Chapter 1 Hong Kong’s Business Environment

Answers to Think It Over

1 a Arguments for: lower costs (e.g., rent and salary), more flexibility in operation (as the bank
does not need to hire workers to do the jobs)
Arguments against: difficult to control service quality, differences in business cultures,
practices and work ethics

b Factors to be considered:
 whether the bank can find a suitable company to provide IT support services and
customer services
 whether the Indian-based company can provide quality IT support services and
customer services
 whether the employees of the Indian-based company have good work ethics (i.e., will
the employees steal the client information from the bank?)
 whether the cost of outsourcing is justifiable
 whether customers are satisfied with the services provided by the Indian-based company
 whether internal employees can communicate effectively with the employees from the
Indian-based company
 how the bank can monitor the service quality of the Indian-based company on an
ongoing basis
(Any two of the above)

2 Some of the methods are:

 employing more part-time staff so that the bank can save on salaries and fringe benefits
 moving to a district in Hong Kong with lower rents
 contracting out some jobs on a project basis to freelancers so that the bank can rent less
office space
(Any two of the above)
(Any other reasonable answers)
However, the bank needs to consider the impact on its work flows if it moves to a remote district
with lower rents. It also needs to consider its service quality if it employs part-time staff and
outsources some jobs to freelancers.

Answers to Check Your Progress

Q1-1 a In 1980, Hong Kong was a manufacturing centre. More than half of employees (50.1%)
worked in the secondary sector (which was dominated by the manufacturing industry).
In 2011, Hong Kong served as a business and service centre. Of those employed, 88.5%
worked in the tertiary sector.

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Management 2nd Edition: Answers to Textbook Exercises 1
 b As shown in Fig. 1.1, the primary sector is relatively unimportant. The contribution of
the primary sector to GDP was 1% in 1980; it further fell to less than 0.05% in 2011.
As shown in Fig. 1.2, in 1980, the secondary sector played a relatively important role
but this began to decline later. The proportion of the labour force engaged in the
secondary sector dropped from 50.1% in 1980 to 11.4% in 2011. Its contribution to
GDP fell sharply from 31.6% in 1980 to 6.8% in 2011.
On the other hand, Hong Kong has shifted its reliance from secondary production to
tertiary production. The tertiary sector became increasingly important. The proportion of
the labour force engaged in the tertiary sector increased significantly from 48.4% in
1980 to 88.5% in 2011. Its contribution to GDP also increased from 67.5% to 93.1%,
which was much larger than the sum of the primary and secondary sectors.

c The major factors accounting for the changes include:

 China adopted its open-door policy in 1978 which encouraged foreign investments.
 Many Hong Kong manufacturers relocated their factories to the Mainland to lower
their production costs.
 There was a growing demand for high value-added services (e.g., finance, banking,
IT, marketing, design) to support relocated factories.
 Hong Kong has become a financial and service centre to support business activities
(e.g., trading, tourism, investment) on the Mainland.
 Hong Kong is transforming itself into a knowledge-based economy.
(Any other reasonable answers)
Q1-2 D
Q1-3 D

Q1-4 a The Mainland is not only an important market for Hong Kong’s exports, but also the
largest source of Hong Kong’s imports and re-exports. Hong Kong imports goods from
other countries and re-exports them to the Mainland, and imports goods from the
Mainland and re-exports them to other countries.
Hong Kong also imports a lot of food and consumer goods from the Mainland for its
consumption.

b Hong Kong is an important service centre for the Mainland. It provides a wide range of
financial and business services to individuals and firms in the Mainland, such as
banking and finance, insurance, transport, accounting, tourism, marketing and sales
promotion. In return, enterprises in the Mainland also facilitate Hong Kong firms (e.g.,
property developers, sellers of consumer products) in exploring and developing the
Mainland market.

Q1-5 A

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Q1-6 C
Q1-7 B
Q1-8 B

Q1-9 (a) Technology transfers from other countries can improve production techniques and
labour productivity of Hong Kong firms. This helps reduce their production costs.
(b) Technology transfers help improve the knowledge and skills of workers in Hong Kong.
Their income increases as a result. They can thus enjoy a higher standard of living.
The wider use of technology can also facilitate Hong Kong in its transformation into a
knowledge-based economy.

Q1-10 C

Q1-11 As the business sector prospers, private enterprises earn more profits. Transactions in the
property market and the stock market will also increase. As a result, government revenue
from land sales, profits tax, and stamp duties on property and stock transactions will rise.

Q1-12 B
Q1-13 A
Q1-14 D

Answers to Try This Activity

A1-1 Free answer
A1-4 Free answer

A1-7 a Major factors include economic factors, physical factors, technological factors, social
and cultural factors, political and legal factors. Political and legal factors are particularly
important when investing in developing countries.
b Because of political instability (such as wars, religious conflicts, social unrest), the
Middle East is the riskiest region for investment.

Answers to Assessment
MCQ
1.1 A
1.2 A
1.3 A
1.4 B
1.5 C
1.6 A
1.7 D

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1.8 A
1.9 D
1.10 D
1.11 C
1.12 A
1.13 B
1.14 B
1.15 C
1.16 C
1.17 D
1.18 C
1.19 B
1.20 B

Short Questions
1.21 Hong Kong adopts a free trade policy with little government intervention. (1 mark)
It also allows the free flow of capital and has no foreign exchange controls. (1 mark)
All of these allow the bank to freely transfer capital in and out of the territory. (1 mark)
Hong Kong also has a favourable location (near the Mainland). This helps the bank expand
its business to cities in the Mainland. (1 mark)

1.22 Key factors that facilitate the transformation of Hong Kong into an international financial
centre:
 Hong Kong allows the free flow of capital. There are no foreign exchange controls.
Firms can freely transfer capital in and out of the territory.
 The free flow of information allows investors to obtain the latest information about
changes in the global market.
 Hong Kong has advanced information and communication technology to support
trading in the financial market.
 Hong Kong can help Mainland enterprises raise capital with its sophisticated financial
system.
 A simple tax system and low tax rate also attract foreign investment.
(Any two of the above, 2 marks for each point)

1.23 A strong economy will lead to a growth in companies’ earnings and business transactions.
(1 mark)
As private enterprises earn more profits, they will pay more profits tax to the government.
(1 mark)
Coupled with the increase in transactions in the property market and the stock market,
government revenue from these business activities (i.e., stamp duties on property and stock

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 transaction) also increases. (2 marks)

1.24 A laissez-faire economic policy is based on the idea that the government should minimise its
intervention in the market. The allocation of resources is to be determined by market forces.
(2 marks)
Hong Kong is regarded as a free market economy with little government intervention. The
government has adopted a laissez-faire economic policy, which promotes a free market and
free trade. For example, anyone can start a business in Hong Kong and people can exchange
goods and services freely in the market. (2 marks)

1.25 I agree with the statement. (1 mark)

In Hong Kong, the government allows the free flow of information. The media enjoy a high
degree of freedom. (2 marks)
Firms can quickly obtain information about changes in the business environment which is
useful for making timely business decisions. (2 marks)
All of these help Hong Kong become and remain a global centre for trade, finance, business
and communications.

1.26 Hong Kong is regarded as an externally-oriented economy because it relies heavily on

external trade and foreign investment. (2 marks)
Volatility in the global economy can cause a surge or drop in the demand for Hong Kong’s
goods and services, with external trade and foreign investment directly affected as a result.
(2 marks)

1.27 Major factors that the firm has to consider include:

 Political and legal factors: labour law, environmental protection law, customs rules, etc.
 Physical factors: favourable location, proximity to infrastructure (roads and ports),
transportation network, availability of natural resources, etc.
 Technological factors: ICT and transport technology (affecting communications and
transports costs), etc.
 Social and cultural factors: population structure (affecting labour supply), education
levels and language ability of the population (affecting labour productivity), etc.
 Economic factors: wage level, price level (affecting rent and other production costs),
control of capital inflows and outflows, taxation policy, etc.
(Any three of the above, 2 marks for each point)

1.28 Technological factors can help raise the productivity of a bank in the following ways:
 Cloud computing enables the bank to store data on servers at a remote location. The
bank can thus save and backup a lot of data at a lower cost. Employees at the bank can
also work at home. Employees with minor health problems who are taking sick leave

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 can work remotely at home.
 The bank can develop new ATM machines which can process transactions faster. For
example, some banks are developing mobile applications which enable customers to
take money from ATM machines without a bank card. Customers are first required to
input personal data and transaction details via their smartphone. A verification code will
then be sent to the customers. They can then input the code at ATM machines to get the
money.
 The bank can develop online banking (Internet banking) which allows customers to
conduct transactions on a secured website. This can speed up banking transactions.
Alternatively, the bank can set up a self-help personal banking centre which encourages
customers to take part in the transaction process. The bank can thus hire fewer tellers at
its branches.
(Any two of the above, 3 marks for each point)

1.29 An MNC can produce and sell its products at different locations around the world. (2 marks)
It can reduce its business risks by diversifying its business operations and markets. (2 marks)
Thus, the MNC would not be seriously affected by labour strikes and demand fluctuations in
a single country. (2 marks)

1.30 a Favourable physical factors that Hong Kong possesses:

 Hong Kong has a natural deep-water harbour (1 mark)
 Hong Kong’s proximity to the Mainland (1 mark)

b Benefits arising from the favourable physical factor of having a natural deep-water
harbour:
 The natural deep-water harbour provides a port for large ships, linking Hong Kong to
the world.
 The natural deep-water harbour helps promote the growth of the freight industry in
Hong Kong.
(Any one of the above, 2 marks)

Benefits arising from the favourable physical factor of its proximity to the Mainland:
 Due to its proximity to the Mainland, Hong Kong serves as a vital intermediary
between the Mainland and the outside world.
 Hong Kong earns foreign exchange by providing services to facilitate trades between
the Mainland and other countries.
 Viewing Hong Kong as a stepping stone to the Mainland market, many foreign firms
have set up headquarters and offices in Hong Kong.
 Hong Kong’s financial sector prospers as it helps many Mainland firms raise capital
in the stock market.

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  Hong Kong is easily accessible to Mainland people due to its proximity to the
Mainland. Residents of some Mainland cities can also travel to Hong Kong easily
under the Individual Visit Scheme. The helps promote the development of Hong
Kong’s tourism.
 Good transportation network links Hong Kong to the Mainland. Hong Kong
businesses can set up factories in the Mainland to save on production cost.
(Any one of the above, 2 marks)
(Any other reasonable answers)

1.31 Globalisation affects business decisions in the following ways:

 Firms can utilise the Internet to explore new markets in other countries and to sell their
products to foreign buyers.
 Firms can make good use of capital to explore business opportunities worldwide.
They can diversify their investment around the world (e.g., by setting up production
bases and businesses overseas) to reduce their risks.
 Firms can raise capital in other countries (by borrowing from overseas banks and
listing on foreign stock markets) for business expansion.
 Firms can specialise in the production of goods and services in which they have a
comparative advantage and export them to other countries.
 Firms can buy inputs from the lowest-cost suppliers throughout the world (i.e., global
sourcing).
 Firms can outsource production processes in which they do not have a comparative
advantage to foreign firms.
(Any three of the above, 2 marks for each point)

Application Problems
1.32 IPOs of Mainland enterprises help boost the financial market in Hong Kong. The buying and
selling of new shares increase stock market transactions in Hong Kong. (2 marks)
Enterprises in the Mainland gain from obtaining capital for investment and development
through IPO activities. (2 marks)

1.33 Factors that I have to consider include:

 Social and cultural factors: whether there is an adequate supply of programming
workers
 Economic factors: whether there is sufficient space for expansion at reasonable cost
 Technological factors: whether there are good communication networks between the
location of this programming department in the Mainland and the headquarters in Hong
Kong
 Political and legal factors: whether the local government has favourable policies
towards the IT industry

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 (Any three of the above, 2 marks for each point)
(Any other reasonable answers)

1.34 a The government has adopted a laissez-faire policy, which promotes a free market and
free trade. Anyone can freely start a business in Hong Kong. (2 marks)
People can exchange goods and services freely in the market. Hong Kong also allows a
free flow of capital, with no foreign exchange controls. (1 mark)
Economic freedom in doing business has promoted trade and economic development in
Hong Kong. (1 mark)
b The following factors are important for Hong Kong’s economic success:
 Hong Kong provides a stable political environment and a sound legal system.
 Hong Kong has a relatively stable exchange rate. This reduces the risk of doing
business here.
 Hong Kong has a simple tax system and its low tax rate also attracts foreign
investments.
 The free flow of information allows investors to obtain the latest information about
changes in the global market.
 Hong Kong has a favourable location (near the Mainland). This attracts foreign
companies which want to enter the Mainland market to set up regional headquarters
or offices in Hong Kong.
(Any three of the above, 2 marks for each point)
(Any other reasonable answers)

1.35 a Outsourcing is the act of a company contracting out a production process or a business
function to another company within or outside the country. (2 marks)
b Firms outsourcing production and customer service to other low-cost countries can
lower their costs. (1 mark)
Since the firms do not own the facility, it gives them more flexibility to adjust their
production plan. (1 mark)
c Major issues and concerns that MNCs need to be aware of include differences in
business cultures and practices, work ethics, product quality control systems, etc.,
between the MNC and the outsourcing company. (Any one) (1 mark)
If the products made or services provided by the outsourcing company are of poor
quality, or if the outsourcing company pollutes the environment, the reputation of the
MNC will be harmed. (2 marks)
(Any other reasonable examples)
d To address the issues and concerns in part (c), MNCs should:
 monitor the quality of products and services produced by outsourcing companies on a
continuous basis.
 help outsourcing companies train their workers and establish a good quality control

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 system.
 request that outsourcing companies follow their codes of conduct or good practices.
(Any two of the above, 2 marks for each point)

1.36 a An accounting firm:

 Political and legal factors: law and legal system, licensing regulation, etc.
 Social and cultural factors: educational background of workers, working culture,
business norms that affect accounting and auditing practices, etc.
 Economic factors: taxation policy, price level, etc.
(Any two of the above, 2 marks for each point)

b A toy manufacturer:
 Political and legal factors: labour ordinance, environmental protection law, customs
rules, licensing regulation, etc.
 Physical factors: physical location, proximity to infrastructure (roads and ports),
transportation network, availability of flat land for factory building, etc.
 Technological factors: ICT, communication network, etc.
 Social and cultural factors: population structure which affects labour supply, etc.
 Economic factors: wage level, price level which affects rent and production costs,
control of capital inflows and outflows, foreign exchange policy, taxation policy, etc.
(Any two of the above, 2 marks for each point)

c A bank:
 Political and legal factors: licensing regulation, regulatory body and authorities,
control of the flow of information, etc.
 Physical factors: access to transportation network, etc.
 Technological factors: ICT, communication network, etc.
 Social and cultural factors: educational background of workers, working culture,
business norms, etc.
 Economic factors: exchange rate, interest rate, money supply, foreign exchange
policy, controls of capital inflows and outflows, etc.
(Any two of the above, 2 marks for each point)

1.37 Costs:
 Relocating production plants to other countries in Asia involves high set-up costs. The
company has to build new plants and recruit new workers.
 It takes time to train new workers.
 The company may find it difficult to monitor and control production plants in
different countries.
 Many countries in Asia are politically unstable. The safety of workers and production

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 plants may be threatened.
 The company may not be familiar with the business environment in other countries.
(Any two of the above, 2 marks for each point)
Benefits:
 Production costs may be lowered by relocating plants to other low-cost countries in
Asia.
 The governments of these countries may adopt favourable policies to attract foreign
investment in manufacturing industries. This will enhance the competitiveness of the
company.
 Business risks can be diversified by carrying out production in different countries.
 As part of the process of relocation, the company can explore new markets in other
countries.
 The image of the company can be enhanced by establishing production plants in
different countries.
(Any two of the above, 2 marks for each point)
(Any other reasonable answers)

1.41

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