Investment magnet: HK University Deputy Vice-Chancellor Richard Wong and Director-General of Investment Promotion Mike Rowse give highlights from the World Investment Report 2005.

Hong Kong retained its position as Asia's second-largest destination for foreign direct investment, according to the United Nations Conference on Trade & Development's "World Investment Report 2005".

Hong Kong and the Mainland - again the largest FDI recipient in Asia - accounted for over two-thirds of FDI inflows in the region last year.

Speaking at a press conference today, Invest Hong Kong's Director-General of Investment Promotion Mike Rowse said the Mainland and Hong Kong have held the No.1 and 2 positions for the last decade.

"We feel pretty chuffed that we are still well in second place. Hong Kong (with US$34 billion in FDI) actually got more than Singapore (US$16.1b), Japan (US$7.1b) and South Korea (US$7.7b) added together. In fact, we almost had enough to include India (US$5.3b) in that calculation, as well. People keep writing stories about the Indian miracle, in which case Hong Kong must be a little bit of a miracle by itself - because we are getting all this money," he said.

"While the numbers are heartening, one of the great benefits of the investment coming into Hong Kong is the innovative technological and business know-how contributed to our economy by the new entrants. Some of this know-how is cutting edge - not only in IT, technology or telecoms sectors, but also in such areas as financial services and sophisticated management consulting."

University of Hong Kong Deputy Vice-Chancellor Prof Richard Wong presented some of the report's key findings. He said that FDI is a result of investment typically made by multinational companies - companies that are usually more successful, larger and better managed.

"They bring not just money but know-how, technical know-how, management know-how, know-how about markets, know-how about how to manage production more effectively," Prof Wong said.

While Hong Kong's FDI inflow of about US$34 billion, its FDI outflow was close to US$40 billion.

"A lot of Hong Kong companies invest across the border in all kinds of activity, most importantly in manufacturing in the Pearl River Delta, but also in construction, retail, infrastructure, as well as transportation and logistics services," said Prof Wong.

As its economy opens and China liberalises, it has become a magnet for FDI, attracting about US$60 billion in 2004. Prof Wong says a lot of that inflow is mediated through Hong Kong, opening up many opportunities for it.

The FDI inflow into China boosts demand for financial services in Hong Kong, especially as Mainland companies choose to list publicly in the city. Initial public offerings have soared in Hong Kong: Last year Hong Kong was second only to New York in the amount of IPO activity.

This year's report includes UNCTAD's first-ever survey on R&D by transnational corporations, or TNCs. It notes that they are internationalising more than their production activities these days - they are shifting an increasing proportion of their research and development to selected developing countries. This opens up new opportunities for investment and jobs.

While Prof Wong noted that it is difficult to compare the dollar figure amounts of R&D across nations in the region, he said one way you can judge how innovative a country is by the number of patents it has registered with the US Patent & Trademark Office.

In 2004, China registered 597 patents in the USPTO, up nearly 30% from the 424 in registered in 2003, he said. "This is not an indication of the total amount of R&D in China, but only those that were deemed worth patenting in the US," he said.

Hong Kong registered even more patents with the UPTO in 2004 than China did, with 641. Prof Wong said it is not obvious the R&D behind those patents took place in Hong Kong, though, as it could have been done on the Mainland by Hong Kong-owned companies.

Prof Wong said a World Economic Forum report issued yesterday put a lot of weight on innovation and R&D investment.

"If you are an economy that does not record a high percentage of R&D investment, you will do poorly. Sometimes, you do not record a high number of R&D because you do not think it is important. Sometimes it is because your R&D activity takes place somewhere else, so you fail to collect the statistics," he said.

"Hong Kong's R&D investment is about 0.7% of GDP. Compared to Taiwan, Singapore, which invest 2-2.5%, we look pretty bad. But as I tried to show, indirectly, that the number of patents per population, Hong Kong is not low at all."

Hong Kong registers about 93 patents per 1 million population with the USPTO, while Singapore has about 114, and Taiwan is 292.

Since so much of Hong Kong's investment in R&D is across the boundary, it is not recorded here, he said.

"The World Economic Forum report adopts a set of methodologies and weights that makes Hong Kong look not so good," he said.

Both Prof Wong and Mr Rowse noted there were many competitiveness reports issued by prestigious agencies, all emphasising different aspects. About a week ago, another such report talked about 'red tape' affecting Hong Kong's competitiveness.

Mr Rowse said he found that one more worrying than yesterday's - as Hong Kong has a strong reputation for being business-friendly. A new committee is addressing concerns.

He added that there is no evidence to support claims in yesterday's report that the Judiciary has become less independent.

"Our judges quite cheerfully rule against the Government," he said, adding Government officials have already replied comprehensively to the concerns highlighted.

Replying to a reporter's query about the World Economic Forum report, Mr Rowse said: "If there were any criticisms that are substantiated, that would in the long run have an effect on FDI among other things, but the results indicate to the contrary.

"The usefulness of some of these surveys I think is in early warning, like the canary in the mine shaft. We should look at all of them. If we find something in them that is genuine, it is real, it is valid, it is a problem, then we should address the problem. That to me is what we should make of these different studies when they come out.

"Ultimately the proof of the pudding is in the eating, and last year we 'ate' US$34 billion."

On a global scale, Hong Kong ranked seventh in FDI inflows in 2004, and continued to be classified as one of the "front-runner" economies. This means it outperformed its investment potential by attracting high FDI flows relative to its economic size. Hong Kong led all Asia economies and was fourth globally in the amount of inward FDI stock, with US$456.8 billion last year.

"It is encouraging to see that we strengthened our position as a major destination for FDI globally, rising to become the seventh-largest destination for FDI in the world," Mr Rowse said.

Hong Kong is in keen competition for FDI in the region, he said, adding that Invest Hong Kong will promote advantages and hone Hong Kong's competitive edge to attract foreign investors.

According to the latest Census & Statistics Department figures, Hong Kong's inward FDI in the first six months of 2005 amounted to US$20 billion. During the same period, Invest Hong Kong helped 144 foreign and Mainland companies to invest in the city.

The overall findings of the 2005 UNCTAD survey on FDI prospects for FDI in 2005-2006 are promising. More than half of the responding transnational corporations and experts, as well as four-fifths of the investment promotion agencies, expected short-term (2005-2006) growth in FDI flows; almost all of the remaining respondents expected FDI levels to be stable. Expectations are the most positive for Asia and other developing regions.

"The report's positive outlook coincides with ours. We are optimistic Hong Kong will remain one of the largest FDI recipients in Asia," Mr Rowse said.