Evolving outward investment, industrial concentration, and technology change: Implications for post-1997 Hong Kong

Abstract

The adoption of an open-door policy in China since 1979 has attracted a continuous and heavy outflow of direct foreign investment (DFI) from Hong Kong to China to exploit lower labor and land costs. A division of labor between Hong Kong and Guangdong has gradually formed in which mainland plants mainly performed the middle-stream or the labor-intensive portion of Hong Kong's manufacturing production. This study aims to investigate first, the behavior of industrial structural adjustment and technical/productivity change in the past decade; second, the effects of outward investment on technical/productivity change and industrial concentration; and third, the impact of manufacturing restructuring on Hong Kong's future economy. Findings suggested that the outward DFI has restructured manufacturing and directly affected industrial concentration but indirectly influenced productivity via concentration. The outward DFI has prolonged the life cycle of labor-intensive production and limited the productivity growth of Hong Kong's manufacturing. ( JEL F21, F14, O32, O33)