"We are surely not talking about months, we are talking about years. During this time, as we adjust ourselves, our economic growth will be affected, deflation will continue and, therefore, budget deficits and all the other negative consequences will follow with it," he said.

Mr Tung said Hong Kong had successfully gone through economic transformation twice in the 1960s and the 1980s and he expressed confidence that Hong Kong would be able to come through this third economic restructuring.

Until the fall in the US-dollar and the US stock market in early June, there were already signs that Hong Kong's economy was starting to recover.

"Indeed as the economy starts to pick up in the rest of the world, particularly in our major markets, I think we should be able to expect a second-half recovery, modest as that might be and indeed a cyclical recovery, in my view, has begun," he said.

But he warned Hong Kong should not be complacent because a number of uncertainties are on the horizon. Also, the HKSAR must continue to analyse in what direction we are heading to ensure that we are successful in our economic restructuring, and how we can achieve that in the shortest possible time?

"Our objective is to use science and technology to enhance the innovative capability of Hong Kong, to strengthen the competitiveness of industry and to create knowledge-based, high value added industries and, through acquisition of knowledge in science and technology, to help individuals move up the value chain also," he said.

Mr Tung said over the last five years Hong Kong had been building up a respectable science base with growing corporate participation in applied research and development in collaboration with local universities.

Before 1997 corporate contribution to public sector research and development sponsored by the Innovation and Technology Fund was HK$9 million compared with HK$222 million committed by the fund. This has now increased to HK$59 million compared to HK$318 million contributed from the fund.

"Our new infrastructure to support innovation and technology are all progressing well," he said.

Phase-1 of the Cyberport's occupancy rate will reach 80 per cent with the signing of a new tenancy agreement in mid-June, followed by the opening of the Science Park by the end of June. Mr Tung said the occupancy situation is very satisfactory with 16 tenants from Hong Kong and overseas, notably the Silicon Valley, already signed up and more are in the pipeline. Moreover, the Applied Science and Technology Research Institute is already embarking on programmes to provide more applied research to support innovation and technology.

"These programmes and the increasingly conducive environment of Hong Kong are attracting research scientists and engineers, particularly those from North America," he said.

On plans to improve Hong Kong's design capability, he said the Hong Kong Design Centre would open in September, and the Hong Kong Science and Technology Parks Corporation and the Applied Science and Technology Research Institute planned to set up a joint IC design support centre by the end of the year.

"We will examine critically whether design courses offered by tertiary institutions need to be further supported and improved in order to face new challenges," he said.

While focusing on the role of science and technology, Mr Tung also reiterated the need for businesses to think out of the box and to market their brands globally.

"For us to be moving up the value chain, we need to improve the quality, the design, and creativity of the products or services we provide to the local market, to the market of the Mainland as well as around the world," he said.

"Building up brand names, improving our capability and design, promoting entrepreneurship and the culture of science and technology are all long-term efforts. But I believe we have made a good start. During my second term, this particular effort will continue to be one of my main focuses and the focus of many of my colleagues."