The political economy of national competitiveness: ‘One country, two systems’ and Hong Kong’s diminished international business reputation

Abstract

Prior to Hong Kong’s 1997 handover to China, some political economists predicted that a regime shift from London to Beijing would result in a deterioration of Hong Kong’s economic and institutional freedoms. Such predictions would seem to have proven accurate according to annual indices of international economic freedom and competitiveness. These have seen Hong Kong’s previously high ranking decline. However, whether Chinese sovereignty or local Hong Kong government ineptitude is responsible for such decline is uncertain; both have been blamed for a series of incidents that have brought Hong Kong’s competitiveness and economic, civil and political freedoms into question. Using data collected from 130 domestic and foreign firms in Hong Kong, this paper disentangles the degree to which the ‘high politics’ of the city now being part of China or the ‘low politics’ of local government action account for Hong Kong’s diminished international reputation for economic freedom and competitiveness. Results for all firms suggest that both Chinese sovereignty and local government actions are equally to blame, but that Chinese sovereignty mediates adverse local government actions. However, results differ by firm origin, and those for domestic Hong Kong firms cast doubt on the general success of China’s ‘one country, two systems’ policy and raise specific concerns about the policy’s potential applicability to Taiwan. Overall, results highlight the importance of macro-political economy factors in assessing comparative international competitiveness and provide objective evidence in support of international political economy theory suggesting that a shift from liberal to more authori­tarian regimes will adversely affect already affluent economies.