Biz@HKUST, Summer 2021 (Issue 65)

Abstract

SUMMER 2021.07 www.BM.UST.HK

HKUST BUSINESS SCHOOL 香港科大商學院 WORLD CLASS IN ASIA

Biz @HKUST

GLOBAL TRADE IN A TRANSFORMATIVE ERA

// Contents // Biz @HKUST Insights and News from the HKUST Business School GLOBAL TRADE IN A TRANSFORMATIVE ERA

// Cover // 4 William FUNG, Deputy Chairman of Fung Group IN CHANGING TIMES 8 Max MA, Chairman of Lee Heng Diamond Group IN FACING THE CHALLENGE 12 Justin LIN, Leading Chinese Economist IN DUAL CIRCULATION TRANSITION 16 Nicholas KWAN, Director of Research at the Hong Kong Trade Development Council IN TIME FORACTION 20 Deborah ELMS, Executive Director of the Asian Trade Center IN REGIONAL SUCCESS

// Insight// 26 By Professor Albert PARK Department of Economics, HKUST Business School CHINA'S BELT AND ROAD INITIATIVE CONFRONTS DEGLOBALIZATI ON 30 By Professor Jiatao LI Department of Management, HKUST Business School WINNING HEARTS AND MINDS: CHINA'S BELT AND ROAD INITIATIVE 34 By Professor QI Ye Institute for Public Policy, HKUST COOPERATION, COMPETITION OR CONFRONTATION? AN ERA OF STRATEGIC CHOICE 38 By Professor Edwin L. C. LAI Department of Economics, HKUST Business School WHY DOES CHINA WANT TO INTERNATIONALIZE THE RMB? 42 By Professor CHEUNG Ki Ling Department of ISOM, HKUST Business School GLOBAL ORGANIZATIONS MUST RETHINK SUPPLY CHAIN MANAGEMENT 46 By Professor Alicia GARCIA-HERRERO Department of Economics, HKUST Business School Senior Research Fellow at BRUEGEL TRADING PACES 50 By Professor Alminas ZALDOKAS & Emilio BISETTI Department of Finance, HKUST Business School SUPPLYING FINANCE TO SUPPLY CHAINS

// Feature // 54 WORKING TOGETHER TO NUTURE FINTECH TALENT HKUST and the Tencent Finance Academy foster fintech talent 56 HOME TEAM TRIUMPHS TN HKICC High-powered teams in HKUST International Case Competition 2021 58 A WINNING STREAK HKUST remarkable performances in local and international case competitions 60 EIGHT SILVER LININGS AMIDST THE PANDEMIC A report examines the endeavors of eight companies in Asia 64 DIGITAL FREEDOM New Digital MBA For global leaders

HKUST BUSINESS SCHOOL 香港科大商學院 WORLD CLASS IN ASIA // From the Dean // The word that springs to mind when we look at the state of today's international trade is "disruptive". Whether the change is driven by geopolitical disputes, technology or even the pandemic, it seems certain that we are heading in a new direction.

It is for this reason that we have decided to put together this exciting and thought-provoking issue on the topic of "Global Trade in a Transformative Era". We believe that it is our responsibility to deep dive into the issues which will affect businesses in the future. These insights will hopefully help our readers find some answers to navigate the fast-changing business environment.

In this edition, we spoke to business leaders and experts in this region to get a glimpse of what they think the future might look like for international trade. Our very own faculty have also shared their studies regarding the trade challenges and outlook for 2021 and beyond.

Starting with two industry veterans and also our School Advisory Council Members, we talk to Dr William FUNG, Group Deputy Chairman of the Fung Group, about how his company has successfully weathered the storms during its century-long business history. Then we hear from Maximilian MA, Chairman of the Lee Heng Diamond Group, to find out how the home-grown retailer has navigated disruptions brought on not only by the trade war, but also COVID-19 and social unrest.

Three experts across the region also share their perspectives. Leading Chinese economist Justin LIN, talks about how China is moving ahead with its "dual circulation paradigm" despite a vulnerable trade environment. Commenting on Hong Kong, Nicholas KWAN from the Hong Kong Trade Development Council explains the city's unique position as the gateway between China and the rest of the world. For more on the macro environment, we talk to the founder of the Singapore-based Asian Trade Center, Deborah ELMS, who gives a strong argument as to why the new world order will see more regional trade agreements, and why this is the way forward.

Free trade is an important topic in this issue. In fact, there is a strong belief within the field of economics that free trade will continue to be the key to economic growth and stability. As such, we have invited our economists and also scholars from various disciplines to share their thoughts. They include Professor Albert PARK, Professor Edwin LAI, and Professor Alicia GARCIA-HERRERO from our Department of Economics. We also hear from Professor J.T. LI from our Department of Management, Professor CHEUNG Ki Ling from our Department of Information Systems, Business Statistics & Operations Management, Professor Alminas ZALDOKAS and Professor Emilio BISETTI from our Department of Finance, and last but not least, Professor QI Ye from the Institute for Public Policy.

Through our conversations with these expert s, we can glimpse a new world order where globalization will continue to exist, notwithstanding the uncertain geopolitical future and the lasting impact of COVID-19. In sum, we hope that this issue can contribute significantly to the ongoing dialogue about international trade, and offer some food for thought regarding the challenges that Hong Kong, China and the region continue to face.

Professor TAM Kar Yan Dean

The magazine is available for download or can be delivered via email on request.

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Stay Connected Biz@HKUST Global Trade in a Transformative Era Surviving the Times

The global trade environment today is best described as challenging, uncertain, and one that begs more questions than it can answer. Trying to navigate such a disruptive environment is no easy feat. However, in a series of interviews, we talk to five industry leaders and experts to get some advice on how businesses in Asia can at least find a way to survive. Through personal philosophies, ingenuity, historical experience and deep insight into global politics, each of them has found a way to ride out the rollercoaster years that have significantly impacted global trade.

Drawing on their own experiences and expertise, all parties agree that businesses today will have to learn to exist in flux and to figure out how best to adjust quickly to a constantly changing external environment which they cannot control. In such circumstances, exercising flexibility in their decision making and embracing change management would be a key tool in their toolbox.

// Cover // Thought Leader Changing Times

Founded in 1906 as one of the first companies financed solely by Chinese capital to export to the West, Li & Fung stands the test of time. Leading one of the most extensive global supply chain networks in the world, Dr William FUNG, Deputy Chairman of Fung Group, shares the secret of his company’s long-term success spanning four generations.

During his 49 years of leadership, Dr Fung has seen the company through many setbacks, and he can identify three huge shocks that have impacted the industry in the last four to five years. These are the impact of technology, the geopolitical environment, and the COVID-19 pandemic.

“The most pervasive and long-term impact on the world is technology. I would say for the medium term, it’s the geopolitical situation, and the short term is COVID-19. That’s how I would categorize the challenges that we now face,” he says.

“The one thing that is constant is change,” Fung continues. “All of these shocks have one common theme, and it’s a common theme for the whole world. We are facing an era of great changes, frequent changes. The only way we know how to deal with these changes is diversification, and to have a very resilient supply chain.”

Take a long-term view

Talking about the current geopolitical climate, Fung says that it would be prudent for businesses to take a long-term view. Li & Fung has survived wars, economic upheavals and everything else that the last 115 years has thrown at it. The ability to manage change is the true secret to survival, he says.

“You cannot deal with changes on a quarterly basis. If you’re driven by quarterly earnings and dividends, then you are usually forced into knee-jerk reactions,” he says. “Businesses should have a much longer-term view and stay the course.”

Li & Fung has traditionally taken a long-term view when executing its goals, and this is why it has gone public and private several times in the past. At the moment, Fung feels that for the company to move forward, it needs to be less reliant on the equity market, because the trends are not healthy. “The rewards tend to be short-term, and often times not based on economic fundamentals. People are buying based on trend and momentum,” he says.

But technology remains the biggest challenge. “Most recent technological changes that relate to our consumer goods business have occurred at the level of the consumer interface, and the impact of e-commerce was the biggest change,” Fung says.

E-commerce primarily impacted Li & Fung’s customers (retailers) in a big way, and they are now having to compete aggressively with other new online retailers and even their branded suppliers going directly to consumers.

Supply chains

Most of the impact is at the consumer interface. Retailers must rethink how to reach and communicate with customers, as well as meeting the demands of home delivery in addition to just offline and in-store sales. There is a lot of pressure to service the new customer via omnichannel or online-to-offline (O2O) sales channels.

While all these changes are taking place, supply chains often remain unchanged, and that can cause problems. “You have generally a situation where analogue supply chains are trying to service a very digitalized marketplace, and obviously that does not work very well, and cannot satisfy the need for speed, and quick response,” he says.

Under the leadership of Fung’s nephew Spencer Fung, the company decided to privatize, reorganize and streamline decision-making and rapidly digitalize its supply chain to create ‘The Supply Chain of the Future’ in consumer goods. It was at this very moment that the company was hit hard by two global events – the rise in geopolitical tensions between the US and China, and COVID-19.

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The only way we know how to deal with changes is diversification, and to have a very resilient supply chain William Fung Deputy Chairman of Fung Group

Biz@HKUST // Cover // Thought Leader But Fung says that the geopolitical tensions were not unforeseen. Even before the breakdown of Sino-US relations, the international trade order was slowly morphing. “The multilateral trade order built up over decades by the WTO was changing. Trade relations like Free Trade Agreements (FTAs) were turning more bilateral,” he explains. “The multilateral institutions and the framework that served us so well for so many years became unwieldy and less welcomed by trading countries, and global trade was blamed for unemployment and non-equitable distribution of income.”

Competitive advantage

Fung says this has more to do with the market driven capitalistic system than the multilateral frameworks themselves. More benefits were going to the exporting countries with lower labor costs than to the developed countries that rely on imports. One of the main beneficiaries of global trade was China. As the world slowly began to shift towards more bilateral systems of trade relationships, it was easy to see how the biggest importer and biggest exporter would eventually confront each other over issues such as jobs.

Fung saw it coming early, noting that the current US-China tension is an example of the theory of comparative advantage playing out. “It’s just much more serious than purely economics now. The trade war is turning into a technology war, and this has further developed into a competitive scenario about dominance, and who is the ‘top dog’ in the world,” he says.

Re-Education Re-Skilling Diversification Biz@HKUST

This geopolitical event really rocked the boat for supply chains when high punitive tariffs were placed on a large segment of China’s exports by the US. However, Fung says many companies have been able to adjust to these changes because of rules about “Country of Origin” – where something is determined to have been made. Country of origin

Fung says that the rules surrounding Country of Origin are archaic at best. “It’s not based on simple concepts like value-added, but is a byzantine arrangement that is primarily based on ‘major transformation’ and requires detailed knowledge of production processes, to determine a product’s Country of Origin”, he says.

Under such rules of origin, raw materials and parts can be exported to another country for final assembly so that the Country of Origin is said to be in the country where the item was produced or assembled, rather than where the raw materials or parts came from.

“All you need is a system that can manage this process, so China, rather than exporting to America, is now exporting a lot of components and raw materials to Southeast Asia,” Fung says. Everyone in the business is doing the same because “we are forced to do that,” he says.

For this reason, Li & Fung’s sheer size and global presence in over 50 countries has worked to its advantage in the current geopolitical storm. Again, Fung attributes this to the company’s comprehensive networks and its historical experience of having to constantly shift its production chain to cater to changing global economics and trade restrictions.

“We never dismantled our network because we saw this shift, this moveable feast idea,” he says. “We are coping with this geopolitical situation well because of our history of dealing with such shifts in production. Due to our experience around ever-changing trade rules, we kept our network big, and that is now serving us in good stead,” he says.

Li & Fung is no stranger to change, and the latest geopolitical developments are but one of many storms it will have weathered, Fung says. Ultimately, Fung says, the secret of survival is always about managing change.

Top Five Tips on Managing Change Realize that the biggest skill you need to develop is how to manage Change.

You can’t stop technological progress, so you need to adjust your employees to cope with changes and their job parameters instead. Investing in Re-education and Re-skilling is always wise.

Realize that not changing something is also a Decision.

Always have a Long-Term View.

Understand that a good way to deal with change is Diversification and building Resilience over time.

Change Resilience Biz@HKUST

// Cover // Thought Leader

Facing the Challenge

Business disruptions brought about by the trade war between the US and China, COVID-19 and social unrest, have led to a challenging few years for retailers. Max MA, Chairman of Lee Heng Diamond Group and home-grown veteran retailer, has some good advice on how to get through the tough times.

“A business will only survive if you innovate, otherwise a business cannot survive, so my advice is to innovate or die,” says Mr Max Ma, Chairman of Lee Heng Diamond Group and founder and Chairman of MaBelle, the Mabros, and MADIA jewellery retail brands.

There is a big difference between “innovation” and “invention”, Ma says. “Innovation means a new method, or way, to solve an old problem or existing process with the aim to increase productivity or efficiency,” he says. Ma maintains that innovation is imperative in these disruptive times.

Ma’s advice results from his personal experiences at the helm of the 72-year-old diamond business, which was founded in 1949. Having spent more than 30 years leading the company through some incredibly difficult times in Hong Kong history, Ma bases his confidence in the business’s future on the resilience it has shown in the past.

Stay true to your values

First and foremost, Ma believes that his company has navigated the storms of the past by staying true to its company values. He advises other businesses to consider doing the same.

“When I think about aligning everyone in my business, I have to think about what ‘Lee Heng’ stands for,” he says. Ma even put pen to paper and had his values transcribed onto scrolls using Chinese calligraphy which are displayed around the offices.

The essence of his words loosely translates to say that by keeping the community, the customers, and its people happy, the company can experience growth. “When people are ok, families will be ok, and our country will be ok,” he says. It’s a win-win formula that has become a company motto. “I have to make everybody understand that this is our core company value,” Ma says.

There are five more values that form the foundation of his company, he says.

The five values are: people are our most important asset; the customer is our highest priority; a partnership is the way to the future because we can’t do everything on our own; knowledge and technology with a touch of creativity form our cutting edge; and performance is the only way to win, as you have to make things happen.

“The way our whole company functions starts from here, and these values serve to align our company, and align our colleagues within the company,” he says.

Take a long view

Ma is committed to Hong Kong and nurturing the future talent. He was a Council Member of HKUST and now an Advisory Council Board Member of the HKUST Business School. He is confident about the future of businesses in Hong Kong, and draws a great deal of optimism from reflecting on the city’s role in relation to China and the rest of the world.

“I tend to take a very long view. There are things we can’t change, such as geopolitics,” he says. Looking back over the history of Hong Kong and the challenges such as SARS and the financial crisis, he is certain that Hong Kong is resilient, and that the city will always be instrumental to China’s success. “If you look back far enough, you can see how far we have come,” he says.

Noting the riots of 1967, the stock market confidence crisis of 1983, the 1997 financial crisis, and more recent events, Ma believes Hong Kong is going through a fourth crisis amid

Biz@HKUST Innovation will ensure that businesses survive today’s challenge Max Ma Chairman of Lee Heng Diamond Group

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// Cover // Thought Leader

today’s trade dispute and other current issues. But the challenges will make the city stronger, he says. Businesses need to “look beyond this fourth crisis” and battle with the challenges brought on by the trade war, social unrest, and COVID-19. “My confidence comes from our attitude, the attitude of the people. Hong Kong people are survivors,” he says.

Ma’s confidence is not rooted in blind faith but in the strength of Hong Kong itself. “When you look at why people choose to go and live in a place, they’re looking for peace, security, rule of law, freedom of speech and travel, and stability,” he says. “As a consequence of all these, capital will flow in and opportunities will appear.”

Another reason why Ma believes Hong Kong will continue as a great city for commerce and finance is because it has accumulated a great deal of wealth, and has therefore secured some staying power. “Our government doesn’t have to go and borrow a lot of money or print a lot of money, it can just spend whatever it has accumulated, and this is our greatest privilege,” he says.

Acquire the best talent

Ma says that the “only problem” now is that China and the US are in a conflict which has a remarkable similarity to that

Commitment Challenge

in Samuel Huntington’s Clash of Civilizations. Ma believes in focusing more on China for now. “My aim is to look at how to transform my company in a way so that we have the sustainability to be the last company standing,” he says.

Ma is no stranger to this approach, having reinvented brands within the company several times. He tapped into something a bit different from ear piercing, and his venture MaBelle has become the leading ear-piercing service in the city.

Ma believes that the best way to ensure a company’s survival is to make sure that it retains and acquires the very best talents for its business. A company should also engage with its customers, he adds. “They are the people who pay my bills,” he jokes.

Ma advises companies to adopt a strategy that is flexible, and employ competent people who can adapt to any situation. “When people have doubts, you have to understand and convince them to take a step in a different direction. I think that is very important. No business will survive the next 20 years if they are still doing what they did 20 years ago,” he says.

How to Stay Ahead Max Ma believes that innovation is the key to staying ahead, and businesses should focus on the “5Cs”:

Identify and understand your Challenge. Every business has a different challenge in a new environment.

Retain an attitude of Commitment. This means having a strong resolve towards solving a problem.

Creativity. With creativity, we can come up with innovative solutions to address the disruptive challenges of today.

Curiosity. Always ask why and find out why things are the way they are.

Connectivity. How do you connect things that don’t seem to connect?

Connectivity Creativity Biz@HKUST

// Cover // Thought Leader Dual Circulation Transition

At a time when the environment for international trade is becoming more vulnerable, China is moving ahead with its “dual-circulation paradigm”. Leading Chinese economist Justin LIN, a former HKUST scholar, explains why China is highlighting domestic demand as the main driver of growth in the new paradigm.

Although it’s one of the world’s fastest growing economies, China was unable to dodge the wrath of COVID-19. As if that wasn’t destructive enough, the country remains in a contentious relationship with the world’s largest economy – the US. It feels like China is being tested on all fronts.

While its “V-shape” economic rebound is a strong testament to the speed at which China took control of the pandemic, the ongoing tensions with the US, and the spillover effects of that, will continue to pose challenges for the country in the coming years. So says Professor Justin Lin, former Chief Economist at the World Bank, and now the Dean of the Institute of New Structural Economics at Peking University.

“China will inevitably confront other natural and geopolitical challenges in the coming years amid these profound changes that we haven’t seen in a century,” says Lin. So, while China’s swift and effective response towards COVID-19 resulted in a second quarter rebound in 2020 which showed a remarkable 3.2 percent growth, and then a further 4.9 percent growth in the third quarter, it doesn’t mean China can rest on its laurels. It must deal with the ramifications of the US-China tensions which will far outlive the pandemic.

The tensions between the two countries stem from many factors, including a US trade deficit with China, former US President Donald Trump’s penalty tariffs on China’s imports, a frothy exchange during the first high-level talk between the Chinese and US officials under new US President Joe Biden, and restrictive measures against Chinese companies in the name of intellectual property protection, just to name a few.

Amidst rising tensions between the two nations, Lin believes that China can still pursue its forward-looking policies and suggests that it is probably best to stay open while tapping into an eight percent annual growth potential, which translates to around six percent growth before 2030, and four percent growth before 2050.

If this is achieved, he says, China would have reached three new milestones. Firstly, by 2025, China’s per capita GDP will have exceeded US$12,535, meaning that the country has graduated to a high-income country. Secondly, China might have replaced the US as the world’s largest economy in nominal terms. Thirdly, China’s per capita GDP may have reached 50 percent and its total size will be two times that of the US by 2050.

Lin says that by the time that this happens, the two countries will have no choice but to “live in peace for common development”. He explains that the regional income disparity in China means that the per capita GDP for Beijing, Tianjin, Shanghai and the coastal provinces, which amounts to a population of 400 million, will be the same as the US. “This means that the technology level of that part of China will rival the US. The US will lose superiority in terms of technology,” he says.

China has another one billion people living in its central and western regions with a per capita GDP that is one third of that of the US. “They are still in the process of catching up and will grow faster than the US. In this scenario, the US will lose the possibility to overturn the power balance and will find that it is better to grow with China for its own benefit,” Lin adds.

A shift away from an export-oriented Economy

To understand how China intends on achieving its economic goals, it is important to look closely at the intended development of the Chinese economy, namely the “dual

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A bigger economy means a bigger capacity for domestic absorption, and as the world’s second largest economy, China can rely on a domestic economy Justin Lin Dean of the Institute of New Structural Economics at Peking University Biz@HKUST // Cover // Thought Leader

circulation” model highlighted in the New Development Paradigm last year.

While domestic circulation continues to be the mainstay, the model says that domestic circulation and international circulation should promote each other. Since the start of the pandemic, all eyes have been on China and how it intends to move forward in terms of this paradigm.

“China is the largest trading nation in the world. If it shifts its development model from export-oriented to domestically oriented, it will affect other countries in addition to itself,” Lin points out. “That’s why domestic and foreign media have been focusing on this topic.”

Lin further explains why China is proposing to treat domestic circulation as the main circulation. Obviously COVID-19 had a major impact on the world economy. International trade is predicted to shrink dramatically so as the world’s largest trading nation, China cannot rely on exports as the main driver of growth.

“This means that its domestically made products will have to be increasingly absorbed domestically via domestic circulation,” Lin explains.

China’s tensions with the US will become another factor which affects the country’s exports. “If its exports decline, its production will have to be absorbed domestically,” Lin says.

This is where China has a comparative advantage, as its population is four times that of the US. Based on the laws

Rebound Comparative Advantage Biz@HKUST

of economies, Lin believes that China can support a circular economy because it has much more capacity for domestic absorption compared to small economies.

“The modern manufacturer has a large economy of scale. If a country is a small economy with insufficient capacity for domestic absorption, it must rely on bigger foreign markets,” he explains. “A bigger economy means a bigger capacity for domestic absorption, and as the world’s second largest economy, China can rely on a domestic economy.”

Unleashing the power of the service Sector

Another reason for China’s reliance on domestic circulation is that its service sector is only about 53.6 percent. Since a big part of the service sector is non-tradeable, there is a lower percentage of exports in its GDP.

China’s domestic absorption has already exceeded 80 percent. With a rise in China’s income, the size of the Chinese economy and service sector will continue to expand. As a result, Lin believes that it will continue to move towards 90 percent in the future. He says that a new statement on domestic circulation is a “clear-headed judgement of the trend in the present development stage and aims to change the general perception that China is an export-oriented economy.” That said, Lin stressed that unless it is an autarchic economy, every country actually has dual-circulation in its economy.

Outlook

Lin believes that if China carries on down this path, it will continue to be the main driver of growth in the world, as 30 percent of the world’s market expansion has come from China since 2008.

China will have to stay calm, pursue smart forward-looking policies with continuous reform, and open up, if it wants to tap into its potential, maintain stability, and grow dynamically.

Lin says the US can choose to work with China and exploit the Chinese market for the sake of its own growth. The two economies have no reason not to live in peace for common development.

Even though trade is a win-win situation for both trading partners, the smaller one tends to benefit more than the larger one. So, when the economic size of China is twice as large as that of the US, maintaining good relations and trade with China will be important for the US’ growth and the generation of jobs. “A growing China will be beneficial not only to itself but to the rest of the world,” Lin says. A Backlash Against Global Trade?

According to Lin, the reason that the US buys from China is not because it cannot produce the products that they need, but because China can produce them at a much lower cost. That is how the Comparative Advantage-driven international trade works. To restrict trade with China and to hurt China, the US will have to pay a price.

While the US might be willing to pay the cost of maintaining its Hegemony, if other countries join the US and restrict trade with China, they will be risking their own growth and jobs. China is the largest trading partner of more than 120 countries and is the second largest trading partner to more than 70 countries. Lin does not believe that other countries will be willing to sacrifice themselves for the sake of maintaining the US’s hegemony. As long as China remains open, the world is unlikely to fall back into a ‘Cold War’.

Hegemony Cold War

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// Cover // Thought Leader

Time for Action

Now is the time for Hong Kong to capitalize on its unique position, says Nicholas KWAN who leads a team of researchers at the Hong Kong Trade Development Council in providing in-depth analysis and advice on the city’s economic and trade issues.

Even though Hong Kong sits on China’s doorstep, it has weathered the US-China trade war well, given the additional impact of the COVID-19 pandemic and the social unrest in 2019-2020 on the economy.

This does not mean that Hong Kong can rest on its laurels. Now is the time for the city to capitalize on its unique position and to find new opportunities to change, said Nicholas Kwan, Director of Research, at the Hong Kong Trade Development Council (HKTDC).

“If you look back at history, Hong Kong has always been highly resilient,” Kwan says. “Our trade with the US and China declined during the last two years, and the numbers are down. But if you compare our trade performance with everyone else, especially competitors in Asia such as Singapore, Korea, and even Japan, we did well. We were one of the top three in terms of trade growth in the world last year.” Kwan says.

A path of growth

Despite such a glowing report card, Kwan emphasizes that Hong Kong has not been immune to the effects of the Sino- US trade war. The mounting tension has taken a toll. But the good news is that Hong Kong remains resilient, and is on a path of growth, thanks to the fact that it has diversified into new markets in recent years.

“A large amount of the trade between the US and China moved through our ports, so of course we were affected. But we managed to offset that with other trade goods,” Kwan says.

“We explored new markets, particularly in Southeast Asia and increasingly in other emerging markets like the Middle East and Africa. At one time we were active in Latin America, and even Eastern Europe,” Kwan adds.

Moving forward, Kwan believes Hong Kong is more likely to be affected by domestic events in the short term. To prepare for the long term, the city needs to understand the changes that are happening globally.

Moving to a multipolar world

Kwan says that the global macro environment is unlike the “old days” when we lived in a peaceful unipolar world where everything followed a relatively predictable course, and everyone simply had to follow the predefined rules. That is no longer the case, he notes. “The world is no longer unipolar, it is multipolar,” he says.

As the world becomes more diversified, what used to work in the past will no longer work in the present or the future. Especially in terms of trade and technology, everyone needs to adapt to a more multipolar culture. We will continue to see an increase in the formation of multilateral institutions, Kwan says.

Kwan also adds that while some multilateral agreements are effective, others might be a little outdated and in need of modification. However, he believes that there will no longer be a single dominant system. American, European and Chinese systems will all play a part in the future.

“I think different sides have to understand that there is no single system that is best for everybody,” Kwan says. Countries will have to work together, and the good thing is that all the major players have an interest in each other’s development. If the US and China continue with the trade war, it will hurt both sides, he notes.

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Hong Kong remains resilient, and is on a path of growth, thanks to the fact that it has diversified into new markets in recent years Nicholas Kwan Director of Research at the Hong Kong Trade Development Council

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// Cover // Thought Leader

Hong Kong has a key role to play

Kwan believes that Hong Kong will continue to be in a great position despite the trade conflict, because it remains one of the few truly open and truly international cities. Hong Kong needs to capitalize on these qualities, Kwan says. He continues to see Hong Kong playing a key role in China’s internationalization.

“Some people think that China is closing its doors, but that’s wrong. In terms of trade, China is lowering tariffs and trade barriers. Some say it’s progressing too slowly, but if you compare its development to that of other countries, you find they did not achieve this very quickly either,” he says.

Multilateral development will not happen overnight, so Hong Kong will continue to play an even more important role. “We are in the best position to help China open up and become more international,” Kwan says.

To support these developments, Kwan believes that Hong Kong should play a more active role in two important initiatives: the Belt and Road and the Greater Bay Area (GBA).

Free Economy Innovation & Tech Hub Super Connector

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For the Belt and Road to work, it needs to be a successful form of globalization effort which benefits China and the rest of the world. Internationalization is important as a simple bilateral program will not succeed. Hong Kong will play a significant role in ensuring that all sides benefit from a globalized approach. “We understand both sides better than anyone else,” Kwan says.

As for the Greater Bay Area, Kwan believes that it is very different from other regional development programs in China. This is mainly because the Greater Bay Area also includes Macau and Hong Kong. “The different systems in Hong Kong and Macau make this region a super connector not just for Hong Kong and China, but for China and the rest of the world,” Kwan says.

The Hong Kong model

Both initiatives need an international market to connect to China and the rest of the world. Mainland China may not be able to do that by itself, so Hong Kong can step in, he says.

“We are the pioneers, the testing ground, and hopefully Hong Kong will serve as a firewall in that process,” Kwan says. “This is the model that they are using when they connect with the rest of the world.”

Jobs will be plentiful in Hong Kong as a result. Despite any cyclical and sector employment problems that may arise because of the pandemic or social unrest, from the perspective of global development, Hong Kong remains in a good position because the transition to a multipolar world will take decades to complete. Many new opportunities will be created. The challenge will be whether the city will be able to fill the new jobs, and this is where education comes in. “We have a lot of work to do,” Kwan says.

Hong Kong’s Strategic Position

HK remains one of the world’s most Free Economy. It is also one of the most service-oriented economies in the world, with the services sector accounting for 93.4 percent of its GDP in 2019.

HK was the world’s Sixth Largest Exporter of trading merchandise in 2020, according to the WTO, rising from the eighth in 2019.

Because of its connections to China and the rest of the world, its strong research and development capabilities, and its world-class universities, HK ranked 11th globally in 2020 as an Innovation and Technology hub.

HK has trade relations with many countries. It is a founding member of the WTO, a member of the Asia-Pacific Economic Cooperation, the Pacific Economic Cooperation Council, and the Asian Development Bank. It also has many free-trade agreements in force, including the Mainland and HK Closer Economic Partnership Arrangement (CEPA).

Diversified CEPA

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Regional Success

With the disruption caused by geopolitical tensions and the pandemic, regional agreements are more urgent than ever. Deborah ELMS, founder of the Asian Trade Center – a Singapore-based advocate and educator for trade in Asia, explains why agreements like the Regional Comprehensive Economic Partnership (RCEP) could become a global game changer.

When it comes to international trade, the last few years have been tumultuous. With the disruption brought on by geopolitical tensions, and the onslaught of the COVID-19 pandemic, it is impossible to deny that the world has started on a path of change.

“We are now in a shift,” says Deborah Elms, Founder and Executive Director of the Asian Trade Center. “This shift is equivalent to the collapse of the Soviet Union, the moment when the old world order changes into the new world order.”

The world order that Elms is referring to relates to international trade, the systems of which, many industry leaders agree, have been fraying for many years. COVID-19 has accelerated the disruption of the old order and created even more uncertainties about what the future will look like.

Elms has some advice for those struggling to cope with the changes. “Get used to it!” she says. But she also understands that today’s global economy is not easy to navigate. Elms highlights the general anxiety and uncertainty that business owners feel, and understands the extra layer of disruption that COVID-19 has brought.

“The combination of the two is even more unsettling. People were already disoriented and disrupted by the grind of the US-China trade war, and then COVID-19 arrived on top of that. It’s no surprise that companies are looking for answers,” she says.

Educated guesses

Elms offers some educated guesses about geopolitics and the relationship between the US and China as we slowly move towards a post-pandemic world. “Everything from hardcore decoupling to decoupling in certain sectors, especially around tech, is on the cards. The stalemate may continue, or there may be increased cooperation, but that is likely to exist at a fairly low level at the moment,” she says. “I think all these scenarios are equally plausible.”

In a best-case scenario, economic issues will remain separate from political and security concerns, and there will be no significant backsliding into economic conflict. In the worst-case scenario, the US-China relationship will continue to fray, she says. “If this [US] administration continues to say that China is its mortal adversary, then everything that we do must be predicated on managing an enemy. This will result in many different kinds of policies,” she says. “That leads to an extremely tense situation, and there is a high risk of it going in directions that no one quite intended.”

Due to the political tensions, Elms feels that regional agreements are more urgent than ever. “The idea that you will get global action on anything in the near term has got to be close to zero. I find it hard to imagine we will get closure on meaningful outcomes in a global setting any time soon,” she says.

Elms points to the discussions about subsidies on illegal fishing at the WTO as an example. She notes that if countries cannot even agree on whether or not they should subsidize something that is illegal, there is not much hope for managing other kinds of issues.

The idea that there will be global cooperation any time soon is simply misguided, so regional agreements will be needed instead, Elms says. Regionally, countries can agree on a set of policies, principles and regulations that can offer clarity. This will make it easier for the rest of the world to do business with them, too.

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Asia is pragmatic, and for them, economics has always trumped everything else Deborah Elms Executive Director of the Asian Trade Center

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The latest example of such an agreement is the Regional Comprehensive Economic Partnership (RCEP), which is likely to be established in 2022. This is set to become the largest trade bloc in history, and could become a global game changer because of its sheer size and the fact it includes China. Built on ASEAN’s own model agreements, it would include 15 Asia-pacific nations accounting for 30 percent of the world’s population and 30 percent of global GDP as of 2020. It will unify any pre-existing bilateral agreements between ASEAN nations and five of its major trading partners.

Asia leads the charge

Such an ambitious trade pact, according to Elms, is a sign of things to come. In this case, Asia is leading the charge. “Asia is pragmatic, and for them, economics has always trumped everything else. So economics comes first, and politics and security after that,” she says.

This was evident in the RCEP negotiations, where participating governments would not have been in the same room if political or strategic reasons had been taken into account. Elms says that it is almost a rule in Asia that such issues are compartmentalized, and countries manage their conflicts in isolated areas. Where there are no conflicts, it’s business as usual.

She cautions that while the development of the bloc is promising, the extent that COVID-19 will devastate societies, communities and the economic structures in the region, is still a worry. How COVID-19 plays out remains to be seen.

Elms feels that the US economy could become less dominant over time as Asia becomes a more important final market. Asian companies are now becoming powerful competitors by formulating new innovative solutions that are not just copies of Silicon Valley solutions.

RCEP REGIONAL COMPREHENSIVE ECONOMIC PARTNERSHIP

15% Asia-Pacific Nations 30% of World’s Population 30% of Global GDP

AUSTRALIA BRUNEI CAMBODIA CHINA INDONESIA JAPAN LAOS MALAYSIA MYANMAR NEW ZEALAND PHILIPPINES SINGAPORE SOUTH KOREA THAILAND VIETNAM

Asia for Asia 16 Markets Express Shipments

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Win-win outcomes Elms says that cooperation in international trade may also become a “coalition of the willing”. For example, she says an agreement could tie Canada, the UK, Singapore and Thailand to a country in Africa around an issue that all the participants agree upon. “It won’t be a regional deal, but a group of countries which all see the potential for a win-win outcome if they collaborate,” she says.

What does this all mean for business education? According to Elms, the world is changing quickly, and industries are changing rapidly. Everyone will have to learn something about digital strategies, but it’s essential that students still receive a broad education. “You have to be able to work independently, you have to be able to work in groups, and with diverse groups,” she says. We are no longer working in insular pockets, but with people in other countries who are from different cultures and speak different languages. Moreover, we may be doing it remotely. “Because of this, the value of a good education is actually higher now than it’s ever been,” Elms says.

RCEP – Transforming Regional Trade RCEP will transform trade in the region into “Asia for Asia”, and Asia will be thought of as the final market.

Businesses can start to make “Asian” qualifying goods for shipment across 15 Major Markets.

RCEP will use a Preferential Certification of origin document that will be the same for all member countries.

Customs Clearance will be easier, faster and more transparent.

There will be Express Shipments on goods, and less complicated documents and paperwork.

RCEP will become the Institutional Platform to address all trade and economic policies in Asia, including the creation of new trade rules, standards, and procedures.

Preferential Certification Institutional Platform

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Global Trade in a Transformative Era Understanding the Bigger Picture

The enforcement of tariffs and trade barriers by the US on China in 2018 raised eyebrows as economists began to fear an economic ‘decoupling’ between the world’s two largest economies. No doubt, these events had a major impact that trickled down to even some of the smallest businesses in Asia. The trade barriers have also forced the two superpowers to readjust and reshape their roles in global trade. Each decision they make has implications for most of the world’s trade.

To understand the far-reaching impact of the changing trade landscape, it is important to look into both the macro-environment and different aspects of its development. In a series of articles, eight of our distinguished faculty members share their expert insights and latest research into the trade conflict and how that has spurred developments that have impacted so many countries, businesses and sectors around the world. Understanding the Bigger Picture

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By Chair Professor Albert PARK Head, Department of Economics at HKUST Business School

China’s Belt and Road Initiative Confronts Deglobalization

Evidence-based studies reveal why China and most Belt and Road countries remain committed to pursuing greater economic integration even with the forces of deglobalization in the form of the US-China trade war and ongoing geopolitical tussles.

China’s Belt and Road Initiative (BRI) provides a broad framework for increasing China’s engagement and integration with the global economy. Announced in 2013, a major feature of the Initiative is Chinese support for large-scale infrastructure and investment projects in participating countries. However, just as momentum was building, the Initiative was confronted with powerful forces of deglobalization in the form of the US-China trade war and questions about supply chain dependence on China raised by the COVID-19 pandemic. How successful was the BRI before the recent turbulence, how has it been affected by the recent turn toward deglobalization, and can the Initiative help combat or reverse rising protectionist instincts? These are all important questions in considering the future direction of the global economy.

Unfortunately, debates about China’s Belt and Road Initiative have been highly polarized, rich in ideological rhetoric but typically devoid of evidence. Many in the West are highly critical, arguing that China seeks to exploit poorer countries and trap them in debt. China presents the Initiative as benevolent, supporting the development of countries around the world. Caught in between are the participating countries themselves, whose leaders often see an opportunity to finance needed infrastructure and attract foreign direct investment, but who also remain wary of excessive dependence on China and the need to balance international and domestic political interests that oppose closer ties with China.

More investment in BRI Countries

In order to better inform our understanding of the implementation of the BRI based on evidence rather than rhetoric, I recently led research teams to complete two major projects on the BRI—one on “Trade and Investment Under the Belt and Road and Implications for Hong Kong” supported by Hong Kong’s Strategic Public Policy Research Scheme, and another on “The Belt and Road Initiative in ASEAN”, a collaboration between HKUST’s Institute for Emerging Market Studies and United Overseas Bank. These projects and related research have produced quantitative and qualitative findings that inform the questions just posed. Quantitative analysis utilizes microdata on Chinese outbound FDI and construction projects in all countries from 2010 to 2019.

First, analysis of the project-level data finds that the BRI significantly increased Chinese investments in BRI countries (defined as the originally targeted 67 countries). Both FDI and construction projects increased by more than 50% in BRI countries after the Initiative began compared to changes in non-BRI countries. When we analyze the determinants of the flow of Chinese FDI to different countries before and after the Initiative began, we find that compared to the years before the BRI (2010-2013), since the BRI began the importance of economic fundamentals (such as GDP growth rates) has declined, while the importance of the countries’ governance quality (including measures of political stability, corruption, rule of law, regulatory quality, and government effectiveness) has increased. These

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findings suggest that outbound FDI flows are less profit-motivated under the BRI, raising concerns about their economic viability. At the same time, the greater importance of governance factors contradicts the narrative that China is seeking to exploit corrupt, poorly governed countries. Encouraged to make investments in BRI countries, many Chinese companies apparently seek to avoid countries with high governance risk. We find that this is true for investments by both state-owned firms and private firms.

What has been the impact of the BRI on international trade? A recent paper by Amber Yao LI, Associate Professor in the Department of Economics, and co-authors finds that the BRI significantly increases bilateral trade flows between BRI countries. The Initiative also increases the total trade volume of BRI countries, especially imports. With respect to trade with China, China’s imports from BRI countries increases after the Initiative, while exports from China to BRI countries do not change appreciably. These findings are consistent with China using FDI in BRI countries to secure access to resources (e.g., energy, minerals) or to outsource production of goods sold in China. The finding of positive trade impacts is important for two reasons. First, much research in economics has found a strong link between trade and growth. Second, if the BRI expands trade with member countries, it may have the potential to counter the trend towards deglobalization.

Diplomatic and economic objectives

Since China’s objectives for the BRI are diplomatic as well as economic, it is of interest to ask whether the Initiative has increased China’s soft power. To shed light on this question, in an ongoing project with coauthors, I examine how sentiment towards China in different countries has been affected by the Initiative. Machine learning methods are used to analyze the positive or negative sentiment found in over one million media articles about China published globally from 2013 to 2019. We find that in most parts of the world, sentiment towards China has become increasingly negative in recent years. This is even true in countries receiving the most FDI from China under the BRI (Indonesia, Pakistan, Russia). Further analysis finds that sentiment towards China is inversely related to the amount of FDI or construction projects received from China. This negative correlation is more apparent when the FDI projects are in the resource sector, and when they are made by state-owned enterprises. Thus, China does not appear to be increasing its soft power through the BRI and may even be harming it.

Why would more Chinese investment in a country increase negative sentiment towards China even though there is evidence that the investments are having positive development impacts? Qualitative research in countries in Southeast Asia as well as other parts of the world finds that some Chinese projects are very unpopular locally because they harm the environment or have poor labor relations (for example, fail to obey local labor regulations or customary practices, or hire Chinese rather than local workers, etc.). Even one bad project in a country can attract considerable

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Media Sentiment Towards China in Belt and Road Countries Receiving the Most Chinese Foreign Direct Investment (FDI), 2013-2019

media attention and severely damage the reputation of Chinese firms. Opposition politicians may mobilize support by criticizing China or the close relationship between government leaders and China. China has drawn criticism from climate activists for being the only international donor that continues to finance coal energy projects. In many instances, China has funded projects requested by government leaders without doing sufficient due diligence to assess environmental and social impacts or to reach out to local communities. Some Chinese companies are gradually learning from their mistakes, by funding more renewable energy projects and focusing more on corporate social responsibility. A main conclusion from these findings is that if the BRI is to realize its lofty objectives, China would be well-advised to put greater priority on ensuring that Belt and Road projects meet high standards with respect to both economic viability and environmental and social impacts. The record of Western foreign aid programs to the developing world shows convincingly that money does not buy development.

A commitment to finish

How has deglobalization due to the US-China trade war and the pandemic affected the implementation of the BRI? A bilateral trade war naturally diverts economic activity to third party countries which actually could increase investment incentives in BRI countries. For example, Chinese companies and multinationals who manufacture goods in China and export them to the US have an incentive to relocate production from China to other countries to avoid punitive tariffs and diversify risk exposure. Producers in BRI countries may have greater opportunities to export to both China and the US. At the same time, if the trade conflict slows growth in the world’s two largest economies or spreads protectionism to other countries, this could have a chilling effect on foreign investment and trade globally. In this light, the recent signing of the world’s largest trade pact, the Regional Comprehensive Economic Partnership (RCEP) signed by all ASEAN countries, China, Japan, South Korea, Australia, and New Zealand, demonstrates that countries in East Asia are committed to expanding rather reducing economic integration efforts. The agreement is complementary to the Belt and Road Initiative in that it facilitates globalization of supply chains and increases the benefits of trade and foreign investment.

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The record of Western foreign aid programs to the developing world shows convincingly that money does not buy development

Similarly, the leaders of most BRI countries have reaffirmed their commitment to completing major Belt and Road projects even if they are delayed due to the pandemic. Most infrastructure and investment projects were delayed by at least three to six months due to disruption caused by lockdowns, travel bans, and the preoccupation of government leaders and firm managers with responding to the crisis. The pandemic was a major economic shock to nearly all countries, even those that did a good job controlling the outbreak. This led many governments to re-prioritise spending commitments, which led to the cancellation of some BRI projects. On the other hand, some governments with sufficient resources, such as the Philippines, decided to increase infrastructure spending as a way to stimulate their economies. Many economies, including the US and China, are bouncing back strongly in 2021.

To sum up, China’s ambitious effort to promote greater connectivity with other countries through the BRI has created new infrastructure, increased investment, and expanded trade in BRI countries, but also has encountered criticisms that have undermined the Initiative’s ability to win hearts and minds in BRI countries. Nonetheless, the BRI is not going away any time soon. The recent turn towards deglobalization and growing anti-China sentiment create a challenging environment for the Initiative, but leaders in China and in most BRI countries remain committed to pursuing greater economic integration even as they adjust to a more confrontational and competitive relationship between the world two largest economies.

Reference HKUST Institute for Emerging Market Studies and United Overseas Bank (2020). The Belt and Road Initiative in ASEAN. Authored by Albert Park, Dini Sejko, and Angela Tritto. Diao, Wentian, and Albert Park (2021). Which Countries Have Benefited Most from China’s Belt and Road Initiative?, HKUST IEMS Working Paper No. 2021-79. Lomas, Guenther, Albert Park, and Han Zhang, The Impact of the Belt and Road Initiative on China’s Soft Power, work in progress. Bian, Ce, Jiaming He, Yao Amber Li, Weili Liu, Shiying Ou (2021). Does Belt-and-Road Initiative Promote Trade Flows? An Empirical Investigation, working paper.

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By Chair Professor Jiatao LI Lee Quo Wei Professor of Business Department of Management at HKUST Business School

Winning Hearts and Minds: China’s Belt and Road Initiative To drive globalization, the Belt and Road Initiative must establish a narrative that inspires stakeholders in China and beyond.

The world is at a crossroads. Globalization — the deepening integration of economies and markets — is facing a backlash that threatens to split the globe into competing regions. In an era of trade wars and economic uncertainty, protectionism and populism are on the rise. The COVID-19 pandemic has not only fueled nationalist sentiment but also forced governments to massively limit cross-border trade and flows of people.

As countries such as the US turn away from multilateralism and societies worldwide reel from the global shock of the pandemic, China is reshaping international geopolitics in line with a unique vision of globalization. It’s Belt and Road Initiative (BRI), a network for infrastructure development and economic cooperation that spans 65 countries to date, promises to usher in a new era of international commerce, cooperation, and prosperity.

Inevitably, however, this mega project will create both winners and losers. Viewed through a protectionist lens, the BRI is a way to expand China’s sphere of influence and even an aggressive attempt to subvert the global balance of power. Such fears could herald a move toward deglobalization, with nations retreating from international cooperation to thwart others’ expansion.

At this critical point in history, either of these routes—deeper integration or deeper fragmentation— is possible. In the face of rising economic nationalism, can the BRI emerge as a force that helps swing the pendulum back toward global integration? To realize China’s vision of globalization, the BRI must be perceived as more than merely a strategy for infrastructure investment. It must also win the battle of narratives.

The power of narratives

Narratives are open-ended, continuously unfolding accounts that invite participation and action. They enshrine shared meanings and sets of values for those who live, create, and interpret them. They derive their power from their ability to engage hearts and minds and thereby affect behavior and decision making.

According to narrative economists, the stories we tell ourselves about the world can even propel major economic events. Considering narratives can thus help us answer “big questions” in international business and economics, such as why some countries and firms succeed while others fail on the global stage.

Such narratives do not emerge from thin air. They are carefully nurtured by firms, institutions, and governments that seek to change the course of history. Successful narratives, such as globalization, act as drivers of institutional change.

At the level of nation-states, narratives are shaped by powerful internal forces (such as national security concerns) and equally powerful external drivers (such as technological development). Such narratives are far from fixed. They may respond flexibly to economic, political, and socio-cultural pressure or break under the strain.

Nor are narratives always logical. The present swing toward deglobalization is counterintuitive, given its overall negative impact on welfare and

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This mega project [China’s Belt and Road initiative] will create both winners and losers

economic activity. Yet the power of narratives can be intoxicating. Projects such as Brexit and Donald Trump’s introduction of a punishing 25 percent tariff on steel from overseas show how potent populist narratives can override economic interests.

To compete with such narratives, the globalizing narrative of the BRI must win hearts and minds worldwide. It must be perceived to serve both Chinese and foreign interest-through free trade and shared economic benefits, for example or risk being derailed by de-globalizing efforts. In short, to use a timely metaphor, it needs to “go viral.”

Going viral

For a narrative to go viral, it must be perceived as a force for the common good. Viral narratives have four key characteristics. They are based on common values, they invite participation, they are open-ended, and they deliver shared prosperity. Using this framework, we can determine whether and how the narrative of the BRI can drive institutional change in favor of globalization.

Values are the first condition for narrative virality. The values espoused by a narrative must be meaningful, legitimate, and substantial. Most importantly, they must be shared by all stakeholders. The BRI narrative must represent a set of consistent values that ring true to firms, governments, and citizens both in China and overseas. Unfortunately, the BRI-promoted values of “community” and “shared interests” are still perceived as hollow by many.

Second, narratives that go viral are those that invite participation and offer stakeholders the opportunity to change the world. Encouragingly, China’s partners in the BRI already include national governments, international institutions, firms from the signatory countries, and, increasingly, parties from third countries, including multinational enterprises. Attracting even more partners and deepening the involvement of both Chinese and non-Chinese stakeholders will be crucial to the success of the narrative.

Third, viral narratives are open-ended and influenced by their environments and participants. If the globalizing narrative of the BRI is allowed to freely evolve, it will be able to adapt flexibly to disruptions such as technological innovation and even global shocks such as the COVID-19 pandemic.

Finally, if the globalizing narrative of the BRI is to go viral, it must offer clear economic benefits for all potential partner countries— not just China. This will be especially important in the wake of the COVID-19 pandemic, which has ravaged economies worldwide. So far, however, only about 11 percent of China’s funding for transportation projects has been won by non- Chinese companies. This may not be enough to encourage overseas firms to buy in to the BRI narrative.

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Combating counter- Narratives

Narratives can be perceived as forces for good or as weapons. Globalizing and deglobalizing narratives are no exception to this binary thinking, as they create distinct sets of winners and losers.

The BRI is one of the most significant capital projects ever undertaken, with trillions of dollars of investment benefiting 68 countries to date. The promised financing has won the initiative political support from many nations. However, countries threatened by China’s rapidly growing influence on the world stage have established counter-narratives that may endanger the success of the BRI.

The biggest threat comes from the US, which regards the BRI as a “weaponized narrative,” a form of economic warfare that imperils the US’s global pre-eminence. It is attempting to recast the BRI as an aggressive strategy to subvert the global balance of trade and destabilize domestic markets. As direct military conflict becomes less likely, such competing narratives could prove the battleground of the future.

Industrial impact

The BRI’s fate will play out in the realm of geopolitics but will affect almost all domestic and international businesses. In theory, competitive value-creating firms in both China and the West should support the narratives and institutions of globalization. However, the world of narratives is neither linear nor logical.

Narratives are strategically nurtured by their creators and carefully selected by those who adopt them. Strategically aligning with narratives enables firms to build “narrative capital.” However, narratives are created and chosen based on imperfect information and with unknown consequences. When faced with competing narratives, businesses must make a bet on the future. Those who choose the right ones can prosper; those who do not may find themselves dangerously exposed.

The success of the BRI’s globalizing efforts will be influenced by how effectively firms align their own narratives with that of the BRI (or with counter-BRI narratives). Firms that operate in different markets must choose carefully between narratives. It will be vital, for example, for companies operating in China, Russia, the US, and Europe to develop institutional narratives that are acceptable to all parties. The alternative is to retreat from international expansion and focus on domestic markets, damaging the interests of the BRI.

During times of rapid change, business leaders must make narrative development a strategic priority. Firms that proactively and creatively manage their narrative assets in close alignment with the BRI narrative will help to swing the pendulum back toward globalization.

Can the BRI cut through?

The success of the BRI narrative in going viral and realizing China’s vision of globalization will depend on its pull with Chinese political and economic coalitions and with international businesses and broader social interests. While the BRI may be presented domestically as a positive force for globalization, we

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must recognize that China offers this narrative from a position of strength. In almost every relationship, it will be the dominant partner.

A narrative that benefits China alone will fail. Instead, by embracing shared values, delivering mutual economic gain, and offering stakeholders opportunities to shape the future, the narrative of the BRI can emerge as a powerful driver of globalization. It must fashion a future that is open, accessible, and participative; one in which benefits are shared, not hoarded.

Currently, however, the future is radically uncertain. As we emerge from the COVID-19 pandemic and embark on recovery efforts, we may witness greater international integration and cooperation. Alternatively, divisions may be further entrenched as populist and protectionist narratives take hold. The BRI and its narrative will be instrumental in determining which path we take at this historic crossroads between globalization and deglobalization.

Reference This article is based on the author’s joint work with Dr Casas-Klett. Casas-Klett, T., & Li, J. 2021. “Assessing the Belt and Road Initiative as a Narrative: Implications for Institutional Change and International Firm Strategy," Asia Pacific Journal of Management, in press.

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By Professor QI Ye Director of the Institute for Public Policy HKUST

Cooperation, Competition Confrontation? An Era of Strategic Choice China and the US should explore every avenue to avoid a conflict which will lead to human tragedy.

Cooperation in technological innovation is desperately needed to face the eminent challenge of the coronavirus pandemic and the deadly threat of global climate change. Yet it is easier to talk about cooperation than achieve it. Under certain circumstances, even advocating cooperation may also be seen as politically incorrect. Unfortunately, such a situation is occurring between the world’s superpowers today.

The US and Japan have been recently forming a partnership that excludes China from a semiconductor supply chain. A spokesman from the Chinese Foreign Ministry rebuked the attempt as damaging to all parties. Despite the inflammatory nature of the incident, this kind of international maneuvering hardly garners much attention after four years of conflict over trade, technology, public health, and strategic issues.

While the foreign ministers of the G7 were blasting China and Russia for bullying others lately, some ranking members of the US Congress were planning a Cold War. In April, the Strategic Competition Act (SCA) was introduced and approved by the Foreign Relations Committee of the US Senate. Seen as a rare form of bipartisan cooperation between the Republicans and the Democrats, the SCA is considered by some Washington think-tank veterans as a de facto declaration of a Cold War with China. All this happened when John KERRY, the US Special Envoy, was discussing cooperation on climate change with his Chinese counterpart in Shanghai. Kerry himself once served a long period as the Chairman of the Senate Foreign Relations Committee. The two opposing political parties of Washington elites seem to be united, determined, and even excited to wage a Cold War against an imagined enemy who they desperately need.

A new Cold War?

Secretary of State Anthony BLINKEN denied that the US is engaging a Cold War with China. The top US diplomat laid out three categories of issues and the corresponding actions: we would cooperate where we could, compete where should, and confront where we must. In dealing with China, cooperation and confrontation can go side by side. But the challenge is how to draw the boundaries between these categories. In a time of growing tension between the two superpowers with nuclear arsenals, and with inflammatory nationalism on both sides, placing a delicate issue in the wrong category or initiating a blurred boundary between categories may lead to a fatal, unintended consequences that even the most ardent populists on either side would hate to see.

The Chinese stance is clear and firm. At the first meeting with the new US administration, YANG Jiechi, the head of foreign affairs in China, told his American counterpart, that “in front of China, the US is not qualified to speak from a position of strength, even 20 or 30 years ago.” This unusual warning clearly shows China’s confidence if it comes to competition with the incumbent world leader. America is still the leader in many areas, especially in technology and the military, but the gap is closing fast, as China pours tremendous resources into indigenous innovation and modern infrastructure, anticipating and embracing a new technological and industrial revolution.

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Graham ALLISON, founding Dean of the Kennedy School of Government at Harvard, observed that no incumbent leading country would sit idle when a challenger grows in power. He warns that historically, the majority of such cases have ended with a tragic war. Unfortunately, humans tend not to learn from history. In a long four years, a vigilant America under a stable genius adopted a strategy of extreme pressure by waging a trade war and suppressing major technology firms. The hostile (and obviously irrational) actions won widespread domestic support. Even today, some congressmen are still advocating a permanent ban on Huawei from entering America. These actions are not only against America’s interests, but are also inconsistent with America’s tradition of openness and big heartedness, and its instinct for embracing diverse peoples, cultures and technologies. Apparently, a deep anxiety has been growing within the minds and hearts of some who have not had adequate exposure to the realities of the world and its history. Deeply rooted insecurity also comes from dissatisfaction with the growing gaps of income and wealth due to economic globalization. But it is much more convenient to make others into scapegoats.

An optimistic China

The widespread anxiety in America is mirrored in the growing confidence and boundless optimism in the Chinese society. To many people in China, the rise of the nation is an inevitable trend, and China has already been leading the world in some of the most advanced technologies. Many commentators often cite favorite examples, such as cashless payment, online shopping and car-hailing, and the online ordering of take-out food. Some are proud of AI-based facial recognition which is seamlessly deployed to catch criminals and suspects. Many believe that China could easily blow the American finance system by cashing out its large holding of US Treasury bonds.

There are resentments about the America’s ban on exporting so-called bottle-neck technologies to China. These technologies are critical, but not yet available in China, and include some of the finest computer chips. Huawei and ZTE are among the best-known companies to be seized by the throat. Leaders from the Chinese Academy of Sciences and leading universities are now resetting their priorities and inspiring their staff and students to develop China’s own technology, as when the Soviets withdrew their engineers and ended technological cooperation in late 1950s. Despite the hardships and anticipated challenges, China seems to be confident, and determined to have a breakthrough in these technologies by means of indigenous innovation.

Pride and prejudice

The prejudice on one side can only be explained and echoed by the pride of the other. The truth may just be in the middle, a place where we spent decades. But can we go back to where we were? That is unlikely. The seemingly inevitable destiny of the two countries, and the world, shows “the solemnity of the remorseless working of things” (quoting from Whitehead). Graham Allison entitled his best-selling book Destined for War: Can America and China Escape Thucydides’s Trap?. Perhaps

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China seems to be confident, and determined to have a breakthrough in bottle-neck technologies by means of indigenous innovation

the answer should be “nothing is impossible”, especially when it is a matter of life and death. It is the only reasonable choice, and the two countries should do everything they can to avoid a tragic conflict. They should take the advantage of every possibility to work together.

Four years ago, in the first meeting of the two heads of state, the Chinese President told his American counterpart that there are a thousand reasons to make a good bilateral relation, and there is not one reason to make a bad one. Ironically, the SCA and some political elites have listed many reasons for confrontation. These elites always try to pass their anxiety to the public, and too often they succeed. Some business elites are those who have made a fortune from doing business in or with China in recent decades, but who find it is getting harder to make money as China itself becomes better market player and technology innovator. Some political elites are surprised to find that China is no longer as tame and low-profile as it used to be, and appears to be more assertive. Some still wholeheartedly believe that China is an errant lamb who needs to be brought back to the right path. But they are frustrated to find that China is growing more and more confident and self-assured. Such elites believe that China needs to be corrected.

These elites, regardless their beliefs, illusions, or frustrations, have little to do with the daily lives of the mass public. For decades, they collectively have failed the American public and now they tell the public that it is all China’s fault. Too many still choose to believe them. That is why we now see a clamoring in the political arena for the so-called strategic competition.

Wisdom and responsibility

Competition itself is not a bad thing at all. Business school students are familiar with their required reading, the Competitive Advantage of Nations, by the Harvard Professor Michael PORTER. Porter revised the classical Comparative Advantage theory by emphasizing competition among nations. According to Porter, each nation could enhance its competitive advantage through engaging in a global system of value chains and trade based on production factors, investment and innovation. In such a system, nations are interdependent of, and benefit from, each other. This has been working well for the US and China in recent decades. Both countries and the world have gained tremendously from the globalized, interdependent system. But now, this system is facing a rapid shift and deterioration, towards competition for dominating advantage.

My former colleague Ryan HASS, of the Brookings Institution, recently published a new book that immediately became a bestseller: Stronger: Adapting America’s China Strategy in an Age of Competitive Interdependence. Indeed, we are not just living in an era of strategic competition, we are in an age of interdependence. Cooperation, competition or confrontation? Our choice matters for present and future generations. Be wise and be responsible.

Reference Graham Allison (2019), Destined for War: Can America and China Escape Thucydides’s Trap?. Michael E. Porter 1998), Competitive Advantage of Nations. Ryan Hass (2021), Stronger: Adapting America’s China Strategy in an Age of Competitive Interdependence

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By Professor Edwin L. C. LAI Department of Economics and Director of Center for Economic Development at HKUST Business School

Why Does China Want to Internationalize the RMB?

China will benefit from internationalizing the RMB, including as a force to drive domestic financial sector reform, but the process could take some time.

The Chinese government is trying to internationalize the RMB, and this gives rise to at least a few questions. What are the real reasons for this action? Will it succeed? What are the factors working in its favor? What are the impediments? What are the implications for the rest of the world?

The internationalization of the RMB is a process of turning the RMB into a currency widely used internationally as a unit of account, medium of exchange, and store of value. There are several benefits from an internationalization.

First, the exchange rate risks in trade, investment and financial transactions are minimized for Chinese citizens and the government.

Second, there is less reliance on foreign currencies such as the USD, and the associated institutions such as the payment system. China believes that if more of its trade were to be settled in RMB, China’s trade would suffer less under the shortage of the dollar or any other foreign currency. Moreover, the use of RMB for international payments would facilitate them to be handled by a payment system that is under the jurisdiction of China. The use of USD for payments, on the other hand, requires the use of a payment system under the jurisdiction of the US authority.

National security reasons

For national security reasons, China clearly does not want a foreign authority to have too much information about, and control over, the flow of payments into and out of China, which the foreign country could possibly exploit for its own benefit. China learned a firsthand lesson of the risk of conducting business using the dollar payments system in the case of MENG Wanzhou (孟晚舟), the Chief Financial Officer of the Chinese technology giant Huawei, who is still in custody in Canada facing extradition to the US.

Third, being able to borrow internationally in China’s own currency brings an important benefit for China. For the long-term development of China, its firms should be able to freely borrow from foreigners so as to finance their business. However, it would be much safer for Chinese firms to borrow internationally in RMB than to do it in a foreign currency. This would reduce the risk of a mismatch between the currency denomination of the revenue source (which is RMB) and the currency denomination of the debt (which is a foreign currency) of the companies, which can result in bankruptcy of the firms in the face of a sharp depreciation of the RMB when it is under speculative attack. It was this currency mismatch in Asian countries such as Thailand and Indonesia, in the face of a currency crisis, that caused widespread bankruptcy and economic disasters in these countries during the 1997- 1998 Asian Financial Crisis.

Fourth, when a currency becomes sufficiently internationalized, the country’s citizens and government might be able to borrow abroad large amounts at low interest rates in the country’s own currency. The US is a case in point. The yields of US Treasury securities are not impressive when compared with other financial instruments. Yet they are widely held by financial institutions and central banks around the world.

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This is because when the currency of a country is widely used as an invoicing and settlement currency in international trade, it can also more likely be a funding currency, that is, a currency chosen by borrowers to denominate their debts, such as bonds or loans. This is a result of the interest rate being lower due to the high demand for the currency for trade invoicing and settlement.

Business for the banking sector

Fifth, wide international use of the RMB would provide more business for the banking and financial sectors of China. When the RMB is more widely used, it benefits Chinese banks and financial institutions, as the international demand for RMB assets would bring business to domestic financial institutions, as payments in RMB have to be ultimately handled by Chinese banks and financial institutions.

Sixth is the ability to earn seigniorage from foreign countries (issuing RMB to foreigners in exchange for real goods). When foreigners trust the RMB, they are willing to hold the currency as a medium of exchange and store of value. Thus, they are willing to sell goods to China in exchange for the RMB.

Seventh is political influence. When a currency becomes a major reserve currency for another country, the issuing country of the currency can use it as leverage to exchange for favor from the foreign country.

There is yet another, uniquely Chinese, reason for certain quarter in China to push for internationalization of the RMB. Certain quarters within the Chinese government wants to use the capital account liberalization and financial market liberalization that come with RMB internationalization to create pressure for domestic financial sector reform.

In my book, One Currency, Two Markets: China’s Attempt to Internationalize the Renminbi (forthcoming, Cambridge University Press), I explain how the problem with the international monetary system since the demise of the Bretton Woods system and the recent global financial crisis prompted China to seek independence from the dollar standard. One way is to make the RMB a widely accepted currency internationally.

An awkward position

China, however, is in an awkward position. On the one hand, it is the second largest economy and the largest trading nation in the world, and it would likely become the largest economy before long. This works in favor of the internationalization of the RMB. On the other hand, China is still an emerging economy, meaning that its financial and legal institutions are still immature compared with the more advanced system in the West. Yet, China does not want to fully integrate its financial system with the West any time soon. As currency internationalization requires the currency to be largely convertible in the capital account, this factor works against the internationalization of the RMB. Thus, China tries to internationalize its currency in its own unique way, i.e. by adopting the “one currency, two markets” approach, which entails establishing a global offshore RMB market.

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By 2030, the RMB can rank a distant third [behind the USD and the euro] in the global ranking of currencies used in international payments, surpassing the British pound sterling

Through this strategy, China sets up a firewall between the onshore and offshore markets, allowing full convertibility of the RMB in the offshore market but partial convertibility in the onshore market. Behind this approach are a number of policy measures, including financial market liberalization, capital account opening, and the facilitation of the formation of a number of offshore RMB centers, such as Hong Kong, Singapore, and London.

Based on theory and evidence, I conclude that China’s economic size, its commitment to sufficiently free capital mobility, the development of a deep, broad and liquid financial market, and people’s confidence in the RMB are the four key factors for the success of RMB internationalization. China has economic size, but it needs to work on the other three factors. It is not at all clear whether and when China would achieve the sufficient degrees of capital mobility and financial market development to make the RMB a significant international currency on a par with say the euro, not to mention the USD.

Moreover, it seems difficult for a country without a mature legal system and a system of checks and balances to secure the confidence of the world on its currency. Thus, my conjecture is that, in the intermediate term, the RMB would only be a distant third payment currency (behind the USD and the euro). In the longer run, because of China’s large GDP and continuing reforms and opening, and the world’s central banks’ demand for safe assets for foreign exchange reserves, the world may become a multi-reserve-currency system, with the USD, Euro and RMB being the three main reserve currencies. However, the road for the RMB to get there may be quite long and uncertain.

Positive feedback

Based on econometric analysis, I find that financial development and capital account opening are much more important than the GDP of China in making the RMB an international currency. My model predicts that it is possible that, by 2030, the RMB can rank a distant third (behind the USD and the euro) in the global ranking of currencies used in international payments, surpassing the British pound sterling. I estimate that RMB’s payment share can reach 6.6% by 2030 (it is about 1.5% to 2.0% today, compared with about 55% for the USD and about 20% for the euro1). However, this is possible only if China greatly speeds up its financial development and capital account opening in the next decade.

I also argue that there is a positive feedback effect (or synergy) between capital account liberalization and domestic financial sector reform. This argument provides the rationale for using the internationalization of RMB to force domestic financial sector reform. This is called “daobi” (倒逼) in Chinese, which I believe is (silently) advocated by some quarters in the Chinese government. I argue that “daobi” is one important motivation of internationalizing the RMB. For this reason, the sequence of liberalization in China should not strictly follow that of conventional wisdom, namely financial market liberalization should take place before capital account liberalization. Instead, the two liberalization initiatives should proceed interactively in tandem.

1. Intra-eurozone payments and payments to/from global market infrastructure are excluded.

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By Professor CHEUNG Ki Ling Department of Information Systems, Business Statistics & Operations Management at HKUST Business School

Global Organizations Must Rethink Supply Chain Management

The recent turbulent years have led to new challenges for global supply chain management, but with proactive mechanisms in place, corporates can minimize the impact and scale of disruptions.

Soon after the start of the trade war between China and the US in 2019, UK research and advisory company Gartner conducted a “Future of Supply Chain Survey” with 990 corporate supply chain professionals. At that time, brand owners like Samsung and Fitbit, among many others, had ceased to operate at least some, if not all, of their factories in China. Not surprisingly, the survey indicated that China was no longer the champion of job growth. That title had passed to India and Mexico, which were also considered to be powerhouses of labor. In the midst of this massive migration of supply chain facilities such as manufacturing sites and distribution centers to India, Vietnam, Thailand, and other nearshore countries of China, COVID-19 struck.

The pandemic has created brand new challenges for societies around the globe. Across the US, there were shortages of crucial medical supplies, including face masks, testing kits, ventilators and even drugs. Until the pandemic, most Americans did not realize that most of the manufacturing activities of these essential medical supplies took place in other countries. Arguably, ex-president Donald Trump was probably right to conduce domestic manufacturing before COVID-19 occurred, although this would have been a more effective argument if face masks and nasal swabs had been on his list.

According to another survey conducted by Gartner in 2020, the pandemic and the shortage of critical raw materials and components ranked number one and number two respectively as the top supply chain risks, while the trade war was only number four on the list, immediately behind cybersecurity.

I believe global organizations must rethink supply chain management to cope with the aggravated supply chain challenges resulting from the pandemic. Below I offer my thoughts on three salient areas.

Supply chain configuration

Frustratingly, global disruptions are occurring more often than ever before. The reasons a company can survive a major market disruption boil down to its ability to handle risk in a proactive manner. No company or individual could have predicted a pandemic of such a scale and duration as COVID-19. But there are always a few companies that are able to react rapidly and effectively because they have been proactive in preparing to face unforeseeable disruptions. Such companies build flexibility and agility in their systems before the event, rather than after it.

In essence, I believe some kind of hedging should be applied to all supply chains, so that they are not disturbed by sudden disruptions such as the COVID-19 pandemic. An intuitive strategy is to have at least two types of supply chain in place. Companies should develop a rapid and super-responsive supply chain and a cost-effectively supply chain located within different continents. This kind of hedging can protect the company against changes in the business environment, whether driven by market or supply.

For example, HP has long realized the power of running what the company describes as a portfolio of supply chains across the globe. So

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there are multiple configurations of the supply chain instead of just one configuration. Each configuration needs to possess different operating characteristics. This approach has served well for products which are progressing through different phases of their lifecycle. It should also work better than relying on one single source of supply during periods of disruption.

Omni-channel Capabilities

The Gartner survey noted that the top six disruptive and important digital technologies are reported to be: • Artificial Intelligence • Big Data Analytics • Machine Learning • Internet of Things (IoT) • Advanced Robotics • Robotic Process Automation

Although advanced robotics and robotic process automation are not on the top of the list, they have been highly significant during the pandemic. Online giants like Amazon and Alibaba have clearly beaten their offline rivals. Even before the pandemic occurred, these companies had invested aggressively in automating their warehouse and distribution operations. Intuitively, better efficiencies in handling orders present an immediate benefit of process automation in warehouses and distribution centers. But few people would have foreseen that this meant Amazon and Alibaba suffered much less due to a shortage of workers during the lockdown periods, and that automation mitigated the effects of social distancing.

In a broad sense, omni-channel fulfillment capabilities with both online and offline channels in place can be regarded as another kind of hedging strategy. What I mean by Omni-channel is that, in addition to a traditional physical channel, there exists an end-to-end online channel from retail to delivery through which customers place their orders online at home and these orders are delivered right to their door. This channel will effectively take over all the orders from the offline channel during a difficult time like a pandemic.

Big data analytics

Other than the physical dimensions of supply chains, information related to market intelligence must be considered. Big data analytics is another proactive strategy, as it allows companies to detect market abnormalities as early as possible. After all, the whole purpose of managing a supply chain is to satisfy customer demand in a seamless manner. The sooner a company can detect market abnormality, the sooner it can take action to either ramp up or turn down supply.

Only a handful of companies, such as the chewing gum manufacturer Wrigley, have remained consistently successful over a long period of time with a single product involving just a few varieties. With a narrow product line, these companies can more intensely focus their efforts and resources on managing a few inventory items. However, most retailers, distributors and manufacturers handle thousands— and sometimes many thousands— of Stock Keeping Units (SKUs). Few would notice that a typical Seven- Eleven store carries about 3,000

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Global organizations must rethink supply chain management to cope with the aggravated supply chain challenges resulting from the pandemic

SKUs on average, depending upon local customer demand. As one can imagine, monitoring the demand patterns of all of the SKUs of a retail giant like Walmart is a formidable task, as the behavior of a SKU is dynamic rather than static much of the time, and perhaps even more so during a pandemic.

As the largest retailer in the world, Walmart receives more than one million transactions per hour from customers. Being able to capture, store, aggregate and analyze data so that the information quickly becomes intelligence is crucial, as the ability for managers to make decisions, not just optimal but also timely, for product assortments and inventories is key to the competitiveness of Walmart. I anticipate big data analytics will remain essential for a company like Walmart to find out whether the changes of customer behavior that take place during a pandemic are temporary or permanent.

Conclusion

The past few years have seen some of the worst market disruptions in decades. No organization is exempt, and whether one can remain on the right path must always be questioned. The views I offer in this article point to the importance of having proactive mechanisms in place in supply chains. This way, global supply chains will not become completely paralyzed during turbulent times.

Reference Gartner (2019). Future of Supply Chain: Reshaping the Profession. Gartner (2020). Weathering the Supply Chain Storm Survey.

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By Adjunct Professor Alicia GARCIA-HERRERO Department of Economics at HKUST Business School Senior Research Fellow at Brussels-based think tank BRUEGEL

Trading Paces How is trade evolving: from tight coupling to loose coupling.

Trade has been bumpy over the last 15 years. There was a massive collapse during the global financial crisis, followed by a rapid recovery and collapse in 2015 as a consequence of falling oil prices and China’s economic woes. COVID-19 has been the third major shock to global trade in only 15 years, and possibly the most important. COVID-19 is a different kind of shock to the other two, as it brings into question the way in which a substantial amount of trading has been organized over the last few decades. This is due to the massive increase in the efficiency of ports, especially in China, especially thanks to the introduction of containerization.

In fact, value chains – loosely defined as the cross-border movement of the parts and components used in production to reduce cost from increased specialization – are a result of globalization, and they explain the massive increase in trade flows. Value chains started to expand in the 1950s with the rise of multinational companies. The persistent fast growth of international supply chains has been supported by the search to achieve production efficiency by pushing a competitive advantage beyond borders.

Effects of the trade war

This process was facilitated in the past few decades by substantial reductions in trade tariffs, as well lower transportation and communication costs. However, these tailwinds have been fading at an accelerated pace since 2008. The global financial crisis of 2008 marked the beginning of a winding down of supply chains globally. The process was slow but steady until recently, pushed by increasing transportation costs as well as environmental shocks like the Thailand floods of 2011 or the Fukushima earthquake and nuclear disaster.

However, Trump’s trade war against China created new challenges to global supply chains, which had become increasingly China-centric over the years. As if this were not enough, the outbreak of the COVID-19 pandemic in January 2020 created big disruptions in the supply chains, and led to shortages of parts and components for manufactured products, especially autos and ITC. On top of that, shortages in medical appliances, including those most needed to combat COVID-19, has further added to the impression that global value chains are not resilient enough to shocks.

The gravity of the pandemic has clearly added a political, and nationalistic, aspect to the debate about the need to reshuffle global value chains. But we should not forget that there are also economic reasons for such a move. In fact, one can think of value chains having been built in the past to maximize efficiency and, thus, increase corporate profit. In other words, a “tight coupling” model has so far been used to build supply chains in as far as a single-entry point has been offered to each of the steps in a supply chain.

That means if one of the entry points fails, the whole chain breaks down. Environmental shocks, the US-China trade war, and the current pandemic has pushed companies to think about

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changing their operations from “tight coupling” to “loose coupling.

Interchangeable options

In other words, instead of a single point of entry for each step of a supply chain, companies prefer to have several interchangeable options. This, of course, increases the cost of production in the short run, but it increases resilience. Higher resilience might also imply lower costs in the long run, depending on whether major shocks can be avoided. Accordingly, the capacity to keep the production process intact, even when a component is temporarily affected by a disruption in production, has become an increasingly important objective for companies.

Is the debate on the reshuffling of international supply chains being pushed by political factors, or are there also sound economic reasons for it? That is the key question. The answer differs depending on the product as some do have considerations for national security, as seen by the disruption in the supply of crucial medical products during the pandemic. On a more general basis, it is highly improbable that decisions to reshuffle the global value chain away from China, are devoid of economic considerations.

New costs for business

The economic rationale for a company to choose a more complex value chain rather than integrating the production domestically, or within a closer geographical area, might no longer be driven by efficiency considerations only. The resilience of the supply of goods has become particularly important as the costs of disruption have turned out to be very large, as observed in the year following the shuttering of Chinese factories in February.

In addition, within the efficiency rationale behind the decision to offshore the production of parts and components in different locations, many new and relevant costs have appeared which might tilt the equation towards a shorter global value chain. First, security issues (including terrorism and cyberattacks) in several countries have pushed up the bill for maintaining logistics across borders. Second, environmental risks are on the rise worldwide, and so is their potential to generate future disruptions in the supply chain.

Third, protectionist measures have found a breeding ground in the inability of the World Trade Organization (WTO) to ensure compliance with the existing multilateral trading system. Fourth, the increasingly relevant role of technology, and the international fragmentation of its standards and legal framework, can increase the costs of global value chains operating in different ecosystems. Finally, China’s central position in the global value chain has resulted in the excessive concentration of risk in one jurisdiction.

Geopolitical and domestic political reasons may be important when it comes to explaining decisions to reshuffle value chains. But there are many important economic reasons, as described above, which might explain the decision to either re-shore part

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of the production or, at least, shorten a company’s supply chain to within a closer geographical boundary. That boundary could be physically or more figuratively based on similar standards and legal frameworks. In other words, moving from tight coupling to loose coupling can be a rational economic decision and not (only) a political one.

It is highly improbable that decisions to reshuffle the global value chain away from China, are devoid of economic considerations

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By Associate Professor Alminas ZALDOKAS (left) and Assistant Professor Emilio BISETTI, Department of Finance at HKUST Business School

Supplying Finance to Supply Chains Research at HKUST informs the debate about the benefits of uniform financial regulation across countries and looks into the effects of the financial intermediation in facilitating international trade.

International trade relationships often involve importing firms paying their suppliers with a delay. However suppliers, and especially small suppliers from emerging countries, require funding to invest in production. Their local financial markets and credit institutions might be cautious in providing such funding, especially in the presence of information asymmetries about the stability of the relationships with international importers and their overall willingness to pay.

Letters of credit, the traditional solutions to supply chain financing, are promises of payment between the importer’s bank and the supplier’s bank sent before the importer receives the goods, typically in exchange for shipping-related documents. Large international importers ask their banks to issue letters of credit to their foreign suppliers, which the suppliers can redeem with their local banks upon presentation of bills of lading. An alternative solution, factoring, would involve a third party (a factor, often a non-banking company) who would also buy the importer’s invoices at a discount.

While letters of credit and factoring allow suppliers to receive upfront cash, and to finance their operations before importers receive the goods, such solutions are expensive both in terms of financing and the related transaction costs of validating the letters of credit paperwork. Sellers end up being charged double-digit rates for passing their receivables to their banks or factors.

Recently, new forms of supply chain financing such as reverse factoring have emerged as cheaper alternatives to traditional letters of credit and factoring in international trade finance. The key innovation of reverse factoring is that in reverse factoring transactions a large creditworthy importer (e.g., Walmart) initiates its own scheme with its international bank (e.g., Bank of America). The international bank then offers the importer’s suppliers from foreign countries to buy the importer’s trade credit from them. Effectively, the importer’s bank extends credit to the suppliers directly. In this way, small, credit-constrained suppliers can have access to cheap funding by taking advantage of the low cost of capital of their international customers: Instead of paying doubledigit rates to advance accounts receivables, reverse factoring can cost international suppliers as little as a 1 to 2 percent margin over the benchmark rate.

Due diligence

While in theory reverse factoring provides significant advantages in relaxing small exporters’ credit constraints, regulators worry that such transactions might be used as a channel to move illegal funds across international borders. As a result, international banks are mandated to perform thorough due diligence of foreign suppliers to be allowed to provide reverse factoring. When the supplier’s country does not have strong Anti-Money Laundering (AML) and Know-Your-Client (KYC) regulations, even with the importer validating the supplier, international banks’ due diligence costs may be too high, and prevent banks from providing supply chain financing altogether. Put differently, Bank of America might agree to provide reverse factoring schemes only for Walmart’s suppliers coming from tightly-regulated countries, thus constraining the formation of supplier-customer links.

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In an effort to relieve the burden of due diligence from international financial institutions and stimulate trade, international institutions such as the Asian Development Bank (ADB) and industry practitioners have been calling for the implementation of a uniform AML/KYC regulatory framework worldwide. This call for uniform regulation is particularly loud in Southeast Asia, a region with both high trade volumes and dispersed regulation.

Strengthening Regulations

Indeed, while typical AML provisions include, among others, the mandatory reporting and recordkeeping of suspicious transactions, the presence of a criminal offence for money laundering, and provisions limiting secrecy for financial institutions, these provisions display substantial heterogeneity across Southeast Asian countries, both in terms of their strength and in terms of their enforcement. For instance, looking at the compliance with around 40 AML/KYC requirements from the Financial Action Task Force (FATF) mutual evaluation reports (MERs) in 2019 and 2020, Malaysia was rated compliant or largely compliant on 38 out of 40 criteria, while Myanmar was rated compliant or largely compliant only on 20 out of 40 criteria.1

In an ongoing research project, we ask whether strengthening AML/ KYC regulations can stimulate the formation of supply-customer relationships between South- East Asian exporters and foreign importers. The answer to this question is not immediately clear. On the one hand, tight AML regulations may stimulate credit provision by foreign banks and relieve small suppliers’ financial constraints. On the other hand, the implementation of uniform regulations may be distortionary when countries differ in their institutional environment and economic conditions. Indeed, in the 2016 Trade Finance Gaps, Growth, and Jobs Survey conducted by the ADB, banks claimed that AML/KYC regulations are the most restricting factor for them to provide trade financing services across borders (Di Caprio, Beck, Yao, and Khan, 2016)2. Moreover, competition by international banks may drive local banks out of business, with possible adverse consequences for local economies.

To study the impact of AML/ KYC regulations on international supply chain relationships, we have collected and organized data on the implementation of these regulations in Southeast Asia over the past ten years. While the strengthening of these laws has been gradual, for each country in the region we have identified one year in which the AML/ KYC regulations were particularly strengthened. Our overall sample consists of 40 countries in the Asia- Pacific region, and we found that eight South-East Asian countries and regions – Bangladesh, India, Indonesia, Myanmar, Malaysia, Thailand, Cambodia, and Hong Kong – radically strengthened their AML/ KYC regulations between 2010 and 2015.

Positive effects

Exploiting granular international supplier-customer transactions between 2007 and 2018, we study whether an increase in the strictness of AML/KYC laws in a country is

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Smooth intermediation with strengthening financial regulation might improve, rather than hinder, real international trade flows.

followed by changes in the structure of supply chain networks for that country, i.e., whether new supply chain relationships are formed or broken. To make a concrete example, we ask whether Thailand’s Anti- Money Laundering Act of 2015 increased or decreased the number of supply chain relationships between Thailand and the foreign countries.

Our preliminary evidence suggests that tight AML/KYC regulations have a positive effect on supply chain formation. In Figure 1, we show that, in the years surrounding an AML/KYC law change in South-East Asia, on average every second international firm added one extra supplier from countries that tightened their AML/ KYC regulations, relative to other South-East Asian countries that did not change their AML/KYC laws around the same time.

Our results shed light on a relatively unexplored issue in academic finance – the role played by international banks in the intermediation of international supply chains. With this, this project aims to inform the current debate on the costs and benefits of uniform financial regulation across countries. Our findings suggest that ensuring smooth intermediation with strengthening financial regulation might improve, rather than hinder, real international trade flows. Thus policymakers should take into account the effects beyond the direct effects on local banking markets when considering strengthening AML/KYC regulations.

Supply chain financing has attracted media and policymaker attention recently with the collapse of Greensill Capital, a specialized lender. This controversial event further highlights the need for robust financial intermediation to soften other frictions that restrict international trade, such as possible post-pandemic restructuring of supply chains and crumbling trade liberalization.

1. The Asia/Pacific Group on Money Laundering (APG), Malaysia’s MER 3rd Enhanced Follow-Up Report from 2019 and Myanmar’s 2nd Follow-Up Report from 2020. 2. Alisa Di Caprio, Steven Beck, Ying Yao, and Fahad Kahn, 2016 Trade Finance Gaps, Growth, and Jobs Survey, ADB Briefs.

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Working Together to Nuture FinTech Talent

HKUST and the Tencent Finance Academy are planning to foster talent for FinTech in the Greater Bay Area.

HKUST has signed a Memorandum of Understanding (MoU) with the Tencent Finance Academy (TFAHK) to nurture FinTech talent for the Greater Bay Area (GBA). The agreement will establish a strategic partnership to foster the development of FinTech by nurturing talent. The parties will collaborate on education, and research and development projects, by leveraging HKUST’s academic knowledge of FinTech and TenCent’s industry experience.

HKUST and TFAHK will collaborate on FinTech case studies for tertiary education purposes with the aim of providing real-life business cases to help students improve their knowledge of FinTech. A curriculum which focuses on FinTech by integrating HKUST’s academic excellence with Tencent’s extensive business experience will be designed to nurture an innovative talent model.

Other initiatives will include internship opportunities, joint FinTech-related research and development projects, guidance on conducting research projects, and education outreach programs to improve public awareness of FinTech. “Hong Kong’s public and private sectors have striven to support and encourage innovation and related science and technology appropriate to the city and beyond. FinTech is a clear example in this domain as it has already been transforming our lives in every aspect from banking and retail payment to e-commerce,” said HKUST President Wei SHYY.

Bringing coursework to life

HKUST’s first FinTech postgraduate program was launched by the Schools of Business and Management, Engineering and Science in 2019, and the University has collaborated with banks and other enterprises to bring the coursework to life. The latest collaboration with Tencent will further its aim to create new knowledge and nurture talent.

The MoU signing ceremony was held in April as part of a Youth Forum hosted by the TFAHK, which was attended by representatives from the HKSAR Government, HKUST and the TFAHK. The forum was held to help audience better understand the GBA, and to encourage young talent to explore the thriving career opportunities in the bay area.

At the signing ceremony, Hong Kong’s Chief Executive Carrie LAM Cheng Yuet-ngor talked about the significance of the launch of the “Greater Bay Area Youth Employment Scheme” project. Lam explained that the Government had introduced the scheme to encourage enterprises with operations in Hong Kong and the GBA to recruit local graduates and send them to work in cities in the GBA.

FinTech is a priority for the GBA

The scheme, which engages 320 companies to provide around 2,400 jobs for young people in the region, is offering up to 1,267 opportunities for work placement in the areas of innovation and technology, doubling what was expected. Lam said that this is a huge step in the right direction for the GBA, where the development of FinTech is a priority.

Jim LAI, Dean of the TFAHK, said that the Academy has already organized a range of relevant activities, including internships, research opportunities, and visits, and they have experienced enormous benefits.

The scheme will help young people to integrate their studies, their work and their daily lives into the GBA, and to experience how technology enterprises focus on the innovations which help to nurture FinTech talent.

Collaborative efforts are also important in the development of cross-border FinTech industries. Opportunities like these will allow the industry to introduce measures that promote the application of cross-border FinTech collaborations and encourage financial institutions and technology companies to develop cross-border FinTech solutions.

More initiatives are planned

Regulators can also take advantage of these opportunities to test cross-border FinTech applications by using regulatory sandboxes.

The Youth Employment Scheme is one of many initiatives that will be rolled out in order to promote cross-border FinTech opportunities, paving the way for more similar initiatives and programs.

It appears that young people are excited by this opportunity. LU Junhong, who graduated from HKUST in computer science in 2019, has signed up for the program, as he feels that working in Shenzhen will give him more opportunities to participate in research and development. “The GBA Employment Scheme has already provided around 70 recruitment positions this year. The opportunity for career development is much greater than if I applied myself,” he said.

Honourable guests (from 3rd left) Mrs Carrie LAM Cheng Yuet-Ngor, Chief Executive of HKSAR; Mr Alfred SIT Wing-Hang, Secretary for Innovation and Technology; Prof Wei SHYY, President of HKUST; (from 1st left) Mr Jim LAI, VP of Tencent, Chairman of Fusion Bank and Dean of TFAHK; Mr Andrew LIAO Cheung-Sing, Chairman of HKUST Council, witness the MoU signing by (from 1st left) Mr James LI, Senior Director of Tencent Financial Technology Group, and Prof WANG Yang, VP (Institutional Advancement) of HKUST

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Home Team Triumphs in HKICC

Nine high-powered teams of business undergraduates took part in the HKUST International Case Competition (HKICC) 2021 from June 6-10, marking the return of the signature event after a two-year hiatus.

First organized in 2003, this time the HKICC contest attracted entries from leading universities in Asia, Europe and North America, and used a virtual format in view of COVID-enforced travel restrictions and social distancing requirements.

The finalists were asked to put forward a series of strategic recommendations to address the real-world challenges facing WeLab Bank, Hong Kong’s pioneering homegrown virtual bank and the competition sponsor.

The essential parameters were drawn up by the Thompson Center for Business Case Studies at HKUST Business School. Accordingly, students were given basic background information about the organization, an outline of the most pressing issues facing senior management, and relevant data from sources such as annual reports, recent financial records, and market research studies.

Unleash the potential of virtual banking

Each four-person team was then expected to come up with workable plans for market penetration, new products and services, sustainable growth, ways to counter likely risks, and a path to profitability.

The proposals set out in online presentations – and the reasoning behind them - were closely scrutinized by experienced executives from the bank, who also chipped with pertinent questions. This provided a true test of both hard and soft skills, obliging the contestants to further explain or justify their analysis, think on their feet, and remain cool under pressure.

Subsequently, during the online award presentation ceremony, Professor TAM Kar Yan, Dean of HKUST Business School, commended the efforts of everyone who had taken part. He also thanked the organizing committee, the many judges who contributed their expertise over the various rounds, and WeLab Bank for their tremendous support. “There were some new and unique features this year, and I was so glad to see we had teams from around the world,” Tam said.

Tat LEE, Chief Executive of WeLab Bank, noted that a lot of innovative and interesting ideas had been put forward in the various presentations. He also highlighted the importance of the partnership with HKUST.

“The competing teams should be proud of what they have accomplished,” Lee said. “And I hope that in addition to learning more about WeLab Bank, students can also have an understanding into the Hong Kong’s virtual banking and financial services landscape.”

After a tough battle, the team to emerge as this year’s winner was Nova Consulting representing HKUST. Over the course of the contest, team members Andrew KONG, Heywood CHAN, LEE Chun Yikk and Cathy CHAN showed insight, imagination and a real appreciation of the practical challenges facing a virtual bank looking to expand services and build market share in a fast evolving and highly competitive environment.

Their recommendations included an “interactive dashboard” to help with personalized savings plans, as well as thematic savings for a wedding, a first home, or a holiday trip. These concepts could help to attract and increase the “stickiness” of millennial customers and overcome typical pain points in financial planning.

They also set out the opportunities for cross-selling to other family members and meeting the wider need for insurance, loans, equity investments and mortgage products. “The competition was a great experience for all of us,” said team spokesman Kong, reflecting on an intense few days. “Of course, we are very grateful to the professors, advisors and organizers who helped us along the way and made the whole event possible.” Their key advisors of the team were Alice LUI, Manager of the Global Business Program, and Adjunct Associate Professor Chris DORAN, who during the pre-competition period offered insights and training to improve the team’s case analytical skills so as to prepare for their competition.

“There was a very steep learning for the students to understand the latest technology being used in Hong Kong and how it is reshaping the banking sector,” Lui noted during the award presentation ceremony. “It was an honor, though, for the team to be able to present their ideas and recommendations. Let’s hope that WeLab will very soon be the number one virtual bank in Hong Kong.”

The first runner-up was the University of British Columbia and Thammasat University came in third. Their recommendations included empowering customers via a website, mobile apps, classes to enhance financial literacy, among others.

In his closing remarks rounding off a highly successful event, Professor Allen HUANG, Associate Dean (UG Programs) at HKUST Business School, commended the performance of all this year’s participants.

“They addressed challenges with real-world constraints, collaborated well, and should all be congratulated for their efforts.” Huang said.

(From right): Prof TAM Kar Yan, Dean of HKUST Business School, and winning team members Lee Chun Yikk, Cathy CHAN, Heywood CHAN, Andrew KONG and their advisor Alice LUI

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A Winning Streak

Participating in case competitions can help students learn valuable skills to support their future careers. Over the years, HKUST business students have formed a like-minded network to participate in and promote case competitions. The HKUST Case Analysis Team (CAT) is a student-led group that connects students and alumni, faculty and staff, in training and selecting teams to represent HKUST in local and international case competitions. They have achieved exceptional performances in many different competitions this year. Let’s find out their achievements and hear what they said their experiences.

I’m grateful for the support of CAT and my fellow teammates. I am humbled and honored to receive the Best Presenter Award. My first case competition was challenging yet rewarding. I will keep developing and diversifying my skills to prepare for the next competition Mimi LAM, the best presenter and a member of the championship team

HKU-NWS Joint University Case Competition Our undergraduate teams participated in Hong Kong’s cross-university competition called the HKU-NWS Joint University Case Competition. Out of 16 student teams, four HKUST teams established a new record. They won the championship, the Best Presenter Award and took home the first, second, and third runner-up titles! This year, the organizer collaborated with NWS Holdings to present the business challenges for the competition. This has helped students gain critical thinking skills and will give them practical industry knowledge through mentorship. The champion team was formed by four students from our Global Business (GBUS) Program.

The team of Giovanni, Alex, Apple and Ankit performed near perfectly at one of the most respected international case competitions. According to the judges, the team ‘went above and beyond for the analysis… looking further than what just the case provided’ and ‘the best speaker played with the audience and really captured their attention’. All in all, they represented HKUST with excellence Professor Stephen NASON, advisor to the winning team

International Case Competition@Maastricht Students from the World Bachelor in Business (WBB) Program won the championship title in the International Case Competition@Maastricht. Hosted by Maastricht University in the Netherlands, the virtual case competition brought together 16 teams of talented undergraduate students from leading international business schools. The HKUST team ranked first in both the 4-hour case and the 24-hour case divisions before entering the final round, Apple JIN also won the Best Speaker Award.

JMUCC was the first time I advised a team in a fully virtual case competition. Dealing with the technical snafus meant a rocky start for our team, but they rallied brilliantly, and their final presentation was amazing! The team supported each other throughout, never letting the initial stumbling blocks bring them down. All four team members played to their individual strengths, and performed in perfect harmony in the finale, beating out many very experienced teams from leading universities. I am very proud of them Professor LAFON-VINAIS, advisor to the winning team

John Molson Undergraduate Case Competition At the John Molson Undergraduate Case Competition (JMUCC) organized by Concordia University (Canada), our WBB team came second and won the Best Speaker title. It is one of the largest undergraduate case competitions in the world.

Case competitions are a platform for students to push themselves out of their comfort zone and realize their potential. It provides a steep learning curve for teams to understand and analyze a particular industry and develop practical recommendations within a time limit. They can build problem-solving, communication, and teamwork skills to support their personal and professional development Alice LUI, Manager of GBUS Program and advisor to the winning team

Central European Case Competition Another GBUS team won the second-place prize in the Central European Case Competition. Held by the Corvinus University of Budapest (Hungary). The 24-hour competition was an invitation-only event and gathered 23 teams from top global business schools. It was the School’s first participation in the competition. The MVM Group was the featured case company, a state-owned utility company keen on regional expansion, digitalization and access to capital markets. Our team developed a strategy to leverage on the resources of the Czech Republic to create a regional electricity hub and AI analytics for consumer-facing solutions and offered a detailed roadmap to IPO.

CAT provides year-long training on root-cause analysis, pyramid thinking, presentation storyboarding, recommendation generation, financial modeling, and more to help students build problem-solving skills and thrive in competitions. We look forward to helping more students reach new heights in future competitions Queenie LI, CAT’s Head Committee

RSM STAR Case Competition Another GBUS team concluded this season of external case competitions by notching up the first runner-up prize in the RSM STAR Case Competition. Organized by the Rotterdam School of Management, Erasmus University, the theme of this year’s RSM STAR Case Competition is Future Growth! Participating teams have to solve two real-life business cases, consisting of one 12-hour case and one 24-hour case.

It was a pleasure to compete in both JMUCC and KPMG Ideation Challenge with my teammates. Solving different highly challenging cases in a virtual format, these competitions were tough but incredibly fulfilling Kim BERG, the best speaker of JMUCC and a member of the two winning

KPMG Ideation Challenge Three of the WBB students who participated in JMUCC worked with a student from the University of Southern California and excelled in the KPMG Ideation Challenge. Since November 2020, 2,000 participating teams from around the world worked through multiple rounds of challenges. Four top-tier teams, including our student team, succeeded in entering the global finals.

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Eight Silver Linings Amidst the Pandemic

A joint report by the Tanoto Center for Asian Family Business and Entrepreneurship Studies at the HKUST Business School and the Asia Business Council examines the extraordinary endeavors of eight companies in Asia, as they move ahead in the turbulent times to embrace innovation, promote inclusion, and drive social and economic impact.

8 Case Studies

1 / Philippines

Ayala Corp: Recommitting to a Broad Stakeholder Ecosystem During the Pandemic

Ayala Corp is one of the oldest conglomerates in the Philippines with a history of supporting the wider community in difficult times. The company realized many years ago that it could be more effective during crisis situations by engaging a network of companies to coordinate relief efforts. In 2009, it helped establish the Philippine Disaster Recovery Foundation (PDRF), known today as the Philippine Disaster Resilience Foundation, a consortium of some of the largest private sector corporations and NGOs in the nation.

As the COVID-19 pandemic unfolded, Ayala stepped in to help the broader community through Project Ugnayan, which provided unconditional emergency cash transfers to economically vulnerable families. Ayala also played a major role in Task Force T3, a partnership to enable the testing, tracing, and treatment of COVID-19 patients. Indeed, Ayala’s efforts supported the government’s response by bringing together the major actors in the private sector and civil society.

2 / Vietnam

DatVietVAC Group Holdings: Leveraging Entertainment as a Force for Good in Face of COVID-19 Challenges

Vietnamese entertainment giant DatVietVAC Group Holdings is an example of how a company can leverage media and content as a force for good during the pandemic. It played no small part in helping the Vietnamese government promote the official BlueZone app, which helped contain the virus. By mobilizing its network of celebrities, DatVietVAC encouraged the public to download the official app, which registers health information, traces close contacts, and provides up-to-date information on the virus.

DatVietVAC also launched online streaming platform VieON and continued to develop dramas and entertainment shows which led to nothing short of a cultural phenomenon in Vietnam. This proved two things: that Vietnam is a prime market for digital media, and that digital media can be used for good. The company is now looking to transform its internal operations, while expanding its digital business with a focus on local content.

3 / Hong Kong

Esquel Group: Launching a Sustainable Mask Amidst a Public Health Crisis

Hong Kong-based textile company Esquel Group reaffirmed its commitment to sustainability and social responsibility by developing a reusable mask even as it was hit hard by the unfolding pandemic and escalating U.S.-China tensions. While initially made for donations, especially in the communities where it had operations, the product soon became a business as well, demonstrating that social responsibility can go hand in hand with opportunity.

The desire to protect the environment is one that runs deep in the family-owned business, and the company has potentially saved 1.3 billion single-use masks from disposal. Esquel’s achievements are due to a convergence of innovation, a focus on wellness, and an ethos of carving out new opportunities while serving the community.

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4 / Taiwan

Fubon Group: Forming a Mobile Phone-Based Information System to Prevent Community Outbreaks

One of the main reasons Taiwan had so few COVID-19 cases at the start of the pandemic was the development of a mobile phone-based information tracking system called the Intelligent Electronic Fences System (IEFS). Taiwan Mobile, the telecoms arm of the Fubon Group, played a key role in this endeavor, as it joined hands with the government and other carriers.

Each carrier was responsible for monitoring its customers who needed to be quarantined. The government, on the other hand, operated an aggregated platform that monitored all subjects. As Fubon Group seeks to expand its business in Southeast Asia, its experience-sharing of successful examples like the IEFS is expected to facilitate partnerships and contribute to positive social impact.

5 / Mainland China

Lenovo: Championing Educational Technologies to Enable Virtual Learning Experiences Worldwide

Leveraging its resources and expertise, Lenovo, a leading technology company with operational headquarters in Beijing and Morrisville, North Carolina, and financial headquarters in Hong Kong, developed educational solutions that could “go beyond the device” during the pandemic. While its commercial solutions ranged from hybrid classrooms to cybersecurity and virtual reality, Lenovo’s philanthropic efforts included hardware donations in North America and laptop donations to students in Milan and refugees in the Netherlands.

Lenovo’s Chairman and CEO Yuanqing Yang also made a personal donation to a public welfare project in Hubei province called the “Lenovo E-classroom.” Through this project, the company sent tablets and three-month data cards to students from underprivileged backgrounds so that they could have access to virtual learning. Lenovo also addressed systemic problems in education in India by developing a student-teacher matching platform. Lenovo’s business and philanthropic endeavors illustrate how Asian businesses can have truly global impact.

6 / South Korea

Lotte Group: Embracing “Open Innovation” in E-Commerce for the Post-Corona Era

For Lotte Group, the fifth largest conglomerate in South Korea, the response to the crisis was not just about braving the storms of the pandemic but also about accelerating pre-COVID-19 developments. Lotte saw its e-commerce app, Lotte On, as the key to its business transformation. Building on the idea of “open innovation,” or the practice of sourcing ideas and solutions from other organizations, Lotte On has collaborated with a number of start-ups since the app was launched in April 2020.

These start-ups include start-ups invested by Lotte Accelerator, namely online convenience store start-up Nowpick, delivery start-up PLZ, and beauty marketing start-up LYCL. Lotte On also rolled out a new brand in partnership with a fashion A.I. start-up Designovel. Given that South Korea already had one of the most sophisticated technological infrastructures in the world prior to the pandemic, the challenge for Lotte is whether it can adapt, transform, and emerge as a winner in the post-coronavirus era.

Adaptability Resilience Giving Back To Society

7 / Singapore

Temasek: Tapping Investment Expertise and Diverse Networks to Help Fight the Virus

Among its many initiatives in response to the COVID-19 pandemic, Temasek’s investments in medical initiatives best demonstrate its agility, resourcefulness, and innovation. Widely seen as one of the most sophisticated government-owned investors in the world, the Singapore-based company has been applauded for tapping its diverse networks and expertise to find solutions for global shortages of medical supplies such as swabs, testing equipment, and masks.

Collaboration with small and medium enterprises (SMEs) was a recurring theme in Temasek’s initiatives during the pandemic. Not only did this help ramp up local manufacturing capabilities; it also allowed SMEs to thrive in a harsh business environment. Temasek’s response to the COVID-19 pandemic has no doubt prompted a rethink of the traditional boundaries of philanthropy and social responsibility.

8 / Myanmar

Yoma Group: Accelerating Financial Inclusion in a Time of Social Distancing

For Myanmar-based conglomerate Yoma Group, the COVID-19 pandemic was a defining moment in its service to the country. Although its acquisition of mobile financial services operator Wave Money was planned before the pandemic, it was the trying times of 2020 that truly underscored the importance of mobile money in promoting financial inclusion in Myanmar.

The widespread use of Wave Money was significant in Myanmar because most of the population has no access to banking services. From sending money to family members to distributing government aid, Wave Money was a true game changer, especially since its coverage reaches 91 percent of the country and 90 percent of rural areas. Partnering with the Myanmar government, Wave Money promoted transparency and helped to minimize corruption for relief aid, in fitting with Yoma’s mission to “build a better Myanmar for its people”.

Read the Report

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Digital Freedom HKUST’s new Digital MBA for Global Leaders allows students to customize their schedules.

The HKUST Business School is leading the way once again with the introduction of a flexible online postgraduate degree designed to meet the evolving needs of careerminded executives who are on the move.

The new Digital MBA for Global Leaders (DiMBA), the first of its kind to be offered by any top-ranked schools in Asia, makes it possible to keep up with classes while travelling for business, or even if relocating to another city.

In doing so, the two-year, part-time program combines the strengths of HKUST’s long-established, highly regarded MBA courses with a new opportunity for working professionals. They now have the extra freedom to customize their schedules as they learn about the latest in finance, systems, marketing practice, management theory and much more.

“The pandemic, along with new technologies, has changed the way we work, meaning a new type of leader is called for in the post-Covid workplace,” says Professor CHEN Tai-Yuan, Associate Dean of the HKUST Business School and Director of the Digital MBA Program. “Professionals need a digitalfocused education to help them adapt to the new normal. As a forward-looking school, we have to keep up with the changing times.”

Overall demand for online MBAs has risen markedly over the past couple of years, notes Professor Chen. The most recent annual survey by the Graduate Management Admission Council showed that global applications for such programs increased by 43.5 percent in 2020 alone.

Tailored to practical need

Until now, most of the top-ranked choices have been offered by business schools in North America and Europe. Because of the time differences involved, it often proves difficult for Asia-based students to join the live online classes or play a full part in team projects and group discussions.

Thanks to the new option tailored to the practical needs and preferences of students in Asia, those concerns have been neatly and effectively addressed.

“Our DiMBA has been carefully designed for senior professionals and executives who realize the future is digital,” Professor Chen says. “It will enable them to master a broad range of hard and soft skills through blended and virtual classes. The format of DiMBA also means participants have greater control over their own pace of learning because they can work through course content at a time which is best for them.”

For the initial intake, starting in February 2022, students will be expected to spend the first “immersion” week on campus at HKUST. This will be a chance for them to get to know their classmates and gain a sense of what happens within the wider MBA community. In passing, they may also hear more about the general outline of the overseas study trip which provides one of the program’s final elements.

A blended learning mode

Students can follow the rest of the curriculum via the school’s dedicated advanced learning platform. Core courses, which are usually more lecture-based, will be delivered in a blended learning mode, with 50 percent running as live virtual classes, and the balance covered through “self-paced” online study.

In other modules, where the material is more case-based, professors favor 100 per cent live virtual classes to spark debate and create the type of engagement that makes for a fully interactive experience.

The general range of assignments will also include class discussions, group and individual presentations, team projects and virtual exams.

Pioneering business technology courses such as AI, big data, blockchain and Python programming have been incorporated into the DiMBA curriculum to develop the kind of all-round leadership skills needed to run a successful business in “tomorrow’s workplace”.

“HKUST’s DiMBA will benefit from having the first exclusive digital classroom in Asia,” Professor Chen says. “With all the latest virtual learning technologies, it allows professors and students to interact with each other in a setting comparable to a physical classroom. Communicating in this forum, and discussing key issues with faculty members and classmates, is another way of training students to be effective leaders in the digital workplace.”

Small and elite classes

As an alternative, he notes that students will still have the option of attending classes in person with the other MBA cohorts.

Unlike many international online degrees, admission for the DiMBA is expected to be highly selective. The aim is to attract a small but elite class of senior executives from diverse fields, who are keen to upgrade their skills and expand their professional networks.

“HKUST believes that online learning should have the same transformational impact as the very best face-to-face courses,” Professor Chen says. “We are the first business school in Greater China to join the Future of Management Education (FOME) Alliance alongside likeminded schools who share that vision. In practical terms, it means our DiMBA students will also be able to enroll in online courses at other global business schools to keep learning without quitting their job or interrupting their career,” says Professor Chen.

The format of DiMBA means participants have greater control over their own pace of learning because they can work through course content at a time which is best for them

Professor CHEN Tai-Yuan Associate Dean of the HKUST Business School and Director of the Digital MBA Program

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