Why Is Innovation Low In Malaysia Be Improved Economics Essay

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1.1 Background

Innovation may refer to incremental and emergent or radical and revolutionary changes in thinking, processes, products or organizations. There are many fields such as arts, economics, educations as well as government policy, must be substantially developed into different level to be innovative. In economics point of views, the change must increase value, customer value, or producer value. The goal of innovation is to achieve positive changes in order to make someone or something better. Innovation leading to increased productivity is the fundamental source of increasing wealth in an economy [1] .

Innovation is an important topic in the study of economics, business, entrepreneurship, design, technology, sociology, and engineering. Since innovation is also considered a key driver of the economy, especially when it leads to new product categories or increasing productivity, the factors that lead to innovation are also considered to be critical to those policy makers. In particular, followers of innovation economics stress using public policy to spur innovation and growth.

As Malaysia entered the next 50 years of independent and the next leap of Malaysian Economy, it is necessary to pause and examine if the strategies and activities were still relevant. Developing countries like Malaysia in the past 50 years had experienced a substantial economic transformation, moving from a resource-based economy (Land and Labour) to a production and services-oriented economy where Infrastructure, Labour and Capital (collateral base) are the key element.

1.2 Objectives:

To discuss the innovation progress in Malaysia.

To familiarize with situation and find alternative ways to improve Malaysia's advancement.

1.3 Scope of Findings:

Development of Malaysia is still in the infant stage. Besides to search for alternative ways, it is a good practice to refer to high innovation countries for example Japan (farther country) and Singapore (neighbour country).


2.1 Innovation Low in Malaysia

2.1.1Research Funding

The Malaysian government is devoted to building a knowledge-based economy focusing on key industries, including Nanotechnology, Information & Communication Technology (ICT), Photonics, Microelectronics, Multimedia Technology, and Biotechnology. In addition, the government wants to further enhance competitiveness in the development of manufacturing and strengthen applications in Environmental and Energy areas. They are currently emphasizing enhancing exposure to international developments in new technologies.

According to S&T, the key government document is the Eighth Malaysia Plan (2001-2005) funded by the Ministry of Science, Technology and Environment (MOSTE). It includes a large Intensification of Research in Priority Areas (IRPA) program (US$224M). Within IRPA, Strategic Research receives 35% of the total IRPA budget [2] .

Figure 1 R&D by expenditure from 1996-2006

In year 1996, Malaysia's gross expenditure on R&D (GERD) was M$549.2million (US$162 million). It has been rising gradually to about M$2.84 billion (US$837.75 million) in 2004 and about M$3.64 billion (US$ 1.07 billion) in 2006 (Figure 1). The increase in R&D spending is apparent not only in nominal terms, but also in real terms as indicated by the GERD per capita and the GERD/GDP ratio.

The mission statement of the Third Industrial Master Plan or IMP3 (MITI, 2006) based on Ministry of Trade and Industry, aims for innovation in and transformation of Malaysia's manufacturing and services sectors to enable them to compete globally. The blueprint also strongly emphasizes the development and application of knowledge-intensive technologies, collaborations among government research institutes (GRIs) and institutions of higher learning (ILHs). It is aims to create

science and technology parks and industries; promote research-based industrial clusters for development; and scale-up its utilization of information and communication technologies (ICT) and other technologies along the value chain [3] .

By 2010, Malaysia aims to position itself as a technology provider in key strategic areas such as advanced manufacturing, advanced materials, biotechnology, microelectronics, ICT and nanotechnologies. Stepping into vision 2020, the Malaysian Higher Education Strategic Plan is aiming for 100 researchers/scientists/entrepreneurs per 10,000 members of its labour force (MASTIC, 2008).

Comparable to the experience of other countries, Malaysia is going through various stages of technological revolution, starting from agricultural to industrial, ICT, biotechnology and, currently, nanotechnology and space science. In 2008, the GDP of Malaysia was M$738,677 million (US$217,898 million) with a growth rate of 4.6 percent. However, contrasting some of the more industrialized and technologically advanced countries, Malaysia spends a relatively small percentage of its GDP on R&D. For example, in 2000, Malaysia spent only 0.5 percent compared with Germany (2.3 per cent), the United States (2.5 per cent) Japan (2.8 per cent) and the Republic of Korea (2.9 per cent) (Othman, 2004).

The figure below extracted from the world science report shows the amount of percentage of GDP used for the purpose of research. It is clear that, excluding Japan, the Republic of Korea, Taiwan, and Singapore has already contributed more than 2% of their GDP as the research expenditure. Malaysia, which spent a mere 0.5% of its GDP on the research expenditure (GERD) is also catching up very fast in terms of technological development.

Figure 2 GERD/ GDP Ratio in East and South-East Asia [4] 

2.1.2 SME Financing for Innovation

Referring to MASTIC's R&D surveys since 1994, the bulk of funds for R&D in the private sector appear to come from internal or own resources. Government has not been an important source of funding for R&D in Malaysia [5] .

Table 1 Sources of funds for Research and Development in the Private Sector

Evidence from the national surveys also shows that innovating firms do find "lack of appropriate source of finance" as an important factor hampering innovation activities. Results show that more than two-thirds of innovating firms that responded to enquiries about this issue considered "lack of appropriate source of finance" as an important issue holding back innovation activities.

Table 2 'Lack of appropriate source of finance' as a factor hampering innovation activities

The fact that most firms come across to the problems in financing innovation implies that there might be a role for government support. The Malaysian government has attempted to provide some support to the private sector for innovation and technology. The funds were allocated to the following programmes:

Technology Acquisition Fund - which provides partial grants to firms to acquire technologies through licensing, to enhance the design and production of new and existing products and processes.

Industrial R&D Grant (IGS) - which provides grants to support the usage and adoption of existing technologies or creation of new technologies by local companies in key technology areas, such as biotechnology, advanced manufacturing, advanced materials, automotive, IT and multimedia, electronics, energy and aerospace.

MSC R&D Grant Scheme (MGS) - which provides grants to encourage research and development in multimedia products and services amongst MSC-status firms with at least 51 per cent Malaysian ownership.

Commercialization of Research and Development Fund (CRDF) - which provides partial grants to qualified R&D projects to be commercialized. Aside from providing grants, the government has also introduced tax incentives to firms to encourage them to undertake R&D activities. These include:

Investment tax allowance on the capital expenditure incurred in in-house R&D.

Demonstrator Application Grant Scheme (DAGS) - which provides grants to projects that are accredited as "Demonstrator Applications" (DAs), i.e. projects that give opportunities for acculturation of Malaysians into ICT-based and related activities.

Exemption of import duty on machinery and equipment, materials, raw materials and component parts and samples used for R&D purposes.

Double deductions for expenses incurred in approved research projects.

Table 3 Percentage of firms receiving support from the government for innovation activities

From the table above we can see that only less than 5 percent of firms received support from the government. We also can see that the overall support from the government is not sufficient for the firms in innovation R&D. This has been the main reason that caused the lack of involvement of private sectors in contributing to the innovation-led economy of the society.

2.1.3 Human Capital

R&D activities have often been alleged to be the 'responsibility' of the public sector and undertaken by ILHs, GRIs and other research institutes, especially those associated with development of human resource. In the private sector, in 2006, R&D was most prominent in applied sciences and technologies, engineering sciences and material sciences (in the descending order) while ICT was in the top three in 2004 (MASTIC, 2008). There were 17.9 researchers for every 10,000 members of Malaysia's labour force in 2006. This figure falls short of the targeted 50 researchers for every 10,000 members of its labour force as per the 9th Malaysia Plan (MASTIC, 2008), and places Malaysia alongside countries such as South Africa (20.7) and Chile (19.3) (MASTIC, 2008). Among the other Asian countries, Singapore registers the highest concentration of researchers at 87.4; Thailand has 12.7, Indonesia 10.7 and the Philippines 2.4 per 10,000 members of labour force (MASTIC, 2008). Finland has the highest concentration of researchers, at 99 researchers per 10,000 labour forces, while industrialized countries have more than 50 researchers per 100,000 labour forces (Table 4). [6] 

Figure 3Public -private participation in R&D in Malaysia (1996-2006)

Table 4 Number of researchers in developed countries (2009)

Figure 4 Comparison between nations on degree holders

Figure 4 shows that generally most of the workforce is well educated and at least 10% of the workforce is university graduates. The graduates however will have no problem in securing a job as Asians are generally more flexible and can adapt into any working environment easily. The statistics shown above also exhibit another fact that most of the courses offered in the universities in the Asian countries are engineering related courses.


3.1 Techniques

This project is first circumspectly observed and then relevant data are collected and highlighted. This project methodology should be tagged along and operated coherently to ensure that in the end of project meets the objectives.

Two techniques have been identified to be used in this research. The techniques are:

I. Scanning

Involves interpreting and predicting the problem faced from reading and discussion, and findings. The result of scanning is the hypothesis, a tentative statement that proposes a possible explanation to some phenomenon or event.

II. Literature review

There would be an extensive evaluation and review of the literature.

III. Online Survey

There would be a Q&A online survey on this topic (Appendix A)


4.1 Malaysia National Innovation System

4.1.1 Transformation of Technology

The government plays a very important role on the development of nation. There is a need for the government to invest in the development of research in science and technology in order to lead the nation to a brand new level in the development.

Figure 5 Malaysia Economic Transformation

It is a necessary to shift resources based economy and production based economy to sustainable economic where knowledge and "know-how" become the main drivers for economic growth. In order to achieve RMP 9 such as move the economy up to value chain, to raise the country's capacity for knowledge, creativity and innovation and nurture first-class mentality, to address persistent socio-economic inequalities constructively and productively, to improve the standard and sustainability of our quality of life and to strengthen the institutional implementation capacity of the country, the old resource-led economy must be replaced by innovation-led economy which will eventually create wealth, employment and also societal well being [7] .

Malaysia has experienced robust growth since independence with average GDP growth of 6%. The growth has been based on national resources like petroleum; and commodities like palm oil, rubber and manufacturing. The success has been mainly driven by traditional drivers of growth, which are land, and raw materials, cost-competitive labour, and capital.

As the rising of industrial nations and emerging giants like India and China, Malaysia is challenged by cheaper labour and commodity based industries. As a result of that, Foreign Direct Investment (FDI), which was the main income of Malaysia, has been diverted to other Asian countries. Thus, Malaysia needs to supplement the investment led economy with innovation driven with growth in central part and new sectors, managing technology, market access, and risk-based capital as in Korea and Taiwan.

Innovation has the potential to construct exponential growth for Malaysia. A resource-led economy lacks the inherent dynamism to reach out 2020 targets while the Innovation-led growth can offset Malaysia's growth shortfall of 1.3%. Therefore, innovation is definitely needed to be fully reflected in Malaysia's macro-economic model.

4.1.2 Skilled Workforce

A skilled workforce is vital to realizing this vision. Government should focus the education programs by promoting partnerships between industries, educators as well as the R&D systems to gain more knowledge based on experiences. Such partnership will aim to provide access to different training programs exposure [8] .

Figure 6 Higher Education Development

4.1.3 Balanced Approaches in Market Driven and Technology-Driven Innovation Model

In a technology driven innovation model, scientists are funded for R&D, and technology will be developed organically thus eventually commercializing their ideas for the global market; While in a market-driven innovation model, the market is determined before hand by knowledge entrepreneurs who will acquire the best science and technology. This will provide rapid commercialization to rally the needs of the market.

Figure 7 Balanced Approach to Market-Driven and Technology-Driven Innovation.

Malaysia has experienced impressive economic development over the past 10 years and its leaders are determined that their country will join the developed world by 2020. Their approach is to build a knowledge economy as the way to join the elites. Fostering S&T and growing high-tech industries in Malaysia is believed to be the key driver for future and sustainable economic growth.


Throughout the findings, the government plays a very important role in the development of Malaysia. A lot related information in detail is being discovered. This includes the statistic result, methodology, survey, and future recommendation. Apart from that, a comparative study has been carried out against the neighbour country (Singapore) and other farther high innovation countries.

Although the policy makers of Malaysia are all well aware of the importance of innovation-led economy to the country, however, innovation in Malaysia is still relatively low compare with other countries. In this report, we inspect the factors that caused the low innovation in Malaysia and recommendations to improve it.


Online Survey Form:

Top of Form

Innovation In Malaysia

1. How often you update yourself on Malaysia development? (i.e. News, articles, internet...)




2. In your opinion, please rate on below in which the choices will strongly affect on the innovation of Malaysia.

(i.e. lowest to highest)






Economy Funding

Skilled Workforce

Good Infrastructure & Service

Local & Foreign Investment

3. Why Malaysia is low in innovation?

Why Malaysia is low in innovation?  Lack of funding

Lack of information in technology

lack of good R&D facilities

Organisation Rigidities

4. Below which plays the most important role in the innovation of Malaysia? 

(i.e. lowest to highest)






Agriculture sector

Educational sector

Manufacturing sector

R&D sector

5. Which contributes the highest profit to Malaysia?

Which contributes the highest profit to Malaysia?  Raw Material

Electronic Industrial

Chemical Industrial

6. In order to sustain growth and strengthen the innovation of Malaysia, which highlights as shown below should have implemented?

In order to sustain growth and strengthen the innovation of Malaysia, which highlights as shown below should have implemented?  Value-added Industry

Productivity-driven Growth

Cluster- Based Industrial Development

Nurture Malaysia Owned Manufacturer


Bottom of Form


Job Distributions:

Assignment 1:

Chua Tee Hai

Ng Wei Kiat

Hor Chun Tat

Assignment 2:

Leong Shin Wei : Methodology, Compile , Online Survey , Innovation and Recommendation

Wai Yin Ling : Literature review in Malaysia, Japan, Singapore , Compile Presentation Slide