Journal of Science and Technology Policy in China

Strengths and weaknesses of Hong Kong's technology and innovation industry with
reference to the extended open innovation model
Yan Xu, Chun Yu Calvin,
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Yan Xu, Chun Yu Calvin, (2013) "Strengths and weaknesses of Hong Kong's technology and innovation
industry with reference to the extended open innovation model", Journal of Science and Technology Policy
in China, Vol. 4 Issue: 3, pp.180-194, https://doi.org/10.1108/JSTPC-10-2013-0010
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JSTPC INVITED PAPER

4,3
Strengths and weaknesses
of Hong Kong’s technology
180
and innovation industry
Received 9 October 2013
Accepted 10 October 2013
with reference to the extended
open innovation model
Xu Yan and Calvin Chun Yu
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Hong Kong University of Science and Technology, Kowloon, Hong Kong

Abstract
Purpose – This study aims to provide an analysis of Hong Kong’s strengths and weaknesses in
developing its technology and innovation industry.
Design/methodology/approach – It briefly discussed the “extended open innovation” model on
the basis of Chesbrough’s “open innovation” model to explicitly highlight the elements associated with
different stages throughout the whole spectrum of innovation processes.
Findings – The model is then illustrated with Hong Kong’s unique experience to gain insights for
various stakeholders on how open innovation could be used beyond research and development
activities and how Hong Kong could benefit from this paradigm shift.
Originality/value – The extended open innovation model can be used as a framework to address the
development of the technology and innovation industry.
Keywords Hong Kong, Extended open innovation
Paper type Research paper

A. Introduction
Mckeown (2008) defined the term innovation as both radical and incremental changes in
thinking, in things, in processes or in services, while Herstatt (2007) defined technology
as the application of scientific and/or technical knowledge to achieve solutions of
practical problems. According to the Organisation for Economic Co-operation and
Development (OECD), technology innovations are relevant to new products, new
processes and significant technological changes of products and processes (OECD, 1993).
Each of these may involve either an innovation new to the world or one that is simply
new to a particular firm or industry (Richard et al., 2005). An innovation is implemented
only if the technology has been introduced to the market. The major goal of innovation is
positive change, that is, to make the target subject better.
Ever since the promulgation of “open innovation model” in 2003 (Chesbrough, 2003b),
Journal of Science and Technology the notion of “open innovation” has gained much popularity especially in the study of
Policy in China research and development (R&D) activities. As pointed out by Christensen et al. (2005), the
Vol. 4 No. 3, 2013
pp. 180-194 notion of open innovation has been covered well before Chesbrough’s proposal in different
q Emerald Group Publishing Limited ways like absorptive capacity and innovative learning (Cohen and Levinthal, 1990;
1758-552X
DOI 10.1108/JSTPC-10-2013-0010 Rosenberg, 1982; Lundvall, 1992; Pavitt, 1998; von Hippel, 1988). However, Chesbrough
 has contributed by presenting “a more comprehensive and systematic study of the Hong Kong’s
‘internal’ corporate modes of managing such more externally oriented processes of strengths and
innovation” (Christensen et al., 2005). In fact, Chesbrough went beyond and deepened the
absorptive capacity analysis to suit the changing R&D environment. weaknesses
In this paper, based on Chesbrough’s work and the “extended open innovation”
model proposed in a related study (Xu and Yu, 2009), a thorough discussion is
presented of Hong Kong’s unique situation in the open innovation arena. Section B will 181
present a brief literature review on open innovation. Section C will introduce the case
background of Hong Kong. A discussion on the role of Hong Kong enterprises as
“external party” will be shown in Section D. Section E will continue with a discussion
on the prospect of Hong Kong enterprises in evolving into “major company”.
The contribution and limitation will be presented in Section F.
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B. Literature review
Cohen and Levinthal (1990) argued that a firm’s innovative capabilities would be
critically influenced by its ability to recognize the value of, assimilate and apply new and
external knowledge. They labeled such ability as absorptive capacity and proposed a
model for analyzing R&D investment. They suggested that absorptive capacity is
largely based on a firm’s level of prior related knowledge and argued that the
development of absorptive capacity and innovative performance are history- or
path-dependent. The study of absorptive capacity involves not only a firm’s innovation
performance but also aspiration level and organizational learning. Absorptive capacity
is primarily focused on R&D activities. Since Cohen and Levinthal introduced absorptive
capacity, it has undergone major refinement such that it is mostly conceptualized as a
dynamic capability (Zahra and George, 2002). Absorptive capacity is one of the
arguments supporting companies to invest in R&D rather than sourcing patents from the
market as the internal R&D teams could enhance the absorptive capacity of a company.
In his 2003 book, Chesbrough (2003a) defined open innovation as:
[. . .] a paradigm that assumes that firms can and should use external ideas as well as internal
ideas, and internal and external paths to market, as the firms look to advance their technology.
Hence, the value creation could be a result of great ideas from internal, external or a
mix of both. In addition, how the idea could be developed further into a marketable
product or service could also rely on paths beyond the internal ones.
Chesbrough’s “open innovation” model is shown in Figure 1.
There are two approaches in the “open innovation” paradigm. The first approach is
the so-called “inbound open innovation”, which refers to the practice of leveraging the
discoveries of others: companies need not and indeed should not rely exclusively on
their own R&D.
The second approach is the so-called “outbound open innovation” which suggests
that companies can look for external organizations with business models that are
better suited to commercialize a given technology rather than relying entirely on
internal paths to market.
Based on Chesbrough’s model, we have proposed an “extended open innovation”
model in a recent study (Figure 2) (Xu and Yu, 2009).
The main difference of this extended model from the original model is that
the elements in the commercialization phase have been explicitly highlighted.
 JSTPC
4,3

182
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Figure 1.
Open innovation model
Source: Henry Chesbrough (2003a)

Figure 2.
Extended open
innovation model
Source: Xu and Yu (2009)
 In fact, “open innovation” at the commercialization stage is evident. Nowadays, more Hong Kong’s
and more companies are outsourcing the manufacturing, delivery and marketing of strengths and
innovation goods to third parties. For example, 98 percent of Boeing 707 – the first
mass jetliner – was produced by Boeing Co. in the USA from the 1950s to the 1960s. weaknesses
However, 70 percent of the manufacturing processes of the newest Boeing plane, the
Boeing 787 Dreamliner, are outsourced to more than 900 contractors. Among these
contractors, half of them are outside the USA – primarily in Japan and Italy but also 183
some in China. After these contractors designed and manufactured the parts, Boeing
did the final assembling (Mudd, 2008).
In the “extended open innovation” model, there are at least nine approaches for
external parties to work with the “major or cornerstone company” at different stages of
the overall innovation process. These approaches include in Table I.
Correspondingly, the “major company” can take at least nine approaches to leverage
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external resources. These approaches include in Table II.

C. Hong Kong in the open innovation arena

Hong Kong is a city with a unique historical background. The transformation of
Hong Kong from a fishing village into an economic miracle is amazing. Hong Kong used to
rely on the highly successful cost minimization and labour-intensive business model for
glorious economic growth. Nevertheless, the past success is becoming unsustainable.
Ever since the late 1970s, the open door policy of the Mainland of China extended the
lifespan of the cost minimization model for another three decades as these Hong Kong
companies have simply moved their factories to the Mainland of China. However, the
success of Hong Kong is actually both a blessing and a burden. The inherited “closed
innovation” nature of Hong Kong’s industry makes it relatively difficult for the companies
in the industry to transform themselves and leverage external parties to strengthen

Stage Type Approach

1. Research Inbound Undertaking contracted R&D projects

2. Research Inbound Venture investing jointly with the “major company”
on project that is of high market potentials
3. Development Inbound Licensing-out intellectual property to the “major
company”
4. Development Inbound Having the technology or even the company
acquired
5. Commercialization Inbound Taking the original design manufacturing (ODM)
business model by licensing-in technologies from
other parties including the “major company” for
product design and production
6. Commercialization Outbound Setting up spin-off new ventures
7. Commercialization Outbound Taking the original equipment manufacturing
(OEM) business model by taking orders from the
“major company” Table I.
8. Commercialization Outbound Providing third-party logistics and distribution Nine approaches for
channel external parties to work
9. Commercialization Outbound Providing accounting, legal, marketing and other with the “major
professional services as external agencies company”
 JSTPC
Stage Type Approach
4,3
1. Research Inbound Contracting research to external partners
2. Research Inbound Inviting venture capital for joint investment and risk-sharing
3. Development Inbound Licensing-in IP from external parties
4. Development Inbound Acquiring technology or even companies
184 5. Commercialization Outbound Spinning-off a new venture if the technology does not fit the main
stream strategy of the company or has potential risk
6. Commercialization Outbound Licensing-out the technology to external company if it can shorten
the time to market
Table II. 7. Commercialization Outbound Out-sourcing the production to external OEM companies to
Nine approaches for the overcome the capacity constraints
“major company” to 8. Commercialization Outbound Relying-on third-party logistics and distribution channel
leverage external 9. Commercialization Outbound Obtaining accounting, legal, marketing and other professional
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resources services from external agencies

themselves and become “major or cornerstone companies” in the long run. The past
success undermines the incentive for a paradigm shift towards “open innovation”.
However, with the aforementioned “extended open innovation model”, Hong Kong’s edges
could actually be leveraged to become core competencies for future success. The high
flexibility of Hong Kong’s small and medium-sized enterprises (SMEs) and the research
capabilities of the local industry and academic community laid solid foundation stones for
the development of a healthy and sustainable innovation and technology industry.
While the awareness and commitment of the industry are essential, the formulation of
an appropriate government policy for innovation and technology development is even
more important. The Hong Kong Government has long adopted a “laissez-faire” policy.
Its reluctance to interfere too much in industry development has resulted in the lack of a
clear innovation and technology development policy. Though government could never
have better senses than the private sector in terms of the need for innovation and
technology development, the perpetuation of a “laissez-faire” policy would make
Hong Kong lose its long-term directions. In order to strike a balance, the government
should formulate a clear policy directive demonstrating its long-term commitment to
innovation and technology development but leaving industry and universities to decide
on the innovation and technology required to be developed over time.
Hong Kong enterprises, especially SMEs, possess the flexibility and versatility to
embrace the “open innovation” model. Instead of direct intervention by limiting the
focus of innovation and technology development, the Hong Kong Government should
create a platform to facilitate and empower the industry and the universities to
demonstrate their innovative capabilities. The provision of facility, consultancy and
funding support could effectively help SMEs to participate in R&D activities to boost
productivity. The flexibility of SMEs makes them one of the ideal candidates for
creative input in the innovation and technology development processes.
For the period from 1998 to 2011, the financial input by the Hong Kong Government
into R&D was increased from HK$91.6 million in 1998 to HK$596.2 million in 2011 (Census
and Statistics Department, The Government of HKSAR, 2013), representing a
450.9 percent increase. However, the number of patents granted, being one of the
indicators for innovation output, only increased from 2,485 in 1998 to 5,567 in 2011 (Census
and Statistics Department, The Government of HKSAR, 2013; Intellectual Property
 Department, 2013), representing a 124 percent increase. The inconsistency between Hong Kong’s
investment and return shows that policymakers should do more than investing money. strengths and
In the following sections, we will address strengths and weaknesses of Hong Kong
from the perspectives of both external party and “major company”. weaknesses

D. Hong Kong enterprises as “external party”

At present, about 98 percent of enterprises in Hong Kong are SMEs in the manufacturing 185
or service industries. While it seems relatively difficult for them to be the “major
company” in the “open innovation” model, the experience, scope and internationalism of
these companies make them good candidates as external parties.

(I) Undertaking contracted research projects

Hong Kong’s advantage in undertaking contracted research projects mainly lies in its
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eight universities. In the past 20 years, universities in Hong Kong have successfully
transformed from teaching-orientated universities to research-orientated universities.
For instance, in 2013, Hong Kong University of Science and Technology (HKUST) was
ranked as No. 21 among the world’s top 100 technology universities by Times Higher
Education Supplement. Other institutes in the list include MIT and Stanford University.
It has been witnessed that some academic institutes have actively cooperated with
the industrial sector including major companies outside Hong Kong. One of the cases is
the Center for Wireless Information Technology (CenWIT) at the Department of
Electronic and Computer Engineering of HKUST.
The CenWIT is one of the world’s leading research centers in wireless
communications technology. From 2002 to 2007, this group had the most papers
published in the journal IEEE Transactions on Wireless Communications compared to
any other institutes. This journal is considered the leading prestigious journal and has
very high impact in the wireless area. During the same period of time, faculties in this
center published 11 books through international publishers, 161 journal papers in top
IEEE Transactions, received over 13 IEEE Best Paper Awards, and filed over 50 US
patents and 30 IEEE standard contributions[1].
On May 25, 2007, Huawei, a Shenzhen-based leading telecommunications
equipment manufacturer, established the Huawei-HKUST Joint Research and
Development Center with the CenWIT. This joint R&D center aims to support
HKUST’s pursuit of academic excellence in the area of wireless communication
technology, to enhance industrial collaboration, and to provide training to leaders of
the next generation information infrastructure. The center will also support Huawei’s
product development and enhance its R&D capability[2].
So far, Huawei has contracted five projects in wireless communications to the center
with the expectation that the research outputs will enable Huawei to obtain international
standards. Such cooperation will be a win-win case, as Huawei can concentrate its
resource on more market-orientated research while obtaining cutting-edge outputs from
HKUST for obtaining strategic intellectual property; for faculties in HKUST, they can
get generous sponsorship to conduct frontier research and further enhance HKUST’s
research strength.
While the major research strength lies with the universities, the SMEs could well
serve as a bridge. Given their fast responsiveness to the market needs, especially when
compared to the large enterprises with red-tape and levels of hierarchy, they could
 JSTPC effectively help narrow the gap between theoretical research and the practical needs of
4,3 the market. It is understandable that SMEs may not possess the resources to invest in
R&D. However, a win-win situation could be created for all stakeholders including
SMEs, research institutions and funding providers. SMEs could provide the acute
market senses; research institutions could provide the research capabilities; the
government, venture capital, etc. could serve as the funding providers. The current
186 technology and innovation policies of the Hong Kong Government have certain defects
such that these kinds of activities are not sufficiently encouraged. In our interview with
industry leaders, explicit concerns have been expressed on the urge for the government
to enhance technology and innovation policies to favour these kinds of synergies among
stakeholders.

(II) Venture investment

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Venture capital investing involves the provision of capital to business enterprises in the
early stages of the development of new products or services. The venture capital is
particularly suitable to the financing of innovation – the financing of enterprises
attempting to do something new. The prominent examples of successful
venture-financed firms include Compaq, Netscape Communications, Apple, Cisco
System and e-Bay (Horvath, 2004). It may not be extravagant to claim that it is venture
capital that has promoted the rapid development of high-tech industry in recent decades.
Venture capitalists (VCs) are typically very selective in making investment
decisions. It is a tacit rule that a fund may invest in as few as one out of 200 presented
opportunities as VCs are only interested in ventures with exceptionally high growth
potential. In order to monitor their invested companies, VCs want to be close to their
invested companies. In Silicon Valley, the unspoken rule is within 60 miles of driving
distance. As for China and other regions, it is within a day trip[3].
Given Hong Kong’s limited number of start-up companies and the fact that the
technology cluster has not reached a reasonable scale, Hong Kong’s industrial sector is
understandably not an ideal target to attract VC investment at this moment.
However, having the highest capital liquidity in the region, Hong Kong is Asia’s
second largest venture capital center, managing about 18 percent of the total capital
pool in the region. As of 2012, there were 377 Hong Kong-based private equity and
venture capital funds with capital under management amounting to approximately
US$80 billion, with a 17 percent growth compared to 2011. In the meantime, Hong Kong
had a pool of 763 professionals for private equity and venture capital which is the third
highest in Asia, right next to China and Japan[4].
Due to limited investment opportunities in Hong Kong, it is not surprising that
Hong Kong’s venture capital industry is highly export-oriented. The overwhelming
majority of venture funds in Hong Kong come from overseas and invest in overseas
companies in the region, including Australia, Singapore, India, Korea, Japan and the
Mainland of China. In the meantime, Hong Kong’s stock market offers easier exits for
venture investments.
Venture capital funds not only invest in start-ups, but also invest in newly initiated
projects of major companies as long as they can see the possibility of extraordinarily
high return and well-fenced intellectual property. Coupling these investment
opportunities resulting from “open innovation” and the solid financial markets in
Hong Kong, this overseas venture capital is attracted to Hong Kong which has further
 strengthened Hong Kong’s status as regional financial centre. To some extent, Hong Kong’s
Hong Kong’s financial sector can itself claim to be a beneficiary of “open innovation”. strengths and
It is a pity that Hong Kong’s industry has not yet benefited from Hong Kong’s
status as regional venture capital center. With the gradual formation of start-up weaknesses
clusters in Hong Kong, especially in Science Park and Cyberport, both the government
and the industry should take some measures to leverage venture capital for the
development of the domestic innovation and technology industry. For example, the 187
Science Park should provide necessary facilities to accommodate VCs firms inside the
campus and facilitate interactions between the venture capital funds and individual
technology firm.

(III) Technology in-licensing and technology acquisition

Given Hong Kong’s low investment in R&D as a percentage of GDP, and low outputs
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of R&D in terms of the number of patents per million residents, Hong Kong is not at an
advanced stage compared to economies with similar populations. The situation is the
same when comparing with the world’s other active economic areas (Figure 3).
To benefit from “open innovation” from technology in-licensing and technology
acquisition, in addition to facilitating the process of obtaining intellectual property and
technology transference, there is no other choice but to invest more in R&D, both by
the government sector and by the private sector.
The question that follows is who should invest more, the government sector or the
business sector? Figure 4 shows the distribution of R&D expenditure by source of
funds in Hong Kong.
Figure 4 shows that the government sector’s expenditure on R&D as a portion of the
overall expenditure on R&D had been declining while the portion from business sector
had been growing until 2005. This is in fact a positive sign that the business sector is
more and more active in investing in R&D than before. It is also consistent with the
trend in other economies. However, it seems the business sector has ceased to maintain
the momentum since then and more incentive should be provided to encourage more
investment in R&D by the business sector. At the same time, the fact that Hong Kong’s

3.5
United States
3
Japan
2.5

2 EU

1.5 OECD
1
China
0.5
Hong Kong
0
91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 Figure 3.
Source: OECD Science, Technology and Industry: Scoreboard 2007; Census and Statistics R&D expenditure as
percentage of GDP
Department of Hong Kong SAR Government
 JSTPC 100%
4,3 90%

80%

70%
188 60%

50%

40%

30%

20%
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10%

0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Business Sector Government Sector

Other local parties and parties outside
Figure 4.
Hong Kong
Distribution of R&D
expenditure by source of Source: Science and Technology Statistics Section, Census and Statistics
funds in Hong Kong
Department, Hong Kong Government, www.censtatd.gov.hk

total expenditure on R&D, as a percentage of GDP, is the lowest among comparable

economies and areas (Brahmbhatt and Hu, 2007) indicates that both the government
sector and the business sector should further accelerate their expenditures on R&D.

(IV) Spin-off
Until Hong Kong has a certain number of “major or cornerstone companies”, spin-off is
not relevant to domestic industry as “major companies” mainly spin-off their business
in the same place where the “major companies” locate.

(V) Logistics services

Logistics provides a means for innovative products to be delivered from factory to
consumers. Good logistics services are important because it controls the cost,
availability of goods and “time to market”. Without an efficient logistics network,
innovative products may be late to the market and lose the first-mover advantage.
Logistics is one of the four pillars of the Hong Kong economy. It is also an advantage
of Hong Kong. In 2011, more than 190,500 people were working in the industry which
created HK$67.7 billion added-value. In 2012, the seaport handled 23.1 million TEUs,
following Shanghai (32.5 million TEUs) and Singapore (31.6 million TEUs)
(Census and Statistics Department, The Government of HKSAR, 2013).
Innovative products, such as electronic appliances, are expensive and have a very
short lifecycle. If they are late to the market, the revenue will be slashed. However,
these products usually have high profit margin that justifies the use of more expensive,
but more secure and efficient transportation means. Therefore, although Hong Kong
 has higher labour costs, it would still be preferable to other nearby ports as long as it Hong Kong’s
provides superior services. strengths and
Facing the potential opportunities for logistics in the Mainland of China, many
Hong Kong companies have formed joint ventures and become involved in weaknesses
infrastructure development. One of the examples is the Hutchison Whampoa Group
which formed a joint venture with Shenzhen Yantian Port Group to develop the
Yantian International Container Terminal in Shenzhen to provide logistics services to 189
various industries. This helps Hong Kong people to capture more revenues
from overseas companies when they manufacture their products in the Mainland of
China.
In addition to ports, Hong Kong has one of the largest container shipping and
logistics services companies[5]. The Orient Overseas Container Line (OOCL) has more
than 270 ships and 280 offices in 58 countries. The company has warehouses in
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Xiamen, Ningbo, Shanghai, Qingdao, Tianjin and Dalian, and its wholly-managed
subsidiary OOCL China Domestic Ltd provides extensive domestics multi-modal
transportation services linking major cities in China[6].
OOCL also embraces innovation in its company culture. It was one of the first in the
industry to offer innovative e-commerce operations. In 1999, OOCL launched the IRIS-2
System for container line operations. This technology was a finalist for the
Smithsonian Institute Award for Innovation in 1999 and was later sold to COSCO[6].

(VI) Original equipment manufacturing

Original equipment manufacturers (OEMs) transform the innovative ideas and designs
into real marketable products. Manufacturing used to be one of the major industries in
Hong Kong. However, because of the increasing labour cost, factories have been
moving to the Mainland of China and have left only the value added services and
offices in Hong Kong.
In Hong Kong, most manufacturers are OEMs. They set up factories in the
Mainland of China, mainly in the PRD area. Hong Kong’s geographic, language and
cultural proximity to the PRD area allows Hong Kong people to operate the factories
better than others. In addition to proximity, Hong Kong manufacturers have strong
advantages in their flexibility, coordination and internationalism.

(VII) Original design manufacturing

In recent years, Hong Kong’s companies have suffered from keen competition from
other Asian factories and rising cost in the Mainland of China. In order to increase
competitiveness, some OEMs began to invest in R&D and provide enhanced design
services, such as detail design, prototyping, etc. for their customers. These companies
are said to become the original design manufacturers (ODMs).
To further increase their competitiveness and reduce the reliance on their clients,
some manufacturers have also adopted the original brand manufacturing (OBMs)
business model by developing their own brands or license-in developed brands.
Compared to OEM, ODM seems to have brighter prospects. According to a survey
conducted by Trade Development Council in 2003, only 55 and 51 percent of
manufacturers anticipate growth in OEM in the medium and longer term. In contrast,
65 and 70 percent of manufacturers are optimistic about ODM growth in the medium
and longer term (HKTDC, 2003a).
 JSTPC In 2007, the Trade Development Council initiated a large-scale survey to understand
4,3 the transformation from OEM to ODM and eventually to OBM. In the survey, 2,200
Hong Kong companies returned the questionnaire. These companies identify “free flow
of information and ability to discern global and product trends” and “marketing
knowledge and experience” as the major competitive edges of Hong Kong companies in
ODM business. As for the OBM business, Hong Kong competitive edges lie on “good
190 reputation”, “free flow of information” and “quality control” (HKTDC, 2003b).
Despite the advantages of Hong Kong companies in developing ODM and OBM, the
weak R&D capability of Hong Kong companies implies that there is still a long way to
go to fully transform themselves from OEM to ODM and OBM.

(VIII) Professional services

Consisting of accounting, legal and marketing services, professional services are
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necessary for a company to maintain daily operation, raise funds and solve disputes
without distracting from its core business. Hong Kong is one the best places for
professional services. As Asia’s most popular city for international companies, having
an efficient law and tax regime and without any foreign ownership restriction,
Hong Kong has the highest concentration of professional service companies. The free
flow of information, capital and expertise also creates an environment for professional
bodies to collect information and deliver services[7].
Accounting. By providing professional advisory services, IPO services and
maintaining financial report, accounting is important for fast growing innovative
business. By 2012, there are 1,593 accounting, auditing and bookkeeping firms,
employing 33,459 accountants in Hong Kong[7]. The large number of firms and
accountants provide a wide range of services. In 2010, the accounting industry
exported HK$1.44 billion’s worth of services, contributing 0.2 percent of total services
exports[8].
As a financial centre, Hong Kong has attracted all the “big 4” accounting firms to set
up offices and provide services in Hong Kong. Their major export clients are
multinational firms, Sino-foreign joint-venture enterprises, Hong Kong listed Mainland
companies and Mainland enterprises expanding to overseas[8]. These would include a
large number of foreign innovative firms that have manufacturing and R&D centers in
the Mainland of China, as well as Chinese technology firms like Alibaba.
Because of the increasing globalization and technology diffusion from the west to
the east, and the rapid IPOs of mainland technology firms, Hong Kong professional
accounting services would play a more and more important role in the innovation
industry.
Legal. In order to protect their IP rights, conduct mergers and acquisitions between
firms and facilitate the transactions of technology, most companies need legal support.
In 2010, Hong Kong’s export of legal services amounted to HK$1.55 billion. Among
these transactions, Asia accounts for HK$755 million and is the most important client
of Hong Kong. Specifically, the Chinese Mainland contributed 28.6 percent of the legal
services exports[8].
According to a survey of law firms, 83 percent of the respondents have conducted
“cross-border commercial transactions”[8]. The strong international-Mainland business
network and client base established by Hong Kong lawyers allow technology firms to
easily transfer technologies and solve disputes over IP rights matters.
 Marketing. Marketing creates a customer base for innovative products. Because Hong Kong’s
high-tech products are usually unfamiliar to the public, marketing and promotion are
extremely important to inform and educate the public about the innovation.
strengths and
Hong Kong is the marketing service capital of Asia. Most multinational agencies weaknesses
have set up their regional headquarters here. The services provided by these agencies
include: creative advertising, media buying, direct marketing, graphic design,
marketing consultancy, customized market research and sales of research data. In the 191
year 2010, a total of HK$5.1 billion’s worth of marketing services, or 7.2 percent of the
total service exports, were exported[8].
Figure 5 is a conceptual diagram that shows the strengths and weaknesses of
Hong Kong as external party in the “open innovation” scenario based on the above
analysis. To develop Hong Kong’s innovation and technology industry, Hong Kong
should invest more in R&D and take possession of more intellectual properties.
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Hong Kong should also strengthen its traditional sectors by upgrading its technical
level, such as the adoption of advanced manufacturing systems. The government
should also build up an efficient intellectual property transaction platform.

E. The prospect of Hong Kong enterprises in evolving into “major company”

In the previous section, discussion focused on how existing companies may play a part
in the “open innovation” process. Since most companies in Hong Kong are SMEs, they
are in a better position serving as external parties. However, Hong Kong should not
overly rely on overseas “major companies” due to the following considerations.
First, without technology advantage, the entry barrier of being external parties is
low. New entrants from developing economies can easily threaten the status of
Hong Kong, especially in labour-intensive sections of the “open innovation” system.
For instance, HSBC have offshored parts of their IT department to India and
PricewaterhouseCoopers, one of the big four accounting firms, have set up offices in
Beijing, Chongqing, Dalian, Guangzhou, etc.
Second, compared to the “major companies”, the bargaining power of external
parties is relatively low. The large number of new entrants from developing economies

1 1 External Research Project

5
9 2 2 Venture Investing
4
3 3 Technology In-licensing
2
4 Technology Acquisition
8 1 3
0 5 Technology Out-licensing (ODM)

6 Spin-off New Venture

7 4
6 5
7 OEM Figure 5.
Strengths and weaknesses
8 Third-party Logistics and Distribution Channel of Hong Kong in the
extended open innovation
9 Marketing, Accounting, Professional Services scenario
 JSTPC would continuously drag down the price. Without technology as the means of
4,3 differentiation, “major companies” would choose whoever favors their own business.
To obtain higher bargaining power and generate more value, Hong Kong’s SMEs
should transform themselves from OEMs to “major companies”. In fact, the “open
innovation” could provide such an opportunity. These companies may take a reverse
approach, namely changing their business model from OEM to ODM and then to OBM
192 by leveraging external parties’ advantages. Should they be successful along this
reverse development path, they may become “major companies” instead of just
providing services to the incumbent “major companies”.
During our interview with a successful Hong Kong manufacturer, the managing
director pointed out that efficiency, internationalism and high value are targets of the
industry. Being able to work with international giants like Motorola, NTT DOCOMO,
AT&T, etc. the company had acquired cutting edge technology and efficiency.
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The international experience also shortened its learning curve to become ODM and
OBM. Currently, this company has set up R&D centres in HK, the USA, Canada,
Singapore and China. This company also has close cooperation with HKUST.
The “open innovation” provides an opportunity for Hong Kong to leap forward to an
innovation and technology-oriented economy. However, there are still many companies
lagging behind the transformation. According to a survey conducted by the Chinese
Manufacturers’ Association of Hong Kong in 2003, lack of proprietary/patented
technology and weakness in innovation/R&D are the major challenges faced by
Hong Kong manufacturers.

F. Contribution and limitation

This study used the briefly discussed “extended open innovation model” to study the
unique capabilities and versatilities of Hong Kong’s SMEs in serving as external
parties in the open innovation arena. The paper also discussed Hong Kong SMEs’
potential in capturing the benefits brought by open innovation in upgrading
themselves to be “major companies”. While many discussions about open innovation
talk about the role played by big enterprises like IBM and Apple in embracing open
innovation, this attempt to put the Hong Kong SMEs into the analytical lens of
“extended open innovation model” has explicitly discussed the roles played by other
stakeholders like SMEs, research institutions and governments in the open innovation
arena. This could extend the discussion to cover a wider spectrum of stakeholders and
cast new light on various stakeholders. For government policymakers, appropriate
policy initiatives like tax incentives could effectively help SMEs to become active
participants in technology innovation. For SMEs, being able to offer their acute market
senses in exchange for the research capabilities in research institutions could well
transform them into active participants in the open innovation arena, with potential to
evolve into “major companies” in the long run. For research institutions, joining hands
with SMEs could inject new life into the research initiatives by enhancing the relevance
to the market needs. For professional service providers like VC, lawyers, accountants
and consultants, they would have a big role to play to help bridge the gap between
SMEs, research institutions and funding sources such that a win-win situation could be
created through lining up the various stakeholders and synergy creation.
The study is one of the first attempts to address the specific roles of various
stakeholders other than the big enterprises in the open innovation arena.
 However, more discussion is needed on the factors and constraints that SMEs have to Hong Kong’s
face when participating in the open innovation arena. In addition, the growth path from strengths and
external parties to “major companies” should also be further explored. In this paper,
only Hong Kong has been studied. Further generalization of the analysis to SMEs in weaknesses
other economies could be conducted to validate the analytical framework.

Notes 193
1. Information provided by Prof. Ross Murch, Director of the Center for Wireless Information
Technology, HKUST.
2. CenWTI News, available at: http://cenwit.ece.ust.hk/news.html
3. Interview with Bing Liao, Venture Partner, Ample Luck International Capital Group, June 13,
2008.
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4. The 2013 Guide to Venture Capital in Asia, Asian Venture Capital Journal.
5. Wikipedia.
6. OOCL company web site.
7. Business and Professional Service Brochures, InvestHK.
8. Industry Report, HKTDC.

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Further reading
Chesbrough, H.W. (2006), Open Business Models: How to Thrive in the New Innovation
Landscape, Harvard Business School Press, Boston, MA.
Chesbrough, H.W., Vanhaverbeke, W. and West, J. (Eds) (2006), Open Innovation: Researching a
New Paradigm, Oxford University Press, Oxford.
Lipsey, R.G., Carlaw, K.I. and Bekar, C.T. (2005), Economic Transformations: General Purpose
Technologies and Long Term Economic Growth, Oxford University Press, New York, NY.
Perkmann, M. and Walsh, K. (2007), “University-industry relationships and open innovation:
towards a research agenda”, International Journal of Management Reviews, Vol. 9 No. 4,
pp. 259-280.
Porter, M.E. (1990), The Competitive Advantage of Nations, The Free Press, New York, NY.

Corresponding author
Xu Yan can be contacted at: xuyan@ust.hk

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