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Chapter 1 Hong Kong’s Business Environment
Short Questions
B1C01T2Q001eng
Explain what ‘big market, small government’ is as described by the Hong Kong government.
(3 marks)
Answer:
The following are descriptions:

market leads and government facilitates

government plays the role of proactive market enabler in facilitating the functioning of the market and enabling

(1 mark)
the free market to allocate resources efficiently.
(1 mark)
government minimises its intervention in the market.
(1 mark)
B1C01T2Q002eng
What has the Hong Kong government done to develop Hong Kong into a knowledge-based economy?
(3 marks)
Answer:

It promotes the Four Pillar Industries. i.e., financial services, trading and logistics, tourism, and producer and
professional services.
(1 mark)

It provides education and training opportunities.
(1 mark)

It introduced the Quality Migrant Admission Scheme (QMAS) to attract talent and professionals from the
Mainland and overseas.
(1 mark)
B1C01T2Q003eng
Many foreign firms that want to penetrate the Mainland market set up their headquarters and offices in Hong Kong.
Why have they set up their headquarters and offices in Hong Kong instead of China?(4 marks)
Answer:
This is because Hong Kong has the following advantages over the Mainland:

A free economy without any foreign exchange controls

Upholds the rule of law and judicial independence

Business contracts as well as private property rights are protected and enforced by the legal system

A free flow of information, goods and services

Productive manpower
(Any four of the above, 1 mark each)
B1C01T2Q004eng
How does Hong Kong serve as an intermediary between the Mainland and the outside world?(4 marks)
Answer:

Many private and state-owned enterprises in the Mainland raise capital by listing on Hong Kong’s stock
exchange.

As a major financial centre in the world, Hong Kong helps the private and state-owned enterprises in the
Mainland raise capital and manage their assets.

Hong Kong serves as an entrepôt for trade between the Mainland and the outside world.

Hong Kong enterprises import technology and knowledge to China while setting up production bases in China.

Hong Kong is often regarded as a stepping-stone to the Mainland market.

Hong Kong provides many financial and business services to firms in the Mainland, e.g., banking and finance,
insurance, transport, accounting, marketing and sales promotion. This helps Mainland enterprises do business
with overseas enterprises.
(Any four of the above, 1 mark each)
B1C01T2Q005eng
How does the Hong Kong government promote the free flow of information to help develop the economy?
(3
marks)
Answer:

It allows freedom of press. Information can be obtained easily for business decisions.(1.5 marks)

It encourages international trade shows, fairs, seminars and exhibitions to be held in Hong Kong.
(1.5 marks)
B1C01T2Q006eng
Hong Kong Basic Law Article 5 reads:
The socialist system and policies shall not be practised in the HKSAR, and the previous capitalist system and way of
life shall remain unchanged for 50 years.
(a)
(b)
(c)
Distinguish between a capitalist economy and a socialist economy.
(4 marks)
Explain why Hong Kong is a mixed economy.
(2 marks)
How do the characteristics of a mixed economy contribute to Hong Kong’s economic success? (3 marks)
Answer:
(a)
Capitalist economy
Ownership of
Socialist economy
Private individuals
The government
Made by consumers and
Made by the government
resources
Economic decisions
producers
Allocation of
Guided by market prices
resources
Guided by government
plans
Distribution of output
Determined by market
Determined by the
(goods and services)
prices
government.
(1 mark)
(1 mark)
(1 mark)
(1 mark)
(b)

In Hong Kong, the market prices of some services are under the regulation of the government, e.g. taxi
fares and bus fares.
(1 mark)

Most of the goods in Hong Kong are allocated by the market mechanism, e.g. property prices. (1 mark)

The market mechanism ensures an efficient allocation of goods and services in Hong Kong. (1 mark)

A free market economy and free trade with little government intervention give investors confidence about
(c)
investing in Hong Kong.

(1 mark)
The government plays an active role in facilitating the functioning of the market and developing a
favourable business environment (provides infrastructure, education and training).
(1 mark)
B1C01T2Q007eng
ABC Co is an international broadcasting company with its headquarters in the US and
many representative offices
around the world. It has been known for fast and accurate news reporting for many years.
ABC provides news and information in 20 languages worldwide on TV, radio and online. To better coordinate its news
reporting in South-East Asia, the CEO is thinking of setting up a regional office in Hong Kong. However, he is quite
worried about the high wages and rents in Hong Kong.
(a)
Give three reasons explaining why Hong Kong is a suitable location for the regional office of ABC.
(3
marks)
(b)
Do you think that it is in the long-term interests of the company to set up a regional office in Hong Kong? Why?
(3 marks)
Answer:
(a)

Hong Kong allows a free flow of information.

The media can enjoy a high degree of freedom in Hong Kong.

It has a well-developed infrastructure (roads and ports).

It has a good communications network.
(Any three of the above, 1 mark each)
(b)
Yes. Reasons:

Free flow of information: increase in news coverage

Global network (transport and communication): quick access to information and timely delivery of news

Skillful and productive workforce: high quality and more professional news reporting and analysis

Better coordination of news reporting in South-East Asia
(Any three of the above, 1 mark each)
B1C01T2Q008eng
Study the following diagram showing the inter-relationship between different business sectors in an economy and
answer the following questions.
Corn Farm
Bank
Field Corn
Manufacturer
Pig Farm
Butchery
Restaurant
Supermarket
Bank
Wet Market
(a)
What is primary, secondary and tertiary production?
(b)
(c)
Group the above business sectors into primary, secondary and tertiary sectors. (6 marks)
(3 marks)
How do the three sectors cooperate with each other to ensure smooth business functioning? Illustrate with the
above example.
Answer:
(a)


(4 marks)
Primary production refers to the economic activities of extracting natural resources. (1 mark)
Secondary production refers to the economic activities of turning raw materials into semi-finished or
finished products.

(1 mark)
Tertiary production refers to the economic activities of providing services to customers. (1 mark)
(b)
Primary sector
Secondary sector
Tertiary sector
Corn farm
Field corn manufacturer
Restaurant
Pig farm
Butchery
Supermarket
Restaurant
Wet market
(2 marks)
(2 marks) Bank
(2 marks)
(c)

Corn farm: provides corn (resource) to field corn manufacturer (secondary sector)

Field corn manufacturer: provides fodder (finished product) to pig farm (primary sector)

Pig farm: provides pigs (resource) to butchery (secondary sector)

Butchery: provides pork (product) to supermarket (tertiary sector) and wet market (tertiary sector). Also
supplies pork (semi-finished products) to restaurant (secondary / tertiary sector)

Supermarket and wet market: sell pork (service) to customers

Restaurant: cooks pork (products) and serves customers (service)

Bank provides funds and banking services (services) to all sectors. i.e., corn farm, field corn manufacturer,
pig farm, butchery, supermarket, wet market and restaurant
(4 marks)
B1C01T2Q009eng
The following shows unemployment rates in Hong Kong from 1997 to 2006.
Unemployment rate (%)
Unemployment rate in Hong Kong
10
8
7.3
6.3
6
4.7
4
2
8
5.7
5.1
5
6.9
4.8
2.4
0
1997 1998 1999 2000
2001
2002 2003 2004 2005 2006
Year
(a)
(b)
(c)
Describe the trends in Hong Kong’s unemployment rate as shown in the above data.
(2 marks)
Account for the changes in terms of historical events and the economy in Hong Kong.
(3 marks)
Hong Kong experienced a high unemployment rate in the 1980s and in the years since 1997. What accounted for
this? Are there any differences between the causes of unemployment in these two periods. Explain this in terms
of the economic transformation in Hong Kong.
(d)
(5 marks)
How can a firm take advantage of the economic transformation mentioned in part (c) to make more profit? (3
marks)
Answer:
(a)

increasing trend from 1997

slight drop in 2000

up again in 2001

reached a climax in 2003

decreasing trend from 2004

1997 – Asian Financial Crisis

1998-1999 – Economic recession and deflation continues

2001 – September 11 terrorist attacks

2003 – SARS epidemic: economy was badly hit

2004 – economy gradually recovered
(2 marks)
(b)
(3 marks)
(c)
1980:

Unemployed persons mostly come from manufacturing sectors, e.g. factory workers, blue collar workers
and low-skilled workers.

(1 mark)
Hong Kong was transformed from a manufacturing centre into a services centre. (factories relocated to
China)
(1 mark)
1997 onwards:

Unemployed persons include those from service sectors, e.g. middle class, white collar workers, middle
managers.
(1 mark)

Hong Kong was transformed from a services centre into a knowledge-based economy.

Local workers were laid off because some companies had to cut costs due to the economic recession and
(1 mark)
deflation, and high-value added industries evolved with advances in IT technology; or

With rapid economic development in China and a closer business relationship between Hong Kong and
China, many tertiary industrial processes have been relocated to the Mainland(1 mark)
(d)
A firm can:

further cut costs by making use of IT technology.

attract capable employees.

change its management team.

lower labour costs by cutting wages / use lower wages to employ workers.

open the China market.

attract talent from China.

merge its Hong Kong and China offices.
(Any three of the above, 1 mark each)
B1C01T2Q010eng
Study the following data showing the percentage contributions to Hong Kong’s GDP of the three economic sectors.
1980
Primary sector
1985
1990
1995
2000
2006
1.0%
0.6%
0.2%
0.1%
0.1%
0.1%
Secondary sector
30.8%
28.9%
24.3%
15.2%
13.4%
8.6%
Tertiary sector
68.3%
70.5%
75.4%
84.7%
86.5%
91.3%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
Total
(a)
Describe the economic structure of Hong Kong as reflected by the above data.(2 marks)
(b)
Account for changes in the relative importance of the primary, secondary and tertiary sectors to Hong Kong
from 1980 to 2006.
(c)
With reference to the above trends, what difficulties would a factory worker in Hong Kong face? How can he
adapt to the change?
(d)
(3 marks)
(3 marks)
Besides gross domestic product (GDP), what indicator can be used to measure the relative importance of the
three economic sectors to Hong Kong’s economy?
(1 mark)
Answer:
(a)

The contribution of the primary sector to Hong Kong’s GDP is insignificant.

The relative importance of the secondary sector to the Hong Kong economy is declining. (0.5 mark)

The relative importance of the tertiary sector to the Hong Kong economy continues to grow. (0.5 mark)

The tertiary sector accounts for 91.3% of the GDP (much larger than the primary and secondary sectors.)
Hong Kong’s economy depends mostly on the tertiary sector.
(0.5 mark)
(0.5 mark)
(b)

Hong Kong lacks arable land and natural resources. The primary sector had almost no change in
contribution to GDP.

(1 mark)
After 1980, more factories moved to China. There was a structural change in the Hong Kong economy.
(1 mark)

Hong Kong’s economy has been transformed from a manufacturing centre into a service-oriented
economy (financial, services, trading and business centre).
(c)
(1 mark)
Difficulties include:

Threat of being laid off as many factories have moved to the Mainland (1 mark)

Difficult to find jobs in manufacturing industries
(1 mark)
To adapt to the change, factory workers have to undergo retraining in the service industry. (1 mark)
(d)
The percentage share of employment by sector
(1 mark)