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Hong Kong Competition Exchange 2018 - Summary of Discussions

Panel 3: Innovate to Compete and Compete to Innovate

Moderator:

Mr Brent SNYDER, Chief Executive Officer, Hong Kong Competition Commission

Panellists:

Mr Roald KOCH, Director for Foreign Direct Investment, Department of Industry Brandenburg State, Economic Development Agency (WFBB)
Mr Jamie SPENCE, Founder and Managing Director, Asian Link Limited
Mr TOH Han Li, Chief Executive and Commissioner, Competition and Consumer Commission of Singapore
Mr Ricky WONG Wai-kay, Chairman, Hong Kong Television Network Limited

Summary of discussions:

The panel explored the relationship between innovation and competition at the state level as well as the corporation level from both global and local perspectives. Panellists discussed how the government could empower the business sector by drawing experiences from other economies and the role of competition policy in fostering competition.

Relationship between Competition and Innovation

Mr Spence stated that competition leads to innovation and innovation is driven by unmet consumers’ demand. Nowadays, due to advancement in technology, there is an increasing number of online platforms, such as Skyscanner, Foodpanda and Lalamove, which enable consumers to obtain goods and services at their fingertips and make payment in different currencies. These platforms innovate in order to use resources more efficiently. He also cited Dyson as the perfect example of “innovate to compete” - the company rolled-out a new type of vacuum cleaners to avoid head-to-head competition with existing products.

Mr Toh agreed with Mr Spence’s view on Dyson and emphasized that technological innovation was more important than a good business model because the latter can be copied, while it is much harder for the former to be replicated. Therefore, companies continue to innovate to distinguish themselves from the rest of their competitors in the market.

Conducive government policies in empowering businesses

Mr Koch explained the situation in Berlin and Brandenburg in Germany in the early 1990s. After the reunification of Germany, Berlin lost over 50% of the jobs in the manufacturing industry. To compete with other countries globally, the state governments of Berlin and Brandenburg decided to join hands to initiate an innovation strategy and provide a conducive business environment for companies to grow, such as providing subsidies to attract new companies.

Berlin tried to rebrand its politically and culturally oriented state image by turning itself into a start-up capital and manufacturing hub in the last few decades. Initial set-up costs are often a huge financial obstacle for aspiring young graduates to set up their start-ups. The government lowered the barriers to entry through policy amendments. For example, the government amended the minimum capital requirements and lowered business registration fee to provide a more conducive business environment. This policy change also attracted more venture capital funds to set up offices in Berlin. Coupled with the abundance of office space in Berlin during the 1990s, local and foreign companies started to set up their offices, causing global capital inflow to Berlin.

In addition, the European Single Market plays a role in fostering innovation at the national or local levels in Europe due to the free flow of capital, people, goods and services, and information. Talents can easily move from one place to another across Europe. This is vital for developing a cluster of innovation firms which requires talents with different expertise.

Government advocacy and disruptive innovations

Mr Toh recounted Uber’s work in reinvigorating the taxi industry in Singapore. In the past, the taxi industry was rather lax. Taxis were rented out to drivers. Once the costs of rental are covered, drivers had no incentives to drive for a longer distance. However, with the entry of Uber, Grab and a few similar companies around five years ago providing platforms that enabled efficient matching of supply and demand, competition in the taxi industry was intensified. Extensive market research showed positive results that such platforms bring benefits to consumers and the CCCS lobbied the transport authority by adopting a soft-touch approach to change the regulations to accommodate the use of new technology. The transport authority issued licenses to taxi drivers instead of licensing the companies. Although the incumbent local taxi industry felt threatened by the new competition, it was able to experiment its own platform in the regulatory sandbox as well.

Mr Toh said that barriers to entry can be created by incumbents but also by government as well. CCCS conducts evidence-based study to persuade the government to amend its regulations to boost competition and encourages innovation. He added that the credits of successfully bringing in more competition in the taxi industry go to the Land Transport Authority because it was able to seize the golden opportunities to make changes and bring benefits to consumers.

Experience in Hong Kong

Mr Wong said that competition generally means creating something new but could also refer to improving the existing products and services. Mr Wong shared his experience of introducing the callback IDD services to Hong Kong in the early 1990s. At that time, the IDD services in Hong Kong was monopolized by one licensed company. The lack of competition results in high prices for consumers. A call from Hong Kong to the U.S. using IDD services would incur HK$15 per minute. Meanwhile, a call from the U.S. to Hong Kong would cost only HK$5-6 per minute. Mr Wong introduced reverse calling which greatly reduced IDD service costs for consumers in Hong Kong.

Mr Wong also highlighted that innovation was a combination of risks and opportunities. When he introduced the broadband Internet to Hong Kong, he spent twelve years building up the new network across the territory. As a result, he incurred substantial loss in the beginning. However, to succeed, companies should innovate and seize opportunities in projects which no one is willing to take.

Government’s Role in fostering Innovation and Competition

Mr Toh said that, at a global level, cities compete with each other and entrepreneurs will inevitably compare different cities for starting their businesses. For example, Hong Kong competes with Singapore in the financial sectors, logistics industry, etc. Mr Spencer stated that the strength of Singapore was that it took proactive measures to innovate, such as funding universities and encouraging young people to start business early. Mr Koch also mentioned that the Singaporean government would send people to shadow multinational companies globally. Despite being rather costly, it is believed to be an effective method to keep abreast of the most updated technological information in the sector.

Mr Wong supplemented that Hong Kong was successful in the past 30 years because Hong Kong was the most innovative and creative city. He said that the success of breaking the monopolistic situation in the telecommunications industry in the 1990s was attributed to the strong and determined government. At that time, the Hong Kong Government put consumers’ benefits rather than vested interests as priority.

Also, pursuing an innovative idea needs long-term vision and commitment. Most of the businessmen prefer investing in real estate for short-term profits to investing in research and development which entails uncertainty in profitability. Mr Wong said that it is costly and risky for firms to engage in research and development (“R&D”). The Government should play a more active role in encouraging R&D in Hong Kong.

Mr Spence added that Hong Kong’s low tax system and prosperous capital market provide a favorable environment for startups. However, one of the challenges facing startups is that it is difficult to open bank accounts as the regulation is overly restrictive.

Implications of competition law on innovation and businesses in Hong Kong

To conclude, Mr Toh believed that the enactment of the Competition Ordinance in Hong Kong was a great start. However, the merger doctrine currently only applies to the telecommunications industry. Hong Kong should broaden the scope of merger rule in order to effectively promote competition.

Mr Wong is happy to witness the commencement of the Competition Ordinance in Hong Kong because it prevents anti-competitive conducts which stifle competition in different sectors. Mr Wong hoped to see stronger investigatory powers be vested in the Competition Commission, such that it could enforce the Competition Ordinance more effectively. Moreover, Mr Wong agreed that liabilities under the Ordinance should also be extended to individuals, as they should be responsible for causing companies to engage in anti-competitive conducts.