Provisional LegCo Trade & Industry Panel

Review of the Applied Research & Development Scheme and the Co-operative Applied Research & Development Scheme : Findings and Recommendations


This paper sets out the results of the review of the Applied Research & Development Scheme (ARDS) and the Co-operative Applied Research & Development Scheme (CARDS) and the proposal to inject $500 million into the Schemes.


2.The Government is fully committed to promoting technological development of Hong Kong's industries so as to ensure our competitiveness in the global market. Apart from providing the necessary support and infrastructure through industrial support organisations and tertiary institutions, the Government hopes to promote applied research and development in the private sector through the provision of financial assistance, in the form of seed money, for worthwhile projects. It also hopes to engender a business culture better predisposed to the venture capital concept.

3.The ARDS and CARDS were set up in 1993 and 1995 with grants of $200 million and $50 million respectively. The aim is to encourage technology ventures and research and development activities in local enterprises by providing financial assistance as a catalyst. The longer term objective is to increase the level of research and development in Hong Kong, thereby improving the technological capability and competitiveness of our manufacturing sector.


4.The Industry Department has recently conducted a review to evaluate the effectiveness of the two Schemes and to examine the way forward. The review has taken into account the public mission of the Schemes, their operating experience so far, the observations and recommendations of the recent Value for Money Study of the Audit Commission, and the vision for an economy of high-value added activities depicted in the Chief Executive's Policy Address. The report of the review is attached at the Annex.

5.The review concludes that the two Schemes have filled a gap in providing a readily available source of finance for technology start-ups and technology upgrades. They have, to some extent, helped to induce private sector investment in research and development activities and technology ventures. They complement and reinforce other Government initiatives to engender an environment conducive to the industrial and technological upgrading of the Hong Kong economy. The review recommends that the Schemes should be maintained.

6.The review acknowledges that in overall quantitative terms, the Schemes' performance has not been impressive. To address the various institutional problems arising from the current operational arrangement, the review recommends that the targetted financial rate of return of 5% for both Schemes should be dispensed with. The stipulation of such a target has caused the Board of Directors of the Applied Research Council, the body in charge of the two Schemes, to attach overly stringent conditions on funded projects. This has a dampening effect on potential applications, thereby partially defeating the objective of the two Schemes. Furthermore, it is questionable whether a narrow financial rate of return should be the determining factor, given that the nuturing of applied research and development culture in Hong Kong is intended to generate economic (as opposed to financial) benefits which are less easily quantifiable.

7.In addition, the review also recommends that the schemes should be managed by full-time professionals who have the experience and expertise in similar technology-related investments. The Applied Research Council should however continue to maintain a supervisory role and oversee the performance of the fund manager.

8.The Board of Directors of the Applied Research Council has agreed to the above recommendations. As regards the future management arrangement, it has examined two options -- whether the two Schemes should be managed by an independent office with full-time professionals or whether they should be contracted out to private sector venture capital firm. After careful deliberations, it has concluded that the latter option should be preferable.


9.As announced in the Chief Executive's Policy Address in October 1997, the Government is prepared to inject an additional $500 million into the two Schemes. We are fully aware of the existing weaknesses in the operation of the Schemes, and have made recommendations to strengthen their effectiveness and enhance their contribution to Hong Kong's technological development. We are confident that when the right improvements are made, the increased resources will enable us to promote applied research, product development, and commercialisation of research results in the private sector more effectively.


10.We plan to seek approval from the Finance Committee of the Provisional Legislative Council for the injection of $500 million to the two Schemes shortly and hope to implement the recommendations of the review as soon as possible.

Trade and Industry Bureau
January 1998