Hong Kong is to small businesses as the rainforest is to plants.
The car stereo district in Hong Kong
I think that analogy not only captures the idea that economic and regulatory conditions in Hong Kong are favorable to business, but it also captures a very real sense of how and where businesses spring up. They pop up like plants wherever conditions will support life.
First let me start with a quiz which was given back in my introductory Microeconomics class: Assume you selling lemonade on a beach. On that beach there is another vendor of lemonade. The lemonade is exactly the same as yours and the same price. The only reason why someone would choose one vendor over another is the distance they have to walk. Also, assume that the people are spread out along the beach evenly and the beach is of finite length. (Think 100m if you want)
The question is, where will both lemonade vendors end up?
The first answer everyone thinks is they will divide the beach up. One would be at the 1/3 point and the other at the 2/3 point. However, you can always steal the market share between you and the other guy by inching towards him, without losing what is on the other side. The correct answer is, they will both end up in the middle.
If you think about it, it makes perfect sense, and it also explains why you see gas stations on the same corner, car dealerships on the same street, and fast food restaurants lumped together. In larger cities like Hong Kong, you see districts where similar small shops all converge. New York has the fashion district, the financial district, the diamond district, etc. In Hong Kong, I’ve noticed even smaller subdivisions in shops. In my previous post, I mentioned the floor tile district. Literally, there were tons of home improvement stores all clumped around the same street. I’ve seen clumps of car stereo stores, shoe stores, book stores, and certainly on Nathan Street, electronics stores.
Nathan street is the main commercial artery in Kowloon
I’ve noticed in Hong Kong a serious lack of large stores. Almost every store is a small mom and pop operation. I think this is a function of the regulatory environment in Hong Kong. It is very easy to open up a business in Hong Kong. Probably the easiest in the world. The lower the barrier, the small the size of the businesses that compete. The larger the barrier, the larger the size of the businesses that can compete. With so many businesses competing, it would be very hard to become a huge store. A small player with lower overhead could always come in and take business away from the area you are expanding into to.
The shopping districts are in effect Hong Kong’s answer to the the superstore. Rather than have a Home Depot, you have a block of stores selling home improvement products. Some sell tile. Some sell bathroom fixtures. Some sell paint. Together, they are pretty close to what you find in a Home Depot…minus the lumber.
A River Of People
So in addition to behaving like pack animals, you can also see businesses spring up like plants. Plants need water. Businesses need people. The primary arteries of people are the streets, with smaller tributaries going down alleys. Likewise, there is vertical component to people as well. Most are on the ground, but some can go up via elevators and escalators. The farther up you are, the farther away you are from people. Just like plants in a rainforest.
The fact that you find shops on busy streets isn’t really Earth shattering. What is interesting in Hong Kong is how you see shops set up in alleys on the second floor of buildings…but only near the escalators. These second floor malls are basically just permanent kiosks. All of the ones I’ve seen had a lot of empty units, with the only open units being at the very top of the escalator, usually visible from the bottom street level.
The home improvement district in Kowloon
Once again, you see growth where you see people. No people, no business. The few businesses you would see are ones which don’t rely on foot traffic. Likewise in the alleys, you would see stands down primary alleys off of major streets, but then in the alleys off of the alleys, you’d see fewer stalls or nothing at all. All a function of human traffic.
Every ecosystem has its parasites. In Hong Kong it is the copy watch and hand bag vendors. They cluster where tourists are and just walk up to people asking them if they want a copy watch. They literally say “boss, want copy watch?”. I guess they got busted selling fake watches, so now they just tell people up front they are copies. I usually couldn’t walk a block without getting approached by several of these guys. Everyone of them I encountered was Indian.
While not parasites per se, you will also get accosted by guys with cutom tailor shops. They will stand outside their shop and target the tourists for custom suits. Unlike the copy watch guys, they run legitimate businesses with storefronts. You can get a custom tailored men’s suit for about US$150, including 2 shirts. Had I needed a suit, I probably would have gotten one. Like the copy watch guys, they were also all Indian.
The last parasitic group are the old Chinese women who hand out fliers for massages. Unlike Saipan, I think most of the massage places are legit. Most offer services like ear candleing and manacures. It is just a very low cost business to open. Nonetheless, they are very annoying deal with. Being a caucasian walking down the street alone, I screemed “tourist” and I was approached by everyone. At least they weren’t as bad as the scam artists I met in Manila.
Hong Kong probably has the most vibrant urban economy in the world, which is really suprising given that it is now technically under the control of the communist government.