A Report on Support Measures for Small and Medium Enterprises

Executive Summary

Introduction

In his Policy Address in October 2000, the Chief Executive reaffirmed the importance of small and medium enterprises (SMEs) as an important pillar of Hong Kong's economy, and the Government's commitment to helping the development of SMEs. The Small and Medium Enterprises Committee (the Committee) was tasked with the responsibility to explore new measures to support SMEs under the themes of "helping to start a new business", "helping to build a new business" and "helping to expand a business", and to come up with practical recommendations.

2. In addition, in his 2001-02 Budget Speech delivered on 7 March 2001, the Financial Secretary announced the setting aside of $300 million for the establishment of a training fund to subsidise SMEs' training initiatives for their employees. He invited the Committee to come up with suggestions on the scope of training, the eligibility criteria and the amount of subsidy to be provided by the fund.

The Committee's philosophy and consensus

3. SMEs are defined as manufacturing firms which employ fewer than 100persons, and non-manufacturing firms which employ fewer than 50 persons. As at December 2000, there were approximately 290 000 SMEs in Hong Kong, accounting for 98% of local enterprises.
   
   
4. After careful deliberations and extensive consultation with the public, in particular SME associations, the Committee reckons that in the face of three major economic developments, namely globalisation of world economy, China's accession to the World Trade Organization (WTO) and the emergence of a knowledge-based economy, SMEs need greater support in six areas, namely business environment, financing, corporate governance and culture, human resources, technology application, and market expansion if they are to rise to new challenges and capitalise on new business opportunities.
   
   
5. In this connection, the Committee has come up with a package of new support measures in the aforementioned six areas. The proposed measures are based on the following philosophies :

1. under the principles of market economy, the Government's role in supporting local SMEs' development is to create a favourable business environment, striking a balance between maximum support and minimum intervention;
   
   

2. SMEs' capabilities to cope with the ever-changing economic environment should be enhanced through different support services;
   
   

3. SMEs must move with the times in terms of their mindset and mode of operation, with greater emphasis on upgrading the quality of management for continuous development;
   
   

4. the current multi-channel approach in providing support services for SMEs should continue. That is to say, various Government departments and support organizations should work together and complement one another in providing different services for SMEs;
   
   

5. the Committee should come up with proposals in response to difficulties and challenges which are common to the many SMEs in Hong Kong, so that the Government and various support organizations could suitably focus their attention and channel their resources. Moreover, the Government should prompt and encourage trade and industrial organizations, professional bodies and research institutes to provide support in response to the specific needs of SMEs; and
   
   

6. the proposed new support measures are meant to be implemented together with existing measures to make the most of the resources.

Proposals to help SMEs start, build and expand their businesses

A. Establishment of four funding schemes

6. The key recommendation of the Committee is to set up four funding schemes to help SMEs enhance their overall competitiveness. The details of the recommendations are set out below.

(1) SME Business Installations and Equipment Loan Guarantee Scheme

7. The Committee recommends the setting up of a $500m million SME Business Installations and Equipment Loan Guarantee Scheme to help SMEs secure loans from banks and financial institutions to acquire the necessary business installations and equipment^{(Note 1)} for enhancing productivity and competitiveness. The maximum amount of guarantee that an SME can receive is 50% of the loan or $500,000 (whichever is the less). The maximum guarantee period is three years. To encourage SMEs improve their financial management and to increase the transparency of their accounts, SMEs wishing to make use of the scheme are required to submit audited accounts to the relevant lending institutions.
   
   
8. The Committee estimates that under normal circumstances, the overall default rate of the Scheme should not exceed 15%. In order to benefit as many SMEs as possible, the Committee suggests that the Government work on the basis of a 15% default rate. With a capital amount of $500 million the Government will be able to commit a total of $3.3 billion as the maximum amount of guarantees for the scheme.
   
   
9. Under this scenario, it is estimated that the scheme will help SMEs raise at least $6.6 billion in the market, benefiting about 6 600 SMEs. If we assume the average the size of a loan case to be, say $0.7 million, which means that on average the Government has to provide $0.35 million as guarantee per loan case, then about 10 000 SMEs will benefit from the Scheme.

(2) SME Development Fund

10. The Committee recommends that the Government set up a $200 million SME Development Fund to subsidise projects to be carried out by eligible support organizations, trade and industrial organizations, professional bodies and research institutes to enhance the competitiveness of SMEs in general or SMEs in specific sectors. The maximum amount of grant for each project is $2 million. Applicants are required to contribute part of the expenses of their projects, but this requirement may be waived under special circumstances.
    
    
11. The Committee estimates that the Scheme can provide funding for at least 100 projects and benefit a great number of SMEs. To ensure that resources in the Scheme can bring maximum benefit and impact, the Committee recommends that a main funding criterion should be the number of SMEs which may benefit from the funded projects. On the assumption that a funded project would on average benefit 200 SMEs, 20 000 SMEs will benefit from the Scheme.

(3) SME Training Fund

12. The Committee recommends the setting up of an SME Training Fund with the $300 million set aside by the Financial Secretary in the Budget in March 2001 to subsidise, on a dollar-to-dollar matching basis, training provided by SMEs to their salaried employees, which are relevant to their business operation. In addition, the Committee recommends the Government to set aside $100 million to provide subsidy, on a dollar-to-dollar matching basis, to SME employers to attend training courses relevant to their businesses. Together they will constitute the SME Training Fund, with a total amount of $400 million. Eligible training courses include training courses provided by local training organizations; overseas training courses; and training courses commissioned by SMEs to suit their particular needs and conducted by training organizations/higher education institutions or individual instructors. The subsidies cover direct course expenses only. For employees' training, the maximum amount of subsidy that each SME can obtain, on a cumulative basis, is $10,000. For employers' training, the maximum amount of subsidy that each SME can obtain, on a cumulative basis, is $5,000. The subsidy would be reimbursed to the concerned SMEs after the relevant employers/employees have completed the approved training courses.
    
    
13. The Committee estimates that, through the Scheme, about $800 million will be spent on SMEs' training initiatives, and that employees of at least 30 000 SMEs and employers of at least 20 000 SMEs will benefit.

(4) SME Export Marketing Fund

14. The Committee recommends the setting up of a $200 million SME Export Marketing Fund to subsidise SMEs' participation in export promotion activities held locally or outside Hong Kong (including trade fairs and study missions). For each successful application, the subsidy will cover 50% of the fundable items of the approved export promotion activities, or $10,000 (whichever is the less). Subsidy would be reimbursed to the concerned SMEs after they have completed the approved export promotion activities. Each SME can only receive subsidy once under the Scheme.
    
    
15. The Committee estimates that, through this Scheme, about $400 million will be spent on export promotion activities, benefitting at least 20 000 SMEs.
    
    
16. Table 1 shows the number of SMEs which will likely benefit from the four funding schemes according to the level of funding recommended by the Committee.

17. As the funding schemes are new initiatives, the Committee recommends that the effectiveness of the funding schemes should be reviewed after the first year of operation.

B. Other major proposals

18. The Committee's recommendations concerning the six major areas, viz. business environment, financing, corporate governance and culture, human resources, technology application, and market expansion are set out in the paragraphs below.

(1) Business environment

Maintaining a favourable business environment

19. The Committee recommends that when formulating and implementing policies, policy bureaux/departments should take into account the impact of their policies on SMEs and consult SMEs concerned if necessary. The Government should also enhance co-operation with all local trade associations, in particular those representing SMEs, so as to pool together resources and expertise in promoting the development of SMEs. In addition, the Committee urges the Government to avoid, as far as possible, levying sales tax. The sales tax, if levied at a time when the economy is just recovering, would deal another blow to SMEs, many of which are engaged in trading and retail businesses. A sales tax would also cause Hong Kong to lose its attraction as a popular destination for tourists.

Helping to start a new business

20. The vigour and enterprising spirit of business starters is the driving force of Hong Kong's economic prosperity. Hence, the Government should provide them with as much support as possible. In this connection, the Committee recommends that the Trade and Industry Department (TID) should further enhance its support services for SMEs. These include　:

1. studying the feasibility of providing one-stop licensing services for starting business;
   
   

2. expanding the SME Information Centre to provide more comprehensive information and advisory services for SMEs; and
   
   

3. enhancing the information and types of services provided by the Virtual SME Information Centre to provide SMEs with diversified, relevant and up-to-date business-related information and services.

(2) Financing

Narrowing the existing gap in the loan market

21. Most financial institutions have not yet put in place a mechanism for the effective assessment of the credit risk of SMEs. Furthermore, because of inadequate transparency of their financial status and management, SMEs often are unable to provide financial institutions with sufficient information to assess their business performance and prospects. As a result, many financial institutions are still cautious about approving loans for SMEs. To narrow the existing gap in the existing loan market, the Committee recommends that :

1. a roundtable should be set up to enhance communication among SMEs, financial institutions, the Hong Kong Monetary Authority (HKMA) and Government departments responsible for commerce and industry;
   
   

2. a checklist of information generally required by financial institutions when vetting loan applications should be drawn up by the roundtable for the reference of SMEs;
   
   

3. the HKMA should expedite the establishment of a commercial credit reference agency; and
   
   

4. the Government should encourage the financial sector to develop and put in place a credit scoring system with which financial institutions can make objective and prompt assessments of credit risks on the basis of various indicators, thereby facilitating the processing of loan applications from SMEs.

Developing diversified financing tools and channels

22. Apart from seeking credit facilities from financial institutions, SMEs should be on the lookout for other financing tools and channels. The Committee recommends that :

1. the services of the Hong Kong Export Credit Insurance Corporation should be strengthened. This includes modifying the Corporation's insurance risk assessment process by providing different percentages of indemnity according to the levels of risk involved, and providing additional diversified credit insurance products;
   
   

2. the feasibility of credit guarantee in the form of insurance should be studied by the trade, with a view to strengthening SMEs' financing capability; and
   
   

3. efforts should be made to enhance SMEs' knowledge of various types of equity financing, including venture capital funds.

Facilitating SMEs to grasp information on the financing market

23. To facilitate SMEs to widen their knowledge on various financing means and the financial management requirements of financial institutions, the Committee recommends that :

1. the trade should establish a comprehensive SME financial resources database to help SMEs identify suitable financial institutions and financing packages according to their own needs; and
   
   

2. the Government should, in collaboration with other SME support organizations, organise educational activities to motivate SMEs to enhance their financial transparency and to acquire better knowledge of and skills in financial management.

(3) Corporate governance and culture

Enhancing corporate governance and culture

24. Many SMEs still adopt traditional practices in running their businesses, thus placing themselves in a disadvantageous position in the new economic order in terms of their ability to adapt to change, plan ahead, raise capital, and exploit business opportunities. The Committee therefore recommends that :

1. the Government should, in collaboration with professional organizations, draw up a set of guidelines on corporate governance for SMEs;
   
   

2. trade associations, in collaboration with support organizations, should formulate suitable sector-specific governance framework for SMEs' reference; and
   
   

3. the Government should, working through its connection with both SMEs and big enterprises, promote the benefit of reciprocal strategic partnership between the two parties.

(4) Human resources

Increasing the supply of quality manpower

25. Quality human resources are of paramount importance to the consolidation and development of SMEs in a new knowledge-based economy. The Committee welcomes the following Government measures to increase the supply of quality human resources in the market :

1. continued substantial investment in education and implementation of education reform; and
   
   

2. implementation of the Admission of Mainland Professionals Scheme, and relaxation of the relevant requirements so that Mainland students studying in Hong Kong can stay and work here after graduation.

Strengthening the culture of "life-long learning" in the workforce

26. Hong Kong has to strengthen the culture of life-long learning by encouraging and motivating our workforce to continue learning with a view to improving their ability to meet the changing needs arising from the rapid development of our society. The Committee supports the Chief Executive's announcement in his 2000 Policy Address that the Government will, in conjunction with the education, industrial and commercial sectors, develop a life-long learning ladder, and study the implications of establishing a qualifications framework and programme standards. Moreover, the Committee encourages our workforce to make the best use of information technology (IT) and the Internet to pursue cyber learning.

Helping SMEs enhance the value of their workforce

27. The Committee recommends that, if evaluation confirms the effectiveness of Pilot Mentorship Programme to SMEs at the start-up stage, the TID should expand the programme to benefit more SMEs.

28. The Committee also recommends the establishment of an SME Outstanding Training Award to commend SMEs with outstanding performance in training.

29. Furthermore, the Committee encourages tertiary institutions to implement an Institution Trainee Practicum Programme, to help direct talent to SMEs.

(5) Technology application

Raising SMEs' IT awareness

30. In terms of active IT application, Hong Kong's SMEs are lagging behind large enterprises. Noting that most SMEs have yet to appreciate the benefits that IT can bring to their businesses, the Committee recommends that :

1. the Government provide financial support to encourage the IT sector to form IT promotion teams to assist selected SMEs in different sectors which currently are not making much use of IT in their operation. The programme will demonstrate how IT application can benefit SMEs' businesses, with a view to helping and encouraging the application of IT in different sectors;
   
   

2. the Government work with relevant organizations, business associations and the media to publicise best practices on IT applications;
   
   

3. the Government co-operate with relevant organizations and business associations in organising sector-specific SME IT-expo to demonstrate how IT may work in different sectors;
   
   

4. the IT sector should be encouraged to set up a database of IT service providers to make it easier for SMEs to obtain information on IT services available in the market; and
   
   

5. an SME IT Application Award should be set up to commend SMEs with outstanding achievements in IT application.

Increasing the supply of IT personnel

31. An adequate supply of suitable personnel is vital to SMEs' efforts to make more use of IT. The Committee recommends that more places under the IT Assistant Training Programme be provided in the light of actual needs, in order to ease the shortage of IT personnel. The Committee also welcomes the pilot subsidy scheme, implemented by the Information Technology and Broadcasting Bureau, which aims at encouraging Secondary 5 to Secondary 7 school leavers to study IT courses. The Committee believes that this initiative will further ease the current shortage of IT personnel.

(6) Market expansion

Development of overseas market

32. The Committee considers that SMEs must focus their attention on forming strategic partnership with other enterprises, and on expanding the promotion and distribution channels for their products/services. In this connection, the Committee recommends that :

1. the Hong Kong Trade Development Council (TDC) should enhance its matching service; study the effectiveness of the APEC Business Partnership Initiative for SMEs, launched by the US Government in conjunction with Thailand and Singapore separately; and consider the feasibility of launching a similar programme for SMEs in Hong Kong;
   
   

2. relevant parties should as soon as possible complete the study on the construction of another large international exhibition centre, make a decision, and proceed with implementation;
   
   

3. the Government should pursue with the Airport Authority the feasibility of establishing an exhibition gallery for Hong Kong quality products and services at the Hong Kong International Airport to improve the knowledge of overseas visitors and potential buyers about Hong Kong products and services; and
   
   

4. SMEs should make wider use of cyber exhibition on the Internet with a view to marketing their products to other parts of the world.

Development of local market

33. Hong Kong experienced a sharp drop in local consumer expenditure in the wake of the Asian financial turmoil. Meanwhile, as more and more Hong Kong people travel north for cheaper consumer goods and services available across the border, local-based SMEs are faced with immense difficulties. The Committee recommends that :

1. the Skills Upgrading Steering Committee consider including relevant service industries in the Skills Upgrading Scheme, and offering training courses on customer service for the employees in these industries;
   
   

2. relevant Government departments work together with their Mainland counterparts to further simplify the application procedures for Mainland tourists who intend to visit Hong Kong, and to increase the quota for these tourists;
   
   

3. immediate steps be taken to firm up and implement measures to improve our environment;
   
   

4. relevant Government departments hold talks to brief SMEs on Government's procurement and tender procedures, and how to prepare tender documents; and
   
   

5. the Hong Kong Tourism Board and the TDC step up their efforts in promoting Hong Kong as a venue for organising large international conventions and exhibitions to enhance Hong Kong's competitiveness in this regard and to help boost tourist spending.

Development of Mainland market

34. Local enterprises, including SMEs, have been encountering difficulties when doing business in the Mainland. Their problems mainly stem from their unfamiliarity with the economic environment, laws and regulations of the Mainland, and a lack of mutual communication. As the economic development of Hong Kong and the Mainland are interwined, the Committee considers that greater support should be rendered to enterprises in developing the Mainland market. The Committee welcomes the Government's positive efforts in this respect. For example, the Hong Kong Special Administrative Region delegation to the Western Region of China, led by the Chief Secretary for Administration, has laid a solid foundation for the development of an interactive and mutually beneficial relationship between the two places. The Committee urges various Government departments and support organizations to keep up their efforts in assisting SMEs to explore the Mainland market. The Committee further recommends that :

1. the TDC implement as soon as possible various measures to facilitate SMEs' entry into the Mainland market; and
   
   

2. the Government consider, having regard to the experience of the visit to the Western Region of China, what action could be taken to help SMEs seize the business opportunities available in the Mainland.

35. The Committee also welcomes trade associations to organise exchange activities between the two places and to maintain communication with the trade and commercial departments in the Mainland, with a view to assisting Hong Kong businessmen when they run into difficulties in the Mainland.

Conclusion

36. The Committee fully recognises the contributions of SMEs over the years in promoting the growth of Hong Kong's economy, providing job opportunities, enhancing the quality of human resources, nurturing a culture of entrepreneurship, fostering creativity, and opening up new business opportunities. The Committee firmly believes that SMEs will play an increasingly important role in the new economy. It is therefore necessary to support the healthy development of SMEs.
    
    
37. With this belief in mind, the Committee recommends that the Government and other relevant support organizations devote more resources to support the development of SMEs. At the same time, the Committee does not encourage SMEs to over-rely on Government's assistance. The Committee believes that it is SMEs' own efforts, capabilities and perseverance which ultimately determine whether they can successfully start, build and expand their businesses. On this basis, the Committee recommends that in addition to enhancing SMEs' capabilities through support services, SMEs should also be encouraged to strive for continuous self-improvement and excellence.
    
    
38. The Committee wishes to express its heartfelt gratitude to all parties who offered their valuable advice. Recommendations in this report are the result of extensive consultations. The Committee hopes that the recommended support measures in this report will be accepted by the Chief Executive for implementation by the Government, with the necessary support of various relevant organizations and SMEs themselves. The Committee hopes that the recommendations will become the blueprint for promoting SME development in Hong Kong. During its term of office, the Committee will do its best to assist the Government in implementing the various recommendations step by step, and in reviewing their effectiveness.

(Note 1) : "Business installations and equipment" could include machinery, computer software and hardware, communication system, stationery, transport vehicles and furniture and fixtures (such as air-conditioning system, built-in cabinets and lighting system).

(Note 2) : On the assumption that the overall default rate of the Scheme will be 15%, we can leverage on the capital amount of $500 million to provide guarantees up to an amount of $3.3 billion. If so, the total amount of loan facilities available will be at least $6.6 billion. About 6,600 SMEs will benefit from the Scheme. If we assume that the average size of a loan case is, say $0.7million, which means that on average the Government has to provide $0.35 million as guarantee per loan case, then about 10,000 SMEs will benefit from the Scheme.

(Note 3) : If each successful applicant receives the maximum subsidy amount of $2 million, then 100 projects will be funded. On the assumption that a funded project would on average benefit 200 SMEs, 20000 SMEs would benefit from the Scheme.

(Note 4) : In his 2001-02 Budget, the Financial Secretary announced the setting aside of $300 million for the establishment of a training fund to subsidise SMEs' staff training initiatives.

(Note 5) : With the exception that $300 million has already been set aside for subsidising SME's staff training initiatives (see Note 9), the resources available for implementing the other funding schemes will depend on the actual amount to be recouped from the SFS. The Committee recommends that, for the time being, the Government work on the basis that $1 billion will be available.

(Note 6) : The figure is based on the assumption that there are no overlapping of SMEs as beneficiaries among the various funding schemes.

Chapter 1 : Introduction

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