The changing status of Hong Kong as gateway to China

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The changing status of Hong

Kong as gateway to China

The influence of comparative psychic distance on the

internationalization patterns of foreign companies in the China

region

By: Hilde Holwerda

Master International Business and Management Rijksuniversiteit Groningen

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The changing status of Hong

Kong as gateway to China

The influence of comparative psychic distance on the

internationalization patterns of foreign companies in the China

region

Master thesis by Hilde Holwerda, S1296418 University of Groningen

Faculty of Management and Organization International Business and Management

Supervisors: Prof. Dr. G.J.E.M. Sanders Dr. K. Van Veen

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PREFACE

August 2006 I had the privilege to leave for Hong Kong for an exchange with the Chinese University of Hong Kong. Because of my fascination with Asian countries I decided to write my thesis on Hong Kong as well, so that I could really experience my research area. I chose the topic of Hong Kong as Gateway to China, because I myself was using Hong Kong as Gateway to China. Firstly, my studies at the Chinese University were China focused, for instance I started to learn Mandarin (instead of Cantonese what they speak in Hong Kong). Secondly, Hong Kong served as the ideal entry point for exploring China to me. My experience is that Hong Kong indeed is still a more comfortable place to stay than most Mainland China cities. Moreover, I was interested in discovering how Hong Kong serves its qualification of the city where east meets west.

After deciding to write my thesis on Hong Kong, my supervisor Mr. Sanders introduced me to Karel Drapers, a Dutch entrepreneur who works and lives in Hong Kong. After arriving in Hong Kong, I was determined to experience how the Dutch community lives in Hong Kong. Therefore, Karel Drapers introduced me to the Dutch Association in Hong Kong and

moreover I started to go to lectures and luncheons of the Dutch Business Association of Hong Kong. During the following months, I got used to the Hong Kong networking etiquette like offering my “business” card with two hands in advance of talking to people. I got to know more people every week, which helped me learning as much as possible on Hong Kong. In addition, the networking helped me finding people willing for an interview for my research. All together, I had a wonderful, enriching period in Hong Kong!

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Abstract

This thesis discusses the dynamics of Hong Kong’s position as Gateway to China from a Dutch perspective, with the use of the concept of comparative psychic distance. In this paper the comparative psychic distance assesses the cultural and institutional distance between Hong Kong and the Netherlands compared to these distances between China and the Netherlands. Furthermore, the influences of four critical developments in the China - Hong Kong environment of the last decade are analyzed to assess how these developments have or will influence the comparative psychic distance between Hong Kong and China. The results show that Hong Kong’s status as Gateway to China for Dutch companies can be explained by its culture and institutions. Hong Kong is culturally and institutionally closer to the

Netherlands than China. This can mainly be explained by Hong Kong’s history as British colony and its long history of western comfort zone within China, which have influenced Hong Kong’s institutions and culture. Moreover, the results show that the identified critical developments are diminishing the comparative psychic distance between Hong Kong and China. The handover of Hong Kong to China in 1997 and the signing of the Closer Economic Partnership Arrangement between Hong Kong and China in 2003 are symbols of the

integration process between Hong Kong and China, which will bring Hong Kong and China’s institutions (and culture) on the long run closer together. Secondly, the ongoing development of the Pearl River Delta region and the accession of China to the WTO in 2001 are signs of China’s opening up. With the opening up, China is developing more reliable market

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Hong Kong’s business is China

In this chapter the topic of this research, Hong Kong as Gateway to China, will be introduced as will the problem definition. The research questions and the research approach will provide understanding of what will be investigated in this thesis and the paragraph ‘ data collection’ will clarify how the data is collected. Finally, the research design paragraph will structure the research per chapter.

In 1841 Hong Kong was not more than a “barren island with hardly a house upon it”

according to the British Foreign Secretary of that time, Lord Palmerston (1841). Nowadays, this is a totally different story. With its seven million inhabitants, Hong Kong is one of the most densely populated areas of the world. Moreover, it’s one of the most developed areas in Asia with a GDP per capita of 27.000 US Dollar (2006), comparable to the GDP per capita of the richer Western European countries. Hong Kong Island is nowadays characterized by bright neon lights on top of skyscrapers, telling you which multinational has its office there. To illustrate, in 2006, 3845 foreign companies1 had an office with regional operations established in Hong Kong. Moreover, there are around 260 Dutch companies established in Hong Kong. Central Hong Kong is stamped with expatriates and the principal language in this business district is English instead of Cantonese. Nowadays, Hong Kong is a true

international city, where people from nations all over the world come together to do business in the China region.

Most companies have their office in Hong Kong, because of Hong Kong’s hinterland, Mainland China. China is an enormous and rapidly growing market and moreover a country with comparative advantages such as cheap labour. The control over operations in China however, is often preferred to be kept in Hong Kong, where the environment is more business friendly for western companies, as most institutions were established under British rule. In addition, the, from origin, Chinese culture in Hong Kong is influenced by the British and other western business cultures as well, which has made Hong Kong a place open to different cultures and opinions.

The quality of Hong Kong’s business environment is showed by its ranking as the world’s freest economy, which translates in: no trade barriers, no restrictions on investments and no

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foreign exchange controls. Furthermore, Hong Kong has a reliable financial system and a law to protect (foreign) companies’ property and security. Conversely, doing business in China is often still accompanied by payment risks and corruption. In this respect, Hong Kong serves as an information center on China and offers services and knowledge on how to do business in China. Therefore, Hong Kong is often used as China’s risk management center (Meyer, 2000).

From its opening up in 1979 on, China has experienced large growth in its trade with the rest of the world, of which by far the largest share went through Hong Kong. In 2005, 62 percent of Hong Kong’s re-exports were of Chinese origin and 46 percent were destined for the Chinese Mainland2. Conclusively, China is Hong Kong’s main business. Mainly to serve the trade with China, Hong Kong has transformed into world’s most service oriented economy covering 90% of Hong Kong’s GDP.

However with the opening up and the growth of China, China itself has also become more accessible to foreign firms. Consequently, companies moving to the China region nowadays have a choice where to establish their business, in Hong Kong or in China itself. Some people are concerned that Shanghai will take over Hong Kong’s position especially as financial center. Others think that the Chinese rule will destroy Hong Kong’s business advantages. What does all of this mean for Hong Kong’s position as gateway to China? This research focuses on that question.

Problem Definition

During Hong Kong’s history as British Colony, it experienced enormous growth and economic development, because of its location as doorstep to China, its cultural flexibility and the absence of trade barriers. The last decades and especially the last ten years, Hong Kong-China’s institutional business environment has been quickly evolving. To begin with, in 1997, Hong Kong returned into the hands of China after more than hundred and fifty years of British sovereignty. Furthermore, China’s 2001 accession to the World Trade Organization consolidated it’s aspire to open up, which it had been gradually doing since the late seventies. As of 2002, the Pearl River Delta (PRD), Hong Kong’s direct hinterland, became China’s province with the largest GDP per capita which stimulated the business links between Mainland China’s PRD and Hong Kong. And lastly, in 2003 China and Hong Kong signed

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the Closer Economic Partnership Arrangement. On top, all of this is happening in the era of globalization and of historical growth and development in China.

The major changes summed up above are deemed to have (had) an influence on Hong Kong’s position as gateway to China. Only three decades ago, companies did virtually not have a choice but to establish their company in Hong Kong if they wanted to do business with(in) China. Nowadays, China is easier to enter for foreign companies and its accession to the WTO means that China also has to further liberalize its trade and to remove trade barriers. However, although office costs as rent and wages are lower in China, Hong Kong still seems to offer (greater) advantages to foreign companies, as the amount of foreign offices with regional operations experienced a 20 percent growth in 2006 compared to three years earlier3.

The aim of this research is to evaluate Hong Kong’s position as gateway to China by means of reviewing its institutions and culture in the past and present, and subsequently to predict Hong Kong’s gateway position in the near future, looking at the influences of critical developments in the Hong Kong-China environment. Hong Kong seems to be primarily chosen as location for foreign offices, because of its institutional and cultural advantages over China. Therefore this thesis will focus on critical developments in that environment. The Uppsala model of internationalization provides insight in how culture and institutions can influence internationalization strategies of companies. This model will be used to define the theoretical framework of this research.

The thesis will provide insight in and tries to forecast the future of Hong Kong as platform for doing business with China, from the perspective of Dutch, Hong Kong established companies. Chosen is for Dutch companies as Hong Kong and the Netherlands have a long history as trade partners. Moreover, the Netherlands are the largest European investor in Hong Kong with a vast amount of 26.3 billion US Dollar in 2004. Nevertheless, the majority of the results of this research can probably be generalized to companies from other Western European countries, because of resembling institutions and culture.

Research Questions

In order to research the above defined problem, the following research questions will be examined:

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What are the prospects for Hong Kong’s position as gateway to China, looking at critical developments in the Hong Kong-China institutional environment of the last decade?

Sub questions:



Why do western (Dutch) companies establish their office in Hong Kong?



How does Hong Kong compare to China as location for Dutch, Hong Kong

established companies regarding their institutions and business culture?



Which major critical developments in the Hong Kong - China institutional

business environment have influenced Hong Kong's position as gateway to China in the last decade?



How did these critical developments influence Hong Kong's position as Gateway to China according to Dutch, Hong Kong established companies?

Research Definitions

Hong Kong: Gateway to China

Gateway is defined as a location, in this case Hong Kong, that acts as platform for companies to do business (with)in a country/region, in this case China. Companies choose to locate their company in a gateway when it is too hard to establish the company in the target

country/region itself or because the gateway’s business environment offers advantages over other cities in the country/region. Gateways often act as network hubs that offer entrance to other networks. In short, a gateway is a strategically chosen location from where companies can get the most out of doing business with(in) the country/region. In the case of Hong Kong, it is common for foreigners to establish their office in Hong Kong, which exert control over business in the China region. Hence, the management is in Hong Kong, while the operations are mainly in China or China related.

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Critical developments in the Hong Kong-China institutional business environment

Through preliminary literature research major critical events in the Hong Kong-China environment of the last decade are identified that have possibly influenced Hong Kong’s position as gateway. Chosen is for developments in the last decade, as ten years ago Hong Kong was handed back to China, which embodies the start of a new period in the history of Hong Kong. Developments in this research are defined to be critical if the developments are expected to change the relationship between China and Hong Kong and consequently Hong Kong’s position as gateway to China. The critical developments defined in the preliminary research, which will be outlined in the results section, are all evolving in the institutional atmosphere of China – Hong Kong. Institutions and especially culture are known for changing slowly; nonetheless the Hong Kong – China environment has been evolving that quickly the last decade(s) that they are expected to have an effect on Hong Kong now and in the future.

Research Approach

The approach used in this research is a descriptive survey. The data gathered with this method is mainly qualitative as it is aimed at understanding the Dutch companies’ attitude regarding Hong Kong’s position as gateway to China and the possible influences of the recent

developments on this position. Attitudes are important in this research as attitudes come before behaviour, and affect the way the person/company will act in the future (Alreck & Settle, 2004). Attitudes consist out of three parts: (1) What the person knows or believes about the topic (2) How the person values or feels about the topic (3) The likelihood that the person will take action based on the attitude (Alreck & Settle, 2004).

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Data Collection

The data in this research is collected by a multi-method approach (Gill and Johnson, 2002). Adapting a multi-method research method gives the researcher assurance that it is addressing the most important topics. Furthermore it enables triangulation to take place. Triangulation means using multiple methods to maximize the validity of the research (Gill and Johnson, 2002). In this research a combination of field and desk research is used. Both generate mainly qualitative data. Below the two methods will be described more in depth.

Desk Research

Hong Kong’s position as gateway to China will firstly be investigated with the use of literature. Scientific literature on the Uppsala model of internationalization is used to define the Theoretical Framework for the research. Internationalization theories are concerned with ‘why?’, ‘where?’ and ‘when?’ companies decide to open offices abroad. For this research, the question ‘when’ is not relevant, therefore the focus lays on the factors deciding ‘where’ and ‘why’ foreign companies decide to establish an office. Furthermore, the description of Hong Kong’s institutions and culture in the Results section are also written by reviewing scientific literature.

Other sources, used to describe the critical developments in the Hong Kong - China institutional business environment, are newspaper articles, the internet and government papers. These sources can give up to date data, concerning these developments, which can often not be found in scientific research. In addition, data from lectures (see references) on this topic are used as background information and as a supplement.

Field Research

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results can be seen as a discussion on the influence of the critical developments on Hong Kong’s position as gateway to China.

Interviews

Objectives Interviews: To find out:

 Why Dutch Companies have established their business in Hong Kong  How Hong Kong serves as gateway to China (now-future predictions)

 How Dutch Companies rate the influence of the developments, in the Hong Kong-China institutional business environment the last decade, on Hong Kong’s position as gateway to China (Attitudes)

 How do Dutch Companies perceive the future of Hong Kong as gateway to China and how will they react (Attitudes Behaviour).

Around 260 Dutch companies have established an office in Hong Kong. Around 135 of these companies are a member of the Dutch Business Association (DBA). As source for my

sampling I have used the DBA Business Directory 2006-2007. From these companies I have contacted Dutch companies in the Trading/Distribution/Buying and Sourcing Office business type and the Transportation & Supporting Services/Logistics sector4. I have chosen for these two sectors for two reasons. First of all, the DBA Directory shows that those two sectors are among the largest represented by Dutch companies in Hong Kong. The

Trading/Distribution/Buying and Sourcing Office and the Transportation & Supporting Services/Logistics sectors cover respectively 22 and 24 companies. It must be noted however

that some of the companies listed with the DBA are not Dutch companies, but Hong Kong companies that want to market themselves in the Dutch community. Those companies are not included in the sample. Secondly, the sectors chosen are both service sectors as the Hong Kong economy is characterized by an extremely large service segment (91% of GDP in 2005).

For this research CEOs/Directors of seven companies were interviewed (for the questionnaire see Appendix I). Five companies interviewed, were from the Trading/Distribution/Buying and

Sourcing Office sector and two from the Transportation & Supporting Services/Logistics sector. Unfortunately, the time available during my stay in Hong Kong did not allow me to

arrange more interviews with companies in the latter sector, which also were much more

4_{The Dutch roots of the companies were investigated with the use of information on their websites. In the DBA}

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difficult to arrange. Companies are defined to be Dutch, if the head office is established in the Netherlands or if the owner of the company is Dutch.

Of the companies interviewed, four are independent Hong Kong offices, meaning that these companies are established in Hong Kong by Dutch entrepreneurs, without having

headquarters in the Netherlands. Furthermore, the two transportation companies are regional headquarters and one of the trade companies is a regional office (see Appendix II). All companies are involved in business with(in) China. The trading companies mainly source in China, especially in the Pearl River Delta but also in other manufacturing regions throughout the country. The logistics/transport companies particularly transport goods to and from China and Hong Kong. Furthermore, some of the companies also use China as sales market.

Besides the interviewed companies, an employee of the Trade and Industry Department of the Hong Kong Government and of the Trade Development Council on developments in the Hong Kong and China environment were interviewed, to complement the business viewpoint from an administrative perspective.

Research Design

In the literature review in chapter two, several sources on the internationalization behaviour of companies will be reviewed. This section will investigate the theoretical questions why

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Literature Review

In this chapter, concepts of internationalization theories and especially the Uppsala model are discussed. First is shortly discussed why companies internationalize. Thereafter, the Uppsala model is discussed in depth with a special focus on psychic distance which can help to explain why Hong Kong has become such an international metropolis. The literature review in this section results in the theoretical framework of this research in the next chapter.

Theories about internationalization of firms state that firms expand across national borders for one or a combination of two reasons (Caves, 1996). Firstly, firms expand across borders because of location-dependent comparative advantages that can not be exploited in other countries and that cannot be captured through trade (Hennart, 1991). Examples of these location dependent comparative advantages may be natural factor endowments like cheap labor, particular raw materials or specialized labor production which can lead to higher productivity levels. Because of this reason, companies vertically internalize the value-adding activities that are located in the country where the comparative advantage exist (Thompson, 2000). Internalization refers to the advantage that a firm derives from keeping (various) activities within the same organization. When firms are attempting to maximize profits in a world of imperfect markets, they will often try to circumvent these imperfect markets. The activities which were previously controlled by the market mechanism are brought under common ownership and safeguarded in a market ‘internal’ to the firm (Ghauri and Prasad, 1995).

Another reason for expanding internationally is to sell in foreign markets (Vernon, 1966). Consequently, identifying and measuring the potential market opportunity is important when considering which market to enter (Root, 1964). Following this argumentation, firms choose to open a subsidiary abroad, in stead of exporting or licensing, to exploit competitive

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The Uppsala Model of Internationalization

The Uppsala model of internationalization gives insight in why companies choose a distinct location for their foreign operations. The theory poses, that the perceived risk of investments in a foreign market defines when and where the company invests. According to them, firms first develop in the domestic market and next, start internationalizing to the countries with the lowest risks, mostly the neighboring countries or countries that are comparatively well-known and similar with regard to business practices. This theory suggest that if companies have decided they want to be present in a certain region, they will search for a location where the risk is the lowest and hence where the market can best be understood by the firm. Johanson and Wiedersheim-Paul (1975), two of the founders of the model, found that the international expansion of four large Swedish multinationals followed a series of small cumulative steps over time. These companies expanded their overseas business by successive steps to markets that were characterized by greater risks measured as psychic or psychological distance.

Psychic Distance

The concept of psychic distance is defined “as factors preventing or disturbing the flows of information between firm and market” (Johanson & Wiedersheim-Paul, 1975: 308). Examples of such factors are differences in culture, political systems, language, level of education and level of industrial development (see figure I). The geographic distance can often be explained by the psychic distance as countries geographically closer often have resembling cultures and business practices.

Psychic distance can be decreased with (experiential) knowledge and understanding of the

host market, as understanding of the market improves the flows of information between market and firm (Johanson & Wiedersheim-Paul, 1975). The more the foreign market

resembles the home market or the more easily a market is to interpret for a foreign company, the fewer factors are disturbing the flows of information between market and firm.

Large Psychic Distance

The Netherlands China

Dutch Language Chinese

Democracy Political system Communism

Individualism Culture Collectivism

Developed Industrial Development Developing

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In general, institutions and business cultures are seen as the two factors that can hamper or ease the information distribution between markets and firms. Erikkson et al. (1997) state that market knowledge pertains to two different aspects: institutional knowledge and business knowledge, or institutional and business cultural knowledge. The consequence of lack of knowledge of foreign markets incurs risks and costs which companies understandably want to avoid.

Many scholars use cultural distance as a proxy for psychic distance, however as just

demonstrated, culture is not the only governing concept (see for instance Eriksson et al., 2000 or Fletcher and Bohn, 1998). As Child et al. (2003) found, psychic distance is not only

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Conceptual Framework

The literature review on the Uppsala model and especially the concept of psychic distance leads to the following theoretical framework for this research. The rest of this chapter will clarify this model and discuss the different elements.

INTERNATIONALIZATION THEORY

COUNTRY

OPPORTUNITIES assessment 1. Location-dependent comparative advantages 2. Market potential: selling COUNTRY RISKS assessment 1. Market Knowledge 2. Avoid Uncertainty Geographic Distance Comparative Psychic Distance CULTURAL THEORY 1. Power Distance 2. Individualism 3. Uncertainty Avoidance 4. Masculinity

5. Long term Orientation

INSTITUTIONAL THEORY 1. Government 2. Legal 3. Financial 4. Educational CRITICAL DEVELOPMENTS

in the Hong Kong – China Business Environment (last decade) W h y e s ta b lis h o ff ic e in H o n g K o n g ?

Status and Prospects of Hong Kong's position as gateway to China

●Handing over to China (1997)

●China's accession to the WTO (2001) ●CEPA (2003)

●Ongoing development of the Pearl River Delta

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Internationalization Theory

The internationalization theory is used as the overlapping theory to explain why companies establish their office in Hong Kong. Before a company chooses a location to establish its foreign operations, the company will first look at possible opportunities: if it is possible to make money in the region. Furthermore companies will assess the risks of the region. It will make the decision to invest only if the companies thinks that the return is equal to/or higher than its risk adjusted cost of capital (Laserre, 2003). The country opportunities are concerned with the potential demand or location-dependent comparative advantages in the region and the

risks with the political, economic or social action that can negatively affect business

performance (Laserre 2003). Market knowledge on the countries institutions and culture can diminish the country risks, as uncertainty about the market decreases as well. The

opportunities and risks taken together outline the attractiveness of a certain geographic

location. The assessment of the opportunities in the Hong Kong region and the risks of the Hong Kong’s system will be used to assess what Hong Kong’s position in this picture is.

Comparative Psychic Distance

The psychic distance is used as a measurement tool of the risks of Hong Kong. The more a company understands a market, hence the smaller the psychic distance is, the lesser the perceived risk will be and the easier it will be for a company to enter the country. Therefore, the more similar a host country’s business practices and institutions are, the more knowledge the company has of the market and the smaller the perceived risks are. However, it does not only have to do with similarities between the home and host market, but also with the transparency of the business system and the predictability of its institutions. If the business system is easily understood and timely and reliable information can be easily collected, while the institutions are predictable, firms also measure lower risks and a lower psychic distance.

The concept of comparative psychic distance will be used in this research as in general,

psychic distance is used in combination with geographic distance. The theory of Johanson and

Vahlne (1990) suggests that companies gradually internationalize, meaning that they start internationalizing to neighbouring countries with a low geographic and psychic distance. In this research however, the information about the internationalization process of the firms lacks. Assumed is that the companies come to the China region because they see

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expected that after the assessment of opportunities and risks, Hong Kong is chosen as the most strategic location in the China region for Dutch companies, because Hong Kong and the Netherlands are psychically closer compared to China and the Netherlands, especially

historically seen. More recently however, there might be developments in the Hong Kong – China environment that are changing this. Comparative psychic distance is used to assess the risks in Hong Kong compared to the risks of China regarding their institutions and culture.

As discussed in the literature review, the psychic distance in this research is measured by the

cultural and institutional distance. The cultural and institutional distance between the

Netherlands and Hong Kong will be measured in comparison to the distance between the Netherlands and China. Suspected is that the differences in these two distances can explain why companies have been establishing their offices with regional operations in Hong Kong.

Cultural distance

Hofstede’s cultural model is the most relevant one for comparison of culture on the national level and hence of importance when establishing an office in a foreign country. Hofstede defines culture as the “collective programming of the mind which distinguishes members of

one group or category of people from another” (Hofstede, 2001: 9). Country boundaries are

usually cultural boundaries, and national culture is instilled from birth. Different national cultures have different patterns of structuring relationships and organizations. Culture therefore differentiates management across nations (Child, 2002). Understanding of the business culture (Hofstede, 1984) and language (Dichtl, 1990) facilitate the understanding of markets (Erikkson et al., 1997).

On his website, Hofstede states that "Culture is more often a source of conflict than of

synergy. Cultural differences are a nuisance at best and often a disaster".5 Hence, the more resemblance between home and foreign business cultures, the less disturbance of flows of information between firm and market and the less the risks or costs of internationalization are. He distinguishes five cultural dimensions on national cultural differences: Power Distance;

Individuality, Uncertainty Avoidance, Masculinity and Long Term Orientation. In this

research Hofstede’s dimensions will be used to test the cultural distance between the

Netherlands and Hong Kong. With the help of Hofstede’s dimensions, the cultural differences will be analyzed to see if on cultural grounds the psychic distance between the Netherlands

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and Hong Kong is to be considered larger or smaller than the cultural distance of the Netherlands with China.

Hofstede’s distinguishes the following dimensions (Hofstede, 1994):



Power distance, or the degree of inequality among people which the population of a

country considers as normal: from relatively equal to extremely unequal.



Individualism or the degree to which people in a country have learned to act as

individuals rather than as members of cohesive groups: from collectivist to individualist.



Masculinity, or the degree to which 'masculine" values like assertiveness,

performance, success and competition prevail over "feminine values like the quality of life, maintaining warm personal relationships, service, caring, and solidarity: from tender to tough.



Uncertainty avoidance, or the degree to which people in a country prefer structured

over unstructured situations: from relatively flexible to extremely rigid.



The fifth dimension was added after research of Bond (Chinese Culture Connection, 1987), inspired by discussions with Hofstede. He discovered the importance of Long

term orientation, especially in Asian countries. Values associated with Long Term

Orientation are thrift and perseverance. On the other hand values associated with Short Term Orientation are respect for tradition, fulfilling social obligations, and protecting one's 'face' (Hofstede, 2001).

Institutional Distance

Institutional theory stresses that different societies have different institutional foundations (Child, 2002). Societal norms have led to the development of institutions in societies with particular structuring and functioning. These institutions reinforce the cultural norms

(Hofstede, 2001). On the other hand, institutions can also weaken cultural values; however it is unlikely that the institutions will radically change the culture.

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recognized organizations), that actors generally follow, for normative, cognitive or material reasons (North, 1991).

The institutional distance between countries is built on institutional theories, which refer to the extent of dissimilarities between home and foreign market institutions. Foreign companies have to adjust to the foreign institutional framework and to live up to its rules. Each country has different institutions and hence a different political, structural and social structure (North, 1991). North (1991) defines institutions as humanly devised constraints that structure

interactions. The fewer institutional barriers, the easier it is for a foreign company to enter a market. This is not only concerned with similarities of institutions of the home and host country but also with the comprehensibility of the host institutions and the easiness of adapting to rules and norms of these institutions.

The most important institutions that can hamper or ease entering a market are firstly the regulatory framework of the government, concerning for example the economic interventions, the extent of corruption, the bureaucracy and the tax system. Secondly, it is important for foreign companies to be able to rely on a reliable and comprehensible law and judiciary

system. The financial institutions determine if and how companies can get the needed capital

and for what costs. Lastly, the education system influences the quality of the potential staff that can be found in the country and consequently of importance on the daily operations of the company.

Critical Institutional Developments

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Past: Hong Kong’s development as Gateway to China

As the history of Hong Kong has formed Hong Kong’s culture and institutions, this section will first discuss the history of Hong Kong as gateway to China. It starts with the history of Hong Kong before 1841. Thereafter, the British era of Hong Kong is discussed with

subsequently a discussion of the period starting in 1997: the Chinese future of Hong Kong. The chapter ends with why foreign companies come to the China region: the opportunities.

The history of Hong Kong is important when analyzing its present position as gateway to China as the main elements of Hong Kong’s system, its culture and institutions, develop and change slowly. Studying the institutional and cultural history is hence important in order to understand what the current position of Hong Kong as Gateway to China is. Concerning institutions, North (1987) describes that there is path dependency in institutional

development. Culture is often deeply rooted and shaped by history as well. Hofstede (2001) states that the cultural setting of a region can not be understood without an understanding of the history of that region.

Hong Kong before 1841: Chinese History

Hong Kong has a long history as trading region because of its geographic location. Especially in the Chinese Song and Tang Dynasties (618-1279), Hong Kong became a strategic location and a main trading region for the Chinese Mainland. However, after these Dynasties Hong Kong lost its importance to the country and changed into a small fishing community (Ngo, 1999). Nevertheless, because of its strategic location in the South China Sea, Hong Kong stayed a retreat for travellers.

1978 Hong Kong becomes British Colony 1842 1860s 1850s 1949 1930s 1997 2001 2003 China opens up & PRD develops World War II:

Trade falls Development industrial relations Transformation transport& communication China closes borders: trade falls Hong Kong's handover to China China's accession to the WTO Signing of CEPA Development trade Europe - China

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Western influence in Hong Kong started in the beginning of the 15th and 16th centuries due to the growth of importance of Chinese Trade products. Western European countries became more interested in Chinese products as silk and tea. For them, Hong Kong was conveniently located on the Far Eastern trade routes and useful because of its one natural asset, its safe deep sea harbour. For that reason, when the Qing dynasty decided to open this region up for limited trade, the British were the first to establish trade enterprises in the Hong Kong region. The British did huge purchases in China and to keep the trade balanced, they started to sell opium.

The Chinese Emperor soon banned the trade in opium, though the British did not want to comply with these rules because of the large profits resulting from selling opium (Wong, 1998). In 1839, this lead to the first opium war, which resulted in a British victory in 1841, when Hong Kong was rewarded to the British under the Treaty of Nanjing (Ngo, 1999). In addition, Chinese ports were opened to British trade and Great-Britain was rewarded with the most-favoured-nation status (Meyer, 2000).

As hostilities between the British and the Chinese kept on heightening, a second war started in 1856. China lost this war again and in 1858, the Treaty of Tientsin was signed. This treaty further liberalized trade for the British and allowed Western countries to have an embassy in Beijing. In reality however, many difficulties were experienced by the British when they tried to establish an embassy in Beijing. These problems lead to fights another time, which ended with the signing of the Treaty of Beijing in 1860. Trade in opium became legalized and the Treaty stated that China would lease The New Territories (the Mainland area of Hong Kong) to Britain for 99 years. In the Sino-British Joint Declaration on the Question of Hong Kong in 1894 the terms of the lease were finalized and the handing back of Hong Kong to China was scheduled in July 1997.

Hong Kong 1841-1997: British History

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between China and Britain (Meyer, 2000)6. Fluent in both Chinese and English the comprador brought information about the Chinese market and channels. The comprador institutionalized information on the Chinese economy in Hong Kong (Meyer, 2000).

To manage the principal-agent relationship with the compradors, foreign firms started to establish regional headquarters in Hong Kong (Meyer, 2000). During this period, China was open to foreign firms in a limited manner. Many trade-companies established offices in Shanghai to trade with the Yangtze valley, the richest, most commercialized area of China at that time. Nevertheless, Hong Kong stayed most popular as location for offices with regional control, because of the adoption of the British common law system, the military authority and the absence of trade barriers (Wesley-Smith, 1996). Large British trading companies that established their headquarters in Hong Kong, made of Hong Kong the center of the

information network in Asia. These headquarters managed ships sailing between Europe and Asia and hired compradors and Chinese staff to control and understand the trade in China. Furthermore the different trading headquarters joined forces to negotiate the best price, they printed newspapers with business information and organized information exchanges through organizations as The Hong Kong Chamber of Commerce (1861), The Royal Asiatic Society (1847) and the Hong Kong club (1846) (Endacott,1973; Kwan 1991). As Hong Kong had the information needed for doing business in China, other countries soon also sent representatives to Hong Kong. The number of compradors and trade house reached 63 by 1855 and 128 by 1861 (Meyer, 2000). Hong Kong became the premier meeting place of Chinese and foreign social networks of capital in Asia and the administrative and financial center of the (opium) trade. At that time (1861), Hong Kong only had 119.321 inhabitants while the ships arriving in Hong Kong had already grown to 2545 per year, five times more than in 1844 (Meyer, 2000).

Hong Kong was under overall supervision of the Foreign Secretary in London, but the governor of Hong Kong exercised the main supervision and also served as Chief

Superintendent of Trade. Because of the British rule and the domination of British firms in Hong Kong, these firms exerted the greatest influence on the emergence of finance,

transportation, trade management and communication networks. With the adoption of the

6_{A comprador is an intermediary or a go-between. More specifically, the word comprador comes from the}

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Common Law system, the government no longer interfered with the development of firms, what gave Hong Kong firms the opportunity to determine the way business was done as long as they stayed within the boundaries of the law (Wesley-Smith, 1996). In this business atmosphere, British banking companies created the banking system of Hong Kong (Deyo, 1987). British Bankers specialized themselves in the complex Hong Kong trade transactions necessary to equilibrate international financial flows. They raised large amounts of capital on the financial market of London to support business in Hong Kong (Meyer, 2000). Though, bankers were not the only companies to open banks in Hong Kong, trading companies established banks as well. The best example of this kind of bank is the Hong Kong and Shanghai Bank (HSBC), one of the largest banking groups in the world nowadays (Meyer, 2000). Also other trade services, as insurance companies, transportation and distribution companies, developed to support the commodity trade.

After 1860, technological innovation raised the quality and the speed of transportation and communication (Meyer, 2000). The invention of steamships made trade with Europe much quicker and the start of telegraphic communication made exchanging trade information much easier and faster. These innovations reshaped Asian trade and powered economic

development in the region (Latham, 1978). Hong Kong kept on developing as a real business metropolis until the 1930s when the Second World War started. Japan occupied Hong Kong and China, and during this period trade fell. Moreover, after the Second World War, the Nationalists and Communists in China started to fight for power, which resulted in a victory of the communists, who declared China into the People’s Republic

1975 1980 1985 1990 1995 0 5 10 15 20 25 30 35 40 45 50 55 60 65

Sectoral Change Hong Kong 1976-1996

Manufacturing Trade Services Years % o f to ta l e m p lo ym e n t

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of China, which virtually closed China’s borders to foreigners. Consequently, the trade with China through Hong Kong languished even more and Hong Kong had to reform itself. As a result, the manufacturing sector in Hong Kong started to develop rapidly.

During Hong Kong’s industrialization in the 1960s, the employment in the manufacturing sector rose with 15 percent (Meyer, 2000). In 1978 however, Deng Xiaoping decided that China’s self-cultivation did not work and consequently reforms were implemented that led to the gradual opening up of China and the declaration of Hong Kong’s hinterland, the Pearl River Delta as Special Economic Zone7. From then on Hong Kong’s service sector (trade) started to grow boomingly again (see figure IV).

Hong Kong 1997 into the 21th century: Chinese Future

In 1997 Britain’s lease of Hong Kong ended and Hong Kong had to be returned to China. The return went exceptionally peacefully. The handover process started with Hong Kong and China signing the Sino-British Joint Declaration on the Future of Hong Kong in 1984. In this declaration, China insisted on absolute sovereignty of Hong Kong to ensure that Hong Kong remained an international financial and business center. They agreed that Hong Kong would operate as a Special Economic Region for fifty years with expiration in 2047. Under this “one country, two systems’ principle a locally elected Chief Executive would run Hong Kong. On the eve of the handover, many people had feared that Hong Kong would loose its international business center status under the Chinese; however few foreign companies left Hong Kong.

Nowadays, 10 years after the handover, Hong Kong has proved that, in practice, it hasn’t changed that drastically: for instance, it has still been rated the freest economy in the world for many consecutive years now, characterized by free flow of capital, information and goods (CATO institute, 2006, Heritage Foundation and Fraser Institute). According to CATO, economic freedom has a positive effect on the growth and GDP numbers of countries and is hence a very powerful mechanism. Economic freedom is defined as right of property

ownership, fully realized freedoms of movement of labor, capital, and goods, and an absolute absence of coercion or constraint of economic liberty beyond the extent necessary for citizens to protect and maintain liberty itself. In other words, individuals are free to work, produce,

7_{A Special Economic Zone (SEZ) is a geographical region that has economic laws different from a country's}

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consume, and invest in any way they please, and that freedom is both protected by the state and unconstrained by the state (Heritage Foundation). Although the fears of major changes for the worse in Hong Kong have been drastically decreased in the last ten years, one is very curious how the one country, two systems will develop over time and how China and Hong Kong will integrate.

Opportunities in the China Region

As Hong Kong is mainly a service economy with high labor costs and expensive land, foreign companies come to Hong Kong mainly to sell their product or service. A 2006 survey

conducted by the Census and Statistics Department of the Hong Kong Government, under companies representing their parent companies in Hong Kong, shows that selling is the major line of business for Hong Kong companies and that manufacturing is only found fifth in row (Census and Statistics Department, 2006).

Yet, Hong Kong itself is only a small market with 7 million inhabitants and hence not a market with huge sale potentials. However, Hong Kong is geographically situated in the southeast corner of China which makes Hong Kong an ideal platform for business with(in) China. Not only is China a huge market for selling but also a country that has comparative advantages like cheap labor and more and cheaper space than Hong Kong. The opportunities many foreign companies exercise in Hong Kong, is enabling trade with China. Most

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Comparative Cultural Distance:

The Netherlands – Hong Kong/China

In this section the Comparative Cultural Distance between the Netherlands and Hong Kong, in comparison to China is discussed. The section starts with a short introduction of the Dutch culture, which serves as the perspective from which the Hong Kong and Chinese culture are compared. Thereafter, the dimensions of Hofstede on Hong Kong are discussed and the section ends with a comparison of the Chinese and Hong Kong cultures.

Dutch National Culture

The culture of the Netherlands is best comparable to Scandinavian countries. It is primarily characterized by a high level of individuality (see figure V). This translates in individuals that are expected to look after themselves, without the protection of the community he lives in. Consequently, the Dutch society is characterized by loose bonds between individuals and more individualistic attitudes. In the daily lives of Dutch people, privacy is considered a foremost cultural norm and individual pride and respect are highly held values.

Furthermore, the Netherlands scores moderately on Uncertainty Avoidance (UA), which entails that laws, rules and regulations are used to reduce the level of uncertainty. The Netherlands scores very low on Masculinity (MAS) and is therefore regarded as a Feminine society. This translates in a low level of differentiation and discrimination between genders and the importance of feminine values as caring and social welfare (Hofstede, 2001).

Additionally, Hofstede (2001) states that the Long Term Dimension (LTO) splits the world in two, as East Asian countries score highest, while, amongst others, European countries score on the low side of this dimension.

PDI IDV MAS UAI LTO 0 10 20 30 40 50 60 70 80

Hofstede's Cultural Dimensions

The Netherlands

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For a Western European country, the Netherlands scores relatively high on Long Term Orientation (LTO), this indicates that the Netherlands are closer on this dimension to East Asian countries than other European countries. Long Term Orientation (LTO) is associated with the values of perseverance and thrift. Consequently, businesses in LTO cultures do not expect direct results of their actions and are eager to work hard. Second lowest dimension for the Netherlands is the Power Distance Index (PDI). This implies that power differences within organizations are not large. Inequality in a “low PDI” country is seen as a necessary evil that needs to be minimized. In the Netherlands, management is often based on consensus, on convincing the other what should be done. Conclusively, Hofstede states that wealth is positively correlated with Individualism (IDV), which is high in the Netherlands, and negatively correlated with Power Distance (PDI), which is moderate in the Netherlands (Hofstede, 2001).

National culture in Hong Kong compared to China

Although Hong Kong has been in British hands for over 150 years, it is located within China and has a long Chinese history, which implies that Hong Kong’s culture is still very Chinese. Nevertheless, the British seem to have had some influence on Hong Kong, as the scores of Hong Kong and China on the dimensions of Hofstede differ (see Figure VI). Indirect and direct influences of the British rule can be seen on Hong Kong. First of all, the British business culture has mixed with the Chinese one, as well as an indirect influence of the other western countries that have established themselves in Hong Kong through time. As Hong Kong industrialized and many different nationalities entered the Hong Kong society, institutions had to come in place to regulate business.

PDI IDV MAS UAI LTO 0 10 20 30 40 50 60 70 80 90 100 110 120

Hong Kong China

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The traditional Chinese family business ties became less important and formal institutional trust building (British common law system) was required in order to replace the trust within the family networks (Zucker, 1986). In Hong Kong the combination of an Anglo-Saxon legal and corporate governance system with a typical family-controlled business environment, led to the development of its current national culture (Cheung et al., 2005).

Fundamentally, Confucius structured the Chinese society as it is nowadays. He observed that the path to happiness for society lays in the degree to which individuals understood and obeyed their given roles in the order of things. For example, the child obeyed the teacher, the father obeyed the leaders, and the wife obeyed the husband. The Chinese believe in

individuals, not desiring to change their place in the world, nor seeking individual

acknowledgment based on individual achievement. Everything an individual does must be done with consideration for how it impacts others and the correct or righteous order of things (Bodde, 1962). In the next paragraphs the Hofstede dimensions of Hong Kong in comparison to China will be discussed in depth.

Power Distance (PDI)

For an Asian country, Hong Kong scores relatively normal on the Power Distance (PDI) dimension with a score of 68. This means that in Hong Kong power inequalities are accepted as cultural heritage while the Netherlands accepts inequalities less and China is even more used to Power Distances and hierarchies than Hong Kong. In Hong Kong and China Power Distance (PDI) between members of the Chinese business networks called “guanxi” is very normal. Guanxi are networks which serve as social mechanism for coordinating economic activities in which mutual trust, affinity, and norms or reciprocity limit moral hazard and define sharing rules (Jacobs et al. 2004; Yang, 1994).

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Uncertainty Avoidance (UA)

Unusual is the score of Hong Kong on Uncertainty Avoidance (UA) of 29. In general, Asian countries score quite high on this dimension, while Hong Kong scores fourth lowest among Hofstede’s investigated countries. Hong Kong even scores lower than most western European countries which scores, in general, lay in the lower half. This score indicates a society where uncertainty is accepted and where freedom of opinions exists. Often these are places where many varying cultures and ideas can come together. Furthermore, countries scoring low on Uncertainty Avoidance (UA), do not feel the need to establish many rules to structure the society, but to leave it open. In the case of Hong Kong, this is certainly true as it has been an international metropolis for over 170 years, where different cultures that have worked together peacefully in a free market economy.

China scores almost as low as Hong Kong, which is remarkable, as China has not really a history of a country open to other cultures or without the need of rules as it has been planned by the communist government for almost 60 years. Hofstede (2001) explains that China scores low on Uncertainty Avoidance (UA) because of its Confucian history. In Chinese history, China had a powerful centralized state, conditioning the Chinese civilians to take orders from the center. In addition, the Chinese never knew the concept of a codified law system that applied to everyone. In stead, the Chinese believe in “rule is by the rulers” which is variable and hence not very uncertainty reducing, whereas in Western cultures, laws are created to protect individuals from the rulers.

The Dutch are much more uncertainty avoiding than the Hong Kong public. Nevertheless, the strength of freedom of opinion in low Uncertainty Avoidance (UA) countries makes it, in general, easier to establish a business in for Western European countries. A survey from the Census and Statistics Department of Hong Kong shows that free flow of information, the simple regulations and cultural openness in Hong Kong is indeed rated positively by foreign companies with an office in Hong Kong (Census and Statistics Department, 2006).

Individualism (IDV)

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collectivist than individualistic society. In Hong Kong, the family and extended family groups are still very important, as they are in China. Loyalty in those societies to the group is very important and group members are expected to cultivate strong relationships and to take responsibilities for fellow group members. Another concept fostered in the Hong Kong and Chinese collectivist’s cultures is face. Face is what a person claims to be implicitly or

explicitly with his or her characteristics and traits (Grove and Hu, 1999). A person loses face when he or she is humiliated in the presence of his/her group members. As reputation is also very important, losing face is very degrading. Therefore, Chinese will take their

responsibilities and will always try to meet requirements placed upon him/her by virtue or the social position he/she occupies (Hofstede, 1983).

Masculinity (MAS)

Another legislation of the Confucian history in China and Hong Kong is the obligation of carrying on the (male) family line. Therefore, Hong Kong and China can both be regarded as more masculine countries. As on the Power Distance (PDI) and Uncertainty Avoidance (UA) dimensions, Hong Kong scores a bit lower on Masculinity (MAS) than China. Masculine societies have strict female and male roles while in Feminine countries the differences between men and women are not that big. Furthermore, in more Masculine countries, values of men and women in the same job differ more than in more Feminine countries. Women attach more importance to ‘social goals’, such as relationships, helping and nurturing others and the physical environment, whereas men attach more importance to ‘ego goals’ such as careers and money (Hofstede, 2001). As the Netherlands is a more feminine country, people in general attach more value to social than to ego goals.

Long Term (LTO) Orientation

Hong Kong's Geert Hofstede analysis has Long-term Orientation (LTO) as the highest-ranking (96) factor of Hong Kong, which is true for all Far East Asian cultures. This dimension indicates a societies' time perspective and an attitude of persevering; that is, overcoming obstacles with time, if not with will and strength. This dimension is seen as the basic difference in thinking between East and West. Confucius believed that a normal person could become a ‘Junzi’ by self cultivation (Lau 1992)8. The best person worked and studied very hard to reach this status, which was seen as a lifetime project. Furthermore, it was seen as a continuing process in stead of a final destination. Hence, Confucius believed that with

8

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perseverance everyone could become a ‘Junzi’ in the long run. The Long Term Orientation (LTO) of China and Hong Kong stems from this Confucius idealism. This results in focus on the future and the importance of education, thrift and persistence (Hofstede, 2001).

Hong Kong’s culture compared to Chinese culture

From the above can be concluded that Hong Kong’s history and location in China have been of more importance to its cultural identity than the 150 years of British rule (see Figure VII). As Bond and King (1985) say, the current Chinese culture is the result of “the heritage stretching unbroken over more than 4000 years” (Bond & King, 1985: 355). Such a history strengthens the cultural identity and gives it continuity, authority and uniqueness (Bond & King, 1985). Nevertheless, on all dimensions but Uncertainty Avoidance (UA) Hong Kong is culturally closer to the Netherlands than China, even though it is only a small difference. Although Hong Kong scores lower on Uncertainty Avoidance (UA) than China and much lower than the Netherlands, this score probably also relates to the British period in Hong Kong. As Hong Kong got used to housing many different nationalities and cultures from 1841 on, the acceptance of uncertainty is possibly strengthened during this period.

For the Netherlands, dealing with(in) Hong Kong is particularly made easier because the English language, in stead of Chinese, is used in business transactions. On the other hand, in Mainland China many Chinese still not speak English on an adequate level, and Chinese is a very difficult language for Europeans to learn, often taking many years of intensive studying. Hofstede (2001) states that the importance of language is often underestimated, as language is the vehicle of thoughts and hence vehicle of certain aspects of culture. Therefore, in this area Hong Kong has an important advantage over China.

PDI IDV MAS UAI LTO 0 10 20 30 40 50 60 70 80 90 100 110 120

The Netherlands Hong Kong China

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Furthermore, especially Hong Kong’s low Uncertainty Avoidance (UA) makes Hong Kong more accessible for Dutch companies as this implies that Hong Kong is open to different cultures and opinions. The cultural difference between Hong Kong and the Netherlands that is most likely to influence Dutch companies in Hong Kong in a negative way, is its high Power Distance (PDI). This implies that Hong Kong employees will expect a hierarchical

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Comparative Institutional Distance:

Netherlands - Hong Kong/China

This section concentrates on the Comparative Institutional Distance between the Netherlands and Hong Kong compared to China. First, the Dutch institutional system is shortly introduced as this is the perspective from which the Hong Kong institutions are investigated. This is followed by a comparison of the Hong Kong and China institutions from the Dutch perspective. The section ends with the perspective of Dutch companies on Hong Kong as location, regarding its institutions and culture.

Dutch Institutions

Like culture, institutions often have been established through time and are affected by a country’s history (Hall and Soskice, 2001). The Netherlands have a civil law system with influences of French penal theory that dates back to Napoleon. Furthermore, it has been a constitutional Monarchy since 1815 and a parliamentary democracy since 1848. It has a long history as a country that relies on trading, which explains its openness to other countries in the world.

Hall and Soskice (2001) describe the Dutch political economy as a Coordinated Market Economy (CME). Firms in CMEs depend more on non-market relationships to coordinate relationships. Cooperative relations are much more important in these economies than in economies that depend on markets, where competitive relationships dominate. CMEs coordinate their relationships through network monitoring, relational contracting and information exchange within networks. The institutions and culture of a country provide support for these relationships. Institutions that are relevant to coordinate relationships in CMEs are those that provide capacities for the exchange of information, the monitoring of behaviour and the sanctioning from defection of cooperative effort (Ostrom, 1990). The institutions matching these descriptions are strong industrial relations, such as

business/employee associations or trade unions and a legal and regulatory system to facilitate information sharing (Hall and Soskice, 2001).

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consensus in all aspects of society and the economy (Eurofound). Consensus is being seeked between the state, the trade unions and employer organizations to stimulate economic

development and welfare. Trade unions pressure the government to change or improve policies and laws in the interest of its members. The government itself also seeks broad consenus with the society on important issues. Finally, the Netherlands is a member of the European Union, which influences the Netherlands politically, economically and judicially. All together, the Netherlands can be characterized as an open, consensus seeking country with a international oriented financial system and a well-enforceable law system.

Hong Kong’s Institutions

Government

“Hong Kong’s generally laissez-faire economic policies have always been based on considered decisions, not mere paralysis of mind and will”

(Sir David Trench, Governor 1964-1971)

Hong Kong’s administrative structure is embedded in its colonial history. The colonial government of Hong Kong was characterized by indirect rule because the government could not base its legitimacy on consent, concerning votes or other democratic measures. In the case of Hong Kong, this resulted in minimal interaction between government and society, so that the colonial rule was less noticeable, while maintaining a certain level of stability and prosperity (Lau, 1982; Lui 1994). Hong Kong’s system was built upon a Weberian

bureaucratic image, underlining policy implementation and routine decision making (Scott, 1989). Furthermore, technical efficieny was one of its highest priorities, which served the function of making the government less visible in the society on the one side and provide legitimacy for the colonial government on the other (Lui 1994).

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market is seen as the primary instrument of coordination, with low government intervention and high stock market capitalization.

Hong Kong’s policy regarding it’s economy is often called ‘positive noninterventionism’ (Miners and Tang, 1998). This allows market forces to play freely, without tarriffs and high taxes and free flow of information. The government ideology is that its primary role is to provide the necessary infrastructure and a sound legal and administrative framework for businesses to act freely in. This non-interventionism has resulted in scoring highest on the Economic Freedom barometer of different authorities (see for instance the Heritage Foundation). However, in the last decades, the government recognizes the need to impose ground rules and legal constraints to provide clear boundaries, within which market forces are allowed to operate (Miners and Tang, 1998). Nevertheless, this has kept the bureacracy in the country relatively low. Establishing a business in Hong Kong can de done within six days at low cost, and other government licenses are also known for being handled very quickly, a result of Hong Kong’s colonial government’s effiency mentioned earlier.

Secondly, Hong Kong, oppositely to, China has a rather low score on corruption. Hong Kong has an Independent Commission Against Corruption (ICAC) which was founded in 1974 and promotes an anti corruption culture in Hong Kong. The clean government ensures that (foreign) businesses can conduct business without being concerned about corruption. Figure VIII shows how important this is for foreign companies as “corruption free government” scores thirdly on the importance of factors positively affecting the choice of location for regional headquarters, right after “low and simple tax system” and “free flow of information”. Furthermore, looking at the top five illustrated in this table, it can be seen that all of these factors influencing foreign companies to establish a regional headquarter in Hong Kong, are

Factor Ranking of

Importance Favourable Neutral Unfavourable No Comment

Low and Simple Tax System 1 71% 14% 1% 14%

Free Flow of Information 2 69% 16% 1% 14%

Corruption Free Government 3 66% 19% 1% 14%

Absence of Exchange Controls 4 69% 16% 1% 14%

Political Stability and Security 5 61% 24% 1% 14%

The changing status of Hong Kong as gateway to China

The changing status of Hong

Kong as gateway to China

The influence of comparative psychic distance on the

internationalization patterns of foreign companies in the China

region

The changing status of Hong

Kong as gateway to China

The influence of comparative psychic distance on the

internationalization patterns of foreign companies in the China

region

PREFACE

Table of Contents

Abstract

Hong Kong’s business is China

Problem Definition

Research Questions









Research Definitions

Research Approach

Data Collection

Desk Research

Field Research

Research Design

Literature Review

The Uppsala Model of Internationalization

Psychic Distance

Conceptual Framework

INTERNATIONALIZATION THEORY

Internationalization Theory

Comparative Psychic Distance

Cultural distance











Institutional Distance

Critical Institutional Developments

Past: Hong Kong’s development as Gateway to China

Hong Kong before 1841: Chinese History

Hong Kong 1841-1997: British History

Sectoral Change Hong Kong 1976-1996

Hong Kong 1997 into the 21th century: Chinese Future

Opportunities in the China Region

Comparative Cultural Distance:

Dutch National Culture

National culture in Hong Kong compared to China

Power Distance (PDI)

Uncertainty Avoidance (UA)

Individualism (IDV)

Masculinity (MAS)

Long Term (LTO) Orientation

Hong Kong’s culture compared to Chinese culture

Comparative Institutional Distance:

Dutch Institutions

Hong Kong’s Institutions

Government