In The News

2013 Budget to Boost Innovation in Malaysia

October 31, 2012

Amid concerns over its rising deficit, Malaysia’s Prime Minister Najib Razak unveiled the 2013 Budget last month – the last before national elections expected next year. The latest budget is part of a series of efforts started by the government in the 1990s to keep Malaysia on track to achieving high-income status. Once a low-income economy dependent on natural resource exploitation, Malaysia now ranks in the 20th percentile of 144 competitive countries in the World Economic Forum’s 2012-2013 Global Competitiveness Report. While Malaysia’s push toward a low-cost, export-oriented manufacturing hub has played a huge role in its success, many economists warn that to compete in the higher-income status it must put even greater emphasis on innovation.

Petronas Towers, Malaysia

Despite Malaysia’s impressive growth, some warn that to compete, it must put greater emphasis on innovation. Photo/Matthew Pendergast

National surveys carried out since the mid-1990s show that the proportion of firms in Malaysia’s manufacturing sector that specialize in innovation and new technology development has remained low, hovering between 21 to 42 percent. These findings indicated that lack of financial support to innovating firms was the main reason for the low levels of innovation.

Recognizing this, the government has implemented initiatives to support and encourage innovation, such as the establishment of the National Innovation Centre and Technology Acquisition Fund. However, despite these efforts, Malaysia continues to slip in the Global Innovation Index rankings, dropping from 25th in 2009 to 32nd this year.

So, despite the government’s investments, why are innovation levels in Malaysia still so low? Moreover, is the latest 2013 Budget, with “inculcating innovation and increasing productivity” highlighted as a focus area, in a position to address this?

While it is widely recognized that enhancing research and development (R&D) is essential to driving innovation, there seems to be a growing understanding that the commercial applicability of R&D products is equally paramount.

A host of challenges contribute to the low levels of innovation in Malaysia, top of which seem to be the lack of public and private spending on R&D activities, a fledgling venture capital market, and low levels of small and medium-sized enterprises’ (SMEs) participation in research and innovative activity – despite the fact that SMEs comprise 99 percent of companies in Malaysia in 2005.

The new budget outlines five goals, one of which is to “inculcate innovation and increase productivity,” with a focus on creating an environment conducive for SMEs to participate in R&D and innovative activities and ensuring that the fruits of R&D labors are commercially applicable.

Acknowledging that access to financing has always been a significant challenge faced by SMEs, the new Budget allows for SMEs to use intellectual property rights as collateral to obtain financing for business expansion. The plan also sets aside an additional investment of RM 1 billion (approximately $0.3 billion) into the SME Development Scheme and offers significant tax deductions for angel investors to encourage growth of this market in Malaysia. Five research universities have also been earmarked to receive funds to conduct high-impact research in strategic fields, such as nanotechnology, automotive, biotechnology, and aerospace.

With these targeted initiatives proposed, Malaysia does seem poised to foster innovation and increase productivity in the economy as the Budget suggests. However, even the best plans have no value when implementation is poor. While this Budget is sponsored by the incumbent government, let’s hope that the ruling party that emerges from the 13th General Elections will see these initiatives through so that Malaysia can reach its full competitive and economic potential.

Nur Azrina Azhar is The Asia Foundation’s project officer in Malaysia. She can be reached at azrina@asiafound.org. The views and opinions expressed here are those of the individual author and not necessarily those of The Asia Foundation.

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