Adaptive Response: Entrepreneurship and Economic Development in Hong Kong
by Tony Fu-lai Yu

A thesis submitted in fulfilment
of the requirements for the degree of
       Doctor of Philosophy
School of Economics and Management
          University College
   University of New South Wales
  Australian Defence Force Academy
          Canberra, Australia
December 1995


I hereby declare that this submission is my own work and
that, to the best of my knowledge and belief, it contains no
material previously published or written by another person
nor material which to a substantial extent has been
accepted for the award of any other degree or diploma of a
university or other institute of higher learning, except where
due acknowledgment is made in the text.



Abstract            vi
List of Tables        viii
List of Figures       xiii
Acknowledgements   xiv

Chapter 1 The Economic Success of Hong Kong: a Search for an

1.1 From a 'Barren Island' to the Mart of East Asia 1
1.2 Explanations of Hong Kong's Success 5
1.3 The Failure of the Orthodox Economic Explanations 10
1.4 Overlooked: the Role of Entrepreneurship 13
1.5 The Objective of This Study 15

Chapter 2 A Critique of the Orthodox Perspective of Economic

2.1 The Orthodox Perspective of Economic Development 18
2.2 Critiques or the Orthodox Perspective of Economic Development: 29
Schumpeter; Neison and Winter; Baumol: Leibenstein; and Kirzner
2.3 A Need for a New Perspective of Economic Development 42

Chapter 3 Towards an Entrepreneurial Perspective of Economic

3.1 Schumpeterian and Austrian Modes of Entrepreneurship 44
3.2 The Interactions between the Two Modes of Entrepreneurship
in Economic Development 48
3.3 The Two Modes of Entrepreneurship Compared 51
3.4 Factors Promoting Austrian Entrepreneurship 54
3.5 Austrian Entrepreneurial Strategies in the Asian Newly
Industrializing Economies 61
3.6 Austrian Entrepreneurial Activities and Structural Change 72
3.7 The Dynamic 'Catching Up' Process in Late
Industrializing Economies 78

Chapter 4 Propositions and Methodology

4.1 The Principal Propositions 83
4.2 Methodology: The Integration of Micro and Macro Analysis 87
4.3 Questionnaire Survey and Case Studies 89

Chapter 5 The Hong Kong Environment and Entrepreneurship

5.1 Hong Kong as an Entrepreneurial Society 95
5.2 The Hong Kong Environment and Austrian Entrepreneurship 104

Chapter 6 Entrepreneurship in the Manufacturing Sector

6.1 Hong Kong's Industrial Structure 118
6.2 Small firms, Opportunity Exploitation and Flexibility 125
6.3 Subcontracting 132
6.4 Product Strategy 135
6.5 Spatial Arbitrage 137
6.6 Changing Economic Activities Within the Manufacturing Sector 143

Chapter 7 Adaptive Response In the Textile and Garment Industry

7.1 Hong Kong's Textile and Garment Industry 148
7.2 Small Scale Enterprise and Short Term Planning Horizon 152
7.4 Product Imitation. Technology Adoption and R&D 153
7.5 Subcontracting and Customer Label Garment Business 161
7.6 Spatial Arbitrage 168
7.7 Entrepreneurial Strategies and Economic Performance 175

Chapter 8 Adaptive Response in the Electronics Industry
8.1 Hong Kong's Electronics Industry 180
8.2 Entrepreneurship in Hong Kong: Opportunity Arbitrageur 183
8.3 Small firms, Flexibility and Short Term Planning Horizon 185
8.4 Subcontracting, OEM Business and Brand Policy 189
8.5 Technology and Product Imitation Strategies 196
8.6 Spatial Arbitrage 205
8.7 Entrepreneurial Strategies and Economic Performance 216


Chapter 9 Entrepreneurship, Structural Change and Catching Up

9.1 Effect on Structural Change 219
9.2 The Increasing Dominance of the Tertiary Sector 226
9.3 Catching up in the World Development: David versus Goliath 232
Chapter 10 Lessons for Developing Economies

10.1 An Entrepreneurial Approach to Economic Problems 254
10.2 The Limitations of the Principle of Comparative Advantage 257
103 The Role of Government in Economic Development 261
10.4 The Emergence of New NIEs in Future 275

Chapter 11 Conclusions

11.1 Hong Kong is an Entrepreneurial Economy 283
11.2 The Hong Kong Environment Has Incubated
Austrian Entrepreneurship 285
11.3 Hong Kong's Economy Has Been Driven Principally by Austrian
Entrepreneurship in the Forms of Small Scale Enterprise,
Product Imitation, Subcontracting and Spatial Arbitrage 286
11.4 Austrian Entrepreneurial Activities Have Brought about
Structural Change of the Economy 290
11.5 Outstanding Performances of Austrian Entrepreneurship
Have Enabled Hong Kong to Catch vp with Developed Nations 292
11.6 Policy Implications 293

Bibliography 295
Appendix I The questionnaire 320
Appendix II Cases from the electronics, textile and garment industries 325



This study examines the role of entrepreneurship in the economic
development of Hong Kong. It questions the orthodox perspective of
economic development, and introduces an entrepreneurial perspective
based on a conception of two (Schumpeterian and Austrian) modes of
entrepreneurship. The principal propositions of this study are that.

@ Hong Kong is an entrepreneurial society,
@ its environment has been conducive to the development of Austrian
@ Austrian entrepreneurship is manifested in the forms of product imitation,
  small scale enterprise, subcontracting, and spatial arbitrage,
@ Austrian entrepreneurial activities have brought about structural changes
  in the economy, and
@ enabled Hong Kong to catch up economically with more advanced
The empirical research focused on both specific manufacturing firms and
industries, and the aggregate economy. A questionnaire survey and case
studies of Hong Kong's electronics, textile and garment firms were
conducted in 1994, and various primary and secondary documentary data
sources were also used to support the argument that the economic success
of Hong Kong is attributable principally to Austrian entrepreneurship.
The evidence shows that Hong Kong, with a small open economy and
limited natural resources, has relied significantly on exports and small family
businesses. Political uncertainty, together with a pro-business government
and loose enforcement of patents, have compelled local manufacturers to
be alert to change, to take a short term view in their investments, and to
keep their production flexible.


The majority of firms adopted imitative strategies and many of them survived
on very small profit margins. Innovative strategies were seldom adopted.
Using Austrian entrepreneurial strategies, local manufacturers learnt from
foreign firms and imitated their products. By selling improved commodities at
lower prices, they competed against the original suppliers from more
advanced countries. Being alert to opportunities and responding rapidly to
change, Hong Kong's entrepreneurs have also shifted their production
activities from one product to another: from higher cost to lower cost
regions; from traditional fishing and agriculture into manufacturing, and then
to finance and other services. By these means, Hong Kong has been
transformed from a "barren island" into one of the most prosperous
economies in East Asia.


List of Tables
5.1 Distribution of Entrepreneurs' Motivation for Starting
Their Businesses (%) 97
5.2 Types of Industry of the First Job of Entrepreneurs and
their Present Enterprise 97
5.3 Reasons for Leaving First Job 100
5.4 A Comparison of the Establishment-Population Ratios
     Among Hong Kong, Singapore and Taiwan, 1986 100
5.5 A Comparison of the Numbers of Firms, New Incorporation
      Rates and Failure Rates in Hong Kong and the US, 1981-1992 101
5.6 General Government Consumption as a Percentage
      of GDP, 1965 and 1990 108
5.7 Number of Work Stoppages, 1969-1987 108
5.8 Distribution of Birth Order of Entrepreneurs in Hong Kong (%) 108
5.9 The Participation of Entrepreneur's Spouses/Relatives
       in Medium/Small Firms, 1987 115
5.10 Employing Relatives in the Manufacturing Industries 115
5.11 Employing Relatives in Hong Kong Spinning Mills 115
6.1 Hong Kong・s Manufacturing Gross Output,
       1973-1991, Selected Years 119
6.2 Number of Persons in the Manufacturing Sector,
       1950-1991, Selected Years 121
6.3 The Export Contribution of Hong Kong's Manufacturing
       Industries, 1950-1991 122
6.4 Number of Establishments and Persons Employed
      in the Manufacturing Sector 124


6.5 Distribution of the Number of Establishments in the Manufacturing
      industry by Number of Persons Employed, 1977, 1983. 1992 (%) 124
6.6 Contributions of Small and Medium Manufacturing Firms
      to Hong Kong by Size, Selected Years 129
6.7 Reasons for Small Firms not Expanding in Next Three Years 129
6.8 Overtime Work and Problems in Delivery in Small Manufacturing
      Enterprises 129
6.9 Sources of Orders for Small Business Enterprise, 1978, 1988(%) 133
6.10 Product Strategies in the Manufacturing Industry, 1970 133
6.11 Product Strategy and Growth Rates of Chinese Firms 133
6.12 Major Problems Envisaged by Small Entrepreneurs (%) 138
6.13 Motivations for Hong Kong's Firms to Invest Overseas 138
614 A Comparison of Wage Rates in Manufacturing Industry
      Between Hong Kong and China 138
6.15 A Comparison of the Purchase Prices and Monthly Rentals
       of Flatted Factories 140
6.16 Hong Kong's Investment in China by Types. 1979-1984 140
6.17 Forms of Investment Chosen by Hong Kong Investors
       in the Pearl River Delta, China, 1992 142
6.18 Outward Processing Trade with China, 1992 142
6.19 Outward Processing Trade by Commodity, 1989 142
6.20 Investment of Hong Kong Manufacturing Firms
      in the Pearl River Delta, China. 1992 144
6.21 Distribution of Hong Kong's Industrial Establishments
      in the Pearl River Delta, China 144
6.22 Performance of the Investments in the Pearl River Delta,
      China, 1992 144
6.23 Change in the Number of Establishments by Types of
       Electronics Products, 1982 and 1992 144
6.24 Export of Hong Kong's Electronics Products,
       1965-1992, Selected Years 146
6.25 Change in the Number of Establishments in the Textile
      and Garment Industry 1982-1992 146
7.1 Hong Kong's Textile and Garment Industry 150
7.2 Market Locations of the Textile and Garment Products 150
7.3 Distribution of the Textile and Garment Firms by
      Number of Workers Employed (%) 150
7.4 Change in Products or Designs in the Last 12 Months 154
7.5 Expected Payback Period Among Textile and Garment Firms 154
7.6 Product Strategies Employed by Textile and Garment Firms 154
7.7 Skill Levels of Textile and Garment Employees, Selected Years 158
7.8 R&D Activities Among Textile and Garment Firms 158
7.9 Distribution of Establishments Which Carried out R&D
      Regularly by Size of Firms (%) 158
7.10 Reasons for Subcontracting (%) 162
7.11 Value of Subcontract as a Percentage of Total Sales (%) 162
7.12 Customer Label Garment, Design Specification and Brand Policy 166
7.13 A Comparison of Wage Rates Between Hong Kong
      and Shekou in the Garment Industry 1986 170
714 Relocation of Production Activities 170
7.15 Total Turnover of Goldlion (Far East) Ltd.
     by Regions, 1988 and 1992 176
7.16 Entrepreneurial Strategies and Firms' Performance (%) 176
8.1 Market Locations of Hong Kong's Electronics Products 182
8.2 Market Share of the Electronics Exports from Hong Kong,
      1965-1992, Selected Year (% by Value) 182
8.3 Average Size of Hong Kong's Electronics Firms, 1961-1992 182


8.4 Distribution of the Electronics Firms by Number
      of Persons Employed (%) 187
8.5 Change in Products for Designs in the Last 12 Months 187
8.6 Lead Time for Product Development and Assembly
     in the Electronics Industry, 1988 187
8.7 Expected Payback Period 187
8.8 On Subcontracting 190
8.9 OEM Business and Brand Policy 192
8.10 Distribution Channels for Local Companies 194
8.11 On R&D Spending 194
8.12 R&D by Size of Establishments and by Origin of Investment 194
8.13 Skill Levels of the Electronics Employees, Selected years(%) 198
8.14 Product Strategy 200
8.15 On Spatial Arbitrage 207
8.16 Investment of Hong Kong Electronics Firms in the
     Pearl River Delta, 1992 209
8.17 Performance of Hong Kong's investment in the
     Pearl River Delta, 1992 209
8.18 Favourable Locations of Hong Kong's Investment in the
     Pearl River Delta, 1992 209
8.19 Reasons for Choosing the Pearl River Delta as a Production Base 210
8.20 Forms of Investment Chosen by Hong Kong Electronics
      Manufacturers in the Pearl River Delta 1992 210
8.21 Entrepreneurial Strategies and Firms' Performance (%) 210
9.1 Number of Firms by Activities 221
9.2 Number of Persons Engaged by Activities 221
9.3 Distribution of Working Population by Sector, Selected Years(%) 223


9.4 Percentage Contribution by Sector to GDP 223
9.5 Technical Progress and Foreign investment 240
9.6 A Comparison of Hong Kong's Technological Levels
      with Japan, 1978 240
9.7 Classification of Selected Economies by Income, 1992-3 240
9.8 A Comparison of Living Standards, Selected Countries, 1995 243
9.9 The Performance of Hong Kong in the Global Development 250


List of Figures
1.1 Hong Kong's Economic Growth, 1948-92, Selective Years 3
1.2 Hong Kong・s Average Annual GDP Growth (%) 4
6.1 Distribution of the Number of Establishments in the
      Manufacturing Industry by Number of Persons Employed 127
7.1 Share of the Textile and Garment Industry in Hong Kong's
     Total Manufacturing Gross Output (% by Gross Output Value) 149
7.2 Share of the Textile and Garment Industry in Hong Kong's
     Total Export (% by Export Value) 149
8.1 Skill Levels of the Electronics Employees (%) 198
9.1 Percentage Contribution by Sectors to GDP 224
9.2 Changes in Hong Kong's International Competitiveness
      by Resource Intensive Categories 242
9.3 Catching Up in East Asia 245
9.4 Changes in Per Capita Income 246
9.5 Per Capita GDP, Selected Countries, 1995 248
9.6 Welfare Level 249
9.7 Human Development Index 1994 249


Confucius said, "isn't it a great pleasure to learn and relearn again?" Yes,
for the past four years, I enjoyed very much studying at the University
College, an ideal environment (or learning. I would like to take this
opportunity to acknowledge those who assisted me to fulfill my PhD goal.
Choosing a thesis topic is a difficult and risky business. I am happy to have
found an important and challenging one. I thank my supervisor, Dr. Cheah
Hock Beng, who helped me to identify this relatively unexplored research
opportunity. Furthermore, he read and commented on this work at several
stages of its evolution. 1 owe him an unmeasurable debt of gratitude for the
time, effort and patience he has put into improving this work. Without him,
This achievement would not have been possible.

I would like to express my high regard for Prof. Paul L. Robertson, my co-
supervisor. Over the years, I have learned so much from him, not only
intellectual knowledge, but also the characteristics of a gentleman scholar.
He offered me help even when he was extremely busy. He has
demonstrated to me gentility and hospitality, and encouraged my desire to

I am grateful for the financial support of the School of Economics and
Management in my field work and conference participations. I am also
deeply indebted to dev. Prof. Paul A. McGavin, for his kind assistance and
sincere care.

During the field trip in Hong Kong, I was fortunate to be affiliated to the
Centre of Asian Studies at the University of Hong Kong. This helped me to
successfully conduct my Survey interviews. In addition, the Hong Kong
Productivity Centre, Hong Kong Census and Statistics Department, Hong
Kong Trade Development Council and Hong Kong Social Research Centre
kindly supplied me with useful information and data. I also express my
gratitude to those founders/managing directors of the manufacturing firms
who sacrificed their valuable time for my interviews and provided me with
useful materials for my survey and case studies.
This research has also benefited greatly from discussions with and
comments from Lawrence L.C. Chau, Peter Hall, Israel M. Kirzner, Richard
N. Langlois, Oary Manger, Stefan Markowski, Adui M. Masih, Hafiz Mirza,
Robin Pope, Wee L. Tan, Lawrence H. White, Siu L. Wong, and
participants from various conferences and School seminars. Naturally, 1
take full responsibility for any errors and shortcomings that remain.

Chapter l
The Economic Success of Hong Kong:
     a search for an explanation
1.1 From a 'Barren Island' to the Mart of East Asia

When Hong Kong was ceded to the British in perpetuity by the Treaty of
Nanking in 1842, Queen Victoria was most distressed to know that only a
piece of useless granite was added to her Empire. The British Foreign
Secretary Lord Palmerston dismissed Captain Charles Elliot for the reason
that Elliot had "obtained the cession of Hong Kong, a barren Island with
hardly a House upon it. Now ii seems obvious that Hongkong will not be a
Mart of Trade" (Ho 1992, p.l). However, entrepreneurs saw things
differently. Earlier in 1836, Great Britain's most significant opium trader,
James Matheson conceived the acquisition of Hong Kong Island as a factory
for British, and notably Scottish, traders.  He claimed in The Canton
Register (a weekly newspaper) that "if the lion's paw is to be put down on
any part of the south side of China, let it be Hong Kong, let the lion declare it
to be under his guarantee a free port, and in ten years it will be the most
considerable mart east of the Cape" (Chan 1991, p.21). History has
confirmed the entrepreneur's insights.

But what has puzzled economists is that Hong Kong is only a small city with
approximately six million people living in an area of around 1064 sq, km. It
does not possess any natural resources and has relied on outside sources


for its fuel and raw materials. It has also imported much of its food supplies,
largely from Mainland China. Before the Second World War, the economy
depended almost entirely on entrepot trade. The colony was described by a
visiting American journalist in 1951 as a 'dying city' (Ho 1992, p.5).
This changed, however, when Hong Kong embarked on its export-led
industrialization in the early 1950s and experienced rapid industrialization in
the sixties. Between 1968-71, the average growth rate in real terms was
approximately 20% and by 1971, the per capita income reached HK$6,096,
placing it only behind Japan in the Asian Pacific regions (Aiedel, 1974,
p.11). Since the early 1970s it has been further emerging as a major
financial centre in the Asia-Pacific region. Between 1987-1991, the city was
still growing in real term at an average rate of 6.5% (Chau 1993, p.31). By
1990, the average per capita income in Hong Kong had grown to surpass
that of her colonial motherland, Great Britain, and more investment was then
flowing from the colony to Great Britain than from Great Britain to the colony
(Vogel 1991, p.68). By 1992, the GDP reached HK$742,582 million (see
Figures 1.1, 1.2). After more than three decades of rapid growth, it has
emerged as one of the richest economies in Asia (Chau 1993, p.l). The city
economy has outgrown its historical role as an intermediary in international
trade, and a centre of redistribution in its respective regional markets. It is
now a major international economy in its own right (Ho 1992, p.10). In sum,
Hong Kong has been transformed from a developing economy to one of the
newly industrializing economies in Asia.

This miraculous performance naturally has intrigued economists interested
in economic development. In particular, they asked: "Why the Emperor's




New Clothes are not Made in Colombia but are being made in Hong Kong"
(Morawetz 1981).

1.2 Explanations of Hong Kong's Success

A number of studies have attempted to explain the earlier economic success
of Hong Kong. Szczepanik (1958) presented the first systematic study of
the Hong Kong's post-war growth. He argued that Hong Kong's rapid
industrialization of the 1950s was attributable to its favourable location with
a good harbour, a pool of hardworking labour, the inflow of capital and
entrepreneurs from China, and the system of laissez-faire capitalism (see
also Owen 1971, pp.146-166; Chen 1984, pp.2-4).

However, the significance of natural factors, such as a deep-water port and
a strategic location, to Hong Kong's economic growth has often been
overemphasised (Sung 1991, p.129). Cheung (1984 p.94) argued that,
although Victoria Harbour has provided the entrepot facility and assisted in
Hong Kong's industrialization, the harbour is not as good as the one in
Shanghai. Furthermore, in terms of Asia-Pacific trade, Shanghai is much
closer to Japan and North America (Cheung 1984, p.94). Hong Kong's
products are mainly shipped to the US and European Countries but the
location of Hong Kong is far from them. Similarly, in terms of trade with
China, Hong Kong is less strategically situated than Shanghai but Hong
Kong has surpassed Shanghai in her amount of trade with China.  Hence


location is not a decisive factor in trade and industrializaiion (Sung 1991,
The willingness of Hong Kong's labour force to work hard has often been
regarded as an unique Chinese quality which brings an advantage to its
rapid industrialization, especially in some labour intensive manufacturing
industries. However, this stereotype of the Chinese workforce has not
proved to be tenable in economic analysis. As observed, during the Cultural
Revolution, many workers in China were not willing to work.

Some scholars contended that Hong Kong's economic success has hinged
on its ability to maintain a high degree of competitiveness in its export trade
(Sung 1987). In their view, Hong Kong's manufacturers were able to
produce goods at relatively lower costs, mainly through cheaper labour.
However, many other developing economies with equally low labour costs
as Hong Kong in the past did not develop as successfully as Hong Kong. In
particular, Owen (1971,p.150) noted that :the much favoured explanation of
Hong Kong's success-an abundance of cheap labour is incomplete since
this explanation fails to explain why other Asian countries with abundant
supplies of labour fail to achieve Hong Kong・s rate of economic growth".
Furthermore, while low wages existed in the early period of Hong Kong's
industrialization, in recent years, this advantage has disappeared. In
addition, Hong Kong today exhibits extremely high rentals in the property
market, having probably the second highest rate in Asia after Tokyo.

Therefore, compared to other South East Asian countries, I-long Kong at
present does not possess a strong advantage.

Apart from Szczepanik (1958), other important works on Hong Kong such as
Owen (1971), Riedel (1974) and Chen (1979, 1984) also noted the
influences of the inflow of capital and entrepreneurship contributing to the
early industrialization of Hong Kong. In general, these economists argued
that the influx of capital and Shanghainese entrepreneurs from Mainland
China during the period 1948-1951 led to the immediate expansion of the
textile industry which formed the basis of subsequent industrialization (Owen
1971, p.148, Chen 1984, p.3). Unfortunately, like Szczepanik's work, most
subsequent studies had not seriously examined the role of entrepreneurship
in the economic development of Hong Kong.
Hong Kong has also been described as the last bastion of laissez-faire
(Rabushka, 1979). 11 is generally known that the tax rates in Hong Kong are
low. The profit tax ranges from 15.5% to 16.5% and the income tax is set at
a standard rate of 15% for the higher income group. Also, there is no
foreign exchange control nor a central bank. Except in land and housing,
government interventions in economic affairs are minimal. This philosophy
has been coined as positive non-interventionism by the former Financial
Secretary of the Colony, Sir Philip Haddon-Cave.  Hong Kong's economic


miracle has been cited by Milton Friedman (1976) as a classic illustration of
the benefits of free market policy. But the difficulty of this argument lies with
the fact that the governments of three other successful NIEs, namely
Singapore, Taiwan and South Korea have all introduced many interventions
in and controls on their economies during industrialization. It is said that
their development has been engineered by their governments and are
prototypes of government-led growth (Deyo 1987, p.17; Soon 1994, pp.144-
147). If so, laissez faire policy is not necessarily the only prescription for

In agreement with Milton Friedman and other Chicago economists, Cheung
(1984, p.97) insisted that the private property rights system is the key to
Hong Kong's economic growth. He argued that the most significant
contribution of the British Government has been to establish a system of
private property rights in Hong Kong so that people can pursue their own
interests with minimal transaction costs.

A review of the literature indicates that most economists utilized orthod0x
theories, particularly the Cobb-Douglas production function and the theory
of comparative advantage to explain the economic development of Hong
Kong. For instance, Riedel (1974) presented an orthodox treatment of Hong
Kong's economic growth. He maintained that an important feature of the
industrialization of Hong Kong had bean the manufacture of standardized
consumer goods for export. The Cobb-Douglas production function was
employed to identify the contributions of labour, capital and technical
change to Hong Kong's industrial growth. Riedel (1974, p.35) concluded
that "Hong Kong has been successful because she has done well what she
can do best. The orthodox trade theory goes far in explaining what Hong


Kong can do best, i.e., where her comparative advantage lies". As will be
argued later in this study, entrepreneurs can change a given resource
situation. Without exploring the role of entrepreneurship. Riedel's work is
simply a tautology.

A quantitative model based on the Cobb-Douglas production function was
employed by Hsueh (1976) to explain Hong Kong's economic growth. Tsiang
and Wu (1985) also used a modified neoclassical growth model to illustrate
the growth experience of the Asian NIEs. In their model, technological
improvement and foreign trade are the most important factors for economic
growth. They argued that the basic condition for take-off into self-sustained
growth is that there should be enough savings to increase the capital/output
ratio. They estimated that Hong Kong 'took off' in 1965.
On the demand side, Hsia. Ho and Lim (1975) constructed an input-output
table to estimate the contribution of exports, consumption and investment to
the GDP growth over the period 1962-1970. Hsueh and Chow (1981) later
developed a dynamic macroeconomic model to trace the growth path of the
Hong Kong economy from 1963-1979. Multipliers were derived to measure
the impact of some exogenous variables such as exports, government
expenditures and interest rates on GDP, private consumption, imports and
capital formation. This type of analysis is essentially Keynesian and
neglects the supply factors (Ho 1989, p.2). Similarly, Peebles (1988) used
the Harrod-Domar growth model to estimate the economic growth of Hong
Kong for the period 1971-84. His findings strengthened the importance of
capital formation in economic growth.

Using econometric analysis, Chen (1979) tried to identify the various
possible sources of the economic growths of Hong Kong and other Asian
economies. His work focused on the manufacturing sector during the period
1955-70. Like most of the of her studies, the Cobb-Douglas production


function was applied to examine the role of factor inputs, resource
reallocation and total factor productivity in the growth process. His study
concluded that there were other important factors contributing to the growth
and remaining to be explained. In his later work, employing the concept of
comparative advantage, Chen (1985) recommended that Hong Kong's
manufacturers should shift their activities from low value added products
towards high-skill, sophisticated technology products. In his inaugural
lecture, Chen (1988) synthesized economic, cultural and political
considerations into an eclectic model to explain the economic growth of
Hong Kong and other Asian NIEs.

Of all the studies mentioned above, none of them considers the role of
entrepreneurship seriously. Perhaps an exception is Chau (1993). In a
monograph prepared for the World Bank, he look a broad-based approach
to economic development. His study covered various sectors of Hong
Kong's economy, such as industry and trade, banking finance and business
services, the labour market and the property market. Borrowing from Chen's
eclectic model (1988), he concluded that the economic success of Hong
Kong, apart from other factors, is attributable to the government's non-
intervention policy and to dynamic merchant entrepreneurs.

1.3 The Failure of the Orthodox Economics Explanations

Most studies employing the orthodox theories of economic development fail
to give a satisfactory explanation of the economic success of Hong Kong
and other Asian NIEs. Economists in the sixties believed that use of the
Harrod-Domar investment-saving model in economic planning would
accelerate economic growth. With this belief, they predicted that India,
Pakislan and Sri Lanka, which al that time employed socialist planning
techniques, would have an outstanding rate of economic growth.
Specifically, Rosenstein-Rodan (1961, pp.107-38) predicted that by 1976


Sri Lanka would have a higher per capita income than either Taiwan or
South Korea where the average income would be barely 20% higher than
that of India. Most of the big countries in Latin America were predicted to
perform well. Argentina was expected to achieve twice the per capita
income of Singapore in 1976 while almost every country would be doing
better than Hong Kong. Similarly, Chenery and Strout (1966, pp.679-733)
estimated that for the period 1962-76 the GNP of India and Pakistan would
grow faster than that of South Korea. Hong Kong and the other Asian Newly
Industrializing Economies, namely, Singapore, South Korea and Taiwan
were not expected to perform well. Even Colombia was expected to
outperform Hong Kong (Hicks 1989, p.36).
However, the outcome was 'surprising'. Neither the Latin American nor
South Asian nations, but the East Asian Economies, had emerged as
prosperous countries. By 1970, Hong Kong and the other Asian NIEs had
grown for over a decade at average rates much higher than those of either
developed or developing countries. They have created what the World
Bank (1993) called East Asian 'miracles'.
Economists began to turn their attention to the Asian NIEs and searched for
other explanations. Some of them looked into the relationship between
trade and development and questioned the validity of the wisdom of import
substitution. Having discovered that import-substitution, inward looking
industrialization led to high costs and balance of payment difficulties, they
stressed the gains from international trade and the importance of
comparative advantage. Moreover, they called for an alternative, outward
looking industrialization strategy which seems to work so well in the Asian
NIEs (Hicks 1989, p.37).

Based on the theory of comparative advantage, orthodox economists
suggested that government intervention such as tariff protection or wage


policies had distorted the relative prices of factors of production, violated
the law of comparative advantage, and retarded economic growth. A
number of studies, for example, Chen (1987; 1989a, 1989b), Ichimura
(1988) and Dahlman (1989), analysed the economic growth of Hong Kong
and other Asian NIEs by examining their changes in comparative

However, the theory of comparative advantage has severe limitations in
explaining the dynamics of economic change (Lichauco 1988, pp.136-7;
Rodan 1992, p.79). In fact, the governments of the Asian newly
industrialized economies often exhibited entrepreneurship to alter the
prevailing comparative advantages (White and Wade 1988, pp.8, 53).
Rodan (1992, p.79) correctly contended that "If Japan had accepted the
logic of the law of comparative advantage, she would still be a farming
nation today, and a poor one at that. The success of Japan and the newly
industrialized states stems from, among other factors, their rejection of the
neo-classical 'comparative advantage' argument".

Unaware of their shortcomings, orthodox economic theorists in the 1970s,
further stressed the role of shadow price in economic planning and
estimated the effective rate of protection in trade. There had also been an
increasing use of formal mathematical techniques for dealing with choices
under uncertainty. These techniques were applied to a wide range of
development issues, ranging from the effects of different forms of land
tenure on risk-bearing, to the benefits of price stabilization schemes
(Backhouse 1985, pp.388-389) Unfortunately, the addition of highly
sophisticated quantitative techniques moves economic analysis further away
from the human dimension.


Unable to explain the high growth performance of Wong Kong in particular,
and the Asian NIEs in general, some scholars began to examine the
influences of culture on the Asian economic growth. Specifically, Kahn
(1979, p.332) first put the Asian NIEs and Japan in a single group and
argued that "the success of Taiwan and Korea can be attributed to cultural
factors favouring development, excellent management of the economy, the
favourable international and technological climate for growth., and quite
simply, hard work and dedication". Chen (1988) integrated Confucianism
into his development model.

In summary, most studies on the economic development of Hong Kong and
other Asian NIEs have employed Harrod-Domar growth models, the Cobb-
Douglas production function, the Ricardian theory of comparative advantage
and Keynesian development planning. These works have failed to yield a
satisfactory explanation of the economic success of Hong Kong because the
most important prime mover in economic development, namely
entrepreneurship, is missing in their analysis.

1.4 Overlooked: The Role of Entrepreneurship

To explain economic development in a country requires a dynamic theory
which centres around some human agency. This means that a theory of
entrepreneurship is required. In recent years, Chen (1988) admitted that
entrepreneurship and labour are the most important factors of production in
the first stage of export orientation. He attempted to integrate Schumpeter's
theory of entrepreneurship in his model and to explain the East Asian
miracle in terms of Neo-Confucianism. Wu (1989) also employed
Schumpeiei's arguments to explain the economic activities in Hong Kong.
However, the approach in both papers is inadequate. As Wong (1988
p,166) correctly argued, Hong Kong's entrepreneurs, particularly in the

cotton spinning industry, did not fit into the theoretical mould constructed by
Schumpeter. Reviewing the works on overseas Chinese entrepreneurship,
Mackle (1992, p.60) concluded that scholars will need to go beyond the
Schumpeterian concepts of entrepreneurship and take note of more recent
thinking on the subiect.

As noted above, Chau (1993) is the first systematic work that used Kirzner's
theory of entrepreneurship to explain the economic development of Hong
Kong. He argued that the economic dynamics of Hong Kong has been
attributed to what he called 'merchant-entrepreneurs'. A crucial point he
made is that the success of merchant entrepreneurs in Hong Kong is not
confined only to manufacturing, but extends to the tertiary sector as well.

In summary, very few economic works recognized the role of
entrepreneurship in the economic development of Hong Kong. Specifically,
'adaptive entrepreneurship' which is so significant to the economic
development of Hong Kong and other Asian developing economies, has
been neglected. Instead, scholars from other disciplines such as
Geography, Sociology and Management examined the role of
entrepreneurship in the economic development of Hong Kong. Sit et al.
(1979; 1988) and Tuan at al. (1986) presented a comprehensive analysis of
the socio-economic backgrounds of Hong Kong's small business
entrepreneurs. Wong (1988) examined the role of emigrant Shanghai
industrialists in Hong Kong's textile industry. Redding (1988, 1990)
explained the success of the East Asian economies in terms of culture,
specifically the influence of post-Confucian teaching on the business
management of Chinese entrepreneurs; while Siu and Martin (1992)
investigated the factors that made entrepreneurs successful in Hong Kong.
role of emigrant Shanghai


However, none of their works are systematically related to the theory of
entrepreneurship in Economics. Casson (1982, p.9) is correct in claiming
that "the subject area [of entrepreneurship] has been surrendered by
economists to sociologists, psychologists and political scientists. Only the
Austrian school ... still takes it seriously". This study attempts to remedy this

1.5 The Objective of this Study

This study endeavours to bring entrepreneurship back into development
economics. As previously noted, a number of economic studies have
attempted to explain the East Asian miracle. However, very few of them
gave convincing arguments. The principal objective of this study is to
examine the role of entrepreneurship in the economic development of Hong
Kong and demonstrate its importance. Specifically, it attempts to examine
how entrepreneurial activities have enabled Hong Kong to catch up with
early industrialized nations. This research first demonstrates that the city is
an entrepreneurial society. it then investigates how entrepreneurship has
developed out of her unique environment. Our major task is to examine the
form of entrepreneurial strategies employed by manufacturers and their
relationship with firm performance. II also analyses the impact of
entrepreneurial activities on structural transformation in Hong Kong and on
its ability to catch up with the more advanced nations.

To achieve the objective, a theoretical framework is needed. However, a
review of the literature (Chapters 1 and 2) indicates that the orthodox
economic theories have severe limitations and are unable to give a
satisfactory explanation of East Asian dynamics. Therefore, it is necessary
to put forward a new perspective on economic development. Based on
Cheah's (1989a; 1992; 1994) work, Chapter 3 first identifies two distinctive


modes of entrepreneurship, namely Schumpeterian and Austrian modes. In
economic development, they are referred to as creative and adaptive
responses respectively. It is argued that during the dynamic development
process, Schumpeterian entrepreneurs exerted a revolutionary change in
early industrialized economies and created a developing discrepancy in the
world economy (creative response), while Austrian entrepreneurs have had
an evolutionary change on late industrializing economies and attempted to
resolve the discrepancy (adaptive response)(Schumpeter 1947b, Akamatsu
1961; Cheah 1992). Austrian entrepreneurs capitalise on the profit
opportunities by employing business strategies such as small scale
enterprise, product imitation, subcontracting and spatial arbitrage. Finally,
the relationship between Austrian entrepreneurship, structural change and
catching up are discussed.
Chapter 4 summarizes the major propositions and the methods of analysis.
The theoretical model developed in Chapter 3 is applied in this chapter to
explain the economic development of Hong Kong, one of the Asian newly
industrialized economies. Chapter 5 explains the influence of the Hong
Kong environment on the development of Austrian entrepreneurship. The
major empirical analysis is presented in Chapters 6, 7 and 8.

Chapter 6 examines entrepreneurial strategies in Hong Kong's
manufacturing industry while Chapters 7 and 8 present empirical studies on
Hong Kong's textile, garment and electronics industries respectively. Given
that entrepreneurial activities will influence the performances of firms as
well as the economy as a whole, our analysis therefore includes both micro
anti macro levels. Chapter 9 focuses on the relationship between
entrepreneurship and the aggregate performance of the economy.
Specifically, the impact of entrepreneurship on Hong Kong's structural
change and catching up with advanced nations is discussed.


If this study sheds new light on development economics, then we would like
to know what lessons can be learnt from the growth experience of Hong
Kong and its applicability to other developing countries. In particular,
Chapter 10 provides a new viewpoint of the controversial role of government
in economic development. Finally, Chapter 11 summarizes our
entrepreneurial perspective of the economic development of Hong Kong.

Chapter 2

A Critique of the Orthodox Perspective
     of Economic Development

In this chapter, a critique of the orthodox theories of economic development
is presented. This study highlights the ideas of Schumpeter, Baumol,
Leibenstein, Nelson and Winter, and Kirzner. They have all either implicitly
or explicitly criticised the orthodox theories of economic change from an
entrepreneurial perspective. The review implies a need for a different
perspective of economic development.

2.1 The Orthodox Perspective of Economic Development

A. The classical theory of economic growth

Adam Smith, David Ricardo and Thomas R. Malthus were the main
economists of the classical school who, in the late 18th and early 19th
centuries, attempted to discover the causes of economic progress.
According to the classical school, the major objective of political economy
was to discover the causes of long term growth in national wealth. The
classical scholars believed that the problem of growth centred on the ability
to accumulate capital. Other relevant factors in economic development
were the productive power of labour, the division of labour, the expansion
of the market through the promotion of agriculture, trade and commerce,
and the distribution of national income.

The classical economists believed that any economy would develop from a
progressive to a stationary state characterized by a low rate of profit,
subsistence wages, and high rents. Their arguments were based on the


Malthusian population principle, the law of diminishing returns, and the
theory of subsistence wages. In the early stage of development,
population was small, compared to natural resources; hence profits from the
high rate of capital accumulation increased production. High profits also
raised the demand for labour and so pushed up wages. This led to an
increase in population. As the quantity of land was fixed, the classical
economists believed that there were diminishing returns to additional labour
in production. As population increased, the wage bill would consume a
large part of the total product (after rent payments), and reduce the amount
left for prolits. This would reduce the profitability of investment, which in turn
would reduce the demand for labour. In these circumstances, wages would
decline towards a subsistence level. As long as total product after rent
payments was greater than the total wage bill, there would be profits. With
profits, there would be inducement for capital accumulation, higher wages
and population growth. When population increased to the point where total
wages equal total product (minus rent), profits would disappear even with
wages at subsistence level. Stagnation resulted from falling profits and the
consequent choking off of capital accumulation. However, a stream of highly
productive inventions might help to postpone the arrival of the stationary
state (Bhattacharya 1989, pp.24-25).

The analysis of most classical economists suggests an admiration for
laissez faire and minimum government intervention policies to growth. Both
Adam Smith and David Ricardo maintained that individual initiative, applied
in competitive ways to promote individual ends, served the general interest.
Following the traditions of Smith, Ricardo and Malthus, development
economists in the pre-Keynesian period held the view that a properly
functioning market system will stimulate both economic efficiency and
economic growth. This view remained unchallenged until the arrival of
Keynesian economics.


B. Keynes' theory of stagnation and growth

Classical economists had held the view that automatic market adjustments
in a capitalist economy would ensure adequate demand for the amount of
goods produced al full employment. However, the Great Depression in the
1930s flatly contradicted this view. The shock inflicted on the capitalist
system compelled economists to find a solution to the economic crisis.
Keynes suggested state action. In his view, capitalism was essentially a
mechanism capable of being repaired and improved so as to help rather
than hinder human progress. The important difference between Keynes
and the classical economics is that the former sought the remedy in the
modification of laissez-faire capitalism through deliberate state action
whereas the classical thinkers placed their faith in the market mechanism.
On this point, Keynes remarked: "I bring in the Stats: I abandon laissez
faire... because the conditions for its success have disappeared" (Harrod
1951, p.407).

Keynes (1936) placed the aggregate demand function in the centre of his
analysis and introduced the very important concept of effective demand.
Assume initially that the existing aggregate demand is less than the level
required to generate full employment. For Keynes, in a world of
uncertainties, the prevailing profit expectations of investments make it
unlikely that changes in the rate of interest could significantly affect
investment activities and create the volume of investment needed for full
employment. Furthermore, prices and wages are sticky in the short run and
they do not respond rapidly to excess demand or supply because they are
set institutionally by private or public administrative decision. Therefore,
Keynes (1931, p.117) argued:

The savings of individuals do not necessarily materalise in
investments. The amount of investment in capital improvement
depends, on the one hand, on the amount of credit created by
the Bank of England; and, on the other hand, on the eagerness

of entrepreneurs to invest... So far from the total of investment...
being necessarily equal to the total of saving, disequilibrium
between the two is at the root of many of our troubles. When
Investment runs ahead of saving we have a boom, intense
employment, and a tendency to inflation. When investment lags
behind, we have a slump and abnormal unemployment.

For economic recession due to a lack of effective demand, Keynes' solution
was revolutionary. He recommended an increase in aggregate demand
through a direct increase in government expenditure or by government
policies that stimulated private consumption and investment. This
expansionary fiscal policy should be accompanied by an accommodative
monetary policy so that the rate of interest does not rise unnecessarily.
Keynes did not believe that single injections of spending by government
would be enough. What was required was a full-scale and planned public
programme. This is the origin of Keynesian development planning which
gained its popularity in the sixties.

In conclusion, though Keynes made no systematic analysis of
development, his theories have relevance to growth and planning,
particularly to underdeveloped economies (Kurihara 1965, p.19). Keynes'
works gave modern expression to some endogenous elements expressed in
the classical theories such as chronic underconsumption, general
overproduction and the secularly declining rate of profit. Moreover, his
national income analysis provided a base of reference for development
programming and a technical basis for estimating saving, consumption,
investment, employment and other operationally significant variables of
economic development

C. Modern growth theory: the Harrod-Domar Model

Modern growth theories, originating from the works of Harrod (1939) and
Domar (1946), maintained that investment is an important factor in
economic progress. Harrod and Domar built their growth models upon


Keynesian theory and proceeded generally on the basis of the following
assumptions: (1) the operation of a market economy, with no government
intervention, (2) a full employment level of income, (3) a closed economy
(4) no lags in the adjustment process, (5) saving and investment are equal:
ex ante as well as ex post, (6) labour is always employed in fixed proportion
to capital and in elastic supply and (7) the propensity to save and the
capital-coefficient are constant: also the average and marginal propensities
to save and capital output ratios are equal.

Based on these assumptions, they argued that a large increase in
investment is required to start growth. The rate of growth of national
income is given by the ratio of the average propensity to save to the
incremental capital-output ratio. Hence, to increase the growth rate an
increase in saving is required, with the incremental capital-output ratio
being assumed given by the technology. The relationship of supply and
demand is analysed in a Keynesian manner, in terms of saving and
investment. Saving is assumed to be a fraction of output. Investment is
determined by the acceleration principle and depends on the growth of

Harrod's theory centred on the concept of the warranted rate of growth:

... that rate of growth which, if it occurs, will leave all parties
satisfied that they have produced neither more nor less than
the right amount ... it will put them into a frame of mind
which will cause them to give such orders as will maintain
the same rate of growth (Harrod 1939, p.15).

The warranted rate of growth was compared with the natural growth rate
which was defined as "the maximum rate of growth allowed by the increase
of population, accumulation of capitol, technological improvement and the
work/leisure preference schedule, supposing that there is always full
employment in some sense" (Harrod 1939, p.61).


The starting paint of Domar's theory (1946) was the dual role of investment.
On the one hand, it produced demand, via the multiplier, and on the other
hand, it increased productivity capacity. Domar was concerned with the
conditions under which demand would grow at the same rate as productive
capacity. He argued that unemployment depended not on the level of
national income, but on the ratio of income to productive capacity. Domar
distinguished unemployment due to insufficient quantity of demand and
unemployment due to the productivity of investment being less than its
maximum level. The latter might arise if investment were inefficiently
allocated between different uses. Domar came to the conclusion that the
economy would converge towards a degree of capacity utilisation given by
the ratio of the growth rate of investment to the required growth rate, the
latter being given by the same formula as Harrod's warranted growth rate
(Domar 1946, pp.72-73).

The Harrod-Domar model drew pessimistic conclusions about the possibility
of steady growth because of the divergence of the natural growth rate from
the warranted rate. If the natural rate was less than the warranted rate of
growth, then depression would result. It follows that, to ensure growth,
government action is required to make up the deficiency in aggregate
demand-a legacy of Keynes. Given the Harrod-Domar equation, the first
step for economic planners is to try to come up with an estimate of the
incremental capital-output ratio for the nation whose plan is being drawn up.
For the next step, planners can decide on the rate of economic growth they
wish to achieve, in which case the equation will indicate the level of savings
and investment necessary to achieve that growth. Alternatively, planners
can decide on the rate of savings and investment that is feasible or
desirable, in which case, the equation will indicate the rate of growth in
national product that can be achieved.

In general, the Harrod-Domar model applied Keynesian ideas to the
problem of growth and provided a framework within which problems of


development can be tackled. Keynesian macroeconomics has increased the
popularity of aggregate economics, contributing towards the view that
development can be equated with increasing per capita income.

C. The neoclassical growth model: Solow's contribution

Robert Solow is generally regarded as one of the initiators and the most
significant representative of neo-classical growth theory. His refinement of
the Harrod-Domar model through the application of the pre-Keynesian
neoclassical theory of markets which formed the core of orthodoxy before
Keynes, and which is still the basis of orthodox microeconomics today,
provides us with the mainstream version of growth theories. Solow relaxed
some of the assumptions in the Harrod-Domar model and formalized the
neoclassical growth model in mathematical terms.

The rigidities of the Harrod-Domar growth model led economists to explore
theories that permitted greater flexibility. Solow (1956) relaxed the rigid
assumption of a fixed coefficients technology of the Harrod-Domar model
which leads to the pessimistic implication that in a capitalist economy, there
is no self-adjusting mechanism which could make it possible for the natural
rate of growth to arise. Combining variable proportions of the factors and
using flexible factor prices, Solow however showed that the growth path of
output was not inherently unstable. His argument assumed perfect
competition, an assumption not made by either Harrod and Domar.
Through market adjustment, Solow(1956, p.68) argued that "the real return
to factors will adjust to bring about lull employment of labour and capital".
At any time, there are given stocks of capital and labour, with competition
ensuring full employment, and the equality of factor prices to marginal
products. When the prices of labour and capital change, then
corresponding appropriate substitutions are made between the factors of
production. If the labour force grows faster than the capital stock, the price


of labour will fall relative to the price of capital; while if capital outgrows
labour, the price of labour will rise. Output is linked to capital and labour by
a production function. Growth occurs through which a fraction of national
output is saved and invested. Thus, the capital stock is increased. The
labour force is assumed to be growing at an exogenously given rate. If
capital accumulates at a rate different from the rate at which the labour
force is growing, the capital-labour ratio will change, This in turn will cause
factor prices to change. Solow was able to show that, starting from any
arbitrary capital stock, the economy will converge to an equilibrium where
capital and labour grow at the same rate, and where factor prices are

The so called neoclassical growth model today is largely Solow's refinement
of the Harrod-Domar model, in which growth is approached exclusively from
the side of supply (Matyas 1980, p.477). Thus, the production function is
the most important feature of the neoclassical growth model. The standard
neoclassical growth model, expressed in terms of the production function by
Solow, is described as follows.

In the Cobb-Douglas production function, the nation's income depends on
two major factors of production, namely capital and labour, with time as the
exogenous variable allowing for technical change. The model assumes: (1)
perfect competition in both factor and product markets; perfect foresight and
flexibility of wages, prices and interest rates, (2) output and input are
homogeneous and capital stock can be measured, (3) constant returns to
scale, (4) the law of diminishing returns to inputs is assumed to operate,
(5) the law of substitutability between the factor inputs holds so that the
marginal productivity of one factor will be increased when more of the other
factors are added. In other words, capital and labour are perfectly
substitutable and factors of production are paid according to the value of
their margin products and (6) in most cases, technology is assumed to be


disembodied (i.e. not embodied in either capital or labour and hence an
exogenous variable) in the production function (Bhattacharya 1989, p.62).

Employing quantitative optimization techniques, neoclassical economists
are able to analyse the contributions of capital and labour inputs to national
income growth. In their treatment, there is a residual component called the
relative rate of growth of total factor productivity which is the part of the
growth of output that cannot be explained by the growth of capital and
labour. In the neoclassical view, this residual factor is largely associated
with technical progress and advances in knowledge (Nelson and Winter
1982, pp.197-198). In tact, in their application of the Cobb-Douglas
production function, whatever cannot be explained is put into the residual
term. In our argument, such residual component is largely attributable to
the role of entrepreneurship, a factor that is missing in the orthodox theories
(see also Matyas 1980, pp.520-524; Bhattacharya 1989, p.62).

Much of the literature on growth theory in the 1960s was concerned with
relaxing the abstraction made in Solow's one-sector model. Attempts were
made to formulate a two sector model: one producing consumption goods.
the other investment goods. The general equilibrium aspect of Solow's
model was also made more explicit: supply and demand determined the
relative prices of the two goods as well as factor prices. Perfectly
competitive conditions were assumed so that factor prices adjusted freely
to equilibrate factor markets, and so were equal to the respective marginal
products of the factors. The real wage maintained equilibrium in the labour
market, and continuous full employment was assured. The Keynesian
unemployment problem arising from a deficiency of aggregate demand was
impossible for it was assumed that there was always sufficient investment
expenditure to match saving out of full employment income. The question of
instability of the unwarranted growth path was ignored. Attempts were also


made to consider alternative technologies, and to allow fat technical
progress in a more realistic way. For example, the so called 'vintage
models' assume that the productivity of capital goods depends on when
they were made, with newer ones being more productive than older ones
(Backhouse 1985, p.320).

In the 1880s, efforts were made to refine the neoclassical growth models.
The so-called new endogenous growth models have focused on the linkage
between technological progress (or new knowledge) and economic growth.
They argued that growth is endogenous and is the result of deliberate
rational, optimising decisions by investors, producers and consumers.
investment encompasses physical and human capital, research and
innovation. They also pay attention to imperfect competition and the public
good characteristics of knowledge. For example, Homer (1986)
incorporated new variables, namely, knowledge externalities and
monopolistic competition in the aggregate production function.  Though the
new growth theories attempted to re-incorporate factors such as knowledge
which was neglected in the old theories, their analyses were also not
convincing (Bureau of Industry Economics 1992, p.54). Entrepreneurship
has not yet been incorporated into their analysis. Meanwhile, in their
quantitative treatment, whatever could not be explained was put into
residual terms and ignored subsequently. Using the Cobb-Douglas


production function and neoclassical optimization techniques, the new
growth theories suffer from the same shortcomings as the old theories.

Apart from growth models, most mainstream studies have also utilized the
theory of comparative advantage to analyse economic growth. Viewing
development from the context of international trade, the theory of
comparative advantage suggests that countries ought to specialize in the
production of commodities in which they possess a comparative advantage.
For many of the underdeveloped countries, this means that they ought to
specialize in the production of primary goods and use the proceeds to buy
manufactured goods from developed countries (Balassa 1981; Bradford
1987). Furthermore, the theory of factor price equalization suggests that,
under a competitive situation, international trade would bring factor incomes
in underdeveloped countries towards the same level as that in developed
countries. Hence both underdeveloped and developed countries benefit
from international trade. By the law of comparative advantage, economic
development is a process of adjustment in which countries move through
different stages of comparative advantage. Similarly, Ichimura (1988) and
Dahlman (1989), had analysed the economic growth of the Asian Newly
Industrializing Economies by examining their changes in comparative
advantage structures.  However, the most significant factor, namely,
entrepreneurship that can change the structure of comparative advantage
of an economy is not considered.


2.2 Critiques of the Orthodox Perspective of Economic Development

A major shortcoming of the orthodox economic perspective is that it
neglects the role of entrepreneurship. This study will present five major
criticisms of mainstream theories, namely criticisms by Schumpeter, Nelson
and Winter, Baumol, Leibenstein and Kirzner. They have explicitly or
implicitly criticized the conventional theories from an entrepreneurial
standpoint. The implication from this review is the need to formulate an
entrepreneurial perspective of economic development.

A. Schumpeter's critique: disequilibrium dynamics and innovative
Schumpeter criticised the orthodox system for its assumptions of profit
maximization, rational human conduct, and the use of equilibrium and static
analyses.  Recognizing the disequilibrium dynamics of economic change,
Schumpeter introduced the elements of creative response and
entrepreneurial agency

The orthodox approach assumes rational human conduct, frictionless
decision making and profit maximisation. But Schumpeter (1934, pp.79, 85)

While in the accustomed circular flow every individual can act
promptly and rationally because he is sure of his ground and is
supported by the conduct, as adjusted to the circular flow, of all
other individuals, who in turn expect the accustomed activity
from him, he cannot simply do this when he is confronted by a
new task...Carrying out a new plan and acting according to a
customary one are things as different as making a road and
walking along it.


Therefore, the assumption that human conduct
... is prompt and rational is in all cases a fiction. But it proves to
be sufficiently near to reality, if things have time to hammer
logic into men. Where this has happened, and within the limits
in which it has happened, one may rest content with this fiction
and build theories upon it... Outside of these limits our fiction
loses its closeness to reality. To cling to it there also, as the
traditional theory does, is to hide an essential thing and to
ignore a fact which, in contrast with other deviations of our
assumptions from reality, is theoretically important and the
source of the explanation of phenomena which would not exist
without it (Schumpeter 1934, p.80).

Schumpeter also showed dissatisfaction with the static and equilibrium
analysis in the conventional system. In Schumpeter's view, economic
change in the traditional sense is too slow and sluggish to bring about new
phenomena. The economic evolution which lays its foundations on the fact
that the economy continuously adapts itself in response to change in the
data may result in certain economic changes and possible economic
growth. However, such an evolution will always remain within the traditional
path of economic growth. Therefore, it is incapable of producing economic
revolution deriving from discontinuous change. Discontinuous change is
the kind of change that arises from within the system and is the cause of
many important economic phenomena. Hence, Schumpeter (1947a, p.223)

In the Smith-Mill-Marshall theory, the economy grows like a
tree ... (and) proceeds steadily and continuously, each situation
grows out of the preceding one in a uniquely determined way,
and the individuals, whose acts combine to produce each
situation, count individually for no more than do the individual
cells of the tree. This passivity of response to given stimuli
extends in particular to accumulation of capital: in a mechanical
way, households and firms save and invest what they have
saved in given investment opportunities. The same passivity of
response is also implied in many historical descriptions of the
development of countries or industries: they are descriptions of


objective opportunities created, perhaps by protective duties,
victorious wars, discoveries, or inventions; and it is tacitly
assumed that people react to them in a uniquely determined
manner that can be taken for granted and does not offer any

Elsewhere, Schumpeter (1939, p.48) remarked:

the difficulties we encounter will be seen to be amenable to
reduction, directly or indirectly, to the one fact that economic
behaviour cannot be satisfactorily expressed in terms of the
values which our variables assume at any single point of time.
For instance, quantity demanded or supplied st any time is not
merely a function of the price that prevails at the same time, but
also of past and (expected) future values of that price: we, are
therefore, driven to include in our functions values of variables
which belong to different points of time. Theorems which do
this we call dynamic... In order to produce new phenomena and
to impair seriously the usefulness of the Walras-Marshall
description, reaction to the intermediate situations created by
such partial adaptation would have to counteract or to reverse
that tendency and to lead away from instead of toward full

In summary, Schumpeter argued that the orthodox equilibrium analysis
cannot deal with the fundamental phenomenon of economic change. In
Schumpeter's words (1934, pp.62-63),"it can neither explain the occurrence
of ... productive revolutions nor the phenomena which accompany them. It
can only investigate the new equilibrium position after the changes have

Having identified the shortcomings of the orthodox framework and
recognized the disequilibrium nature of the economic change, Schumpeter
introduced in economic analysis the concepts of creative response and
entrepreneurial agency. The later is responsible for destroying the existing
equilibrium structure. Thus, Schumpeter (1947a, p.243) suggested that

...we take account of this by recognising two, instead of only
one, types of responses: adaptive and creative. I further


suggest that we have no choice but to admit that, from our
information in the observed situation before the fact (of creative
response), we cannot foresee it and that thus an element of
indeterminateness inevitably enters the analysis of economic
growth whenever there is creative response. We may bring this
element within the range of our list of factors of growth by
observing that it links up with "quality of the human material"
and in particular with "quality of leading personnel". And since
creative response means, in the economic sphere, simply the
combination of existing productive resources in new ways or for
new purposes, and since this function defines the economic
type that we call the entrepreneur, we may reformulate the
above suggestions by saying that we should recognise the
importance of, and systematically inquire into, entrepreneurship
as a factor of economic growth.

Schumpeter's insight, specifically his evolutionary approach to economic
problems has been extended in Nelson and Winter's influential work, The
Evolutionary Theory of Economic Change.
B. Nelson and Winter's critique: an evolutionary theory of economic change
Like Schumpeter, Nelson and Winter (1982, p.24) traced the basic
problems of the neoclassical system to the notions of maximizing,
uncertainty competition and equilibrium. They argued that conventional
production theory attempts to explain the determination of equilibrium price,
inputs and outputs under various underlying product demand and factor
supply conditions. The theory assumes profit maximization and does not
address the basic question of how firms make a time-consuming response
to changed market conditions based on incomplete information.
According to Nelson and Winter, the mainstream economists "assume that
there is a global, faultless, once-and-for-all optimization over given choice
sets comprising all objectively available alternatives. This clearly conflicts
with ... an assumption that the firm operates at all times with a status quo
policy, the profitability of which it inexactly compares, from time to time, with

individual alternatives that present themselves by processes not entirely
under its control" (Nelson and Winter, 1982, p.31). Therefore, optimization
techniques tend to ignore the essential features of change, including
uncertainty, diversities of viewpoint, the difficulties of the decision process,
the importance of search and alertness, the value of problem-solving and
errors in decisions (Nelson and Winter, 1982, p.31).

Neoclassical theories analyse competition in the context of equilibrium.
Nelson and Winter argued that neoclassical models do not elucidate the
competitive process itself, but only the structure of relations among the
efficient survivors. In this way, "they cannot address such questions as the
duration of the struggle or the durability of the mistakes made in the course
of ii" (Nelson and Winter, 1982, p.52). The theoretical neglect of the
competitive process gives rise to a sort of incompleteness. In other words,
disequilibrium behaviour is not fully specified.

When the neoclassical theory of production is applied to explain economic
growth in general and technical change in particular, it is impossible to
reconcile the maximization principle with the tact that, in the major invention
process, there are significant differences in the ability of inventors to
perceive opportunities as well as differences in knowledge, capabilities and
luck. Furthermore, as Nelson and Winter (1982, p.:!O3) pointed out, the
neoclassical formulation "avoids the uncertainty related with attempts to
innovate, the publicness of knowledge associated with the outcomes of
these attempts and the diversity of firm behaviour and fortune that is
inherent in a world in which technical innovation is important".

In sum, the neoclassical perspective fails to address uncertainty, bounded
rationality, the presence of large corporations, institutional complexity or the
dynamics of actual adjustment processes (Nelson and Winter, 1982, p.5).


Having explicitly rejected the notion of maximizing behaviour as an
explanation of decision making, Nelson and Winter proposed an
evolutionary approach to understanding economic change. In their
argument, firms are modelled as having, at any given time, certain
capabilities and decision rules. Over time these capabilities and rules are
modified as a result of both deliberate problem-solving efforts and random
events. In other words, firm behavioural patterns and market outcome are
jointly determined over time. Hence search and selection are simultaneous
and interacting aspects of the evolutionary process. Through the joint
actions of search and selection firms evolve over lime, with the conditions of
the industry in each period bearing the seeds of its conditions in the
following period (Nelson and Winter, 1982, pp.4,19).

Nelson and Winter focused on the concept of routines as incorporating the
regular and predictable behavioural pattern of the firm. In their evolutionary
model, these routines play the role that genes play in biological evolutionary
theory. "They are a persistent feature of the organism and determine its
possible behaviour; they are inheritable in the sense that tomorrow's
organisms generated from today have many of the same characteristics,
and they are selectable in the sense that organisms with certain routines
may do better than others" (Nelson and Winter, 1982, p.14).

Nelson and Winter put forward a dynamic theory of economic change.
They focused their analysis on innovation, invention and upsetting of firms'
routines. Although they claimed their intellectual debt explicitly to
Schumpeter. O'Driscoll and Rizzo (1985, p.124) contended that Nelson
and Winter actually applied a Hayekian theory of rules and evolved market
institutions to firm behaviour.  While Nelson and Winter・s model is in many
aspects superior to neoclassical theories and their evolutionary approach to


technological change has much to be commended, they did not explicitly
include entrepreneurship in their work.

Nevertheless, O'Driscoll and Rizzo (1985, p.124) did mention that an
important advantage of Nelson and Winter's approach is the ease with
which entrepreneurs can be integrated into the analysis. Entrepreneurs are
engines for change. They disturb firms; routines by changing the
environment. Conscious entrepreneurial adaptation to a changing
environment is sometimes the only way a firm may survive when production
activities are locked into a current inappropriate routine. Entrepreneurial
innovation may result eventually in a new routine, an adaptation to the new
environment. The market outcome reflects both the results of conscious
planning and the unintended consequences of entrepreneurial interaction in
the market process. In this sense, O'Driscoll and Rizzo (1985, p.125)
concluded that Nelson and Winter's work is attractive and their contribution
is a first step towards a theory of institutional change.

C. Baumol's critique: the significance of imitative entrepreneurship

Baumol (1968) criticized neoclassical theory explicitly from an
entrepreneurial viewpoint. He argued that the neoclassical paradigm is
non-entrepreneurial. Production is simply an exercise of choosing among
known alternatives. Decisions are made by comparing costs and revenues
with each set of values as described by the relevant functional relationships
and mathematical equations. The producer then employs optimization
techniques to reach a decision. When there is a change in exogenous
variables, the firm will readjust the choice accordingly (Baumol, 1968, p.52).
With this optimization technique, the entrepreneur has been removed from
the model. There is no room for enterprise or initiative. The management


becomes a passive calculator that reacts mechanically to change imposed
on it by external developments over which it does not exert and does not
even attempt to exert, any influence. In neoclassical models, there are no
clever strategies. ingenious schemes, brilliant innovations, or charisma
(Baumol, 1968, p.68).

Having indicating that entrepreneurship plays a significant role in economic
development, Baumol (1988, p.85) further argued that "the entrepreneur
provided leadership contributing to growth in productivity and per capita
income not only through innovative activity, but by means of aggressive and
imaginative imitation that is a key instrument of international technology
transfer". In other words, "imitative entrepreneurship deserves a place
alongside innovative entrepreneurship in the front rank of those who
contribute to an economy's prosperity". Moreover, in the international
context, imitation demonstrably plays a significant role in the sense that
each economy's welfare depends critically on ideas produced outside its
borders and only imitation can bring those ideas to its own producers.
Baumol (1988, pp.86-87) hypothesised that, for any one country, on
average, some 5% of the technical progress can be ascribed to processes
involving the participation of domestic innovative entrepreneurs while the
remaining 95% must have involved the agency of entrepreneurial imitators.

Thus, Baumol emphasised the importance of imitative entrepreneurs in
economic development. As will be seen in chapter 3, the notion of imitative
entrepreneurs comes very close to Austrian entrepreneurs, a key
contributing factor for rapid economic growth in the Asian Newly
Industrializing Economies.


D. Leibenstein's critique: X-efficiency and routine entrepreneurship

Another challenge of the general equilibrium paradigm of neoclassical
economics comes from the theory of X-efficiency devised by Harvey
Leibenstein. Leibenstein (1978, p.9) remarked that "one of the curious
aspects of the telationship of neoclassical theory to economic development
is that in the conventional theory, entrepreneurs as they are usually
perceived play almost no role".

Like Baumol, Leibenstein (1968, p.72) argued that the received theory of
competition in neoclassical analysis gives the impression that there is no
need for entrepreneurship. In particular, the conventional micro theory
assumes the basic actors are households or firms which attempt to
maximise the value of some variables subject to constraints. All relevant
information to make the decisions is assumed to be available. The most
important phenomena explained by the model are the allocation of inputs to
firms made on the basis of price signals, the choice of techniques to be
used in production and the quantities of goods purchased by households
(Leibenstein 1968, p.72; 1978, p.4). In this situation, all a potential
entrepreneur has to do is to calculate possible outcomes and make his
decision The role of entrepreneurship is reduced to a trivial activity
(Leibenstein 1978, p.9).

Furthermore, in such models, how effectively the inputs are utilized in
producing the goods does not enter as a variable. In particular, the
distinction between the purchase of inputs by a firm and the degree of
effectiveness of their use in the firm is not made. Neoclassical theorists
simply assume that firms minimise costs and hence inputs will be used as
effectively as possible. The degree of the effectiveness of the utilization of
inputs was ignored (Leibenstein 1978, p.5).


In the adoption of new technology, the traditional theory assumes that
profitable innovations will always be adopted because it is an obvious
corollary to the usual profit maximizing postulate. Leibenstein argued that if
we recognize that there are some influences due to inertia or personality
differences among decision makers, then there is a possibility that the most
profitable innovations will not always be adopted. Such factors are
important in economic growth.

As a remedy to the neoclassical models, Leibenstein (1966) made a
valuable distinction between allocative efficiency and X-efficiency.
Leibenstein (1978, pp.17-18) explained the concept of X-inefficiency as
follows. Suppose that certain inputs have been allocated to a firm. These
inputs can be used with various degrees of effectiveness within the firm.
The more effectively they are used the greater the output. When an input is
not used effectively, the difference between the actual output and the
maximum output attributable to that input is the measure of X-inefficiency.
The sources of X-inefficiency chiefly come from organizational entropy,
human inertia, incomplete contracts between economic agents and
conflicting agent-principal interests (Leibenstein 1978, pp.36-37).

The distinction between allocative efficiency and X-efficiency has enabled
us to recognise the role of entrepreneurship. Leibenstein (1966; 1978)
distinguished between two broad types of entrepreneurial activity: routine
entrepreneurship and Schumpeterian or "innovational" entrepreneurship. By
routine entrepreneurship, he referred to "the activities involved in
coordinating and carrying on a well-established, going concern in which the
parts of the production function in use are well known and which operates
in well-established and clearly defined markets". By "innovational"
entrepreneurship, he meant "the activities necessary to create or carry on
an enterprise where not all the markets are well established or clearly
defined and/or in which the relevant parts of the production function are not


completely known" (Leibenstein 1966, p.73, 1978, pp.40-41). In both the
routine and innovative cases, entrepreneurs coordinate activities that
involve different markets; they are inter-market operators. But in the case
of innovative entrepreneurship, not all the markets exist or operate perfectly
and entrepreneurs, if they are to be successful, must fill in for the market
deficiencies (Leibenstein 1978, p.41).

Hence, for Leibenstein, the roles of entrepreneurs in economic development
are gap filling and input-completer (Leibenstein 1978, pp.74-75).
Entrepreneurs possess "the capacities to search and discover economic
opportunities, evaluate economic opportunities, marshal the financial
resources necessary for the enterprise, making time-binding arrangements,
take ultimate responsibility for management, be the ultimate uncertainty
and/or risk bearer, provide and be responsible for the motivational system
within the firm, search and discover new economic information, translate
new information into new markets, techniques and goods, and provide
leadership for the work group" (Leibenstein 1978, p.74).

In conclusion, Leibenstein had correctly identified the shortcomings of the
conventional system and recognized the role of entrepreneurship in
economic development. However, like Baumol, his distinction between
Schumpeterian entrepreneurship and the routine entrepreneur is still
blurred. In particular, the function of the routine entrepreneur in economic
development is not comprehensively defined. The role of two types of
entrepreneurship in dynamic world development remained to be identified,
leaving much room for theoretical improvement.


E. Kirzner's critique: the significance of entrepreneurial discovery in
economic growth

The concept of entrepreneurship has always been a central part of the
Austrian School of economics. Therefore, in analysing economic change,
economists such as Kirzner, Hayek and Mises focused on the role of
knowledge and entrepreneurship.

Kirzner (1985, p.16) criticized the aggregate approach in the mainstream
growth models where knowledge and learning are ignored. In the orthodox
analysis, there is no need for mutual information among individual
participants in the economy. Correct decision making means correct
calculation. Decision makers have a clear perception of the scope of their
ignorance and of how this ignorance can be reduced. In a sense, they know
precisely what it is that they do not know.

In Kirzner's view, the mainstream paradigm assumes that the economy is
rigidly constrained by resource scarcity so that growth follows along a very
definite path. In this context, nothing can be discovered regarding new ways
of using given resources or regarding the existence of hilherto unnoticed

While the conventional theories recognize the role of technology in
economic growth, technology only appears in an impersonal manner and
can be obtained without effort by all members of the society. In particular,
Kirzner (1985, p.70) remarked that

K the opportunities for growth were seen as marked out, given
initial technology by a clearly defined array of inter-temporal
investment possibilities that somehow existed apart from any
need for them to be discovered, and whose very existence
dictated the appropriate growth path. There was no suggestion
that the set of opportunities likely to be in fact discovered might


in some way depend on the institutional framework within which
growth was sought.

For Kirzner, technical knowledge can be treated as a kind of resource but
the knowledge of the availability of opportunity cannot. Economic
development consists not only of technical knowledge but also of the
exploitation of opportunities. The development process consists of the
interaction of millions of individual acts of mutual discovery. Development
occurs "not because of the availability of new opportunities, but because of
expanded awareness of existing opportunities" (Kirzner, 1985, p.74).

More specifically, for developing economies, two problems need to be
addressed. The first is the determination of the best course of economic
development available to the society. It is a matter of comparing alternative
possibilities with available resources and technology. The second is to
ensure that the opportunities thus computed will be fulfilled. No matter what
form of economic organisation, whether central planning or market
economy, the central issue is to ensure that the opportunities that exist will
be discovered and seized. It is here that the entrepreneur plays a
significant role (Kirzner 1969, p.116).

According to Kirzner, the literature on growth and development consists of
comprehensive discussions of what possibilities exist for raising the
productivity of labour, for increasing the volume of resources, for
accumulating physical and human capital, for obtaining gains through
foreign trade and foreign capital. Unfortunately, entrepreneurship in this
literature is treated in much the same way as economic resources in
general. Although a difference is made between entrepreneurs and
managers, the former still appear to be treated as an element that extends
the range of possible opportunities, rather than the element needed to
ensure a tendency toward the fulfilment of opportunities available in
principle without them (Kirzner 1969, pp.116-117).


Stemming from dissatisfaction with the mainstream development theories in
explaining economic progress, Kirzner (1969, p.108) urged us to re-
examine the role of the entrepreneur in developing economies. In
agreement with Leibenstein's distinction between allocative efficiency and
X-efficiency, in 1985, he proposed two dimensions in understanding
economic development. First, at a given period, output of a nation may be
lower than its desired and possible level because opportunities remain
unnoticed. Second, due to technical advance over time, the capacity of
production increases. For this technical knowledge to be utilized, it is not
enough that these opportunities exist, they must be perceived. (Kirzner
1985, p.75). In short, entrepreneurial discovery is an important ingredient
in economic development.

2.3 A Need for a New Perspective of Economic Development

The orthodox theories and the radical challenges have failed to provide us
with a satisfactory explanation of the economic progress of the Asian
developing economies. Their major shortcoming is the neglect of
entrepreneurship, the element contributing to economic dynamism. A
systematic investigation of the role of entrepreneurship in economic
development is of utmost importance. Moreover, using Schumpeter's
concept of entrepreneurship to explain the economic development of all
nations, including the late industrializing economies, is far from satisfactory
Schumpeterian entrepreneurship has been a rare phenomenon in most
developing countries, and even in many industrialized economies. The
emergence of individuals with 'heroic entrepreneurial' character was not an
essential condition for the development of dynamic capitalist economies in
the Third World, since rapid growth was taking place in several countries
even without such entrepreneurs (Mackie 1992, p.46). As Nafziger (1986,
p.7) argued, Schumpeter's concept of the entrepreneur is "somewhat limited
in less developed countries, since the majority of indigenous Schumpeterian


entrepreneurs are traders whose innovations are the opening of new
markets. In light of the possibilities of technical transfer from advanced
economies, no undue emphasis should be put on the development of
entirely new combinations. People with technical, executive and
organizational skills may be too scarce in less developed countries to use in
developing new combinations in the Schumpeterian sense". Furthermore,
to adapt new combinations from economically advanced countries does not
involve Schumpeterian entrepreneurs. Hence, Nafziger (1986, p.11,
Kirchhoff, 1994, p.65) argued that Schumpeter's concept of the
entrepreneur needs to be broadened to include those who adapt and modify
already existing innovations. However, for analytical purpose, it is
preferable to separate the two kinds of entrepreneurship. In other words, a
different conception of entrepreneurship is required. Baumol and
Leibenstein put forward the notions of imitative and routine
entrepreneurship respectively. However, the most important function of
entrepreneurs in the Asian NIEs, namely alertness to opportunities and
adaptation to changes, were not considered in their arguments. The kind of
entrepreneurship operating in late industrializing nations remained to be
explored. Employing Kirzner's insight, this study will put forward an
entrepreneurial perspective of economic development. This theoretical
framework, presented in Chapter 3, will shed some light on the
understanding of the economic success of the Asian NIEs.


             Chapter 3

Towards an Entrepreneurial Perspective
      of Economic Development

The review of the orthodox perspective of economic development in Chapter
2 revealed that their approach in explaining the growth performances of the
Asian NIEs are inadequate. A crucial element, namely entrepreneurship, is
missing in their analysis. For this reason, a systematic investigation of the
role of entrepreneurship in economic development is of the utmost
importance. Moreover, Schumpeter's notion of entrepreneurship has been
a rare phenomenon for the development of dynamic capitalist economies in
the Third World, since rapid growth was taking place in several countries
even without such entrepreneurs (Mackie 1992, p.46). Instead, adaptive
entrepreneurs operating in developing economies should be emphasised.
This chapter attempts to put forward an entrepreneurial perspective of
economic development to explain the success of the Asian NIEs.

3.1 Schumpeterian and Austrian Modes of Entrepreneurship

Cheah (1989a, 1993) identified conceptually two distinct modes of
entrepreneurship, namely Schumpeterian and Austrian, and analysed their
relationship in economic development. In Cheah's view (1992), the dynamic
interactions between Schumpeterian entrepreneurs who are responsible for
creative responses, and Austrian entrepreneurs, who are responsible for
adaptive responses, constitute the entrepreneurial process. The two kinds
of entrepreneurship are discussed as follows.

A. Schumpeterian entrepreneurship

Schumpeter's concept of entrepreneurship introduced a new dimension into
Economics. According to Schumpeter (1934, pp.81-86), entrepreneurs exert
a disturbing force to an economy, which is termed 'creative destruction'.
The entrepreneur was described by Schumpeter as the economic agent who
performs the service of innovating, of introducing changes that radically
change the framework of the economic system. Entrepreneurs are defined
as people who innovate, and innovating is the act of combining productive
factors in some new way: This includes the introduction of a new good or
quality of a good, the introduction of a new method of production, the
opening of a new market, the utilization of some new source of supply for a
raw material or intermediate good and the carrying out of the new
organization of any industry (Schumpeter 1934, p.66; 1939, pp.87-88).

Furthermore, Schumpeter recognized that entrepreneurial innovation is a
difficult job because it lies outside the routine framework and because the
environment resists in many ways. Therefore, the entrepreneurial function
does not essentially consist in either inventing or creating the conditions
which the enterprise exploits. It consists in "getting [new] things done"
(Schumpeter 1943, p.93).

Schumpeter argued that entrepreneurship encompasses three essential

Firstly it can always be understood ex post; but it can practically
never be understood ex ante; that is to say, it cannot be
predicted by applying the ordinary rules of inference from the


pre-existing facts ...  Secondly, it shapes the whole course of
subsequent events and their long run outcome ... it changes
social and economic situations for good, it creates situations
from which there is no bridge to those situations that might have
emerged in its absence... Thirdly, the frequency of its
occurrence has something to do with the quality of the
personnel available in the society, with relative quality of
personnel and with individual decisions, actions and patterns of
behaviours (Schumpeter1947b,p.150).

B. Austrian entrepreneurship: alertness and arbitrageurship

Unlike Schumpeter, Kirzner, as a follower of Mises, has built his concept of
entrepreneuiship entirely upon the foundation of Mises' action theory
(Kirzner 1973, 1979, 1982, 1985, 1992). He repeatedly stressed Mises'
thesis that "each human actor is always, in significant respects, an
entrepreneur" (Kirzner 1982, p.139). It is important to note the link between
action theory and entrepreneurship, more specifically, action and alertness.
Kirzner (1973, p.33) noted:

Human action, in the sense developed by Mises, involves the
course of action taken by the human being to remove
uneasiness and to make himself better off. Being broader than
the notion of economizing, the concept of human action does
not restrict analysis of the decision to the allocation problem
posed by the juxtaposition of scarce means and multiple
ends...but also the very perception of the ends-means
framework within which allocation and economizing are to lake
place... Mises' home endowed not only with the
propensity to pursue goals efficiently, once ends and means
are clearly identified, but also with the drive and alertness
needed to identify which ends to strive for and which means are


Hence, we can trace an important element of Kirzner's concept of
entrepreneurship, namely, alertness, from Mises. In the market, the
opportunity that human agents are alert to is monetary profit. The entire role
of entrepreneurs lie in their alertness to hitherto unnoticed opportunities.
They proceed by their alertness to discover and exploit situations in which
they are able to sell for high prices that which they can buy for low prices.
Alertness implies that the actor possesses a superior perception of
economic opportunity. II is like an "antennae that permits recognition of
gaps in the market that give little outward sign" (Galid at al., 1988, p.483).

For Kirzner, alertness to profit opportunity implies arbitrage activities. Indeed
Kirzner has not distinguished arbitrageurship from entrepreneurship (White
1976, p.4). Regarding the arbitrage theory of profit, Kirzner (1973) argued
that the existence of disequilibrium situations in the market implies profit
opportunity. The entrepreneur endeavours to exploit this opportunity,
eliminate errors, and moves the economy toward equilibrium.


3.2 The Interactions between the two modes of entrepreneurship in
economic development

According to Schumpeter (1947b, p.150), there are two kinds of response in
economic development, namely 'creative response' and 'adaptive
response'. "Whenever an economy reacts to an increase in population by
simply adding the new brains and hands to the working force in the existing
employment, or an industry reacts to a protective duty by expansion within
its existing practice, we may speak of the development as adaptive
response. And whenever the economy or an industry or some firms in an
industry do something else, something that is outside of the range of
existing practice, we may speak of creative response" (Schumpeter 1947b,
Moreover, adaptive response follows creative response (Schumpeter 1934,
p.228). Once the new possibility is tried, imitators arise who perceive the
advantages of the new combination, and who are eager to share in those
advantages. These imitators are people who did not have the will or drive to
overcome the social resistance to innovation themselves, but who are ready
to adopt new methods promptly as soon as the initial resistance has been
overcome by the true innovator. It is in this way that an innovation achieves
widespread adoption in the system. Some kinds of subsidiary innovations
may be derived from the initial breakthrough (Cauthorn 1989, p.14).
Schumpeter (1934, p.228) described the relationship between the two
responses as below:

If one or a few have advanced with success many of the
difficulties disappear. Others can then follow these pioneers, as
they will clearly do under the stimulus of the success now
attainable. Their success again makes ii easier, through the
increasingly complete removal of the obstacles ... for more


people to follow suit, until finally the innovation becomes
familiar and the acceptance of it a matter of free choice.

Despite Schumpeter's insight, the interactions between the two modes of
entrepreneurship in the development process have not been fully
elaborated. As previously noted, most studies did not even appreciate the
existence of two modes of entrepreneurship. They tended to neglect the
existence or to dismiss the significance of Austrian entrepreneurship (Cheah
1994, p.138). More importantly, most scholars (including Schumpeter)
failed to see that Austrian entrepreneurship over time can also increase the
scope for Schumpeterian opportunities. For this, Kirzner (1985, p.162)
noted, Austrian entrepreneurship consisted of "the social integration of the
innumerable scraps of existing information that are present in scattered form
throughout society... Yet the same entrepreneurial spirit that stimulates the
discovery in the market of the value of information now existing throughout
the market also tends to stimulate the discovery or creation of entirely new
information concerning ways to anticipate or to satisfy consumer
preferences. The entrepreneurial process at this second level is what drives
the capitalist system toward higher and higher standards of achievement...."
In Kirzner's view, it is important to understand the Schumpeterian process
(long run) and the Austrian entrepreneurial processes (short run) in the
market process.

Cheah (1989a) represents the first piece of work that recognises the two
distinctive entrepreneurial processes and formally integrates them into one
framework. Cheah (1989a, p.11) remarked that Schumpeterian
entrepreneurs "promote change of an existing situation. Schumpeterian
entrepreneurial activities result in major innovations and even systemic


change that increase or create uncertainty and promote new development
processes which serve to create and/or widen the leg. technological) gap
between leaders and followers". In contrast, Austrian entrepreneurs
promote "change within an existing situation. It stems from the discovery of
profitable discrepancies, gaps, mismatches of knowledge and information
which others have not yet perceived and exploited, and the entrepreneur
acts to capitalise upon the opportunity for gain or advantage which that
discovery presents". Austrian entrepreneurial activities include "arbitrage,
speculation, risk taking, adaptive innovation, imitation as well as planning
and management efforts in response to market signals" (Cheah 1992,
p.468). They "increase knowledge about the situation, reduce the general
level of uncertainty over time and promote market processes which help to
reduce or to eliminate the gap between leaders and followers" (Cheah 1992,
p.466). For Cheah, the two kinds of entrepreneurial activities are opposites
and yet complements to each other. The long run (Schumpeterian) and the
short run (Austrian) entrepreneurial process are interpreted as a process of
alternating hegemony (6heah 1989, p.13; 1994, pp.134-139).

Assume initially an equilibrium situation in Schumpeter's model (1934) of
circular flow of economic life. The launching of Schumpeterian innovation
produces "systemic change which destroys the existing equilibrium and re-
creates uncertainties, mismatches of information, and a proliferation of new
unexploited opportunities within a particular situation" (Cheah 1994, p.137).
The result is a continual series of steps that together propel the engine of
long-run economic growth and development (Cheah 1994, p.135). As the
level of uncertainty rises due to the initiation of Schumpeterian activities and
processes, the scope for Austrian entrepreneurs also grows. Austrian
entrepreneurs discover the existence and/or the value of available
knowledge, arbitrage profit opportunities, and coordinate economic
activities. At the same time, Austrian entrepreneurial activities lead to a
higher level of certainty and promote a tendency towards equilibrium (Cheah


1994, p.135). Through the exploitation of profit opportunities, Austrian
entrepreneurs define the full potential and approximate limits of a
Schumpeterian innovation. Their activities also pave ways for subsequent
Schumpeterian entrepreneurs to use that knowledge as the new foundation
from which to launch the next Schumpeterian innovation (Cheah 1994,
p.137). The two modes of entrepreneurship interact in a dialectical manner.
Two extremes in the entrepreneurial process, namely equilibrium (certainty)
and disequilibrium (uncertainty), represent the maximum scopes for Austrian
and Schumpeterian entrepreneurial opportunities respectively. Each force
dominates the other alternately at different points in time in the
entrepreneurial process (Cheah 1994, p.137). The interactions of the two
modes of entrepreneurship lays the foundation for a dynamic development

3.3 The two modes of entrepreneurship compared

The two modes can be further differentiated in terms of technological and
marketing strategies as below:

A. Technological strategy

Schumpeterian entrepreneurs often exhibit what Freeman (1982, p.170)
called offensive technological strategies. Being a first-mover, they exercise
technological leadership in the market and initiate an industry life cycle. To
keep their technological supremacy and maintain leadership in the industry,
they emphasise fundamental research. Patents are employed to protect their
benefits as long as possible (Freeman 1982, p.172; Martin 1984, p.53).

There is also a need for effective downstream coupling. This means that the
implementation of a radical innovation requires good communication
between all the departments concerned to ensure quick identification and


solution of problems (Martin 1984, p.57). To facilitate communication during
innovative process, vertical integration is preferred (Langlois and Robertson,

Austrian entrepreneurs adopt what Freeman (1982 p.176) called defensive
technological strategies. They are in essence "follow-the-leader'' policies.
Such policies are attractive for two reasons. First, a radical innovation has
recently been introduced in the market, but the dominant design has yet to
emerge. Second, the mortality rate of launching a new product can be quite
high at this stage. For these reasons, Austrian entrepreneurs avoid being
the first to enter the market where an innovation is commercially unproved.
In this way, if pioneers first launch a new innovation and prove to be
commercially unsuccessful, followers have nothing to lose. If the product is
successful, followers will capture much of the market by launching their own
versions of the product or service (Freeman 1982, p.178).

Austrian entrepreneurs aim at matching or duplicating new products
launched by Schumpeterian entrepreneurs. The latecomers have to ensure
that their firms possess the scientific knowledge to exploit the new
innovation once it appears to be successful. This implies that they have to
conduct some applied research (Martin 1984, p.60).

As an industry matures, a dominant design emerges. Opportunities can only
be exploited incrementally based upon design, reliability and cost reduction
rather than upon major technological breakthrough. In other words, firms
will pursue an imitative or "me-too" policy. Since, imitative activities mainly
modify the existing designs, the costs of production are also lower. This
strategy can be particularly attractive to countries that traditionally lag
behind leading industrialized countries in adopting technology. Martin


 (1984, p.61) argued that Japanese companies had followed this strategy
very successfully since World War II, although some of them now have
moved to offensive strategies.

B. Marketing strategy

Schumpeterian entrepreneurs employ proactive marketing strategies to
introduce their new product. In other words, they seek to establish their own
brand name and position their product in the target niche. Schumpeterian
firms rely on highly efficient marketing and intelligence systems to generate
accurate and detailed product and consumer information. Since a radical
innovation brings something entirely new to market, considerable effort must
be made to ensure the reliability of the product in use and to educate users
in its operation (Freeman 1982, p.175).

In contrast, Austrian entrepreneurs are imitative followers. They adopt
reactive competitive strategies Often they produce under the brand of other
firms (customer label product) or simply sell their goods without a brand.
Little efforts are devoted in marketing, as the objective is to minimize cost by
relying wholly on the marketing resources of the foreign buyers. They have
no desire to establish their own marketing delivery systems (Ting 1985,
pp.96-97). As customers already process some experience of using the new
product, latecomers put less emphasis on education, training and advisory
services. However this does not mean that education and training is not
required because customers may be locked into the first version of the
innovation (Martin 1984, p.57). A comparison between two kinds of
entrepreneurial strategies is summarized in Table 3.1.


Table 3.1 A Comparison of the Two Styles of Entrepreneurial Strategies
Aspects Innovative strategies Imitative strategies

A. Technological strategies
Product novelty high low
Technology adoption early adapter late adopter
Expenditure on R&D large small
Patent for protection frequently employed seldom employed

B. Marketing strategies
Brand strategy niche brand no brand
Product life cycle Initial stage mature stage
OEM business little involvement heavily involved
Subcontracting low degree high degree

C. Other aspects
Spatial arbitrage new location familiar market
Size of firm(employment) large enterprise small firm
Expected payback period long term short term

3.4 Factors Promoting Austrian Entrepreneurship

In the development process, Schumpeterian innovations in developed
countries have created tremendous profit opportunities for Austrian
entrepreneurs in developing nations to capitalise upon. However, not all
nations have evolved successfully into entrepreneurial economies to exploit
these opportunities. Therefore, it is essential to investigate the factors that
promote Austrian entrepreneurship in Hong Kong.

A. Economic factors
Paradoxically, inheritant weaknesses in an economy, such as its small size,
poor natural resource endowment, and vulnerability to external shocks can
sometimes become favourable conditions for economic success (Chia 1993,


p.l). Such initial unfavourable conditions, together with some non-economic
factors have forced the manufacturers to embark on Austrian entrepreneurial
strategies which enable them to catch up with more developed nations.

For manufacturers in small economies, the domestic market obviously
cannot provide sufficient demand and thus exhibits the difficulties of
attaining scale economies and cost competitiveness (Lee and Low 1990,
p.30). Therefore, they aim at overseas markets. As a result, they face an
open world trading environment which is extremely volatile (Chia 1993, p.l).
To cope with keen global competition and constantly changing environment
such as international business cycles and oil crises, producers adopt
Austrian entrepreneurial strategies including small business operation,
original equipment manufacturer (OEM) business, product imitation, spatial
arbitrage and subcontracting. Such strategies provide the firms with
flexibility and adaptability to cater to rapidly changing global markets.

As Bolton (1993, p.37) remarked, the best way to tackle market uncertainty
bought about by uncertain demand for a new product is to be an imitator.
Lee and Low (1990, p.30) also argued that through highly integrated
international networks of marketing, exporting standardized products so as
to achieve specialization and scale economies is possible. Put differently,
through subcontracting, firms specialize in a single production process and
rely on other firms such as a trading company for marketing (Sit and Wong
Government policies can also influence the choice of entrepreneurial
strategies. If the state conducts policies favourable to foreign direct
investment, then multinational corporations (MNCs) will have incentives to
invest. Consequently, local producers will have more opportunities to learn
foreign technologies and imitate their products via joint ventures,
subcontracting or spin-offs. MNCs do not provide only production

technology but also management and marketing know-how (Yamazawa and
Watanabe 1988, p.204). Compared with Schumpeterian innovative
strategy, which involves greater risk and higher cost, learning and imitating
from multinationals are relatively cheaper and easier but may be equally
profitable (Kingston 1977, p.81: Bolton 1993, p.35).
Obviously, for a small economy with limited natural resources, original
research and development like the establishment of Silicon Valley in
California cannot be afforded. Without large expense on R&D, it is difficult
to conduct Schumpeterian innovation. On the other hand, technologies from
overseas are abundant. it has been argued that today there is more
technology than Asian producers can apply (Engardo and Gross 1992,
p.67). Provided that there is a good international communication network,
local manufacturers can replicate new foreign products or processes at
relatively low costs. As Ting (1985, p.64) pointed out, "the easy
accessibility and rather cheap availability of even the latest technologies ...
mean that with even a minimum of technical preparation any aspiring NIC
firm would have very little problem in acquiring the desired technology". In
addition, loose enforcement of patents in developing economies leads to
widespread technological piracy (Ting 1985, p.63). Under this situation,
manufacturers will widely adopt Austrian entrepreneurial strategies such as
product imitation and are prone to be followers.

Compared to the more advanced nations such as the US, Western
European nations and Japan, Hong Kong is a latecomer. The advantages
of being a latecomer include a lower cost of learning and imitating than
original discovery and testing, an avoidance of pioneers' mistakes, the
availability of a wide range of technologies to be adopted, and the
production of a standardized product with the economies of scale (Woronoff
1986, p.286; Ames and Rosenberg 1963, p.18-19; Perez and Soete 1988,


p.477). Those merits make manufacturers in developing nations pursue a
product imitation strategy.
Moreover, in responding to rapid technological change, latecomers adopt
subcontracting networks as a crucial source of flexibility. Ernst and
O'Connor (1989. p.55) argued that "subcontracting networks are an efficient
structure when learning economies are significant but technology rather
than firm specific".

B. Cultural factors

Several studies discuss the influence of culture on the development of
entrepreneurship.  One of the arguments is that a hybrid of traditional
Chinese and Western cultures is conducive to the development of
entrepreneurship. Tam and Redding (1993, p.159) noted that in the
traditional Chinese culture, "entrepreneurial drive had been continually
suppressed, occasionally crushed, and for centuries denied legitimacy as a
basis for claiming respect and position in society". The westernization of the
East Asia economies, for example through the British colonization of i-long
Kong and Singapore, has brought about transformations to these
economies.  These economies have developed a multi-cultural, accepting
western ideology and life-style within the greater framework of the ancient
culture, and slowly evolved into their own brand of management (Chau
1974, p.155). More importantly, the pursuit of wealth in these societies has
become respectable. A new merchant class has emerged. The merchants


are no longer tied to traditional values and beliefs. On the contrary, they
modify whenever necessary the traditional values and beliefs to achieve
their ends (Siu and Martin 1992, p.90). Similarly, Wong (1989, p.170)
concluded that the entrepreneurs "have blended Western elements with
their own tradition" and they have successfully combined their origins with a
totally cosmopolitan world outlook.

However, as this study argues, in Hong Kong, Austrian entrepreneurship
predominates. To explain this phenomena, one important factor must be
mentioned. It is Chinese family values. Wong (1980, 1988) and Redding
(1986, 1988, 1990) argued that 'entrepreneurial familism' has laid the
foundation for East Asian capitalism.

Entrepreneurial familism refers to the fact that the Chinese manage their
enterprises like a family. This is observed in their business loans,
management and marketing strategies. According to Wong (1988, pp.137-
144; 1989, pp.173-177), the family is the basic unit of economic
competition. II provides the impetus for innovation and the support for risk-

Entrepreneurial familism entails three distinguishing characteristics, namely
a paternalistic managerial ideology and practice, nepotistic employment and
family ownership of enterprise. First, owners of the family firms consider
themselves as patriarchal business leaders who confer welfare benefits on
their employees as favours, take a personal interest in their subordinates'
non-job related activities, and disapprove of trade union activities. Second,
nepotism is practised in active and passive forms. Chinese firms prefer to
employ close family members in key positions but take on other relatives
only reluctantly or passively. Such preferential recruitment of kinsmen is a
phenomenon deriving from the family mode of ownership. Third, in order to
keep the ownership of the firm within the family, the founders choose to


obtain capital sources through bank loans rather than through the stock
market because the former will not force them to relinquish exclusive

The practice of family business has several implications of the development
of Austrian entrepreneurship. First, when an enterprise is divided into
smaller units, it provides the manufacturers with flexibility to adjust to the
changing international environment (Chau 1974, p.157).

Secondly, as Wong (1988, p.144) argued, familism can lead to the
evolution of a subcontracting system, under which multiple independent
small firms are linked into a network.

Thirdly, in the family firm, it is a custom that the welfare of employees is
taken care of by their patriarchal employers. This paternalistic approach
weakens the labour movement, and promotes subcontracting activities.

Fourthly, the reliance on family and the exclusion of outsiders for senior
management positions have important effects on the shape and the size of
business organization. In particular, when an enterprise grows large, ii will
split into smaller parts just like the Chinese practice of dividing their family
estate. Redding (1988, p.109) argued that this practice "facilitates the
initialing phase of entrepreneurship but ... places barriers to the higher
levels of coordination necessary for growth of the individual firm to a large
scale". The issue may be argued in terms of our perspective that familism
facilitates Austrian entrepreneurship but is not conducive to a major creative
breakthrough or Schumpeterian entrepreneurship.


C. Political factors

A "siege mentality" also influences the development of entrepreneurship.
For example, after the Second World War, all the Asian NIEs were faced
with problems which threatened their survival. Taiwan faced frequent threats
from the Communists to 'liberate' it. South Korea faced the possibility of
invasion from the North. Singapore, after its expulsion (ram the Federation
of Malaysia in 1965, faced the problem of its viability as an independent
nation state. For Hong Kong, its status as a British colony will end in 1997
when the Territory is returned to Communist China (Tan 1992, pp.73-73).

It is argued that in such an uncertain political environment, manufacturers
will adopt Austrian entrepreneurial strategies. In their investment planning,
they take a short term view. They opt for the projects with quick returns and
avoid large capital commitment. Hence Austrian business strategies such as
small business operation, product imitation, subcontracting, and spatial
arbitrage are all consistent with these kinds of strategy. Schumpeterian
strategies, requiring huge R&D spending and aiming for a technological
breakthrough, are not practical because a political disturbance such as a
coup or a riot may ruin the investment.

Furthermore, to secure political stability, the Asian NIEs, such as Singapore,
South Korea and Taiwan imposed anti-labour legislation banning
oppositional trade union activities. The consequence of repressed labour
systems was the presence of vast reserves of cheap, unorganized and
disciplined labour (Appelbaum and Henderson, 1992, p.17; World Bank
1993, pp.164-165; see also Wade 1990). If manufacturers during their
business restructuring can lay off workers without paying them heavy
compensation, they will have the incentive to be more alert to new
opportunities. More importantly, without effective labour unions and with


anti-labour legislation, piece rate wage contracts and flexible wage
systems are practised. This in turn promotes subcontracting activities.

Taken as a whole, a small economy, with limited natural resources, loose
enforcement of patents, government policies promoting private enterprises,
reliance on family business and exporting, and under the pressure of
political uncertainty will provide a most favourable environment for
developing Austrian entrepreneurship.

3.5 Austrian Entrepreneurial Strategies in the Asian Newly
Industrializing Economies

Schumpeterian innovations in advanced industrial nations had created
tremendous opportunities for Austrian entrepreneurs in the late
industrializing economies. The conditions in the Asian NIEs allow Austrian
entrepreneurs to capitalize upon these opportunities through imitation, small
scale enterprises, subcontracting and spatial arbitrage. These
entrepreneurial strategies adopted by the manufacturing firms in late
industrializing economies such as Hong Kong constitute the principal focus
of this study.

A. Product imitation

Austrian entrepreneurial activities include imitation, adaptive innovation and
arbitrage (Cheah 1992, p.468). When Austrian entrepreneurs notice a
product or a business pattern successfully launched by someone else, they
will imitate it if they can produce at lower costs (and hence sell at lower
prices).  In other words, entrepreneurs conduct arbitrages on the (factor)
price discrepancies.


Imitation can be a clever competitive strategy involving investment, creativity
and insight. Imitative entrepreneurs exploit the success of others. They have
not invented a product or a service, but rather have perfected and
positioned it. Imitation adds some product attributes so that the modified
product is slightly different from the original one and fits a slightly different
market. That is, imitators supply something which is still lacking. Drucker
insisted that imitators do not proceed by taking away customers from the
pioneers who have first introduced a new product. Instead, they serve the
markets which the pioneers have created but have not yet adequately
serviced. Imitators satisfy a demand that already exists rather than creating
a brand new one (Drucker 1985, pp.203-207).

To enter the market, imitators must possess some competitive edges
(Hagedoom 1981, p.91: Freeman 1982, p.183). Usually, firms in developing
countries can produce at lower costs due to cheaper labour and rentals. In
addition, unlike Schumpeterian firms which can enjoy a monopoly situation,
at least for initial period, imitators face keen competition from other similar
firms in the industry. Therefore, they have to be very efficient in production.
They constantly modify their product, improve the production process and
exploit economies of scale.
Imitators do not aspire to leap-frogging nor attempt to keep up with
innovators. They are content to follow way behind the innovation leaders.
In other words, imitation is strategic followership (Hagedoom 1981, p.91,
Freeman 1982, p.179: Bolton 1993, p.32). Being a follower is less risky.
Normally, imitation occurs when the market becomes established and the
original venture has been accepted. As the market segments are knowable,
marketing research can easily find out the consumption patterns of
customers. Bolton (1993, p.32) showed that Matsushita's low-cost strategy
in the consumer electronics business was built upon being a second-mover.



  Jardines Matheson & Co., founded by James Matheson and William
Jardine in 1832, remains one of the most influential 'hongs' (firms) in Hong

  It was widely known that the members of the Royal Family of England,
especially the Duke of Kent, liked to order some clothes from Hong Kong's
tailors when they visited the Colony. But such purchases had been
criticised by some British Members of Parliament as not being patriotic.

  During mid-1993, the Central Government of China, led by the Vice
Premier, Mr. Zhu Rongji, the former Mayor of Shanghai, proposed an
ambitious economic plan which attempts to boost Shanghai, to surpass
Hong Kong, as a major financial centre in Asian Pacific region by the year

  Morawetz (l981) rejected the idea that the Asian economic miracle is due
to cheap labour. In his view, the higher productivity in East Asia is due to the
differences in the management skill originating from some cultural and social
factors. In particular, he noted: "US garment buyers commonly point out that
you can gel anything you want ill Hong Kong, Korea or Taiwan-any garment,
in any material (cotton, wool, synthetics, fur, leather), at competitive prices,
acceptable quality and delivered on time. In Colombia, by contrast, the
range of garments and fabrics is limited, prices are in general higher, and
quality and delivery times are less dependable ... Success breeds success,
failure breeds failure" (Morawetz 1981,p.199).

  Sir Philip Haddon-Cave remarked in 1978 that the philosophy of the
Government policy was positive non-interventionism. It meant that the
Government took the view "that attempts to frustrate the operation of
market forces will tend to damage the growth rate of the economy,
particularly as it is so difficult to predict, let alone control, market forces that
impinge on an open economy. But... the Government must play an active
role in the provision of those services and facilities essential to life in a
civilized community and ... we also believe that there are certain services
and facilities which it is either more convenient and efficient for the
Government to provide or which should be provided, as a matter of policy,
as a charge, wholly or partly, on public funds" (Hong Kong Government
Secretariat 1977-78, p.813).

  It will be argued in Chapter 10 that the Hong Kong Government has
played a significant role in the industrialization of Hong Kong, though its
interventions have been carried out in a more subtle way.

  In a review article, Hicks (1989, p.39) remarked that East Asians were
less willing to listen to economists who had led other countries so badly

  Mackle referred to the works of Kirzner (1973, 1982), Casson (1982),
Drucker (1986), Nafziger (1984), to name a few. This issue will be further
discussed in Chapters 2 and 3.

  I owe this insight to Dr. L.C. Chau.

  Jorgenson (1961,pp.309-34) used the neoclassical production function to
explain the growth processes of a dualistic economy. Production in the
agricultural sector is determined by land and labour, with a production
function subject to diminishing returns. In the industrial sector, output is
given by labour and capital and the function is subject to constant returns to
scale. Population growth is determined by per capita food supply and the
net rate of reproduction. Then the marketable surplus from the agricultural
sector releases labour to be employed by the industrial sector. He
concluded that it is necessary to accumulate capital to promote growth.

  For a review of recent developments in the theory of economic growth,
see Bureau of industry Economics (1992).

  For an account of the recent developments in the trade theory and
policy, see Alam (1995, pp.367-386).

  Though Schumpeter was an admirer of Leon Walras, his dissatisfaction
with Walrasian theories, in particular, and the neoclassical framework in
general are well documented in his works.

  The Hayekian theory of rules and institutions is discussed in Hayek(1967, 1978a: 1978b),

  The term 'entrepreneur' was not indexed in their seminal work: An
Evolutionary Theory of Economic Change. See Nelson and Winter (1982).

  Baumol and Kirzner are both associated with New York University where
the Centre for Entrepreneurial Studies is located.

  De Bone (1992 p.15) argued that every valuable creative idea must
always be logical in hindsight.

  Such an argument has raised a number of criticisms both from within and
outside the Austrian camps. Specifically, White (1976) commented that
Kirmer failed to recognize the highly important part played by
entrepreneurial imagination. Defending his position, Kirzner subsequently
differentiated two kinds of markets, namely single period and multi-period
markets (Kirzner 1982). For the multi-period market, with the passage of
time and uncertainty, Kirzner accepted the elements of creativeness and
imagination into his model. Hence, "incentive for the market
entrepreneurship along the intertemporal dimension is provided not by
arbitrage profits generated by imperfectly coordinated present markets but
more generally, by the speculative profits generated by the as yet
imperfectly coordinated market situations in the sequence of time" (Kirzner
1982, p.154). In multi-period situation, the entrepreneur "must introduce...his
own creative actions, in fact construct the future as he wishes it to be"
(Kinner 1982, p.63). Accordingly, his position becomes similar to
Schumpeter's vision.

  Nelson and Winter (1982, p.275), drawing the argument from Schumpeter
described the interaction of the innovative and imitative firms in the market;
process as follows: "a central aspect of dynamic competition is that some
firms deliberately strive to be leaders in technological innovations, while
others attempt to keep up by imitating the success of the leaders".

  For a detailed discussion of the advantages of being a latecomer, see
the later section of this chapter.

  For example, see Redding (1988; 1990); Wong (1989); Siu and Martin

  For a detail account of the impact of colonialism on the formation of an
entrepreneurial society in Hong Kong in terms of the power, economic,
social and knowledge structures, see Tam and Redding (1993, pp.158-

  Vesper(l990, p.6) called these people 'pattern multipliers'.

  This idea will be fully elaborated in Section 3.7 of this chapter.

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