Rekindling Hong Kong's economic growth through innovation

Deloitte and Alibaba Hong Kong Entrepreneurs Fund jointly produced this report Rekindling Hong Kong's economic growth through innovation . The study explores Hong Kong’s progress in establishing itself as a world-class innovation hub, covering government and policy, research and development, talent and education, funding, business support, and culture and norms. It also assesses Hong Kong’s role in the integrated innovation and technology (I&T) ecosystem development in the Guangdong-Hong Kong-Macao Greater Bay Area (GBA).

The research involved consultations with key opinion leaders in innovation and entrepreneurship across the public, private and voluntary sectors, supplemented by a survey of 153 Hong Kong-based startup executives and 1,382 university students. One recurring theme—resilient leadership amid uncertainty—stood tall. In the past year, we have witnessed startups and innovative ventures transform, exemplifying the attitude, agility and adaptability to not just recover, but vault forward with direction and purpose.

Innovation and technology is key to Hong Kong's economic growth plans and entrepreneurship is vital to maintaining its status as one of the most vibrant and competitive opportunity hubs in Asia.

Hong Kong’s I&T ecosystem is increasingly vibrant against backdrop of National 14th Five-Year Plan and GBA development

• As part of China’s 14th Five-Year Plan, Hong Kong is encouraged to elevate its status as an international I&T hub and reinforce its unique position of close links with the GBA, Mainland Chinese, and other key global markets.
• Hong Kong’s efforts to accelerate I&T development and GBA integration over the past decade led to a two-fold increase in I&T GDP, with double-digit growth achieved for the first time in 2017-18 and again in 2018-19. There was also a three-fold increase in the number of startups in Hong Kong.
• The pandemic created new headwinds for startups, with nearly half of entrepreneurs surveyed (46%) finding it difficult to interact with customers, and about a third (29%) struggling to manage a decline in revenue. Despite this, the startup ecosystem remains vibrant with 12% year-on-year growth in 2021, reaching a record high of 3,755 companies.
• According to the survey, 63% of Hong Kong startups have a strong interest in expanding into GBA cities. They expect this to help them access a larger market (65%), tap strong talent pools (40%) and gain exposure to and potentially enter partnerships with large corporations (30%)

The Hong Kong Government has made unprecedented strides in accelerating and extending the HKSAR’s I&T ecosystem into the GBA 

• Budget allocation and spending on I&T has hit new heights, with more than HKD130 billion invested over the past four years. More than 40% of entrepreneurs agree the Government is effective at cultivating an ideal entrepreneurial environment, boosting public confidence in adopting startup-led digital solutions, and supporting I&T startups. Most students remain neutral.
• To seize development opportunities under the 14th Five-Year Plan and in the GBA, the latest policies announced by the Hong Kong Government focus on promoting I&T cooperation with key cities in the Chinese Mainland. This includes the “Twin Cities, Three Circles” concept, the San Tin Technopole and the Shenzhen-Hong Kong I&T Cooperation Zone.
• However, having to deal with two different institutional systems is a challenge for half of the entrepreneurs surveyed, emphasising the importance of regulatory harmonisation.

Leveraging its world-class R&D capabilities, Hong Kong is set to forge new I&T collaborations with the Chinese Mainland and the world while bridging the commercialisation gap

• Hong Kong is well placed to become a global research collaboration hub. As flagship projects, its two established InnoHK research clusters—Health@InnoHK and AIR@InnoHK—have attracted world-leading universities and research institutes to collaborate with local universities in setting up 28 research laboratories. A third cluster, the InnoLife Healthtech Hub, is proposed for the Hong Kong-Shenzhen Innovation and Technology Park (HSITP) in the Loop.
• But much remains to be done. Respondents face large gaps in university research commercialisation, with only 21% saying they have enough support. Improving knowledge transfer and commercialisation will require concerted efforts from the Government, universities, R&D institutions and industry players.

Hong Kong must strive to cultivate talent and reverse brain drain in an intensifying global race for talent

• The government has invested ample resources in STEM education, but the onus remains on schools to plan and implement the curriculum. STEM education should be defined at the policy level to be more balanced, sustainable, far-reaching and in line with government I&T priorities. This also requires collaborative efforts, to ensure students are skilled and understand their job prospects.
• Forward-looking talent strategies are essential to attract and retain Mainland Chinese and overseas talent in Hong Kong, amid a brain drain, emigration wave and fast-ageing population. The Technology Talent Admission Scheme has prompted an influx of R&D talent. However, 80% of entrepreneurs see the high cost of living in Hong Kong as a major deterrent. Key players should join forces to support the talent base. Incubators should accelerate the build-up of infrastructure, resources and space for I&T development, and the Government should enhance tax incentives.

Venture capital funding in Hong Kong now covers the entire startup funding journey; government co-investment schemes need to be enhanced to maintain momentum

• Venture capital funding in Hong Kong has evolved to cover the entire startup journey, a total of 46% of venture capital deals in Hong Kong went to mid- and late-stage companies. Since the Government set up the Innovation and Technology Venture Fund (ITVF) in 2017, it has invested more than HKD142 million in 22 startups and attracted over HKD889 million in private co-investments. HKSTP and Cyberport also play a vital role in startup financing, with a combined investment of HKD400 million in 41 startups.
• Progress is evident, but the Government should accelerate vetting and revisit the ITVF scheme. The aim is to attract more long-term investments with a moderate to high risk appetite to support startups that are R&D-driven and have long research lifecycle, and encourage venture capital funds to take on additional risk through co-investment.

Hong Kong has a well-connected, supportive network for startups that will remain an essential catalyst for cross-border ecosystem development

• The number of co-working spaces, incubators and accelerators in Hong Kong doubled from 2017 to 2021, reaching 124 in 2021, testament to the efforts of its Government, universities and large corporations.
• According to the survey, 56% of entrepreneurs agree Hong Kong has enough incubators and accelerators, with 70% finding the support for marketing, business development and networking, fundraising, mentoring and IT useful.
• There is a consensus that cross-border connectivity and support can be strengthened to better integrate Hong Kong startups into the GBA network.

Hong Kong has a sophisticated business culture with a budding entrepreneurial mindset among young people, but requires a startup friendly environment to nurture the next unicorns

• Although 60% of students have entrepreneurial intentions, less than a third want to work at a startup (33%) or establish their own startup (23%).
• This is often due to lacking a solid business idea (40%) or access to capital (38%). Hong Kong needs a risk-taking culture to foster innovation amid intensifying global competition for young talent, capital and startups, and more prominently celebrate success stories and startup heroes.

Call to action

There have been encouraging efforts by multiple stakeholders to foster a thriving I&T ecosystem in Hong Kong. The integration of Hong Kong’s I&T sector within the Greater Bay Area will be a key catalyst for growth.

• Employ a comprehensive strategy to bolster integration with the Mainland GBA cities, with a focus on harmonising different institutional systems
• Accelerate I&T adoption through 360-degree public procurement
• Establish an independent research-industry consortium to forge long-term collaboration between academia, R&D centres and industry
• Enhance co-investment schemes by increasing risk appetite and introducing alternative models
• Strengthen policies to attract and retain global talent and build a sustainable pipeline of local talent

Transforming Hong Kong into an international I&T hub requires government, industry, startup, academia and research sector collaboration. We invite our readers—whether founders, investors, policymakers, students or ecosystem builders—to join hands on this I&T agenda and advance together.

Contact us

Falcon Chan
Partner
Strategy, Analytics and M&A
Deloitte China
falconchan@deloitte.com.hk

Jocelyn Law
Senior Manager
Strategy, Analytics and M&A
Deloitte China
joclaw@deloitte.com.hk

Coco Tong
Senior Consultant
Strategy, Analytics and M&A
Deloitte China
cotong@deloitte.com.hk