HKUST Business School [SBM] Newsletter, November 1999 (Issue 8)

Abstract

[evdate 1999-11-15] HKUST Business School Newsletter ISSUE 8 NOVEMBER 1999 1Clear Water Bay, Kowloon, Hong Kong AMONG THE TOP A team of four HKUST Business School students, alongside teams from Wharton, University of California, Berkeley, and University of Texas, Austin, qualified for the final round in a case competition held in Austin, Texas, USA, over the last weekend in October. This achievement was the third in this year that a HKUST Business School team scored well in direct competition with students from other major business schools from around the world. All in the final year of their studies, the team included Maggie Chan (Marketing), Grace Chun (Information Systems), Lam Wai Nam (Finance and Dennis Lai (Economics). They took part in the Undergraduate M a n a g e m e n t C o n s u l t i n g Association 1999 International Business Challenge organized by the University of Texas, Austin, with more than 80 students from Asia, Europe, South America, Canada, Mexico, and the United States. Other Asian schools competing were Hong Kong University and Thammasat University from Thailand. The students were presented with a business issue involving Ford's strategic plans for the first five years of the coming Southern California and University of Washington. They also did a great job in the final round, but the competition at that stage was even more intense," he said. The final overall winner was University of California, Berkeley. Earlier this year, two HKUST Business School teams entered the final round at two other major case competitions: Marshall International Invitational Case Competition in February (organized by the University of Southern California), and the Global Business Challenge in April (organized by the University of Washington). Pictured at the award presentation ceremony with their advisor Andrew Delios (far right) are from left Maggie Chan, Grace Chun, Lam Wai Nam and Dennis Lai. A study published in Economic Inquiry (October 1999) has found that faculty members in HKUST have highest research productivity in economics based on the publication of their articles in top journals. Conducted by Jang C. Jin and Louis Yau, researchers at the Chinese University of Hong Kong, the study covers the period from 1990-1996. HKUST's performance in economics research was considered as good as some of the best universities in the US. TOP-3 IN EAST ASIA: 1990 - 1996 Top-36 Top-24 Top-42 Ranking University Journals Journals Journals 1 HKUST 809.2 575.7 611.5 2 Chinese University 618.8 487.5 596.4 (Hong Kong) 3 Tokyo University 425.8 249.7 301.0 (Japan) Source: Economic Inquiry Vol.37, No.4, October 1999, 706-710 Note: The values are total pages published, standardized to the average length of a page in the American Economic Review. Professor Leonard Cheng, Head of Economics, was pleased with the results. "It has always been a culture of the School and the entire University to pursue high quality research. By now, this culture has taken root. We are delighted to be able to attract top researchers to join us and at the same time provide a good environment for junior faculty to develop their academic career. We know all along that we are one of the strongest groups in East Asia, but a formal recognition of our standing based on objective criteria will certainly bolster the spirit of our faculty," said Professor Cheng. Three HKUST A c c o u n t i n g graduates, Pau Kit Suen (98), Chan Siu Ling (98) and Anita Yu Ka Pui (96), surpassed hundreds of students sitting the Joint Examination Scheme (JES) held by Hong Kong Society of Accountants (HKSA) and the Association of Chartered Certified ACCOUNTING GRADUATES PASS WITH FLYING COLORS Accountants (ACCA) in June 1999 and were awarded firsts in three of the professional stage papers. Mr Pau, now an associate with PricewaterhouseCoopers, came first in Paper 10 - Accounting and Audit Practice. professional examinations in the June JES that consisted of six professional stage papers. Students who came first in the other papers included graduates from the Chinese University, City University, Polytechnic University and University of Auckland. millennium in the global automotive industry. They were asked to develop a solution and present it before a panel of business executives, senior consultants from McKinsey and business professors. The team's faculty advisor, Dr Andrew Delios, Assistant Professor of Management of Organizations, said the team's overall performance was impressive. "They were the best team and beat all the other competitors in their division, which included Hong Kong University, N o r w e g i a n S c h o o l o f Management, University of Miss Chan, a staff accountant at Ernst & Young, headed the list in Paper 13 - Financial Reporting Environment. Miss Yu, accounting supervisor of the Hong Kong Jockey Club, took top honors in Paper 14 - Financial Strategy. A total of 901 students completed their Inside this issue: Conferences page 3 HKUST RANKED NO.1 IN ECONOMICS RESEARCH PRODUCTIVITY IN EAST ASIA Graduates venture into Cyber business pages 6 & 7 Upcoming events page 8

2The Hong Kong University of Science & Technology The Business Students' Union (BSU), together with the Engineering Students' Union

and the Science Students' Association, organized the third students' camp of the

Association of East Asian Research Universities (AEARU) in July. The theme of this year's camp was "Information Technology in the New Millennium".

Activities such as seminars, discussions, contests and firm visits were organized to

enhance students' knowledge of the development of information technology in the East

Asian region. A total of 53 business, engineering, and science undergraduate students

from 11 universities in the East Asian region participated. Chairwoman of the Organizing Committee Isabella Leung (BSU) said, "the seven-day

program was a tremendous success. It provided an excellent venue to facilitate exchange of ideas and experience, and forge friendships. I believe the program has

established a strong tie among the participants for further collaborations in the future."

The AEARU was formed in 1996 to promote communication and cooperation among universities in East Asia. It has brought together 17 premier universities from the Chinese

Mainland, Hong Kong, Japan, Korea and Taiwan, all of which share the same goal in

creating a forum where members can meet to identify areas of mutual interest, foster

cultural exchange, and nurture communication networks for productive collaboration.

The students' camp is one of the initiatives geared towards these ends. "I think the most precious thing that I gained from the Business Mentoring Program is a friendship with my mentor Evan," said Maxie Lai (Accounting), who is one of the 15 undergraduates that joined the program this last April. Evan Auyang was educated in the US and returned to Hong Kong five years ago. He is glad to have participated in the program. "Many people think that mentees are the only ones to benefit from the program. But the fact is, we as mentors gain a lot too. To me, the interaction with Maxie has given me a chance to know more about the thinking and attitude of local youngsters. We talk about everything from political, social, and educational issues to personal stuff like values, career development and hobbies. I will share my work experience with her, and hopefully I can help her figure out her own goals in career and life." "Evan inspires me to think critically and from a wider perspective," Miss Lai said in a cheery tone. "He does not preach to me on what is right or what is wrong. Instead he always encourages me to see things from different angles and not to be bounded by my own preconceptions. We seldom set specific goals for each meeting. The learning process is very natural and is sometimes even more effective than hearing a lecture." In July, the pair enrolled in a one-month Putonghua program in Peking University on the Mainland. "I had just quit my job, as I MENTORING PROGRAM FOSTERS MUTUAL FRIENDSHIP prepared to leave for the US in early September to further my studies, when Maxie asked if I was interested in the program," said Mr Auyang. "We were both eager to know more about the Chinese Mainland and its people, so we seized every opportunity to go out and talk to local people while we were there. It was a very interesting and fruitful experience." "Apart from learning Putonghua, I was able to interact with a diverse group of people and it really opened up my exposure," Miss Lai said. Although Evan Auyang is now studying abroad, his mentee is definitely not left in the cold. Before leaving, Mr Auyang has arranged for another mentor to take his place. "Even though I am away, we can still communicate through email or the Internet. We have built up a friendship that will go on even after the completion of the mentoring program," he said. The Business Mentoring Program is organized by the Undergraduate Programs Office and voluntary organization Friends Unlimited. The program aims to establish mentor-mentee relationships between business executives and HKUST business students to foster academic, career and personal development of the students. The current 15 mentors are all members of the organization that was founded by a group of young professionals dedicated to the cause of nurturing future leaders for Hong Kong. AEARU STUDENTS' CAMP STRENGTHENS EAST ASIAN NETWORK The MBA Office went on an international road show between September and November. An information counter with posters about the program was displayed in 10 different international cities over the course of the three months. The 10 cities included, in Asia, Hong Kong, Shanghai, Singapore, and Tokyo; in Europe, Copenhagen, Frankfurt, and Paris; and in North America, Chicago, Los Angeles, and New York. All events were organized by the Graduate Management Admission Council as MBA Forums, with the exception of the Scandinavian International Career and Education Fair (SICEF) held in Copenhagen. Organized by the Danish Association of Students in Economics and Business Administrations, the SICEF was by invitation only. HKUST was the only school from Asia among the 19 MBA PROGRAM ON INTERNATIONAL RECRUITMENT TRAIL participating international business schools, such as Copenhagen Business School, INSEAD, London Business School, Harvard, MIT, Stanford and Wharton. Chris Tsang, Associate Director of Postgraduate Programs, said the road show generated some very good responses. "The exhibition in Shanghai, for example, attracted some 1,500 people. They were very keen on getting information on our MBA program," he said. In other cities, the HKUST exhibits provided useful information to visitors. "Some were amazed to know that our program was taught entirely in English and the tuition was so affordable for the high quality that we offer," he said. The international road show is part of the School's drive to diversify the student mix of its full-time MBA program. Currently about 40 percent of the HKUST full-time MBA students are non-local. Vivian Wong (left) and Sam Lee, both full-time MBA students currently on exchange at ESSEC

in France, flew to Copenhagen to assist Chris Tsang (center) at the SICEF. STUDENTS

3HKUST BUSINESS SCHOOL - Newsletter Dean Yuk-Shee Chan FROM THE DEAN The period since our last newsletter was one with many activities. August is always the hectic month when we take in our new batch of students. For the class of 1999 the Business School has enrolled 710 BBA/BSc, 186 MBA/MSc, and 17 MPhil/PhD students. The new faces and the enthusiasm they bring with them have invariably boosted up our campus atmosphere. On the other hand, November is the month when we witness the joyful occasion of our annual congregation. At the University's Seventh Congregation, we have happily added 959 new alumni (703 BBA/BSc, 30 Kellogg-HKUST EMBA, 220 MBA/MSc, and 6 MPhil/ PhD graduates). A quick count of the alumni numbers over the years shows that the HKUST Business School has already produced a total of 3,488 graduates since its first congregation in 1993. We are proud of our graduates and are delighted to learn that they have played an increasingly important role in the business community. You may have already noted the expansion of our newsletter. As our faculty, students, and alumni activities increase over time, we find it necessary

to tell you a lot more. In this issue and the future ones, you will find an additional

piece of faculty research report on topical business issues. You will also find a new column, which is devoted to alumni news. Many of our alumni have expressed interest in more communication channels. While the alumni associations and their web sites provide good forums for exchange, we hope the alumni news section will also serve as an important conduit of communication for alumni who like to report their recent activities, such as marriages, baby announcements, new postings and business ventures. Through this column, we hope all of our alumni can reach out to each other and to their friends, the faculty, and staff of the School. I would like to conclude with two pieces of exciting news featured in this newsletter - one on our faculty achievements, and the other on our students'. Firstly, a recent article in Economic Inquiry has ranked HKUST the best in East Asia in terms of research productivity in the areas of economics and financial economics. The article also benchmarks the research productivity of the Asian universities in terms of top-tier research publications. Our performance is rated to be at a par with the University of Illinois, Urbana Champaign and the University of Rochester, two major research universities in the US with outstanding economics departments. Secondly, I am delighted to report that our undergraduate international case competition team has won a place as a finalist in the recent competition held at the University of Texas, Austin. This is the third time in this year our

student teams have excelled in a high-profile international competition. On this high note, may I wish you all a very prosperous Year 2000! A workshop held at Peking University in Beijing in November has provided valuable insight

into the future direction of academic research on China business and management.

The workshop, entitled "The Reform and Development of Enterprises in China", was co-organized

by HKUST, the Chinese University of Hong Kong, and Peking University. Some 80 academics from Hong Kong and the Chinese Mainland participated in the two-day workshop that

featured senior government officials and business leaders of state-owned, private, township and

village, and foreign-invested enterprises as speakers. Setting the tone for discussion throughout the workshop was presentation on the Chinese

government's policies and approaches to enterprise development by Chen Qingtai, Deputy Director

of Development Research Center of the State Council, and Ma Jiantang, Director General of

General Department, State Economic & Trade Commission. A total of nine sessions, including

one plenary and eight separate discussion sessions, were held. In each session, speakers shared

their experience in and views on developing business in China, and then the floor was opened

for questions and answers, comments, and suggestions. Many interesting ideas and prospective research topics emerged from the discussion and

debates, according to conference coordinators Professors Leonard Cheng, Head of Economics

and Anne Tsui, Head of Management of Organizations. "The participants were so fervently involved

with the discussions that many sessions continued into the recess time. At the closing Round

Table Discussion session we already had clear indication about subjects that warranted further

research and researchers who might team up to pursue those subjects," Professor Cheng said.

The next step will be to identify critical research issues and to solicit research proposals from

Researchers in both Hong Kong and the Mainland to systematically investigate the issues.

WORKSHOP SETS RESEARCH AGENDA ON CHINA BUSINESS HKUST Business School Dean: Yuk-Shee Chan Associate Deans: K.C. Chan, Steve DeKrey, Kar Yan Tam Newsletter Editors: Elaine Chu, May Hung Sub-editor: Virginia Unkefer Contact us: echu@ust.hk or bmmhung@ust.hk, fax: (852) 2358 1467 Website: http www.bm.ust.hk (c) 1999 by the School of Business and Management, the Hong Kong University of Science and Technology. All rights reserved. In October the Center for Economic Development co-sponsored Hong Kong's first international conference on cross-border production fragmentation, i.e., the phenomenon of splitting a traditionally integrated production process into a number of sub-processes to take place in different parts of the world. The conference was entitled "Global Production: Specialization and Trade." The other co-sponsors were the Center for Asian Pacific Studies, Lingnan University, the Graduate Institute of International Studies, Geneva, and the Hong Kong Trade Development Council. The first part of the conference, held from 25-26 October, was opened by the conference organizer Professor Leonard Cheng, Head of Economics. It featured a total of 16 research papers. The speakers included about 30 famous academics from Asia, Australia, Europe and the US as well as experts from the World HONG KONG'S FIRST CONFERENCE ON CROSS-BORDER PRODUCTION FRAGMENTATION Bank. The papers addressed interesting theoretical, empirical, and policy issues related to the theme of the conference with a focus on the Asia-Pacific economies. The second part was a half-day public forum in the morning of 27 October. It was opened by the Financial Secretary Donald Tsang and attracted about 140 academics, diplomats, and business leaders. The keynote speakers and panelists included an overseas academic, a government official and an industry leader from Hong Kong. The public forum was very well received by the participants. Conference organizer Leonard Cheng (second left) and panelists: Peter Petri, Brandeis University (left), Cherry Ling, Deputy Director-General of Trade, and Roy Chung, Techtronic Industries (far right). Financial Secretary Donald Tsang at the opening of the public forum.

4The Hong Kong University of Science & Technology DIRECTION RIGHT BUT RECOVERY STILL ON BUMPY ROAD Original research "Asset Price Bubbles, Liquidity and Investment: Evidence from Japan" by Vidhan Goyal and Takeshi Yamada

The central bank of Japan has the right idea of paving the way for the economy to recover by holding fast to an easy monetary policy. But the real push to rejuvenate it will hinge on the availability of more add-ons from the Japanese government. EASY MONETARY POLICY Since the bursting of the economic bubbles in Japan at the turn of the decade, the Bank of Japan, the nation's central bank, has been standing by an easy monetary policy in order to stimulate domestic demand and help financial institutions. The short-term interest rates have been gradually descending from over five percent at the beginning of 1992 to the current near-zero percent level. This favorable environment, however, does not seem to have nurtured any growth in the economy as firms have continued capital investment reduction and bank lending has continued to fall. The Bank of Japan's quarterly corporate survey Tankan, released in September, showed that big Japanese companies plan to cut capital investment by 9.4 percent in the financial year ending 31 March 2000, compared with 7.9 percent as indicated in the previous survey three months ago. Lending by Japanese banks also fell 6.3 percent in September from the same month in 1998. So the question is: does monetary policy carry any meaning in helping an economy, like Japan, regain its resilience? The answer is probably positive, especially based on Japan's own figures around the economic bubble period, according to finance researchers Vidhan Goyal and Takeshi Yamada. RESEARCH In a recent research based on evidence from the Japanese economy during 1980-93, Goyal and Yamada find that Takeshi Yamada is Assistant Professor of Finance at HKUST, email: tyamada@ust.hk BUSINESS FORUM while firms' investment cash flow sensitivity varies substantially with changes in asset values and monetary policy regimes, the effect of monetary policy is more powerful than collateral values. The sample of study included all Japanese firms listed on the Tokyo Stock Exchange at the beginning of 1980, with the exception of firms in the financial services or utility industries. Also excluded are firm-years in which a firm either merged or was spun-off. There were approximately 1,100 firms in each year. The period of study was divided into four segments, namely, "benchmark" (pre-bubble) period, "asset inflation" (bubble) period, "collapse" (bursting of bubble) period, and "contraction" period. The characteristics of each are summarized in Table 1. The empirical results of the analysis show that the increase in collateral values (as a consequence of high land and stock prices) and the easy monetary policy contributed to relatively low estimated cash flow sensitivity of firms during the bubble period. And, as expected, the sharp decrease in collateral values and tight monetary policy during the collapse period led to a significant increase in cash flow sensitivity. However, during the contraction period while collateral values remained low but the monetary policy had been loosened, the cash flow sensitivity dropped to a level even lower than during the asset inflation period. The results suggest that variations in sensitivity are attributable more to changes in monetary policy than to shifts in collateral values, according to the researchers. They also find that even more bank-dependent firms face significantly greater liquidity constraints only in times of tight monetary policy. CURRENT SITUATION The current situation in Japan is that the central bank has reduced firms' cash flow sensitivity by maintaining a loose monetary policy, but this removal of constraints has not been translated into any action at the receiving end. "In my opinion, the Bank of Japan has done what they can so far and this is definitely the right policy. However, this policy can only create a favorable environment at best. The stimulants to fuel the demand will have to come on top," said Dr Yamada. In fact, there have been some favorable signs such as the improvement in business sentiment as reported in the September issue Tankan and the positive growth of the stock market since early this year. The survey showed that the sentiment index for big manufacturers rose for the third consecutive quarter, to minus 22 from minus 37 in June. (The sentiment gauge is a diffusion index of the percentage of companies reporting favorable business conditions minus those reporting unfavorable conditions. Thus a decrease in the negative figure means a rise in the relative optimism in the market.) The Nikkei Stock Average has risen from 13,416 at close of play on 4 January to 18,896 on 24 November. "The crucial thing to revitalize the economy is for the Japanese government to speed up the deregulation of the economy. There are simply too many rules and regulations to follow that makes doing business costly," said Dr Yamada. Worse still, a large part of these are in the form of "administrative guidance" (unwritten rules) that are totally at the discretion of government officials, according to Dr Yamada. While Dr Yamada is optimistic about the eventual recovery of the Japanese economy, he does not expect the government to be capable of making a swift change. "It is difficult, as there are so many people with vested interests, including the government, in the current system," he said. -- MH Other key findings of the research include: During asset price bubbles -  Corporate investment responds more to non-fundamental components of stock valuations  Firms with high non-fundamental valuations issue more new debt and their cash flow sensitivity is lower the Bank of Japan has done what they can so far and this is definitely the right policy" Table 1 Key Characteristics of the Japanese economy from 1980-93 Year Period Characteristics 1980-86 Benchmark Gradual increase of stock and land indices; easy and stable monetary policy by the

Bank of Japan; average official discount rate*: 5.77 % 1987-90 Asset inflation Rapid surges of stock and land prices; easy monetary policy; average official

discount rate: 4.17% 1991 Collapse Both stock and land values collapsed within a short time; a significant tightening of

monetary policy by the Bank of Japan; average official discount rate: 5% 1992-93 Contraction Continuous contraction of the economy; loosening of monetary policy by the Bank

of Japan; average official discount rate: 2.8% * The official discount rate is the interest rate charged by the Bank of Japan when extending loans to private

financial institutions. "The crucial thing to revitalize the economy is for the Japanese government to speed up the deregulation of the economy" Vidhan Goyal is Assistant Professor of Finance at HKUST, email: goyal@ust.hk

5HKUST BUSINESS SCHOOL - Newsletter In a new theory proposed by economics professors Chew Soo Hong and Guofu Tan, optimism, or the lack of it, is regarded as a key weighting factor in explaining why innately risk-averse human beings are often seen to be risk-taking. TYPES OF RISK AVERSION Economists have observed several types of risk aversion. The extreme case of risk aversion is that, given an opportunity to receive the expected return for sure, a person will reject any gamble. Such risk aversion basically precludes any possibility of risk-taking behavior in that person. Under the assumption of this definition, if there is a gamble that offers $1,000 with a 0.1 percent probability, the person would still opt for the expected return for sure which is, in this case, $1 only. Two other kinds of risk aversion are less extreme and more commonly seen in human behavior: "aversion to even-chance bets" and "aversion to small-probability hazards". The former type can be explained as follows. Consider a gamble has two equally likely possible outcomes, i.e. , the chance of their occurrence is the same, but one carries a higher value than the other. If a person is offered the average value of the two outcomes, he/she will rather not take part in the gamble. This decision of not taking part, however, can be changed if the offered value is much reduced. This occurs in financial markets where players willingly take on risk as the common perception is that they can reap a higher return, for example, by investing in stocks than putting the money in a fixed-deposit account. The latter describes people who dislike the thought of even a slight probability of damage to or loss of their wealth. Insurance provides a way to deal with this type of risk aversion. WEIGHTING FACTOR At the end of the 1940s, Friedman and Savage used a famous reversed S-shaped von Neumann-Morgenstern utility model to TO RISK OR NOT TO RISK OPTIMISM HOLDS THE KEY Original research "The Market for Sweepstakes" by Chew Soo Hong and Guofu Tan Guofu Tan is Associate Professor of Economics at HKUST, and Associate Professor of Economics at University of British Columbia, email: guofutan@ust.hk explain what makes a risk-averse person take risk. (See Figure 1). In this model (known as the expected utility model), a person is basically averse to risk (inside the concavity of the graph). However, once the potential return goes beyond a certain threshold, that person starts to take risk (the convexity part of the graph). The model, while effective in explaining certain risk-taking behaviors such as those observed in the financial markets, falls prey to its simplicity in regarding the amount of the potential return as the key factor governing whether or not a person will take risk. Under this model, certain behaviors cannot be explained. For argument's sake, we take an example of a bank manager who has the responsibility of recommending and approving loan applications. Given a high enough potential return, say the possibility of becoming a director of a major bank, that manager will willingly work harder in the hope that he/she may eventually get promoted to that position. This investment of extra effort is in itself a risk-taking behavior because there is no guarantee whether the amount of effort will result in any gain. According to the Friedman and Savage model, this manager is now classified as a risk-taking person. But does it mean that he/she will now be risk-taking when confronted with his/her daily dealings with customers' applications for loans? The sensible answer will be no. In the new model employed by Chew and Tan, the impact of "optimism" was added as a decision weight that explains whether a person prefers to take risks. Represented graphically, the risk-averse nature of any person will remain throughout, as the concave utility curve (dotted line) shows in Figure 2. However, a person's decision on taking risk or not will be determined by an additional curve - the "optimism" weighting curve. An upward curve represents the type of person who has a preference to go for a long shot if the proposed reward is big enough to be attractive. The co-existence of the bank manager's risk-taking behavior in his/her career (the upward curve) and his/her prudence (aversion to risk) in handling customers' loan applications (concave utility curve) can therefore be explained. Can the additional curve be downward? Yes. If that is the case, the disposition to be risk-averse is reinforced. With a downward curve, it will be more difficult for the bank manager to be motivated to invest extra effort into the job. "This is a step forward for us in understanding paradoxical phenomena such as why retired people, who generally tend to protect their wealth and therefore are averse to risk, will sometimes go for a long shot, say, by buying lottery tickets," said Professor Chew. SWEEPSTAKES Based on this new model, Chew and Tan ascertained that a market exists for sweepstakes, for both fixed or variable prizes. A fixed-prize sweepstakes means there is a pre-determined value of the prize regardless of the total ticket sales, whereas the value of variable-prize sweepstakes will adjust accordingly to the level of sales. They find that the bigger a population is, the more profitable it is to hold a sweepstakes for either fixed or variable prizes. In comparison, if it is profitable to hold a fixed-prize sweepstakes, then it is more profitable to hold a variable-prize sweepstakes for the same population. Another striking theoretical result is that the per capita profit of a variable-prize sweepstakes increases as the size of the population grows. As an illustration, the researchers pointed out the mergers of smaller state lotteries into larger ones in the US over the last few decades. A telling example was the Multi-State Lottery Association, a lottery consortium involving over 20 states. In 1998, this consortium delivered the largest ever top prize of US$297 million through its highly popular Lotto called Powerball. The professors further studied the demand for sweepstakes that is explicitly linked to the provision of a public good. One such example is state lotteries where usually part of the proceeds are donated to a charity (public good). There are two complementary results. One is the fixed-prize sweepstakes can be effective in drawing positive contributions based on the inherent appeal of the public good to the consumers, even when consumers are all risk-neutral or risk-averse. This explains why many charity raffles are able to appeal to people like the retirees who are usually averse to gambling. On the other hand, when a large p o p u l a t i o n o f consumers with a preference for long shots is involved, the a p p e a l o f t h e underlying public good may not matter much. It is still effective to bundle the public good with a variable-prize sweepstakes that is usually profitable with a large population. In response to this second result, Chew and Tan conducted an analysis to offer a theoretical basis to estimate the elasticity of lottery demand and to derive the choice of takeout rate (the portion of the lottery ticket price being kept by the organizer of the sweepstakes) to m a x i m i z e n e t revenue. The basic result is illustrated using the Laffer curves in Figure 3. According to the curves, the optimal takeout rate should be at a moderate level of 50 to 60 percent of the ticket price (in Hong Kong, the de facto state lottery Mark Six keeps 41 percent from the total sales for lottery duty, charitable causes, and operating costs). A higher level of the portion for a public good induces a higher Laffer curve, meaning that the takeout rate can be further maximized and a higher net revenue can be obtained. Figure 1 Convex zone - risk taking Reversed S-shaped von Neumann-Morgenstern utility curve Utility Concave zone - risk averse $Concave utility curve shows that human beings are usually averse to risk Upward curve displays a preference for a long-shot $Utility Figure 2 Downward curve reinforces intrinsic risk averse nature 800,000 400,000 0 0.5 1 Net Revenue Takeout Rate Figure 3 Laffer curves for different marginal values of a public good Higher portion for a public good Chew Soo Hong is Professor of Economics at HKUST, email: shchew@ust.hk (cont'd on page 8)

6The Hong Kong University of Science & Technology It goes back about three years. The paths of Grace Lo (current part-time MBA), William Wan (95 ISMT graduate), and Hilda Wong, crossed while they worked at Hongkong Telecom Interactive Multimedia Services. They were like-minded people but little did they know that they would later together develop a business based on their own ideas and insights. "We talked about various business ideas all the time. At the beginning of this year, we started to get serious about it and we met regularly to brainstorm, research, and evaluate. In March we all agreed on e-auction and began to develop a business plan for setting up such a business," said Grace Lo, now Manager of Service Development & Management of red-dots, a niche Internet auction site launched in early October. Things have moved fast since March. Two months later, the idea was developed into a full-fledged proposal attractive enough to get the support from Sun Hung Kai Properties (SHKP), one of Hong Kong's largest home-grown corporations. The introduction of the team to Raymond Kwok, Vice Chairman and Managing Director of SHKP, was through a friend, according to Hilda Wong, Manager of Business Development & Marketing of red-dots. "We met with Mr Kwok in May to present our ideas. He asked us a few questions, such as what sets us apart from the others. And, within a few hours after the meeting, we received a call from his office confirming their interest in our proposed business," she said. red-dots.com Another two months on plans on the drawing board were transformed into an entity with office space and the necessary hardware. By that time the trio had all quit their previous jobs. Two more months later and the business, red-dots, became a reality that captured the attention of the media and the business community. The key selling point of red-dots is, however, not technology, according to William Wan, Manager of Application & Systems Development. "Technology is important. But our focus is more on the reliability and service sides of it. The crucial thing is that it has to be convenient and friendly to the users," he said. The real edge is service. "Usually Internet auction sites provide only a platform to facilitate the reaching of a deal. Once it's done, it's up to the buyer and seller to work out between themselves how to deliver the goods and handle any necessary follow up," said Ms Lo. "At red-dots we provide complete service from start to finish. We have a customer service center to help buyers and sellers with their transactions. So instead of two people, strangers to each other, meeting in the street to exchange the goods and the payment, they can do it through o u r c u s t o m e r s e r v i c e professionals." Although red-dots has been successfully launched and business at this early stage has been encouraging, the team is wasting no time. They closely monitor operations each day and maintain a very open style of management that promotes dialogues and exchange of ideas among staff. They have, for example, started plans to bring in interns from local tertiary institutes. "The culture at red-dots is that we are open and energetic. In fact, the average age of our 15-strong staff is 25. We welcome creativity and emphasize teamwork," said Ms Wong. Recalling the preparation stage, Ms Lo said, "in a way, it was actually easier setting up the business because you were more single-minded. Although you had to put in 14 hours a day, seven days a week, you knew exactly what the tasks were and what deadlines to meet. Now it's a free form. It's up to you to nurture and grow it." The part-time MBA program that she is currently enrolled in is useful in helping her face some of the challenges. "Knowledge that I gain from the program is surely helpful. But even more intriguing and enlightening is the interaction between the instructors and the other students. It serves as a very important conduit for me to get a broader perspective of what's going on in the business world as a whole and insights into the future trends," said Ms Lo. Mr Wan also felt that education played a significant role in preparing him for the challenges. "What was really useful to me was the broad-based management education offered by the HKUST u n d e r g r a d u a t e b u s i n e s s programs. I am more a technical man but, because I was required to study other business subjects as well, I never felt my career choice was limited. This foundation proves to be even more useful now t h a t I ' m i n v o l v e d i n t h e management of red-dots," he said. Their advice for young people who would like to follow in their footsteps to try out their business ideas? Don't rush it, do more analysis, look at the hard facts and understand the needs of the users and the market. "Work experience is crucial too because it gives you the flavor of the real life situation and hopefully the network that you will need," concluded Ms Wong. Alumni working in the Hong Kong office of Morgan Stanley Dean Witter (MSDW) held a reunion with their HKUST advisors in Central in September. The lunch get-together was arranged to follow a meeting held between MSDW's human resources executives and the advisors. There are now 13 HKUST graduates and students working in the company in different positions. Seven of them were available to join the lunch. Pictured in the City Hall garden with Exchange Square (where MSDW's offices are located) in the background are: From left: Name Year/Major Department in MSDW Miranda Hui 99/Accounting Controller Clarence Ng 98/Finance Operations Andrew Cheung 99/Finance Operations Patrick Sung 98/Finance Operations Albert Law 97/Accounting Operations Eric Cheung 99/Information System Information Technology Frankie Ng 97/MBA Operations MBA GRADUATE ON A FAST TRACK Full-time MBA graduate Roger Yu was recently promoted to Senior Sales Analyst for Federal Express (FedEx) after serving the company for slightly more than a year. Mr Yu worked as a computer sales representative before joining the MBA program. "After working in the same field for two years, I felt the need to en-hance my business knowledge to pre-pare myself for f u t u r e c a r e e r development. As I had been contem-plating a different career path for a while, a full-time MBA program seemed to be a per-fect match for me." FedEx was Mr Yu's first employer upon graduation from the MBA program in 1998. He joined the company as a sales analyst, responsible for formulating sales pricing policies and collating sales analysis for the Asia Pacific Division. "I am lucky to be able to apply what I learned in the MBA program to my workplace and, most important of all, to have the opportunity to perform and to show my strengths," he said. Roger Yu (far right) with his colleagues at a company meeting in Bangkok. Happy faces at the launch of red-dots are (from left) William Wan, Jimmy Wong, Managing Director of red-dots, Raymond Kwok, Vice Chairman & Managing Director of SHKP, Grace Lo, and Hilda Wong. ALUMNI NEWS CENTRAL REUNION

7HKUST BUSINESS SCHOOL - Newsletter The fad of e-commerce is catching up in Hong Kong. While most of the people are still hustling to dip their toes into the sizzling e-world, a group of HKUST graduates has already jump-started their internet venture - Food Easy, the first bilingual dining information guide on the Internet in Hong Kong. Ten out of the 11 co-founders in Food Easy are graduates of the School. Three are MBA graduates, six are MSc in Investment Management graduates and one is from the undergraduate program. "We met each other in classes and through personal networks. It was in November last year when we seriously talked about setting up our own business. We came up with many ideas and the thought of providing on-line dining information was very enticing as the up-front investment was affordable and the potential was great. So we decided to give it a try," said Ronald Kung (99 MSc), a co-founder of the company. The site, foodeasy.com, was officially launched in April this year after six months of GRADUATES VENTURE INTO CYBER BUSINESS BBAAA FORMS NEW EXCO preparation. "We have three full-time staff to collect dining information for us. I, together with several other co-founders, take care of the sales and marketing, content development, and overall business development," he continued. "It is lucky that members of the founding team all come from different fields with different specialties. We have investment bankers, accountants, IT experts and management professionals, just the right mix for managing a new venture." After just six months, Food Easy is now the leading web site in its category. "Competition in the IT business is really keen. We have to keep adding value for our customers or we will risk losing out. We still have to fight an uphill battle in order to stay ahead," Mr Kung reckoned. Food Easy is now extending its reach into the major cities in Greater China. It has already set up a dining guide for Shenzhen. Other cities such as Beijing and Shanghai will be included in the near future. An inauguration ceremony was held in October to mark the formation of the new Executive Committee (Exco) of the BBA Alumni Association (BBAAA) for the year 1999/2000. Comprised of 12 graduates from various disciplines, the new Exco vowed to continue the policy of its predecessors to strengthen the network among the alumni, the S c h o o l a n d t h e University. Newly elected President Benson Wong Siu Pan, a 1996 ISMT graduate, has been serving the Association for more than two years since 1997 and has found h i s s e r v i c e v e r y meaningful. "The Association not only fosters relationships between the alumni and their alma mater, but it also benefits all its From upper left: Daisy Ko, Michelle Ng, Rita Lo, Lily Wong, Sylvia Ng, Miranda Hui, Cheron Wong, Janis Leung. From lower left: James Cheung, Eric Lo, Kenneth Ho, Stanley Wan, Benson Wong. Management of Organizat-ions professor Anne Lytle, sub-editor of this Newsletter Virginia Unkefer (formally Technical Writer with the Office o f C o n t r a c t a n d G r a n t Some 15,000 people visited the HKUST outreach day and open day held over the first weekend in October. The School arranged eight seminars, a video show and exhibition displays during the two days. Organized annually, the outreach day targets mainly secondary school students who will in due course consider options for their tertiary education. The open day, held every other year, welcomes all members of the public to join. In addition to information on academic programs, cultural performances, talks and seminars on current issues, and tours around the campus were also available to the visitors. HKUST LADIES FIRST IN TRAILWALKER Administration), Louise Liu (a HKUST family member) and Lily Ng (from Warner Brothers) completed the Trailwalker charity race in 23 hours 17 minutes, the fastest of all female teams The MBA team: (Back row, second from left) Aldous Chui, Solon Wan, (front row from left) Lilian Leung and Jeanne Lim with supporters Steve DeKrey, Associate Dean & MBA Program Director, and Samuel Chua (96) (back, far right). The winning team: (from left) Virginia Unkefer, Louise Liu, Lily Ng, and Anne Lytle. executive committees and members a lot through various types of activities. The future success of BBAAA counts on the participation and support of our alumni. I hope they shall all come and join us!" said Mr Wong. participating this year. This year's Trailwalker event started on a rainy Friday in mid November. A total of 881 teams entered the race.Among them was also a team from the MBAAlumni, comprisingAldous Chui (95), Lilian Leung (95), Jeanne Lim (97), and Solon Wan (97). The Trailwalker event is held annually by Oxfam Hong Kong. Participants are required to complete the 100km scenic but grueling Maclehose Trail in Sai Kung in 48 hours. Together the two teams have raised more than HK$47,000 in support of the various poverty alleviation projects organized by the charitable organization. ALUMNI NEWS ANNUAL OUTREACH DAY

8The Hong Kong University of Science & Technology HKUST Business SCHOOL - Newsletter

BLOOMBERG TALK Michael Bloomberg, the founder of Bloomberg, is scheduled to give a talk to the MBA students, alumni and faculty of the Business School at the end of November. HKUST is the only academic institution where Mr Bloomberg will speak during his visit to Asia. A veteran on the Wall Street, Mr Bloomberg is a self-starter and entrepreneur and now owns a multimedia empire that offers products ranging from electronic financial information, television, radio, magazines, books and a web service, to an international market covering America, Asia, and Europe. Mr Bloomberg obtained his MBA from Harvard Business School. Prior to founding Bloomberg in 1981, he was general partner at Salomon Brothers. In his presentation at HKUST, Mr Bloomberg plans to reveal his secret of success and present first-hand information on what it is like to be an entrepreneur. In addition, he will also share his views on how technology will continue to influence the financial industry. FIRST ASIAN CONFERENCE ON EXPERIMENTAL BUSINESS RESEARCH Twenty-five experts from around the world will gather at HKUST for the First Experimental Business Research

Conference in Asia from 7-10 December 1999. The Conference, to be organized by the School's Center for Experimental Business Research, will feature

a "who's who" list of speakers in the field from Asia, Europe, the Middle East and the US. Pioneer experimental

economists such as Professor Charles Plott, founder of the Caltech Laboratory for Experimental Economics

and Political Science, and Professor Vernon Smith from the University of Arizona, are included among the

speakers. The Conference will be held in the Multipurpose Hall of the University Center. Website: http cebr.ust.hk/conference.htm Email: cebr@ust.hk The Business School was among the eight units from HKUST participating in the first ever advanced technology exposition organized and held on the Mainland, from 6-11 October. Titled the "China Hi-Tech Fair", the event took place across the border of Hong Kong in Shenzhen, a city that was hailed by Premier Zhu Rongji as at the spearhead of China's technology development. The opening of the Fair was graced by Premier Zhu and State Councilor Wu Yi. HKUST was the only tertiary institution in Hong Kong that was offered free exhibition space. Its display area was alongside displays from renowned state universities such as Peking University and Tsinghua University. HKUST displayed 40 panels featuring the achievements of the participating units in transferring their research findings into real-life applications. The Business School, boasting its strength in blending business savvy and technological know-how, showcased three projects that it had developed for the business and public sectors: 1) Electronic Library for the Open University of Hong Kong 2) SmartInvest services for Hang Seng Bank, and 3) Mondex Internet Payment for HSBC The Electronic Library was a HK$40 million investment by the Open University. The system, launched in 1998, enables users to access the university library's materials through the Internet. SmartInvest is an integrated platform that possesses personal financial planning capability to help customers plan their financial future. Mondex Internet Payment applies state-of-the-art technology, which allows consumers to purchase goods and make payments by using the Mondex Card (a smart card), on the Internet. This is the first time such infrastructure has been set up in Hong Kong. Programs offered by the School were also introduced in the exhibition. The China Hi-Tech Fair was organized by the Ministry of Foreign Trade and Economic Cooperation; Ministry of Science and Technology; Ministry of Information Industry; Chinese Academy of Sciences; and the Shenzhen Municipal People's Government. More than 400 exhibitors and 500,000 visitors were attracted to the Fair. Dr Lau Wah-Sum, Treasurer of the University visited the Fair on its opening. SEVENTH CONGREGATION Graduates vowed to be involved with alumni activities to help their alma mater grow and proposed a model for an ideal university graduate, at the U n i v e r s i t y 's S e v e n t h Congregation. Held in the second week of N o v e m b e r , t h e S e v e n t h Congregation saw, for the first time, graduate representatives addressing the event. James Cheung, student of the Bachelor of Business Administration (Economics) program, and Steve Yeung, part-time MBA student, both studied their programs from 1996-99, represented their peer students at the ceremony. James Cheung gave a brief account of his experience at the HKUST Business School. He was an exchange student to the University of Pennsylvania in 1998. In addition to academic studies, he also participated in numerous activities organized by student societies and by the University. In his speech, he said it was important for the organizers of the various activities to have the necessary resource in order to keep up with what they were doing for the students. He called for alumni to help contribute to this resource. "At the completion of today's ceremony, the University would have conferred degrees on some 8,600 undergraduate students, over 3,000 of them business graduates. If we could all make a point of sparing two hours a year for our alma mater, we could provide the University and the School with an additional work force of 17,000 man hours that they can deploy in supporting and expanding the various kinds of enrichment activities," said Mr Cheung. "Being involved is the part we can play in helping the University thrive into the new millennium." Steve Yeung said that during his three year part-time MBA study, Hong Kong went through the most eventful period in the last two decades. The territory was faced with challenges that came w i t h e v e n t s s u c h a s i t s reunification with the Chinese Mainland, the Asian financial crisis and the subsequent economic downturn, and the various new p o l i c i e s a d o p t e d b y t h e government. He regarded such coincidence as beneficial to his learning experience. Having been a student and a business executive at the same time for three years has given him insight as to what an ideal university graduate should possess. "Apart from having professional knowledge and intellectual skills, and the ability to analyze issues from different perspectives, the ideal graduate holds fast to three fundamental tenets, namely: respect for individuals, zeal for knowledge-creation, and, as expressed in the Bible, belief in the golden values of human beings which include integrity, justice and mercy," said Mr Yeung. Dean Yuk-Shee Chan welcomed the addition of the graduate speeches to the congregation. "The strong affinity to the School and the University that was expressed in their messages was most encouraging to us. Likewise, the graduates are sent on to pursue their goals with the best wishes from all of us here at the University," said Dean Chan. OTHER APPLICATIONS "The results of our studies provide a foundation to refine our understanding of the incentive effects and their links to the risk attitudes of the contenders. In addition to lotteries, the principles can be applied to analyze other activities such as tournaments, patent races, or even remuneration packages offered to managers," said Professor Chew. "In marketing, for example, our analysis finds that under most circumstances, it is more effective to promote a product by offering a sweepstakes than to discount, given a fixed budget," Dr Tan added. -- MH TO RISK OR NOt To Risk OPTIMISM HOLDS THE KEY (from page 5) CHINA HI-TECH FAIR UPCOMING EVENTS