Independent Variable Globalization Determinants

5.3.2.1 Inward Foreign Direct Investment (FDI)

Based on Hong Kong Monthly Digest of Statistics from the Census and Statistics Department, Hong Kong Special Administrative Region, it states that external direct investment, which is known as foreign direct investment, is categorized as inward and outward direct investment. The inward foreign direct investment is the inflow of foreign direct investment from foreign enterprises and investors, including Mainland China, to Hong Kong, while the outward direct investment is the outflow of investment from Hong Kong enterprises and investors to foreign

35 Property Market Statistics, Rating and Valuation Department (2007 Website). Website of Rating and Valuation Department. (Online) Available from: http://www.rvd.gov.hk/en/publications/pro-review.htm (Accessed 1 March 2007)

places. They are good indicators to show the free international capital flows and the effect of globalization.

There are several reasons of choosing inward foreign direct investment as a proxy of the globalization effect on the office rental market in Hong. Firstly, based on Haila research (2000, p2242), she has included foreign direct investment as one of the globalization indicators for her research. In addition, Helpman (2006, p589) states that the vividly growing foreign direct investment is affected by globalization. To incorporate inward foreign direct investment instead of the outward direct investment or their net into the equation model is mainly because both outward and inward direct investments share the same trend and of similar magnitude, therefore, if net foreign direct investment is used, the effect of inward and outward direct investment will be canceled out. Outward direct investment is not used because it measures the investment outflow of Hong Kong local enterprises and investors to foreign places, which may be affected by the economy of Hong Kong, but could not show the direct effect on local rental office market since money is leaving from Hong Kong. In addition, the increase in the outward direct investment does not imply the local investment to Hong Kong will be reduced and vice versa. Since local enterprises and investors are able to increase both the local investment in Hong Kong as well as expand their investments to elsewhere. Therefore, neither outward direct investment nor net foreign direct investment is a good indicator to measure the globalization effect on Hong Kong and its local office rental market. Moreover, the inward foreign direct investment has played an important role in shaping Hong Kong economy stated in Feature Article on External Direct Investment Statistics of Hong Kong Monthly Digest of Statistics. As a result, inward foreign direct investment is used to measure the effect of the inward globalization effect on Hong Kong office rental market.

Since data of the inward foreign direct investment is available from Census and Statistics Department starting from 1998, therefore, the trend can only be

examined from 1998 to 2006. Despite the Asian Financial Crisis in 1997, which had hindered the local economy and its local investments in Hong Kong, the foreign direct investment had experienced a tremendous increase in 1998 till 2000, and starts to fall in 2000 and continue to fall to its trough in 2002 when the world’s economy are seriously affected by 9/11 events in 2001. Afterwards the foreign direct investment inflow started to rise in spite of the plague SARS occurred in Hong Kong.

Figure 5.5 Inward Foreign Direct Investments in Hong Kong from 1998 to 2006

Foreign Direct Investment Flow (Inward)

0 100,000 200,000 300,000 400,000 500,000 600,000

1998 1999 2000 2001 2002 2003 2004 2005 2006 Year

Amount (Million)

Source: Capital and Financial Account, Balance of Payment Account, Census and Statistics Department, Hong Kong Special Administrative Region³⁶

5.3.2.2 Number of Oversea Companies having a Place of Business in Hong Kong (OVERCOM)

The number of oversea companies having a place of business in Hong Kong is the difference between the number of oversea companies newly registered as having a place of business and the number of oversea companies ceased to have a place of business in Hong Kong. Firstly, in Haila research (2000, p.2242),

36 Source: Balance of Payments Branch (1), Census and Statistics Department HKSAR (2007 Website). Website of Census and Statistics Department. (Online) Available from:

http://www.censtatd.gov.hk/hong_kong_statistics/statistical_tables/index.jsp?charsetID=1&subject ID=12&tableID=043 (Accessed 23 March 2007)

she does not only include foreign direct investment as one of the indicators of economical globalization, but also included transnational companies as one of the indicators as well. In Hong Kong, there is no exact definition and data for the number of transnational companies, therefore, the number of oversea companies in Hong Kong is used instead. Same as international companies, the number of oversea companies in Hong Kong is driven by globalization. Because of globalization, it has enhanced the capital and investment flow between territories, and allows enterprises to expand their businesses so as to set up headquarters or establish new companies in elsewhere. Secondly, the number of oversea companies having a place of business in Hong Kong is a good indicator to capture the globalization effect in Hong Kong that would affect Hong Kong office rental market. This is because this number does not simply show the number of oversea companies in Hong Kong, but it also shows those companies which have a business place in Hong Kong. Therefore, it is a good indicator to reflect the demand from overseas enterprises for business places in Hong Kong, which is most likely to be the office space.

According to the concept of law of demand and supply, the change in demand will lead to a change in price or value. As stated in Fraser (1993, p182), the office rents, which capture the demand for occupying the office space, will be determined by the oversea companies that demand for a business place in Hong Kong. Therefore, the number of oversea companies having a place of business in Hong Kong is a good indicator to reflect the globalization effect to the office rental market.

In mid 80s’, the number of oversea companies having a place of business in Hong Kong is little, with less than 100 in 1985, 1987 and 1988. Afterwards, the globalization effects started to grow vividly in the late 80s’ together with the number of oversea companies in Hong Kong. Starting from 1989, the number of oversea companies having a place of business in Hong Kong started to increase drastically. The upward trend continuous till 1995 and it starts to drop, which may

due to the threat of the return of Hong Kong to China in 1997. It continued to rise afterwards but follow by another drop in 2001, which may due to the 9/11 events in 2001. When Hong Kong and the world’s economy started to recover in 2004, the number of oversea companies in Hong Kong started to increase again.

Figure 5.6 Number of Oversea Companies having a Place of Business in Hong Kong from 1985 to 2006

Number of Oversea Companies having a Place of