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Economic Dimension –

What is Economics?
• Economics is the study the production and
distribution of goods and services, it is the
study of human efforts to satisfy unlimited
wants with limited resources
• It studies how agents allocate scarce resources
amongst alternatives to meet unlimited human

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Approaches to Economics
• Positive Economics:
- Examines how decisions are made and the consequences
of such decisions
- Descriptive process exploring the process of decision
making and its impacts

• Normative Economics:
- Examines how resources should be allocated
- Prescriptive process analyzing what should be done
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Allocation of resources
• Process occurs at many levels
– Consumers
– Firms
– Government
– Market System
• Allocation decisions impact natural environment
– Want decisions to be based upon incentives that reflect
“true” value to society
– Unfortunately decision makers do not consider “true” value
in choices
– Need for policy intervention to overcome such market failure
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Contemporary Economics • Macroeconomics – Aggregated analysis – John Maynard Keynes in 1936 and 1940 – Choices of government • Monetary Policy .Federal Reserve • Fiscal Policy – Taxes and Spending – Macroeconomic targets • Income Levels • Inflation • Employment The Hong Kong Polytechnic University 4 .

Contemporary Economics • Microeconomics – Disaggregated analysis – Adam Smith’s Wealth of Nations in 1776 – Choices of consumers (households) and producers (firms) – Two types of Markets • Factor Markets – Consumers sell inputs used in production to firms • Product Markets – Firms sell final output to consumers – Three types of analysis • Partial Equilibrium – Focus on single factor or good • Multi-Market – Interrelationships amongst key fundamental markets • General Equilibrium – Economy as a whole The Hong Kong Polytechnic University 5 .

but there are reasons why markets may fail – Externalities – Public Goods – Property Rights The Hong Kong Polytechnic University 6 .Economic Theory of Value • Value is reflected in prices determined through interaction of supply and demand • Supply (demand) reflects trade-offs firms (consumers) make when producing (buying) goods and services – Abundance implies lower prices – Scarcity implies higher prices • Conceptually market forces reflect “true” value to society.

Keynesian Economics • An economic theory stating that active government intervention in the marketplace and monetary policy is the best method of ensuring economic growth and stability. The Hong Kong Polytechnic University 7 .

The Hong Kong Polytechnic University 8 .Opportunities in China and Hong Kong Discuss economic opportunities available to HK. those provided through • WTO • PPRD development • CEPA • FDI [Please refer to notes given].g. e.

To set up a joint venture commercial retail business in China. foreign enterprises need to have an annual turnover of more than US$2 billion and assets of no less than US$200 million. a more open China market will not automatically benefit Hong Kong. Hong Kong businesses need to overcome the challenges that lie ahead. The asset requirement for joint venture wholesale business is as high as US$300 million. foreign banks must currently fulfill the asset requirement of US$20 billion and various other funding requirements for setting up a branch in China. For example. The Hong Kong Polytechnic University 9 .WTO • Challenges for Hong Kong Despite all the opportunities.

and thus increase competition. and as China itself catches up through. among other things. advancement in telecommunications and information technology. not only from multinationals but also from the Mainland's own developing indigenous business sector. Hong Kong's gateway function will diminish gradually as more foreign companies may try to go to China directly. The Hong Kong Polytechnic University 10 . Hong Kong trading firms that match sellers and buyers without adding any significant value to the process will be faced with a trend toward more direct dealing between customers and manufacturers in the future. Diminishing Gateway Function With a more transparent trade regime in the Mainland.WTO Increased Competition Market liberalization will bring in more outside players.

High salaries and property prices are the two biggest cost items for many Hong Kong businesses -.WTO Hong Kong's Competitiveness Besides external factors. there are concerns over the inherent weakness of Hong Kong's education system. The Hong Kong Polytechnic University 11 . In addition.the textiles sector being an obvious example. Costs for professional services are also high. A major factor that can erode Hong Kong's competitiveness is our high operating cost. Hong Kong businesses are facing internal challenges and weaknesses as well.

Although Hong Kong is now part of China. Hong Kong businesses should rethink their role. We must play up our role as the "Valueadded. diversification and upgrading. Two-way Bridge" to and from China. The Hong Kong Polytechnic University 12 . and this will call for restructuring.WTO What Hong Kong Businesses Can Do Whether Hong Kong can remain competitive and take advantage of the liberalization in the Mainland will depend on how Hong Kong positions itself. it is extremely important for the business community to maintain its international character.

Asean • Chief Executive Donald Tsang says Hong Kong possesses unparalleled strengths and unique features in bridging the Pan-Pearl River Delta and the Association of Southeast Asian Nations. Mr Tsang said Hong Kong's extensive trade connections with the Mainland provinces and Asean countries have facilitated import and export trade between the two regions. 2007. he added. Hunan on June10. • Speaking with Asean business officials in Changsha. • As an international financial centre.PPRD HK can bridge PPRD. The Hong Kong Polytechnic University 13 . Hong Kong provides Asean and PPRD enterprises with a diversified and effective market for raising funds.

PPRD • Noting the city has extensive global connections and can facilitate trade between Asean and PPRD. Mr Tsang said PPRD and Asean enterprises can effectively network with overseas enterprises by setting up offices in Hong Kong. The Hong Kong Polytechnic University 14 .

2009 agreed on further services liberalisation and trade co-operation under the Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA). The Hong Kong Polytechnic University 15 .CEPA Update • The Hong Kong Special Administrative Region Government and the Central People's Government on May 9.

CEPA • The Mainland and Hong Kong Closer Economic Partnership Arrangement (CEPA) is the first free trade agreement ever concluded by the Mainland of China and Hong Kong. greatly enhancing the already close economic cooperation and integration between the Mainland and Hong Kong. • CEPA opens up huge markets for Hong Kong goods and services. The main text of CEPA was signed on 29 June 2003. The Hong Kong Polytechnic University 16 .

CEPA • For Hong Kong. CEPA provides a window of opportunity for Hong Kong businesses to gain greater access to the Mainland market. Foreign investors are also welcome to establish businesses in Hong Kong to leverage on the CEPA benefits and join hands in tapping the vast opportunities of the Mainland market. CEPA also benefits the Mainland as Hong Kong serves as a perfect "springboard" for Mainland enterprises to reach out to the global market and accelerating the Mainland's full integration with the world economy. The Hong Kong Polytechnic University 17 .

CEPA Implementation CEPA covers 3 broad areas: • Trade in goods .All goods of Hong Kong origin importing into the Mainland enjoy tariff free treatment. • Trade and investment facilitation . • Trade in services .Hong Kong service suppliers enjoy preferential treatment in entering into the Mainland market in various service areas. upon applications by local manufacturers and upon the CEPA rules of origin (ROOs) being agreed and met.Both sides agreed to enhance cooperation in various trade and investment facilitation areas to improve the overall business environment. The Hong Kong Polytechnic University 18 . Professional bodies of Hong Kong and the regulatory authorities in the Mainland have also signed a number of agreements or arrangements on mutual recognition of professional qualification.

Mainland travel agents authorised to operate group tours to Taiwan can organise group tours for Mainland residents. This measure aims to facilitate the travel trade in the Mainland and Hong Kong to develop multi-destination tour products. to enter and remain in Hong Kong in transit. The Hong Kong Polytechnic University 19 . the total number of service sectors covered by CEPA will be expanded from 40 to 42. Among them.CEPA Update • Under Supplement VI to the CEPA. Thus. and rail transport). the Mainland will introduce 29 liberalisation measures covering 20 service sectors. who hold a valid exit/entry permit for travelling to and from Taiwan and travel endorsement. the noteworthy liberalisation measures are: • On tourism. including two new sectors (research and development.

CEPA Update • On telecommunications services. which is also a newly added sector. • On audio-visual services. Hong Kong service suppliers (HKSS) can provide videos and sound recording (including motion picture products) distribution services on the Mainland in the form of wholly-owned operations. HKSS can set up whollyowned enterprises on the Mainland to provide research and experimental development services in the natural sciences and engineering. The Hong Kong Polytechnic University 20 . • Regarding research and development services. HK Service Suppliers(HKSS) can distribute in Guangdong Province fixed/mobile telephone service cards which can only be used in Hong Kong.

Hong Kong pharmacists can sit for examination and register on the Mainland. The Hong Kong Polytechnic University 21 . These measures will provide greater business opportunities for the trade and facilitate the upgrading of the professional standards of the two places. construction. Supplement VI to CEPA also includes a number of measures to encourage mutual recognition of professional qualifications as well as technical exchange work among professionals from the accounting. real estate and printing sectors.CEPA Update • Regarding mutual recognition of professional qualifications. On medical and dental services.

html The Hong Kong Polytechnic University 22 Update • On the whole. Such measures will not only help enterprises overcome the current financial crisis. • Details on CEPA including the newly agreed liberalisation and co-operation measures will be uploaded to the Trade and Industry Department's CEPA website: www. the new measures can help enhance HKSS' competitiveness in the Mainland.tid. but will also promote the long-term economic development of both sides.

It is the establishment of an enterprise by a foreigner. • The FDI relationship consists of a parent enterprise and a foreign affiliate which together form an international business or a multinational corporation (MNC). The Hong Kong Polytechnic University 23 . Its definition can be extended to include investments made to acquire lasting interest in enterprises operating outside of the economy of the investor. In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate.FDI • Foreign direct investment (FDI) in its classic form is defined as a company from one country making a physical investment into building a factory in another country.

FDI Methods of Foreign Direct Investments The foreign direct investor may acquire 10% or more of the voting power of an enterprise in an economy through any of the following methods: – – – – by incorporating a wholly owned subsidiary or company by acquiring shares in an associated enterprise through a merger or an acquisition of an unrelated enterprise participating in an equity joint venture with another investor or enterprise The Hong Kong Polytechnic University 24 .

(2) FDI had a bigger.3343.oecd. positive effect on productivity in large than in small OECD countries. [OECD details can be found from: http://www. the impact of inward foreign direct investment on the host country using industrylevel data for 11 OECD economies in 1987-2003 was 2006).FDI In a recent research(Zámborský. electrical engineering and chemicals).It was noted that: (1) FDI had a significant positive effect on productivity and notably on capital’s contribution to productivity in technologically advanced (“high-tech”) industries (such as automotive.en_2649_201185_ 1889402_1_1_1_1.html The Hong Kong Polytechnic University 25 .

The second result contradicts the findings of other researchers.FDI The first result offers a more nuanced view of FDI’s impact on “high-tech” industries compared to other studies. who found more support for FDI spillovers in small than in large countries. They generally found support for a significant positive impact of FDI on total factor productivity in technologically more intensive sectors but did not stress capital’s contribution to productivity. The Hong Kong Polytechnic University 26 .

with the growth of GDP hitting a new record low in the past 7 years while the increase of CPI hitting a new record high in the past 12 years.5%. up by 9. up by 5.3%.Chinese Macro-economic Profile 2008 Facing the strong impact of the international financial crisis and the drastically worsening world's economic environment.0487t.4t. The Hong Kong Polytechnic University 27 . that of the secondary industry RMB14. Chinese economy still maintained a relatively high growth of 9% in 2008. • New progress had been made in the work including structural adjustment and energy conservation and emission reduction while the stable and fast development of economy was maintained. the added value of the primary industry amounted to RMB3.6183t. As far as industries are concerned. up by 9.5%. and that of the tertiary industry RMB12.

000 dropped by 4. with the growth rate falling by 5. The added value of industries above designed size increased by 12. The growth speed of investment and industries in central and western regions was faster than that in east China . and what's more. with profits of enterprises declining quickly. energy consumption of GDP per RMB10.Chinese Macro-economic Profile 2008 The growth of industrial production slowed down.21% year-on-year. In 2008. positive progress has also been made in the energy conservation and emission reduction and the building of a resource-saving and environment friendly society. with regional structure being built and concurrently optimized. The Hong Kong Polytechnic University 28 .9% from the previous year.6 percentage points from the previous year.

In respect of this statement. try to answer the questions in the next slide: . “Free market” is advocated as the means by which efficiency and material abundance are generated.Economic Dimension (1) The market mechanism is commonly seen as the key institution underpinning Western economic society.

Closer Economic Partnership arrangement (CEPA) and Foreign Direct Investments(FDI) in China. .Economic Dimension (2) • Evaluate the opportunities available to HK via China’s entry to the World Trade Organization (WTO). recent Pan Pearl River Delta(PPRD) development.

hk/en/category/businessan dfinance/070610/html/ Reading Information relevant to this lecture may be found from following sites: • • • http://www. htm The Hong Kong Polytechnic University 31 .