Shanghai’s development as a business and financial center has brought it into greater competition with its southern neighbor, Hong Kong. The cities have a long and intertwined history; after 1949, many of the merchant class that left Shanghai ended up in Hong Kong.
Today, that flow is reversing – most clearly among multinationals that have moved their China or regional headquarters from Hong Kong to Shanghai.
"From the mid 1990s, our management team was in Shanghai, not Hong Kong," said Alan Jope, Greater China chairman of Unilever (ULVR.LSE, UNA.AS). "Before that, there was a period when China was run by remote control from Hong Kong."
As Jope’s words imply, Shanghai’s main advantage over Hong Kong remains its location. For all Hong Kong’s increasing economic integration with mainland China and other cities in Pearl River Delta, it remains separate from the mainland, legally, financially and operationally.
Separation can have its benefits. Hong Kong entrepreneur William Wong founded his firm, Ality, in 2004 to make digital photo frames. It now has 30 employees and has expanded its product range to universal remote controls, which are sold in retail chains in Europe and the US.
"Living in Hong Kong, it has better living standards, at least right now," said Wong. "I choose to be here and still very easily access China’s infrastructure."
Businesses like Ality also benefit from Hong Kong’s financial freedom. The convertibility of the Hong Kong dollar is a boon for companies making remittances to other markets, avoiding the foreign exchange difficulties that plague foreign firms on the mainland.
In addition, Wong finds it easier to create and lead consumer trends in the special administrative region, with benefits to the company in ways beyond higher profits. "It’s easy to create a name in Hong Kong, and here if you create hype, it’s easier to attract engineers," he said. "China is much larger scale, so the amount you need to spend and invest to recruit people will be a lot [higher]."
Attracting and retaining high-quality talent has long been a problem for companies operating in Shanghai. The competitive job market is partly to blame, but the problem goes deeper.
John D. Van Fleet, supervisor of international affairs at Shanghai Jiao Tong University’s Antai College of Economics and Management, said that fresh university graduates in mainland China are usually in need of further training after being taken on due to weaknesses in the higher education system.
"Students are changing a lot faster than the schools are changing," said Van Fleet. He gives the example of MBA students, who are required to study Marxism-Leninism as part of their domestic business programs.
An undoubted strength of Hong Kong remains its long legal tradition and high levels of transparency. Illustrating the difficulty of picking a winner between Hong Kong and Shanrghai, however, even here the advantage isn’t straightforward.
"It’s clearer in Hong Kong what’s going on," said Willi Vett, who leads the Shanghai office of German law firm Beiten Burkhardt. "But it’s not necessarily easier, and it’s not necessarily faster."