Economics , Entrepreneurship

Glenn Carroll: How Did Hong Kong’s Transition Affect Entrepreneurship?

New research says start-up activity declined after the handover, compared to what it should have been had things remained the same.

July 15, 2014

| by Eilene Zimmerman

Women waving scarves in Hong Kong

Hong Kong’s 1997 transition was met with optimism as well as uncertainty. (Reuters)

When the British transferred Hong Kong back to the Chinese in 1997, it ranked as one of the most significant political transformations in modern history. Since then, the effects of the transition have been scrutinized by economists, diplomats, political activists, and journalists. Until now, however, few have examined the handover’s impact on entrepreneurship and start-up activity.

But in the first and most extensive look at the impact of Hong Kong’s political transformation on entrepreneurship, scholars from Stanford, Peking, and Tilburg universities found the number of new businesses started in Hong Kong declined after the handover, compared to what it should have been if things had remained the same. The companies that were founded tended to be nonlocal firms, rather than firms incorporated in Hong Kong — likely because it is easier for non-local firms to withdraw from Hong Kong if needed and, possibly, because many of these new companies are incorporated in China now.

This research provides a window into how political transformation affects entrepreneurship and to what extent that change leads to feelings of opportunity or uncertainty about prospects for business. In most large-scale political transformations, there is a mix of both. Because entrepreneurs are adept at spotting opportunities and exploiting them — even in times of uncertainty — they often anticipate and bet on the possibilities generated by political change.

Hong Kong was unique in that unlike most political transitions, the change in government was expected and widely anticipated for years. Many people saw it as a time of tremendous opportunity. The pre-handover economy allowed for relatively unfettered, fast access to markets, and that showed in the routinely high number of new businesses that registered there. At the same time, “there had been a lot of tension between the Hong Kong government and China before the handover, and Hong Kong businesses had trouble gaining access to the Chinese market. This alleviated those problems,” says Glenn Carroll, a professor of organizational behavior at Stanford Graduate School of Business. “Now businesses would have access to China in a way they didn’t before.”

People wondered if their assets would be secure, if there would be additional restrictions on labor or speech.
Glenn Carroll

With the handover, however, there was also new uncertainty about what life and business would be like under a new government — in this case a socialist government replacing a democratic one. “People wondered if their assets would be secure, if there would be additional restrictions on labor or speech,” says Carroll, a coauthor of the study along with Mi Feng at Peking University and Jeroen G. Kuilman at Tilburg University.

Entrepreneurs did manage to successfully navigate these opposing realities, says Carroll, which is why the effects of the handover lessened over time, and the rate of start-up activity picked up. “I lived in Hong Kong in 1996 and people went back and forth between fretting over uncertainty and feeling optimistic,” he says. “If you look at polls leading up to the handover, many business people moved out of the colony. But a few years later, a lot of them moved back.”

To conduct the study, the scholars examined official monthly business registration data from Hong Kong and analyzed the founding rates of new businesses from 1975 to 2013. “We took into account things like the state of the economy over time, the number of people living in the area, and the rate of growth and built a model that would predict the number of companies opening in any given month,” says Carroll. The researchers also looked at founding rates at the time of major events associated with the transfer, including the signing of the Sino-British Joint Declaration in 1984 and the handover itself in 1997.

Although there have been other cases where political transformation was expected — after the Berlin Wall fell in November 1989, for example — what happened in Hong Kong is very different. “When Poland and Hungary opened up and Germany reunified, it was pretty clear you were replacing a very oppressive, anti-capitalist regime with one more favorable to capitalism. We expected there would be more opportunity, and there was more opportunity,” says Carroll. Hong Kong, however, already had a very open, pro-capitalist economy at the time of its transition. “Whereas in Hong Kong, concerns about uncertainty alternated with optimism about improved opportunities, in East Germany the arrival of new business opportunities was so swift and clear that it dominated reaction to the change of polity,” write Carroll and his colleagues. Hong Kong’s protracted transformation also gave the public more time to speculate about the implications of the change and feel alternately optimistic and concerned.

What Carroll found fascinating in studying the effects of this large-scale change was that in the end, those effects went far beyond the behavior of individual entrepreneurs. Although entrepreneurs create the organizational infrastructure that helps determine how well an economy does, the immediate impact of the decline in start-up activity wasn’t significant, and today the number of new businesses being founded in Hong Kong is rising. The researchers’ model predicts it will eventually reach its pre-handover rate, and in terms of its long-term economic impact, Carroll says Hong Kong’s economy hasn’t taken much of a hit. “The rate of new business foundings is still very high, and Hong Kong is still a very open economy,” he says. “We were there last summer, and it’s remarkable how vibrant the economy has remained. It’s just booming.”

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