Policy Address 2017 Review: Flipping R&D from public-led to private-led

(From top left) Charles Mok, Peter Bullock, Alex Li, Ted Suen, Witman Hung

[Story updated on 2 Nov 2017 with ITB's responses.]

As Chief Executive Carrie Lam pledged to catch up in the "innovation and technology (I&T) race" and to develop Hong Kong into an international I&T hub in her maiden Policy Address, the Government is encouraging more private sector-led IT research and development (R&D) investments to tap on global and local innovative IT talents.

To recap, some of the relevant policies were: 1) to raise the proportion of gross domestic expenditure from 0.73% to 1.5% within the coming five years; 2) to provide 300% tax deduction for first HK$2 million R&D expenditure; 3) to develop a "Hong Kong-Shenzhen Innovation and Technology Park" the in Lok Ma Chau Loop; and 4) to review the outdated existing legislation and regulations which might impede technology advancement.

According to Secretary for Innovation and Technology Nicholas Yang, the I&T related initiatives in the Policy Address show the Government's determination to make a change, to make Hong Kong the gateway in I&T connecting mainland China and the other parts of the world.

Can these policies achieve the intended purpose of pooling in R&D investments from the private sector? To answer this question, Computerworld Hong Kong solicited the views from senior IT practitioners, IT industry bodies, lawmaker and lawyer, and evaluated the effectiveness of the IT policies highlighted above.

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Doubling GDE on IT R&D

As stated in the Policy Address, the Hong Kong government has set a goal to double its gross domestic expenditure (GDE) on research and development (R&D) as a percentage of the gross domestic product (GDP) to about HK$45 billion a year, i.e., from 0.73% to 1.5% by the end of the current Government's five-year term of office.

By comparison, the GDE percentages on R&D adopted by neighboring locations in 2015 were: Shenzhen 4.1%; overall mainland China 2.06%; Singapore 2.18%; Japan 3.29%; South Korea 4.23%; Taiwan 3.05%, according to the data from the Organization for Economic Co-operation and Development (OECD).

According to an ITB spokesperson, R&D investments contributed by the public sector now stands at 55% -- a situation that is different from other advanced areas.

"Our goal is to increase the total R&D expenditure by local public and private sectors to about HK$45 billion, representing 1.5% of the GDP by 2022," said the spokesperson. "At the same time, we hope to progressively reverse the ratio of public sector versus private sector expenditure on R&D from government-led to public-private participation with investment from the private sector dominating, i.e. at a ratio of about 45%:55%, which will make R&D funding more sustainable." To achieve this goal, the Government will progressively increase public R&D investment, while encouraging private enterprises to conduct more R&D activities.

IT legislator Charles Mok said this showed the Government's determination "to set up a meaningful KPI (key performance index) for itself." "Although it remains arguable whether or not we can achieve this target in five years' time, or raising the percentage even further, at the least, this is pretty much the first time that the Chief Executive committed to setting up target in R&D investments," he said.

iProA Chairman Witman Hung saw this as a right direction to take -- if the Government can indeed achieve the target set. "Implementation also matters -- how it achieves the target set will remain to be seen. Nonetheless we believe financial incentive is a good driver, and the setting up of a goal in terms of R&D percentage is a correct move."

Hong Kong Computer Society President Ted Suen also welcomed the specific target set regarding R&D investments, as this would provide a lot of support and resources to encourage R&D and talent nurturing in Hong Kong.

However, despite the "nice efforts" on nurturing upcoming technology talents, the Policy Address failed to introduce enough short-term solutions to boost local IT R&D. "The investment in R&D and talent nurturing will takes years for the benefit to reveal," Suen said.

"A shorter and more immediate solution to boost the local IT industry is to attract existing global technology companies to Hong Kong. Yet the Policy Address did not mention about driving multi-national corporations to build R&D centers or set up their regional headquarters in Hong Kong," he suggested.

Local IT entrepreneur Alex Li, founder and CEO of cloud backup and disaster recovery provider BizConline, lamented the lack of a sustainable innovation-technology ecosystem in Hong Kong.

"Adoption is the fundamental process of innovation and technology development," he said. "The major handicap of Hong Kong's inno-tech ecosystem is that it does not have the essential cultivating soil much-needed by the local IT startups."

"To foster homegrown IT R&D, I suggest the Government to form a small innovation-technology facilitation unit under the Office of the Government Chief Information Officer (OGCIO). The unit can be tasked to drive the government bureaus and departments to adopt the IT products developed by the local IT graduates of the HKSTP and the Cyberport. Together with public KPI monitoring, the local IT startup community can grow exponentially."

"And to help local startups to expand their market reach internationally, I suggest the Government to form strategic partnerships with 'second-tier' cities like Jiangmen and Zhongshan, to encourage them to adopt Hong Kong-developed IT products and solutions. This can provide a jump start to Hong Kong startups to enhance their technologies before they expand into overseas markets," Li said.

Tax incentives to foster PPP

In the Policy Address, the CE announced to provide an additional tax deduction for the expenditure incurred by enterprises on R&D, with the goal to reverse the ratio of public sector versus private sector expenditure on R&D. Specifically, the Government will grant a 300% tax deduction for the first HK$2 million eligible R&D expenditure, and 200% tax deduction for the remainder.

"There will be no cap on the amount of tax deduction claimed. The higher the qualifying R&D expenditure, the larger the amount that is claimable for tax deduction," added the ITB spokesperson.

"We need to attract overseas high-tech companies to Hong Kong," said iProA's Hung. "This policy will be useful to attract large technology companies to set foot in Hong Kong to drive the IT R&D ecosystem."

"The policy may encourage enterprises to increase their R&D investments with a view to upgrade or transform their businesses. But for the local startups which generate no or little revenue in the near future, however, the tax incentives are of no use to them," said Bizconline's Li.

"Local tech startups may instead find it useful if the Government grants 300% tax deduction to organizations that purchase local IT products or solutions," Li suggested. "Also, the Government can consider having the Cyberport or the HKSTP to act as business match-makers to facilitate the acquisition of local startups and enterprises."

HK-Shenzhen Innotech Park

Lok Ma Chau Loop: development constraints, opportunities (Source: Planning Dept)According to CE Lam, the Hong Kong government will together with the Shenzhen government develop a "Hong Kong-Shenzhen Innovation and Technology Park" the in Lok Ma Chau Loop, with a view to providing the "largest-ever innovation and technology park in Hong Kong."

"Upon completion, the HK-Shenzhen Innotech Park will be the largest-ever innovation and technology platform in Hong Kong with a site area of 87 hectares, which is about four times that of the existing Science Park," said the ITB spokesperson.

Given its strategic location, the Park will facilitate and strengthen cooperation between Hong Kong and Shenzhen. Other than providing office space for R&D, the Park will also serve as a key base for co-operation in scientific research. Relevant higher education, cultural and creative, and other complementary facilities will also be provided in the Park.

iProA's Hung, also the managing director of Qianhai International Liaison Services, welcomed the policy, but stressed that the Hong Kong government should also consider ways to cooperate with its mainland counterparts.

"For example, the Hong Kong and Shenzhen governments can consider hosting a cross-border data platform in Hong Kong to drive big data applications. Given the voluminous cross-border trading between Hong Kong and Shenzhen, such a cross-border data platform can be used to enhance food safety, for instance," Hung suggested. "Food safety is not something politically sensitive. The sharing of food safety data cross-border can certainly bring convenience to the people in both places."

"And with the implementation of the China Cybersecurity Law, which mandates data localization requirements, Hong Kong can act as the 'Switzerland of data' by allowing organizations that store data in Hong Kong to comply with all the data protection laws in other jurisdictions," he added.

Review outdated legislation

Following the passing of a motion to reform outdated legislation in July, CE Lam announced the establishment of the Policy Innovation and Co-ordination Unit to work with all bureaux to remove outdated provisions that impede the development of innovation and technology.

In the following, Peter Bullock, partner, King & Wood Mallesons shared with Computerworld Hong Kong readers the areas that he identified as limitations in the existing legislation, and what new legislation might be put in place to better support Hong Kong's I&T development.

A. Electronic Transactions Ordinance

In October 2016, the Securities and Futures Commission issued a circular to allow the use of digital signatures generated by approved certification authorities outside Hong Kong. According to Bullock, however, to date only three authorities have been approved and they are all in Guangdong, China.

"To promote greater use of electronic signatures, government departments should be allowed to opt-in to the use of different forms of electronic signatures. More government departments should start to accept digital certificates generated outside Hong Kong and the number of approved overseas certification authorities should be increased," he suggested.

B. No freedom of information law, or equivalent

Those involved in R&D in such fields as smart cities, internet of things, big data analytics and the sharing economy need to have access to data sets to test their theories. It is usually not practicable to use dummy data, and data which is not actively being used in processes is often full of errors.

"Whilst it is difficult to mandate that private companies hand over their data (apart from for good regulatory reasons), the Hong Kong government could do a lot more to release public sector non-commercial data," said Bullock. "Rather than simply releasing such data for public access, the Government may feel it needs legislative protections to be put in place."

C. Personal Data (Privacy) Ordinance

Hong Kong identity cards are currently in the form of smart cards which contain a chip that stores and processes data. Although personal data on the smart identity card are fully protected by the Personal Data (Privacy) Ordinance, when entering into transactions online, the chip has no role to play to protect the users from online identity fraud, said Bullock.

CE Lam's proposal last month to develop an e-ID will purportedly involve an electronic version of the smart card on people's mobile phones, which contains a digital signature and authentication features. "Whatever form the e-ID takes, it is a welcome step forward in preventing identity theft and making it easier and safer for people to engage in transactions online," said Bullock. "However, to make it work there will need to be amendments to the Ordinance to keep pace with the development of technology, including what data users can and cannot do with information obtained from a transaction involving an e-ID."

D. Road traffic legislation

"A few jurisdictions (California, the UK and others) are far-sighted enough to have made provision in their road traffic legislation for the testing of autonomous vehicles on their roads," said Bullock. "Such legislation is a threshold component for the development of autonomous vehicles and the use of autonomous vehicles in any jurisdiction. Hong Kong is not an early adopter in this space."

He suggested that the Government to consider how best to permit autonomous vehicle testing in Hong Kong, whilst appreciating that such vehicles are probably not yet suitable for use in Central and Causeway Bay.

E. Employment Ordinance

In Hong Kong, there is an increasing numbers of workers participate in the "gig economy", where workers work as independent contractors or freelancers instead of full-time employees.

The present laws either treat them as "self-employed", in which case they receive no holiday pay, statutory sick pay or other employee rights, or "employees" with all the associated rights, said Bullock. Those companies running gig economy services try to structure their model such that workers are self-employed.

"On the basis that the gig economy is here to stay, and is set to expand, there are good arguments why an intermediate level of protection might be afforded to such workers. This would require additional provisions in the Employment Ordinance," he said.