Reform of Hong Kong’s Public Research Funding System

Chintay Shih and Shin-Horng Chen 

College of Technology Management, Tsing Hua University, Hsinchu, Taiwanand

Chung-Hua Institution for Economic Research, Taipei, Taiwan

Outline

Introduction A Snapshot of R&D in Hong Kong Hong Kong Public R&D Funding Innovation Governance of Hong Kong Public

R&D Funding Policy Recommendations

Conclusions

2

1. Introduction

Central theme: Public R&D What to be done in order to improve the innovation

governance of HK public R&D; the sound “soft infrastructure” required for the promotion of R&D and innovation in general, public R&D in particular

The way in which the HK government, the ITC in particular administrates the R&D funding schemes Innovation and Technology Support Programme (ITSP) under

Innovation and Technology Fund (ITF) Accounting for 53.75% of the approved projects and 83.5% of

the approved amount respectively The way in which the research institutes interact with the

funding agencies

3

Structure of the Funding Schemes Administrated by the ITC

4

ITC (Innovation and Technology Commission)

Innovation & Technology Fund (ITF) Applied Research Fund (ARF)

Patent Application Grant (PAG)

New Technology Training Scheme

DesignSmart Initiative

Innovation and Technology Support Programme (ITSP) R&D Centres Programme

Guangdong-Hong Kong Technology Cooperation Funding Scheme (TCFS)

Forward-looking and innovative applied R&D projects

University-Industry Collaboration Programme (UICP)Teaching Company SchemeMatching Grant for Joint ResearchIndustrial Research Chair Scheme

Small Entrepreneur Research Assistance Programme (SERAP)

General Support Programme (GSP)

The amount approved under the ITSP amounted to 83% of the whole ITF from its initiation to May 2008.

The investment period of the Applied Research Fund has expired in end March 2005 and the Fund has ceased making new investments.

2. A Snapshot of R&D in Hong Kong (1/3)

R&D expenditures in 2006: HK$ 11.95 billion (US$ 1.54 billion); accounting for 0.81% of GDP Relatively low by international standards, lower than

Taiwan (2.58%) and China (1.42%), and even much lower than a few other economies of similar size

A positive trend: Growing momentum of the private (business) sector in R&D investment 53% of the total R&D expenditure in 2006

R&D expenditure invested by the HK government either fluctuated over time or at most grew at a modest rate. Since 2004, growing at a rate of less than 8% annually

5

2. A Snapshot of R&D in Hong Kong (2/3)

Predominant role played by the service sector in business R&D The wholesale, retail and import and export trades,

restaurants and hotels sector: 58% The financing, insurance, real estate and business services

sector: 24% An extra part of R&D for manufacturing hidden in the

wholesale, retail and import and export trades, restaurants and hotels sector Trading firms with sub-contract processing arrangements De-linking of R&D and manufacturing in terms of location

R&D activities undertaken by the financing, insurance, real estate and business services sector related mainly to information technology

6

R&D Expenditure in the Business Sector by Industry Sector, 2002-2006

7

Industry sector R&D expenditure (HK$ million)

2002 2003 2004 2005 2006

Manufacturing 481.9 406.1 587.1 471.3 369.0

<19%> <11%> <13%> <8%> <6%>Wholesale, retail and import and export trades, restaurants and hotels

936.3 1,255.6 2,310.8 2,541.9 3,676.1

<37%> <35%> <50%> <45%> <58%>Financing, insurance, real estate and business services

552.8 1,493.7 1,299.2 2,184.4 1,528.5

<22%> <42%> <28%> <39%> <24%>

Others 534.8 389.7 393.1 424.0 713.8

<21%> <11%> <9%> <8%> <11%>

Total 2,505.8 3,545.1 4,590.3 5,621.6 6,287.4

<100%> <100%> <100%> <100%> <100%>

Notes: Figures in < > represent the percentages to total. The percentages in a year may not add up to 100 due to rounding.

Source: Adapted from HKCSD (2008a).

2. A Snapshot of R&D in Hong Kong (3/3)

A mismatch between public R&D and private R&D, esp. in terms of the strategic areas selected by the ITC for the R&D Centre Programme R&D expenditure in the business sector mainly on information

technology (42.5%) and electrical & electronic engineering technology (33.6%)

R&D for Chinese medicine and nanotechnology by the private sector negligible

The business sector in HK engaged substantially in R&D outsourcing Its size more than half the total business R&D Intra-corporate cross-border network, esp. within the PRD

Economic Zone, as the dominant type of R&D outsourcing adopted by the HK-based firms or establishments

8

Total Expenditure for in-House R&D activities in 2007 by Technology Area by Industry Sector

9

(HK$ million)

Technology area

Information technology

Information system and technology

Computer hardware

technology

Computer software

technology

Com-munication technology

Subtotal

Electrical & electronics engineering technology@

Manu-facturing

technology

Bio-technology

Chinese medicine

Nano-technology

Advanced materials

technologyOthers Total(1)

By industry sector

Manufacturing 25.7 47.6 27.0 8.1 108.3 201.0 220.2 4.3 3.8 3.9 49.9 0.1 591.5

<4.3%> <8.0%> <4.6%> <1.4%> <18.3%> <34.0%> <37.2%> <0.7%> <0.7%> <0.7%> <8.4%> <#> <100.0%>

Wholesale, retail and import and export trades, restaurants and hotels

60.0 126.1 189.4 273.2 648.8 1,410.8 448.9 31.6 0.0 45.1 156.3 0.0 2,741.4

<2.2%> <4.6%> <6.9%> <10.0%> <23.7%> <51.5%> <16.4%> <1.2%> <0.0%> <1.6%> <5.7%> <0.0%> <100.0%>

Financing, insurance, real estate and business services

616.5 189.6 610.2 146.9 1,563.2 399.3 32.9 65.5 1.4 14.8 92.9 2.2 2,172.3

<28.4%> <8.7%> <28.1%> <6.8%> <72.0%> <18.4%> <1.5%> <3.0%> <0.1%> <0.7%> <4.3%> <0.1%> <100.0%>

Others 68.5 25.3 76.9 80.9 251.7 26.1 10.4 238.5 0.5 0.1 0.9 21.1 549.4

<12.5%> <4.6%> <14.0%> <14.7%> <45.8%> <4.8%> <1.9%> <43.4%> <0.1%> <#> <0.2%> <3.8%> <100.0%>

Total 770.7 388.6 903.5 509.2 2,572.0 2,037.2 712.5 339.9 5.8 63.9 299.9 23.4 6,054.6

<12.7%> <6.4%> <14.9%> <8.4%> <42.5%> <33.6%> <11.8%> <5.6%> <0.1%> <1.1%> <5.0%> <0.4%> <100.0%>

Note: (1) Figure include expenditure for in-house R&D activities conducted by a local party for itself and / or for other organisation.# Figure less than 0.05%.@ Electrical and electronics engineering technology associated with (a) computer hardware (such as integrated circuits) was included in the area of computer hardware technology; (b) communication technology was included in the area of communication technology.

Source: Adapted from HKCSD(2008b).

3. Hong Kong Public R&D Funding (1/2)

Innovation and Technology Support Programme (ITSP) under the Innovation and Technology Fund (ITF) The lion’s share of the research institutes’ funding from

ITSP The amount approved under ITSP: 83% of the whole ITF

A new three-tier structure in funding proposals under the ITSP since 2005 Tier 1: R&D centres in six areas

Automotive parts & accessory systems Logistics & supply chain management enabling technologies Textile & clothing Nanotechnology & advanced materials Information & communications Chinese medicine 10

3. Hong Kong Public R&D Funding (2/2)

The designated functions for these centres To conduct industry-oriented research To facilitate IP commercialisation To provide technology and market intelligence To provide a platform for exchange of IT/technology To promote technology development, transfer and knowledge

dissemination Some of them like project offices, with limited in-house

R&D capacity and a limited number of staff members ASTRI established in 2000 to conduct industry-oriented

applied R&D Photonics technologies, internet applications, wireless

communications and IC design

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4. Innovation Governance of Hong Kong Public R&D Funding

12

Public R&D Investment and Portfolio (1/3)

Insufficient level of R&D intensity: 0.81% China’s R&D : 1.42% in 2006 and to reach 2% by 2010

Beijing, Shanghai and Guangdong in 2005: 5.5%, 2.3% and 1.1% respectively

Taiwan and Singapore: Both setting a goal to raise R&D intensity to the 3% level around 2010

The resource allocation of public R&D in HK intrinsically short-termism R&D initiatives funded by ITC by and large short-term-oriented,

dispersed and reactive type, at most individual programme-specific or technology policy by nature Short of long-term, integrated type of R&D and innovation

initiatives, or “innovation policy” in a broad sense ASTRI: Mainly doing development work, not genuinely forward-

looking research Because of the short time spans of the projects

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Public R&D Investment and Portfolio (2/3)

Lessons learned in OECD Budgetary practices often promote short-term thinking and

in some cases undermine strategic, long-term policy making To reduce fragmentation and create critical mass and

excellence in the public research sector Finland: Strategic Centre for Science, Technology and

Innovation (SHOKs) A new way of coordinating dispersed research resources to

meet targets important for Finnish business and society Companies, universities and research institutes working

together to formulate a jointly-agreed research plan to meet the application needs for practical application by member companies within a 5-10-year period

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Public R&D Investment and Portfolio (3/3)

Recommendation: HK to have a more balanced R&D portfolio Public R&D investment in long-term strategic topics

A more flexible governance relationship between the funding agencies and the research institutes needed

Public R&D expenditure in service innovation, systemic service innovation in particular Controversies around the factor of de-linking of R&D

and manufacturing in terms of location “Enclave” vs. leverage on the mainland

To build strength on strength and serve as a “testbed” for brand new service innovation Demanding needs to trigger service innovation The success of “Octopus Card”

Digital TV services?15

A Four Dimensional Model of Service Innovation

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NEW SERVICECONCEPT

(DIMENSION 1)

NEW CLIENTINTERFACE

(DIMENSION 2)

NEW SERVICEDELIVERY SYSTEM

(DIMENSION 3)

TECH-NOLOGICAL

OPTIONS(DIMENSION 4)

organisational

capabilities

HR

Mca

pabi

litie

s

marketing & distributioncapabilities

capabilities, skills & attitude of existingand competing service workers

char

acte

rist

ics

of e

xist

ing

and

com

peti

ng s

ervi

ces

char

acte

rist

ics

of a

ctua

l a

nd p

oten

tial

cli

ents

© Dialogic

Source: den Hertog (2001, p.4).

When promoting systemic service innovations, the government needs to adopt a holistic and flexible approach, which will be different from that to the promotion of manufacturing-centric R&D or technology-centric initiatives.

The Funding Mechanism and Institutional Arrangements (1/6)

The research institutes in HK deficient in their R&D portfolio & short of capital for making strategic investment The funding schemes by ITC: Short term-oriented, dispersed and

reactive type ASTRI: constrained to pursuing development work and/or me-

too projects Compounded by ITC’s requirement of 10 % of industrial

contribution basically for each project The business sector in HK: A strong preference for short-term

profitability DoIT’s funding schemes in Taiwan for research institutes:

Different types of research and/or strategic investment Ranging from pioneering technology research, the building-up of

infrastructure required, to large-scale R&D facilities The assessment procedures varying across different types of the

funding schemes17

The Types of Funding Schemes for Research Institutes, Administrated by the DoIT in Taiwan

ITRI, with financial support from the DoIT, can propose and conduct long-term R&D projects, say up to four or five years. Annual reviews for checking progress still needed

The assessment procedure for the Pioneering Technology Research Program is conducted by ITRI itself in order to provide appropriate room and flexibility for the formation of more creative projects. External and overseas reviewers with international reputation called upon to the

assessment committee.18

1. Pioneering Technology Research Program (獨立性創新前瞻計畫 )

2.Key Technology Base Program (關鍵性計畫 )

(1)Forward-Looking R&D Program (創新前瞻類 )

(2)Key Technology/Product Program (關鍵技術 /產品類 )

(3)Infrastructure-Building Program (環境建構類 )

3.Large-scale R&D Facilities Program (獨立型環境建構計畫 )

(Unofficial Translation)

The Funding Mechanism and Institutional Arrangements (2/6)

10 % of industrial contribution to ensure industry-orientation Some local professionals: This requirement troublesome and

rigid ASTRI: Some flexibility shown by ITC, allowing ASTRI to get

an average of 10% from a number of projects rather than a full 10% for each project

Our views: Not so unreasonable as it looks The problem: ITC’s R&D funding schemes for research institutes

not so diversified as the case of the DoIT in Taiwan Recommendation: ITC to provide a wider variety of R&D

schemes for the research institutes Some of the schemes still demand industrial sponsorship, while

others allows the research institutes to involve strategic R&D even without industrial participation right from the beginning.

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The Funding Mechanism and Institutional Arrangements (3/6)

Some unease with the regulation that approval from the Finance Committee of the Legislative Council required for project requesting more than HK$15 million each from ITF From October 2008, the financial ceiling is increased from

HK$15 million to HK$21 million For such projects to kick off, the research proposals have to

go through five panels. internal review, industrial review, technology review, ITC review

and board of directors, plus the Legislative Council Recommendation: As funding practices in many countries,

the technology review committee given authority to make decisions, before reporting to ITC for final approval

20

The Funding Mechanism and Institutional Arrangements (4/6)

Project management on the part of ITC criticized Not to tolerate any changes in the projects Outputs from the R&D projects specified beforehand

DoIT in Taiwan: Tolerate failures in some cases, while evaluates the performance of the research institutes from a long-term perspective Esp. regarding forward-looking and risky programme, as the

Pioneering Technology Research Program Recommendation: ITC to reduce administrative

micromanagement Changes in projects up to certain extent allowed and endorsed

mainly by the review committee rather than all the way by the ITC, except for major changes

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The Funding Mechanism and Institutional Arrangements (5/6)

The R&D centres not truly engaged in R&D activities Some of them: serving simply as a project office, creating an additional

layer of bureaucracy between ITC and the other innovation actors The projects funded by the R&D centres not that different from

those funded by some other major schemes by ITC Recommendation: Upon completion of their project time span, ITC

to conduct an intensive evaluation on the performance of the individual R&D centres To review the R&D centers’ business plan, to be formulated by the

centers and their major stakeholders, which should be in line with ITC’s long-term strategy, if any.

ITC to make a critical decision for the consolidation of the Programme in the near future A mismatch between public R&D and private R&D

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The Funding Mechanism and Institutional Arrangements (6/6)

Shortage of dedicated professional (technology manager) for the promotion of technology transfer on the part of the research institutions and universities ASTRI’s R&D personnel to shoulder the work of R&D and the

promotion of technology transfer at the same time Taiwan: Research institutes have dedicated units for technology

transfer and/or technology management DoIT providing the research institutes with resources required through

the Infrastructure-Building Program. Recommendation: ITC to step up its efforts in this regard

HK to take advantage of the training and supporting system built by the Association of University Technology Manager (AUTM) in the US and/or the Association of University Technology Managers (AURIL) in the UK to train and recruit the technology managers required

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5. Conclusions

If HK’s R&D investment keeps move at the same pace or cannot manage to catch up with its neighboring economies for years to come, it will be unrealistic for HK to become an “innovation hub” in the region

If the funding mechanism and institutional arrangements continue to work based on administrative mindset, HK’s innovation governance will be undermined.

Recommendation: To solve the above problems from a long-term perspective, the HK government as a whole to follow the example set by its neighboring economies to promulgate a HK version of “Science and Technology Basic Law” that can facilitate the speeding-up of public R&D investment with “additionality” and the sound development of innovation governance

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Thank you for your AttentionComments More Than Welcome

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R&D Expenditure by Performing Sector, 2002-2006

26

Sector R&D expenditure (HK$ million)

2002 2003 2004 2005 2006

Business 2,505.8 3,545.1 4,590.3 5,621.6 6,287.4

<33%> <41%> <48%> <51%> <53%>

[0.20%] [0.29%] [0.36%] [0.41%] [0.43%]@

Higher education 4,800.7 4,796.2 4,707.3 5,085.0 5,410.9

<64%> <56%> <50%> <47%> <45%>

[0.38%] [0.39%] [0.36%] [0.37%] [0.37%]@

Government 237.1 207.5 207.6 215.2 248.6

<3%> <2%> <2%> <2%> <2%>

[0.02%] [0.02%] [0.02%] [0.02%] [0.02%]@

Total 7,543.6 8,548.8 9,505.2 10,921.8 11,946.9

<100%> <100%> <100%> <100%> <100%>

[0.59%] [0.69%] [0.74%] [0.79%] [0.81%]@

Notes: Figures in < > represent the percentages to total. The percentages in a year may not add up to 100 due to rounding.Figures in square brackets represent the ratios to GDP. The GDP estimates are based on the data on expenditure-based GDP estimates at current prices released on 27 February 2008.@ Figures are subject to revision later on.

Source: Adapted from HKCSD (2008a).

Innovation and Technology Fund:Distribution of Approved Projects among Different Industrial

Sectors (as at 30/9/2008)

27

Programme

Innovation and Technology Support

ProgrammeGeneral Support

Programme

University-Industry Collaboration Programme

Small Entrepreneur Research Assistance

Programme Total

Industrial Sector No $mn No $mn No $mn No $mn No $mnBiotechnology 77 236.3 5 2.8 37 62.9 23 22.6 142 324.4

Electrical and Electronics 225 1,120.3 3 2.8 37 31.6 74 76.1 339 1,230.9

Environmental 19 44.2 1 1 8 19.6 12 12.5 40 77.3

Information Technology 139 709 8 9.6 42 49.1 139 144.2 328 912.1

Foundation Industries 135 667.4 4 3.2 46 27.9 13 12.6 198 711.0

Textiles/Clothing/Footwear 55 223.5 1 0.4 5 3.3 4 3.2 65 230.4

General (Cross Sectors) 3 37.7 84 92.9 - - 1 0.9 88 131.5

Others 6 20.9 10 17.0 - - 10 8.3 26 46.1Total 659 3059.3 116 129.7 175 194.3 276 280.4 1226 3663.7

Note: There may be a slight discrepancy between the sum of individual items and the total as shown in the tables owing to rounding.

Source:http://www.itf.gov.hk/eng/statistics/StatTable104View.asp?StatTypeId=104&StatId=517&StatCaption=Distribution+of+Approved+Projects+among+Different+Industrial+Sectors.

Funding Indicators of the Major Funding Schemes under the Auspices of the ITC, 2006-2008 (1/2)

28

2006(Actual)

2007(Actual)

2008(Estimate)

ITSPΨApplications received and processed 126 137 137Projects funded and being monitored 117 116 144

TCFSApplications received and processed 62 51 60Projects funded and being monitored 58 90 103

R&D centres’ projectsφ

Automotive Parts and Accessory Systems R&D Centre New projects -- 9 39Projects funded and being monitored -- 9 48

Hong Kong R&D Centre for Information and Communications Technologies

New projects 16 35 43Projects funded and being monitored 16 51 93

Hong Kong R&D Centre for Logistics and Supply Chain Management Enabling Technologies

New projects -- 8 13Projects funded and being monitored -- 8 21

Nano and Advanced Materials Institute New projects -- 5 48Projects funded and being monitored -- 5 53

Hong Kong Research Institute of Textiles and Apparel New projects -- 13 20Projects funded and being monitored -- 13 33

Funding Indicators of the Major Funding Schemes under the Auspices of the ITC, 2006-2008 (2/2)

29

Notes:ΨThe figures do not include applications submitted by or projects undertaken by the five R&D centres and the ASTRI, which are reported under the indicators “R&D centres’ projects” and “ASTRI projects”.φAll projects (including TCFS projects and feasibility studies) undertaken and/or monitored by R&D centres are included. For the Hong Kong R&D Centre for Information and Communications Technologies (ICT R&D Centre), the actual figures for 2006 have been updated to include feasibility studies.@The figures do not include projects undertaken by the ICT R&D Centre hosted by the ASTRI, which are now reported under the new indicator “R&D centres’ projects”. Separately, the actual figures for 2006 have been updated to include feasibility studies undertaken by the ASTRI.

Source: Adapt from ITC, Controlling Officer’s Report (2008).

2006(Actual)

2007(Actual)

2008(Estimate)

ASTRI projects@New projects 8 -- --Projects funded and being monitored 32 25 11