Contents i

Malaysia’s Quest for Innovation

ii Malaysia’s Quest for Innovation

The Strategic Information and Research Development Centre (SIRD) is an independent publishing house founded in January 2000 in Petaling Jaya, Malaysia. The SIRD list focuses on Malaysian and Southeast Asian Studies, Economics, Gender Studies, the Social Sciences, Politics and International Relations. Our books address the scholarly community, students, the NGO and development communities, policymakers, activists and the wider public.

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Malaysia’s Questfor Innovation

progress and lessons learned

by

K. ThiruchelvamVGR ChandranNg Boon-Kwee

Wong Chan-Yuan

Strategic Infor mat ion and Research Development Centre,Petaling Jaya

SIRD

iv Malaysia’s Quest for Innovation

Copyright © 2013 K. Thiruchelvam, VGR Chandran, Ng Boon-Kwee & Wong Chan-Yuan

Published in 2013 byStrategic Information and Research Development Centre No 11, Lorong 11/4E, 46200 Petaling Jaya, Selangor, Malaysia.Email: sird@streamyx.comWebsite: www.gerakbudaya.com

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form, or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publisher.

Perpustakaan Negara Malaysia Cataloguing-in-Publication Data

Malaysia’s Quest for Innovation: Progress and Lessons Learned / K. Thiruchelvam ... [et al.] Includes index Bibliography: p.75 ISBN 978-967-5832-83-3 1. Technological innovations–Economic aspects–Malaysia. 2. Technological innovations–Malaysia. 3. Malaysia–Economic conditions. I. Thiruchelvam, K.

338.06409595

Cover design by Ng Boon-KweeLayout by Janice Cheong

Printed by Vinlin Press Sdn Bhd2, Jalan Meranti Permai 1,Meranti Permai Industrial Park,Batu 15, Jalan Puchong,47100 Puchong, Selangor, Malaysia.

Contents v

Contents

Acknowledgements ixForeword xiList of Abbreviations xiiiList of Tables xviiList of Figures xixList of Boxes xxContributors xxiPreface xxiii

1 Introduction and Macro Performance 1

1.1 Macroeconomic Performance of Malaysian Economy 1 1.2 Structural Change and Industrial Technology Progress, 1950s to 2010 3 1.3 Framework conditions for Innovation 4 1.3.1 Comprehensive but uncoordinated measures 4 1.3.2 Uneven competitive landscape 9 1.3.3 Laws, Regulations and Corruption 10 1.3.4 Entrepreneurship 12 1.4 SWOT Analysis 13 1.5 Framework of National STI Policy 14

2 Malaysia’s Innovation Performance 16

2.1 Knowledge Creation through R&D 16 2.2 STI Human Resources 17 2.3 STI Outputs and Outcomes 18 2.4 Uneven Innovation across the Regions 20 2.5 Summary of Malaysia’s STI performance 21 2.6 Benchmarking Malaysia’s STI performance 21

3 Actors of the National Innovation System 25

3.1 Key Actors in Malaysia’s NIS 25 3.2 Business Sector R&D and Innovation: Overview 27 3.3 Higher Education Sector 28 3.4 Public Research Organizations in Malaysia 33 3.5 Bridging Organisations 34 3.5.1 Extension Services 34

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3.5.2 Special Innovation Services 35 3.5.3 Financial Institutions 35 3.6 Governance Structure of STI Policy Making 36

4 Business Sector Innovation Activities 37

4.1 R&D, Technology Capability, Innovation and Linkages in Manufacturing Industry 37 4.1.1 Manufacturing Industry: Sectoral Profile and R&D expenditure pattern 37 4.1.2 Measuring Sector capabilities using Technology capabilities Index 44 4.1.3 Foreign firms, linkages, patterns of innovation and learning 46 4.2 Knowledge Content of the Malaysian Industries 47 4.3 Commercialization of Public Research 49 4.4 Factors limiting Innovation in Business Sector, RI and Universities 49 4.5 Case Study – Innovation in Electronics, Automotive and Furniture Industry 52 4.5.1 Electrical and Electronics (E&E) 52 4.5.2 Automotive 58 4.5.3 Furniture 62

5 Human resource development 64

5.1 Skilled Labour Force 64 5.2 Brain Drain 66 5.3 Mismatch and Responses of Education System to Changing Demands 66

References 71Index 75

List of Abbreviations vii

To our Parents for their endless love, support and encouragement

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List of Abbreviations ix

Acknowledgements

We would like to record our gratitude to the Directorate for Science, Technology and Industry, OECD for their funding support of the project – OECD Review of Innovation in South-East Asia: A Country Profile of Malaysia on Innovation. This book is an updated version of the report which was submitted under this project. We wish to thank all the organizations and people who have assisted us in this book. We, however, wish to stress that we remain responsible for any errors, shortcomings or misinterpretations. We gratefully acknowledge the support of our respective organizations without which this book would not have been possible. Our profound gratitude to Y.Bhg Professor Emeritus Dato’ Sri Dr. Zakri Abdul Hamid, Professor Rajah Rasiah and Dr Gang Zhang for their kind messages. Our deepest indebtedness is reserved for our families for their amazing love and support in all our efforts. Finally, we wish to extend our appreciation to Mr. Chong Ton Shin from Gerakbudaya Enterprise Sdn Bhd for supporting the publication of this book and to Ms. Sherly Kusuma Setiadi for her enthusiasm, meticulousness and ideas in bringing this book to its completion.

K.ThiruchelvamVGR ChandranNg Boon-KweeWong Chan-Yuan

February 2013

x Malaysia’s Quest for Innovation

List of Abbreviations xi

Foreword

Malaysia presently faces a very clear challenge. Whilst much has been achieved, the challenges ahead are significant. In achieving our bold aspirations of Vision 2020, Malaysia needs to economically transform to join the select group of high income nations. Underpinning these initiatives is the need to build a knowledge based economy on our competencies in Science, Technology and Innovation (STI). In view of this, the government of Malaysia is fully committed to pursue a strategy in order to achieve high-income status. We have embarked on an Economic Transformation Programme (ETP) to propel our economy to 2020. The ETP builds upon the policy directions, strategies and programmes of the 10th Malaysia Plan. It is aligned with previous efforts such as the Government Transformation Programme (GTP) and 1Malaysia People First Performance Now as well as the groundwork of the New Economic Model. I wish to commend the authors of this book for presenting this concise but fairly comprehensive account on what the country has achieved in terms of STI; what the deficiencies are; and what we need to focus in order to move forward in our STI agenda Such an overview is important in raising public awareness on our STI situation. I am of the view that better public understanding of STI can contribute enormously towards raising the quality of public and private decision-making; in enriching the lives of individuals and above all, in improving our national prosperity. I first met one of the authors – K. Thiruchelvam – more than two decades ago at the then Ministry of Science, Technology and Environment. I was impressed then and now by his constant enthusiasm and energy in trying to make a difference to the country’s STI management. With his collaborators – VGR Chandran, Ng Boon Kwee and Wong Chan Yuan – Thiru has brought out this book which I am confident would contribute to greater public discourse on the nation’s STI agenda. The journey ahead for Malaysia in terms of proficiency in STI will not be easy given the global economic uncertainties and increasing protectionist tendencies among the rich countries. However, given single-mindedness and committed leadership, the country, as the authors have repeatedly emphasized in their book, can mobilize its collective talents and resources to ensure a vibrant and dynamic national innovation system that will steer the nation’s continued prosperity. I am confident we can together make this happen.

Prof Emeritus Dato’ Sri Dr. Zakri Abdul HamidScience Advisor to the Prime MinisterFebruary 2013

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List of Abbreviations xiii

List of Abbreviations

ACE Access, Certainty and EfficiencyAIM Malaysian Innovation AgencyAPEX Accelerated Programme for ExcellenceAPITD Action Plan for Industrial Technology DevelopmentASEAN Association of Southeast Asian NationsASM Academy of Sciences MalaysiaDFIs Development Financial InstitutionsDOS Department of Statistics E&E Electrical and ElectronicsEPU Economic Planning UnitFDI Foreign Direct InvestmentFOR Field of ResearchFPI Foreign Portfolio InvestmentFRIM Forest Research Institutions MalaysiaFTE Full Time EquivalentFTZ Free Trade ZoneGCR Global Competitive ReportGDP Gross Domestic ProductGERD Gross Expenditure on R&DGLCs Government Linked CorporationsGRIs Government Research InstitutionsHEIs Higher Education InstitutionsICT Information and Communication TechnologyIHLs Institutes of Higher LearningIJN National Heart InstituteIMR Institute for Medical ResearchIMU International Medical University IPR Intellectual Property RightIRPA Intensification of Research in Priority AreasISI Institute of Scientific InformationMARDI Malaysian Agricultural Research and Development Institute MASTIC Malaysian Science and Technology Information CentreMATRADE Malaysian External Trade Development CorporationMBC Malaysian Business CouncilMCB Malaysian Cocoa BoardMESDAQ Malaysian Exchange of Securities Dealing and Automated Quotation

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MFA Muar Furniture AssociationMIDA Malaysian Industrial Development AuthorityMIER Malaysian Institute of Economic ResearchMIGHT Malaysia Industry-Government Group for High TechnologyMIMOS Malaysian Institute of Microelectronic SystemMMU Multimedia University MNCs Multinational CorporationsMOSTE Ministry of Science, Technology and the EnvironmentMOSTI Ministry of Science, Technology and InnovationMPC Malaysian Productivity CorporationMPOB Malaysian Palm Oil BoardMQF Malaysian Qualification FrameworkMSC Multimedia Super CorridorMyIPO Intellectual Property Corporation of MalaysiaMYR Malaysian RinggitNCRSD National Council for Scientific Research and DevelopmentNDTS National Dual Training SystemNEAC National Economic Advisory CouncilNEM New Economic ModelNIS National Innovation SystemNSRC National Science and Research CouncilNSTP 1 First National Science and Technology PolicyNSTP 2 Second National Science and Technology PolicyODM Original Design ManufacturerOECD Organisation for Economic Co-operation and DevelopmentOEMs Original Equipment ManufacturersPEMANDU Performance Management and Delivery UnitPPP Public-Private PartnershipPRIs Public Research InstitutionsR&D Research and DevelopmentREMs Replacement Equipment ManufacturersRRIM Rubber Research Institute of MalaysiaS&T Science and TechnologySETARA Rating System for Malaysian Higher Education InstitutionsSIRIM Standards and Industrial Research Institute of MalaysiaSMEs Small and Medium-sized EnterprisesSMIs Small and Medium-sized IndustriesSTI Science, Technology and InnovationTCI Technological Capabilities IndexTFP Total Factor ProductivityTNCs Transnational CorporationsTVET Technical and Vocational Education and Training

List of Abbreviations xv

UKM Universiti Kebangsaan MalaysiaUM Universiti MalayaUNIK Special Innovation UnitUNITEN Universiti Tenaga Nasional UPM Universiti Putra MalaysiaUSM Univesiti Sains MalaysiaUSPTO US Patent and Trademark OfficeUTAR Universiti Tunku Abdul RahmanUTM Universiti Teknologi MalaysiaUTP Universiti Teknologi PetronasVC Venture Capital

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List of Tables xvii

List of Tables

Table 1:1 Real GDP growth rate 2Table 1:2 TPF and GDP growth 3Table 1:3 TPF by sectors 3Table 1:4 Stylised representation of Malaysia’s economic trajectory and NIS focus 5Table 1:5 Profile of VC firms and VC investments in Malaysia, 1996-2008 7Table 1:6 Investment by financing stage in Malaysia 8Table 1:7 Number of projects approved and the estimated amount of deduction for R&D, 2004-2006 8Table 1:8 Doing business indicators for business start-ups in Malaysia and selected countries 10Table 1:9 Ratings of legal structure and business regulations 11Table 1:10 SWOT analysis on Malaysia’s STI 14Table 2:1 National R&D expenditure by sector, 1996-2006 17Table 2:2 Ratio of researchers to labour force/population, national headcount & FTE, 1996 – 2008 18Table 2:3 Patents granted by USPTO, 1977-2007 19Table 2:4 Distribution of regional R&D budgets (%) in Malaysia, 1998-2008 20Table 2:5 Malaysia’s STI performance scorecard 22Table 2:6 Selected STI data for selected ASEAN countries 23Table 2:7 World Bank knowledge economy index, 2009 24Table 2:8 Malaysia’s global ranking in innovation activities, 2010-2011 24Table 3:1 Share of manufacturing firms undertaking innovation activities (%) between 2002 & 2007 28Table 3:2 Number of higher education institutions in Malaysia 29Table 3:3 Enrolment and output of students in higher education institutions in Malaysia, 2002-2008 30Table 3:4 Comparison of ISI publications and citations of selected universities 31Table 3:5 Publication of scientific papers in selected universities in Malaysia, 2001-2008 32Table 3:6 Publications of scientific papers in Malaysia by subject fields, 1909-Feb 2009 32Table 4:1 Sectoral contribution (% of GDP), 2000-2010 38Table 4:2 R&D by manufacturing sector, 2006-2008 40Table 4:3 R&D spending (MYR million) by ownership, 2000-2005 41

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Table 4:4 Mean scores of Technological Capabilities Index (TCI), 2007 44Table 4:5 Incidence of innovation by sector, 2002-2004 45Table 4:6 Constraints of knowledge content in industries by levels 48Table 4:7 Commercialisation rate by PRIs and universities 49Table 4:8 Barriers to commercialisation 50Table 4:9 Factors limiting innovation 51Table 4:10 Percentage of gross export and value added of E&E, 2005-2010 54Table 4:11 Environment for technology development in the electronics cluster of Penang, 2006 56Table 4:12 Relationship between firms and other agents in the electronics cluster of Penang, 2006 57Table 4:13 R&D and human capital development in the automotive sector 60Table 5:1 Labour force by education level in Malaysia 65Table 5:2 Labour force by tertiary education and skills 65

List of Tables xix

List of Figures

Figure 1:1 The most problematic factors for doing business in Malaysia 12Figure 1:2 Competitiveness by major dimensions 13Figure 2:1 Malaysia’s R&D output in terms of publications and patents 19Figure 3:1 Key actors of Malaysia’s NIS 27Figure 4:1 Patents granted by ownership and field of technology, 1988-2008 43Figure 4:2 Factors hampering innovation in business enterprise 52Figure 4:3 Progress of the electronics industry 55Figure 4:4 Automotive industry: players and linkages 59Figure 5:1 Technical education and vocational training - dual pathway to employment 68

xx Malaysia’s Quest for Innovation

List of Boxes

Box 3:1 Selected success stories of PRIs’ R&D in Malaysia 34Box 4:1 Drivers of innovation activities in electronics industry 57Box 4:2 Backward and forward linkages as the driver of process innovation 61Box 4:3 The dynamics of innovation systems in Muar furniture cluster 63

List of Tables xxi

Contributors

K. Thiruchelvam is presently a Professor at the Perdana School of Science, Technology and Innovation Policy, Universiti Teknologi Malaysia. He was previously an Associate Professor with the University of Malaya for almost a decade. Prior to this, he served the Civil Service for over 24 years with stints at various Ministries including the Ministry of Science, Technology and Innovation (MOSTI). He has led a number of consultancy studies including the drafting of the new National Science, Technology and Innovation Policy. He obtained his Bachelor’s degree in science from the University of Malaya and his Master’s and PhD degrees in science and technology policy studies from the University of Sussex, United Kingdom.

VGR Chandran is an Associate Professor at the Faculty of Economics and Administration, University of Malaya. He was previously the Principal Analyst of Economic and Policy Studies with Malaysian Industry-Government Group for High Technology. He is also an Adjunct Professor of Economics with the Management and Science University, Malaysia. He holds a PhD in Economics and has held positions as a consultant and research associate with several international institutions including United Nations Industrial Development Organisation, Korea Institute of S&T Evaluation and Planning, New York Academy of Sciences, Copenhagen Business School, and National Center of Science and Technology Evaluation, Republic of Kazakhstan.

Boon-Kwee Ng is a Senior Lecturer at the Department of Science and Technology Studies, University of Malaya. He received his PhD in the field of Innovation Management from University of Malaya. He has published his research findings in the forms of referred journal articles and book chapters. He has engaged in a number of consultancies and technical reports in both national and international levels. These include the National Science and Technology Indicators Report (2006), Asian Innovation City (2009), Innovation Financing in Asia (2010), National Innovation Study on Timber Industry (2011), and National Science, Technology and Innovation Policy (2011).

Chan-Yuan Wong is presently a Senior Lecturer at the department of Science and Technology Studies, University of Malaya. He received his PhD in Applied Statistics from the University of Malaya. He is also researcher for Ministry of Science, Technology and Innovation and Malaysian Industry-Government Group

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for High Technology in several research projects, and IDRC-sponsored projects on Innovation in Asian Megacities and Policies for Innovation Financing in Asia. He has published in several international journals on system of innovation, mathematical analysis of growth patterns in science and technology and diffusion of innovations, including Scientometrics, Journal of Informetrics, Technological Forecasting and Social Change, Technological and Economic Development of Economy, World Patent Information, and Asian Journal of Technological Innovation.

Preface xxiii

Preface

This book provides an overview of the country’s macroeconomic performance, followed by a brief summary of the key features of the nation’s National Innovation Systems (NIS), the innovation performance, the key actors of the NIS, business sector innovation, human resources and a SWOT analysis of how we measure up in terms of science, technology and innovation (STI). Malaysia’s macroeconomic story since independence in 1957 is truly remarkable. From an economy that was entirely dependent on primary commodities, it has successfully navigated over the course of its brief history to become a multi-sector economy with manufacturing and services propelling its growth to its current emphasis on innovation. It has achieved robust economic growth for most parts of its history but is finding itself dogged by weak technological dynamism due to structural features of the economy. Weak investments in high technology and poor educational levels in its workforce are undermining its ambitions of becoming an innovation driven economy. Such ambitions are also being weakened by an exodus of large numbers of talented Malaysians to other countries. The country’s framework for innovation is sound given the range of schemes and incentives to nudge firms ahead in the innovation game. However, there have been deficiencies in the management and design of many of these programmes. Industry’s success in innovation has been limited and confined only to the more dynamic export-oriented firms. For most firms, proficiency in innovation is weak and much needs to be done to change this innovation landscape. Less than 10% of small and medium-sized enterprises (SMEs) are engaged in research and development (R&D) although they constitute almost 95% of the nation’s manufacturing establishments. The challenge for policy makers is not only to foster more innovation among firms but more firms to be engaged in innovative activity. Gross expenditure on R&D (GERD) has grown from 0.5% in 2002 to 0.82% of GDP in 2008. Industry accounted for almost 71% of total GERD in 2006. However, public sector R&D that is funded by industry is less than 3% suggesting weak linkages. The number of researchers per 10,000 labour force has increased markedly from 18 in 2002 to 28.5 in 2008. Almost 45% of the national R&D budget is expended in the 4 most developed regions of the country indicating a skewed STI distribution. Malaysia’s publication and patenting record, although second among Association of Southeast Asian Nations (ASEAN) countries, is poor when compared internationally. An area of concern is the poor publication record in high impact journals.

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The government is the principal driver of the nation’s NIS. Despite a sound institutional framework, the NIS is characterised by weak management and poor linkages. A new governance structure has been recently introduced to redress this deficiency. The public education delivery system is found wanting by industry. Enrolment in higher education is still biased towards academic disciplines. Lack of dedicated industrial extension programmes and weak bridging organisations have hampered the growth of dynamic SMEs and entrepreneurship. Such poor linkages have contributed to the weak commercialisation (less than 5% of total research projects funded) of findings from public funded research projects. There are promising signs for Malaysia in its journey towards becoming an innovation driven economy. It has strong government support and a relatively young population located strategically between the two most dynamic economies of China and India. However, as this overview has repeatedly emphasised, policy makers will do well to pay much attention to strengthen human capital, enhance linkages, rationalise programmes and improve the management and governance of the nation’s NIS.