Industrial Organization and Spatial Economic Relations Between Hong Kong and China: A Linkage-Interaction Approach

Abstract

The economic reform of China since 1978 has resulted in a rapid expansion in trade and industrial interaction between Hong Kong and China. Based on a comprehensive examination of the linkage characteristics of firms in Hong Kong's industrial system, the study aims to provide a detailed understanding of the spatial distribution of Hong Kong's manufacturing activities in China, the nature of industrial interaction, and the associated impacts on both areas. Moreover, the study also aims to provide a conceptual and analytical framework for China's Shi-dai-xian regional development strategy. The three major types of production linkages of a firm; that is, sales, input, and subcontracting, constitute the frame of the study. With respect to the spatial distribution of Hong Kong's manufacturing activities in China, the findings show that sales linkages containing finished goods are clustered in Beijing and Shanghai because of the concentration of foreign investment and the larger market potential in these locations. Subcontracting linkages, along with the semi-manufacture sales linkages they induced, are concentrated in the Pearl River Delta, as spatial and social proximities are the two major locational determinants in respect of the quality and delivery requirements of Hong Kong manufacturers engaged in export. Although relatively dispersed, the spatial distribution of Hong Kong's input linkages in China reflects more the spatial organization of China's material procurement and distribution networks than the specific locational choices of surveyed manufacturers, as most of them rely on China-linked intermediate agents in Hong Kong for acquiring their inputs from China. Of the various types of linkages examined, sales linkages containing finished goods have low levels of stability in linkage connections and impulse transmission because of China's control on import through a centralized transaction structure for trade. The presence of such a transaction structure hinders the development of direct and interdependent relationships between Hong Kong manufacturers and their ultimate Chinese buyers, hence reducing the technological and marketing impacts on the associated firms. The transaction structure for trade also hinders the efforts for cooperative material research and development between Hong Kong firms and their ultimate Chinese suppliers, as direct and interdependent relationships are difficult to establish because of the control of China on export. Unlike the finished-good sales and input linkages, the relationship between Hong Kong manufacturers and their Chinese subcontractors is a highly interdependent one as reflected by the high levels of stability in linkage connections and impulse transmission of the subcontracting linkage system. The existence of strong interdependence is attributed to the complementary of production functions between China and Hong Kong in which the former has an ample reserve of low-cost labor and the latter has a well-established export base. Although through subcontracting the industrial system of Hong Kong is increasingly integrated with that of the Pearl River Delta, the long-term development impacts on the delta area remain limited as a result of the labor-using nature of most of the linkages and the supply constraints for product development in the area. The findings of the study call into the attention that the inter-relationships between firms are one of the major environmental factors governing the decision making behavior and hence the linkage characteristics of firms. The study proposes that a theoretical perspective based on the interdependences between firms, which takes into consideration the full institutional context of a firm, can provide a fruitful avenue for future research in economic geography and regional development.