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Asia Pacific / Hong Kong

The state of play: FDI in Hong Kong

With a regulatory system built on the UK models and English widely spoken, Hong Kong offers a comfortable gateway for Western investors entering Asia – but is this advantage crumbling?

HongKong-fdi-skyline
Despite its small size, Hong Kong has been an FDI giant for a number of years, but civil unrest in the country could threaten its reputation. (Photo by Anthony Wallace/AFP via Getty Images)

Foreign direct investment (FDI) into Hong Kong has performed very strongly in the years since the financial crisis, averaging $103bn annually between 2009 and 2018, according to data from the UN Conference on Trade and Development (UNCTAD).

Such growth is reflected in Hong Kong’s stock of FDI inflows, which almost quadrupled between 2005 and 2019 to reach $1.85trn in 2019.

All good things, however, have a lifespan. Due mainly to the political unrest – which tends to negatively impact investment figures – that has rocked Hong Kong since early 2019, FDI fell to $68bn in 2019, representing a 34% year-on-year decline, according to UNCTAD. Meanwhile, greenfield FDI dropped by 12% in 2019, with 151 projects registered that year, according to The fDi Report 2020.

“The FDI outlook for Hong Kong is bleak because of declining corporate earnings and the impact of the continuing social unrest on the economy,” said UNCTAD’s 2020 World Investment Report. “High reinvested earnings by multinational enterprises is a key feature of FDI in the economy. Some 80% of FDI between 2013 and 2018 was financed through reinvested earnings of affiliates.”

Hong Kong remains an FDI force

Despite this negative trend, Hong Kong still ranked as the seventh most attractive destination in the world for FDI in 2019, and within developing Asia it was the second-largest recipient after China, followed by Singapore, India and Indonesia, according to UNCTAD.

Hong Kong is a hub for foreign multinational enterprises’ regional headquarters, and the vast majority of FDI goes to service sector operations; more specifically, investments in holding, real estate, finance, insurance and banking, according to the Hong Kong Statistics Office (HKSO).

The main sources of investment to Hong Kong are the British Virgin Islands, mainland China, the Cayman Islands, Singapore, Bermuda, Japan and the US, in that order, 2017 data from the HKSO shows.

One of Hong Kong’s key attractions is its strategic position (acting as a gateway to the Chinese market), as well as its status as a free port, a simple tax system that provides many incentives, and good infrastructure and judicial security, according to Santander Trade, a leading provider of international market information.

Indeed, Hong Kong has one of the world’s best regulatory systems for paying taxes. It ranks third out of 190 countries in terms of its business climate, according to the World Bank’s Doing Business ranking for 2020.