The Handover in Hong Kong: Impact on Business Formation

The Handover in Hong Kong: Impact on Business Formation

By
Glenn R. Carroll, Mi Feng, Jeroen Kuilman
Sociological Science.
2014

Although the 1997 Handover of Hong Kong from the United Kingdom to China ranks among the major political transformations in modern history, its impact on new business formation has not been fully scrutinized.

Theory suggests contradictory forces may operate before, during and after such a transformation: (1) a detrimental impact from uncertainty over the future or (2) an enabling effect arising from the opportunities created.  To determine which force may have dominated in Hong Kong, we first decomposed the analysis demographically by the major social groups likely affected and then analyzed the expected impact. 

Aggregating the expected impacts by group led us to predict that, in aggregate, the handover depressed business formation, although this effect likely attenuated over time and varied wildly at times. For empirical assessment of impact, we relied on detailed monthly records of business registrations before and after the 1997 Handover of Hong Kong. (For a plausible counterfactual comparison, we also conducted a similar analysis of registrations in Singapore.) We used generalized autoregressive conditional heterogeneity (GARCH) time-series modeling to analyze the period from 1975 to 2013, looking at variation over time in total registrations as well as in terms of local and non-local businesses.

After controlling for macro socio-economic conditions, we find that the founding rate of new business formation dropped significantly throughout the post-Handover era. We see this drop as implying a dominance of uncertainty in the transformation period, especially over broadly defined property rights. Meanwhile, new business registrations displayed higher volatility following the Sino-British Joint Declaration announcing the Handover formally in 1984. In our view, this volatility reflected shifting public sentiment about the economic prospects of Hong Kong in the build-up to the transformation. We also find that in the post-Handover era, the legal form of new businesses shifted in composition toward non-local firms with higher asset mobility. As time from the Handover elapsed, however, entrants became more balanced among local and non-local forms of business.