HONG KONG: Just a week after Hong Kong celebrated Charles Kao's Nobel Physics Prize, now all eyes are on what the government is doing and going to do to support innovation and technology. The answer was unveiled in the annual policy address by Chief Executive Donald Tsang yesterday, and it was certainly innovative, albeit on a limited scale.

A new scheme will give a 10 percent rebate on research spending for companies already linked to a government-related fund or designated institutions.

In order to support the innovation and technology sector, which is among the six priority industries, the government will allocate HK$200 million to launch an "R&D Cash Rebate Scheme". Under the initiative, companies conducting applied Research & Development (R&D) projects with the support of the Innovation and Technology Fund (ITF) or in partnership with local designated research institutions will enjoy a cash rebate equivalent to 10 percent of their investments.

Designated research institutions include local universities, the R&D centers under the ITF and the Hong Kong Productivity Council.

"We hope this scheme will inculcate a research culture among enterprises and encourage them to establish long-term partnerships with research institutions," said Chief Executive Donald Tsang.

The scheme will be launched on April 1, 2010, subject to funding approval by the Legislative Council.

A government source said the rebate scheme is better than further tax incentives, as even companies not making any profits, hence not paying profits tax, can also benefit. The source added the rebate scheme will not complicate Hong Kong's simple tax structure. Currently, companies in Hong Kong already enjoy a 100 percent tax allowance for research expenditures. Rumors earlier had it that an additional tax allowance was in the pipeline, but this proved to be unfounded.

The government said the share of enterprises in Hong Kong's total expenditure on research and development increased from less than 30 percent in 2001 to nearly 50 percent in 2007.

In 2007, the total R&D expenditure of Hong Kong was HK$12.4 billion, half of which was by private-sector companies.

The 10 percent rebate is based on projects, so a company with multiple research projects can apply for many rebates.

The government said the objective of the scheme is not just to promote research, but also to encourage companies to establish long-term partnerships with local research institutions. An official said part of the reason for limiting the scheme to companies already in the "public research loop" is for quality control, and research projects do not necessarily need results to enjoy the scheme.

Herman Tsui, who heads Interactive Systems & Technologies Limited, which is headquartered in the Hong Kong Science Park and specializes in air purification technology, welcomed the initiative but was disappointed by its scale.

"Projects conducted by high-tech firms are usually long-term and capital-intensive investments, which normally take at least two to three years before bearing any fruit. The rebate can barely cover our interest payments for our bank loans," he said.

But others believe the scheme will definitely help the technology sector.

"In the short term, the scheme will encourage industry to make more investments and further cooperation with the universities. In the medium-term, it will bring up Hong Kong's investment in R&D," said Dr Nim Cheung, CEO of Hong Kong Applied Science & Technology Research Institute Corporation, which has research projects ranging from information & telecommunication technology to biomedical electronics.

The government will review the effectiveness of the scheme in three years.

(HK Edition 10/15/2009 page4)