Without economic prosperity, people cannot make a decent living and all visions for the future are nothing but empty talk. Even when the going is good - like it is now - we must continue to make steady progress and secure growth along a pragmatic working path. Indeed, now more than ever, we need to be looking for ways to sustain this growth.

By sustaining growth in Hong Kong I mean balanced and diversified development. It's not just about the quantity of money in our bank accounts - it's as much about the quality of life enjoyed by our people. So, protecting the environment and our heritage are important elements of sustaining our competitiveness. If nobody enjoys living here, or if nobody wants to live here, then economic advancement will also be nothing more than empty talk.

Ongoing development must also foment social harmony. We have to try to make sure that everyone's a winner - that all people in all strata of society can share the fruits of our economic prosperity.

Looking after the less fortunate, the elderly, the needy; creating jobs, promoting a caring culture. All of these elements are part of sustainable development, and part of my government's agenda.

I do believe that if we stick to these guiding principles then Hong Kong will become the most advanced and harmonious city in China, as well as a global metropolis offering a good quality of life.

So, how do we make that happen? How do we make the most of what we've got?

It is common to list Hong Kong's competitive advantages in traditional terms - our tried and trusted legal system; our level playing field for business; a clean and efficient administration; the free and unfettered flow of news and information; our low taxes; our position as a leading financial hub; our sophisticated infrastructure and transport systems; our geographical, cultural and language ties with the Mainland; our pluralistic and cosmopolitan society. These are fundamental advantages. But, listing them in this way is much like looking from the outside, in.

There's nothing wrong with this, because we want the world to understand the range of advantages we possess as an Asia hub for international business services. But we also want the world to see what Hong Kong offers when viewed from the inside, out. That is, when viewed as a city in China with an important and irreplaceable role in our country's development. So, Hong Kong has two complementary roles to play: as a global co-ordinator of business activity, and as a major city in our country. "One city, two roles."

Our country's national 11th five-year plan explicitly recognises this dual role. And that is why Hong Kong's development must continue on parallel tracks - international and national. They are self-reinforcing roles. And we can't have one without the other.

For example, our efforts to boost the physical connectivity with the Mainland will enhance our attractiveness as both a national and international businesses services centre, and a co-ordinator of regional economic activity.

A dedicated express rail link from Guangzhou to Shenzhen and on to West Kowloon will improve the flow of people between Hong Kong, Guangdong and beyond - benefiting two-way tourism and business flows.The Hong Kong-Zhuhai-Macau Bridge will open up new areas of economic activity in the western Pearl River Delta, as well as reinforce Hong Kong's status as an international shipping and aviation centre.

We will study the feasibility of a rail link between the Hong Kong and Shenzhen airports to complement our strengths in international aviation and national connection as well, and Shenzhen's impressive domestic network.

Similarly, we plan to make the best use of Hong Kong's financial infrastructure so that we can continue to develop as a regional financial centre for Asia, and as an international capital-raising centre for our country.

We will further develop our ability to handle renminbi-denominated transactions, and we'll work with Mainland authorities to identify new forms of RMB-denominated business. Developing RMB business in Hong Kong will boost the depth and scope of our financial services, and it will also help pave the way for the internationalisation of the national currency. So, Hong Kong has the software needed to serve both global and national demands.

We will also draw on Hong Kong's strength as a global financial centre to serve as an outward investment platform for the Mainland. Our expertise and wide range of contacts in the global market are being used by Mainland companies to explore new business opportunities in major markets such as the US and Europe.

Hong Kong's financial services expertise, particularly in fund management, will be put to good use for the Qualified Domestic Institutional Investors scheme which will allow Mainland enterprises and investors to participate in Hong Kong's stock market and those elsewhere in the world.

So, the future looks bright. But, there are challenges that we must squarely address to ensure our sustainable development.

One aspect we must look at is how to enhance productivity. If we want to compete globally, and if we want to continue to play an added-value role for our country, then we must constantly be moving onward and upward. This is a real challenge given our ageing population and low birth rate. With a shrinking workforce, we need to work out how best to equip our young people to compete in a globalised world, as well as how to attract talented people from elsewhere.

Enhancing education is vital for raising productivity in the long term. That is why, from the 2008-09 school year, we will provide 12 years of free education as compared to the current nine years. We are also poised to introduce small-class teaching to improve the learning experience for students.

Our academic structure has been reformed to include four-year degree courses that provide students with a broader range of learning options that will make them more well-rounded graduates. We will also attract more international and Mainland students to study at our universities - to enrich the mix of young people on our campuses and to foster pluralism and a global outlook.

Coupled with this initiative, we will also relax employment restrictions to help retain talented people who want to live and work in Hong Kong and contribute to our economic development.

We will adjust our immigration policy to attract more talented people from the Mainland and overseas. We will lower the age limit for the Quality Migrant Admission Scheme, and relax other requirements.

We have also put in place an investor migrant scheme. So far, almost 1,600 people have been granted residency under this scheme, while a further 330 have been granted approval in principle. By the end of October they had invested about $11.3 billion in Hong Kong. We will continue to promote both the Quality Migrant Admission Scheme and the Capital Investment Entrance Scheme to attract talent, know-how and capital to our city.

Other challenges we face relate directly to business. For more than two decades, Hong Kong companies have utilised the low-cost land and abundant labour resources in the Pearl River Delta to move our manufacturing operations across the border. This modus operandi has long served us well.But things are changing fast.

While Hong Kong has evolved into a financial and services centre, the Mainland is also integrating with the world economy. This means the Mainland is facing pressure to do more to protect the environment, to ensure better working conditions, to improve quality control, and to move up the value-added chain.

By extension, Hong Kong companies operating in the Mainland are facing these same pressures. Companies can no longer focus on low-cost production of low-value products. We have to re-orient ourselves to meet the changing needs of our hinterland.

We have to add more value to our goods and services; we have to upgrade our products, facilities and production technologies; we have to consider relocating labour and land-intensive operations to the central and western regions of our country; we have to develop new markets; and, we have to build and promote our own brand names.

Our competitive edge sharpens on our design and innovative capability, as well as our high quality products. We can no longer compete on cost advantage. Like I said earlier, quality as much as quantity counts these days.

And while the market must move with the times, so must the Government. We believe in the philosophy of "big market, small government". Some think that this means separating the two spheres - that is, isolating governance and economic activities. I disagree.

The government definitely has a role to play - not in the market, but for the market. What we aim to achieve is the most efficient use of government resources in conjunction with a thriving, free market. Just as we expect Hong Kong enterprises to be socially responsible, we hold ourselves responsible for providing business with the best environment to grow and prosper.

This includes such things as our low taxes, our constant drive to cut red tape and streamline procedures, world-class corporate governance standards, and to work at the government-to-government level to improve market access for our products and services. All these efforts are directed at the ultimate goal of improving both the livelihood of our people, as well as the world city status of Hong Kong.

Topping the list of our efforts in this area is the Closer Economic Partnership Arrangement, or CEPA as it is commonly known. This is a free-trade pact between the Mainland and Hong Kong. The business community has already made good use of CEPA to gain supra-WTO access to the Mainland market in 27 services areas.

Because CEPA is an ongoing initiative, a further 11 services sectors will come on stream from January 1 next year. There is no doubt that CEPA has, and will, continue to deepen the extent of economic interaction between Hong Kong and the Mainland. And because we are nationality neutral in trade and investment, CEPA applies equally to overseas companies as well as local companies meeting the relevant requirements.

Apart from CEPA, we also have an Innovation & Technology Fund, and the Small & Medium Enterprises Funding Scheme, to help our manufacturers move up the value chain, upgrade their facilities and develop their own brands. We have dedicated land and R&D facilities to help industry stay at the forefront of modern technologies.

Our industry support bodies have been helping businesses to enhance their management and technological capabilities, go for more design and innovation, as well as find new markets. We are also assisting in the areas of pollution control, energy conservation and extending new operating bases in the central and western provinces.

As I announced in the Policy Address, we will ask the Legislative Council to approve funding of $93 million for the Hong Kong Productivity Council to launch a five-year programme. This programme will assist and encourage Hong Kong-owned factories in the Pearl River Delta region to adopt clean production technologies and processes. So, we can help them upgrade their production while improve the regional environment at the same time.

As always, the Hong Kong Government will work hand-in-hand with our enterprises to create the best possible business environment for them to thrive in Hong Kong. We will also work closely with the Mainland authorities to enhance business opportunities and market access for our firms in the world's most exciting market today.

There's only so much we, as a government, can do. The rest, as they say, is up to you. If past experience is anything to go by - and we need only look at our impressive skyline to catch a glimpse of that success - then you will rise to the challenges before you with confidence and flair.

The history of Hong Kong is a tale of adversity met and mastered, and of ever more sophisticated responses to global economic movements. We have thrived on competition and revel in the art of re-invention. That is the path to prosperity. That is your future. That is our future, too.

Chief Executive Donald Tsang gave this address at the 14th Annual Hong Kong Business Summit.