with the United States, Mainland China, Japan and the United Kingdom being the biggest. One trend, according to Government figures, is that a small fallback in the number from the U.S. has been more than matched by growth in RHQs from Mainland Chinese companies. Cushman and Wakefield has seen the same trend in its research.
“Around six years ago, the Greater Central area – Admiralty, Central and Sheung Wan – PRC occupancy was 13%,” Siu said. “We recently did another survey and the number had already gone up to 20%.”
Hong Kong has long been a gateway for international companies to access Mainland China. Now it is more of a two-way flow, with Mainland companies using Hong Kong as a base to go global.
The tremendous growth in the Chinese Mainland also means that its Tier 1 cities could be an option for RHQs. However, Siu sees them playing a complementary role alongside Hong Kong, rather than competing.
“I think Greater China is big enough to accommodate more than one or two regional cities or hubs,” he said. “Hong Kong and Shanghai perform different roles in the development of the Greater China economy.”
Kwong from Finnair agreed that Hong Kong will work alongside Mainland cities. In particular, he anticipates greater cooperation with cities in the Greater Bay Area (GBA).
Eric Chong, CEO of Siemens, also noted that the development of the GBA is changing the picture for Hong Kong, as the market size grows from 7 million to 67 million.
“One of the reasons why we set up the Siemens Smart City Lab in Hong Kong is that we are not only looking at the Hong Kong market, we want to scale up across the GBA,” he said.
Hong Kong’s straightforward tax system has long been a key factor in our success as a global hub. However, John Timpany, Partner, Tax at KPMG, noted that some other cities have been catching up. Singapore in particular has been “very proactive” in using tax to encourage economic development, and has introduced a number of targeted incentives aimed at attracting RHQs.
“If Hong Kong is going to continue to compete, it makes sense to think about what other incentives can be built into the tax system,” he said. “We have seen the government start to use tax incentives to try and encourage economic development over the last few years – corporate treasury centres, aircraft leasing – and the government has taken away some tax disincentives to business.
“Hong Kong has been successful: its low rate, simple tax system has been a factor in making it a strong base for regional headquarters, but you can’t rest on your laurels.”
A number of ASEAN members have also introduced similar incentives. But Siu pointed out that tax is not the only concern. Hong Kong also has a sophisticated and mature business environment, which has been developed over many years.
On the downside
The first thing mentioned on the question of Hong Kong’s disadvantages as a home for international business is usually expensive real estate.
“The space is frustratingly small and the office rental price is one of the highest in the world,” said Kwong.
On the topic of Hong Kong’s downsides, Siu agreed, saying: “I would say the costs of living and the cost of real estate.”
This is one area where we lose out to Singapore, which offers similar benefits to Hong Kong but has lower property costs. In terms of sheer numbers of RHQs, Hong Kong is far behind Singapore. According to a 2016 report by Cushman & Wakefield, the Lion City had 4,200 RHQs compared to Hong Kong’s 1,389. However, this is a long-term situation and does not reflect a trend away from Hong Kong.
But Chong from Siemens suggested that the real estate issue is sometimes overblown. Property cost may be higher than other cities, but the tax rate is generally lower.
“One of the things people bring up is property prices,” he said. “But you don’t need to be in Central. I tell my colleagues in Germany that the property cost is overrated as an issue in Hong Kong.”
Timpany from KPMG agreed, adding that the Government could do a better job of explaining that there are other options for companies to set up and operate outside Central.
Chong pointed to manpower as another challenge for Hong Kong, particularly in innovation and technology. The historic appeal of careers in the property and financial sectors mean that fewer students enroll on STEM courses, leading to a shortage of talent in areas like AI and robotics.
“I think the Hong Kong government needs to encourage more kids to study science and technology and engineering,” he said.
On the manpower side, Timpany pointed out that Hong Kong retains an edge in attracting overseas professionals.
“Salaries tax remains very attractive – more attractive than Singapore in particular and much more attractive than the Mainland market,” he said. “The Hong Kong government is still much more liberal about work visas and it is easier to bring in international talent than Singapore, and clearly much easier than Mainland China.”
Shifting role for RHQs
RHQs generally oversee their local markets. However, this is not always the case, and a hub in Asia, for example, can also have international reach. Schneider Electric has adopted a “multi-hub” policy, creating an international leadership structure with key jobs located across the company’s three global hubs in Hong Kong, Paris and Boston.
“This helps achieve our ambition of offering everyone in the company, in every location of the world, the opportunity to have the same chance of success,” said Jonathan Chiu, Hong Kong President of Schneider Electric. “With global hubs in these world-class cities, we can attract and retain top talent from around the world.”
This approach means the company can develop a more diverse leadership, which helps in terms of innovation, he added.
And as technology makes the physical location of workers less important, the definition of RHQs is becoming more blurred, according to Cushman and Wakefield’s Siu.
“Some companies may have their CEO based in Hong Kong, and their CFO based in Singapore,” he said. “It is hard to draw a clear-cut line in this regard.”
Even if the RHQ is located elsewhere, cities can still benefit from attracting major projects or subsidiaries of large global corporations. For example, Siemens’ RHQ in East Asia is in Beijing, but the company chose Hong Kong as the location for its Smart City Digital Hub.
Chong explained that the hub was set up 2017 in cooperation with Hong Kong Science and Technology Park. “We work with our partners, mainly in infrastructure projects, to try out different concepts related to smart city,” Chong explained. The hub also aims to nurture talent in the technology sphere.
Siemens chose Hong Kong for this Smart City Digital Hub because, besides the usual attractions, it is an ideal canvas for smart city research due to its high density, and the fact that it faces a number of common problems such as an ageing population.
Looking to the future, Hong Kong’s key attractions as a global hub remain steadfast. Other cities may be improving in one area or another, but few can match Hong Kong when it comes to location, access to markets, skilled workforce, tax regime and rule of law. And our long-held reputation as Asia’s world city is as relevant as ever.
“When you talk about cities globally – people will think of New York, London and Hong Kong,” Chong from Siemens said. “So for us, if you want to be in Asia, Hong Kong is the right place.”
Providing an Ideal Platform
Growing numbers of international businesses – from global firms to start-ups – are choosing to set up in Hong Kong
By Stephen Phillips, Director-General of Investment Promotion, Invest Hong Kong
Hong Kong is an attractive destination for companies of all sizes to set up their business, including multinational corporations and start-ups. The Belt and Road Initiative and the Guangdong-Hong Kong-Macao Greater Bay Area (GBA) development are two critical national economic development strategies, which provide global business communities ample business opportunities.
Hong Kong, a highly dynamic city that serves as the perfect platform for companies expanding into the mainland and Asia Pacific, continues to attract a wide array of leading companies from around the globe, as is fully reflected in our latest annual surveys.
According to the 2018 Annual Survey of Companies in Hong Kong with Parent Companies Located outside Hong Kong, there are 8,754 companies in the city with parent companies located outside Hong Kong, representing a robust 6.4% year-on-year growth. The growth is even more prominent in the number of companies using Hong Kong as their regional headquarters, which has now reached 1,530, up 8.3%. The companies tell us that the favorable factors are Hong Kong’s simple tax system and low tax rate, free flow of information, free port status and geographical location.
Hong Kong’s business appeal was also shown in our “2018 Start-up Survey”. Hong Kong’s start-up ecosystem has skyrocketed in the last few years. The survey saw 2,625 start-ups operating in Hong Kong’s various co-working spaces, private or government incubators. This is an 18% year-on-year increase, while jobs created surged by 51% year-on-year. The start-up community is also highly international in nature, with 35% of founders coming from outside Hong Kong.
The United Kingdom, United States, the Chinese Mainland and Australia are the top origins of non-local founders. They are engaged in businesses such as fintech, e-commerce, supply chain management, logistics technology, professional or consultancy services, information, computers and technology.
GBA: Driving growth
Hong Kong’s business potential was further strengthened by the promulgation of the Outline Development Plan of the Greater Bay Area (GBA) by the Central Government in February. This supports Hong Kong in consolidating and enhancing its status as international financial, transportation and trade centre as well as an international aviation hub. It also strengthens Hong Kong’s status as a global offshore renminbi business hub, an international asset management centre and a risk management centre, and promotes the development of high-end and high value-added financial, commercial and trading, logistics and professional services The plan also shows that the authorities are making great efforts to develop the innovation and technology industries, nurturing emerging industries, and establishing Hong Kong as the centre for international legal and dispute resolution services in the Asia-Pacific region.
The GBA Development Plan also includes policy measures for developing an international innovation and technology hub, expediting infrastructural connectivity, building a globally competitive modern industrial system, taking forward ecological conservation, and developing a quality living circle for living, working and travelling. Its aims include strengthening cooperation and jointly participating in the Belt and Road Initiative, and jointly developing Guangdong-Hong Kong-Macao cooperation platforms.
The authorities are actively improving the business environment in Hong Kong and recently announced eight measures to facilitate free flow of people and goods in the GBA:
- In determining one’s tax obligations, any stay of less than 24 hours on the Mainland will not count as a day of presence
- Provide tax relief to non-Mainland high-end talent and talent in short supply
- Support the open recruitment of Hong Kong and Macao residents by public institutions of the Guangdong Government in the GBA
- Extend to young entrepreneurs of Hong Kong and Macao working in Mainland cities in the Greater Bay Area support measures provided by the Guangdong Government to Mainland youth
- Support higher education institutions and scientific research institutes from Hong Kong and Macao to participate in projects under Guangdong technology programmes
- Introduce pilot schemes for the facilitation of immigration reform in the GBA
- Facilitate non-business private cars from Hong Kong and Macao using the Hong Kong-Zhuhai-Macao Bridge
- Expand the implementation scope of expedited customs clearance
Hong Kong will contribute to the GBA development by leveraging its multiple roles as an international financial, logistics and trading centre as well as a global innovation and technology hub and the centre for international legal services in the region.
Invest Hong Kong is the department of the Hong Kong SAR Government responsible for attracting foreign direct investment and supporting overseas and Mainland businesses to set up or expand in Hong Kong.