Like many economies trying to escape the middle-income trap, Malaysia has sought to increase its research and development (R&D) capacity and spur innovation as a means to reach the next level of development. Building on its strengths, Malaysia has focused its energies on its traditional cash crops (oil palm, rubber and rice) and on electronics, but it has also made headway in biotechnology, medical research and green energy – competing in the BRIC league.

SPENDING PATTERN: R&D spending in 2011 amounted to $3.1bn, up from $2.6bn 2010. For 2012, the Battelle-R&D Magazine “2012 Global R&D Funding Forecast” estimates the total R&D expenditure to be $3.3bn, or 0.7% of GDP (the same percentage as the previous year). The forecast ranks Malaysia 33rd out of 40 countries in gross expenditure on R&D per population, and 34th in terms of R&D as a percentage of GDP. These rankings show that funding is an issue, but it is not the only bottleneck facing the sector. Despite the low level of spending, Batelle also highlighted the skyrocketing growth of Malaysian R&D expenditure ( admittedly from a low point): over the 1996-2007 period, R&D funds grew an annual average of 18% – second only to China and ahead of Thailand, Singapore, Taiwan, South Korea, India, the EU, the US and Japan.

There is still room for improvement if Malaysia is to be a global competitor in research and innovation, though. In its “innovation sophistication” category, the World Economic Forum’s (WEF) “Global Competitiveness Report 2012-13” ranked Malaysia 23rd out of 144 nations. The report also ranked the country 28th for the quality of scientific research institutions and 34th for its patents per population ratio.

According to an Institute of Management Development (IMD) survey on the competitiveness of 59 economies released in 2011, Malaysia ranked 35th in private R&D funding as percentage of GDP; 38th in total GDP expenditure on R&D; 42nd in terms of total R&D-related workforce in the private sector, and 45th in the number of scientific articles published. This last ranking in particular illustrates one of the issues facing research and innovation in Malaysia: education.

ACADEMIC INNOVATION: Universities, both public and private, still have a long way to go in providing quality graduates to satisfy the new economy’s demands in human capital and in bridging the gap between the laboratory and the market. In industrialised countries, 5-10% of universities’ R&D work reaches consumers; in Malaysia, the proportion is 0.5-0.8%. The growth of private higher education has yet to produce an impact on commercially oriented research and innovation as human capital needs in services (such as health care and tourism) still outpace these institutions’ output.

BIOTECHNOLOGY: Certain specific sectors are becoming leaders in research and innovation in Malaysia based on the jobs and investment opportunities they create.

The biotechnology sector, with its multiple applications in medicine, industry, energy and agriculture, is expected to generate RM248bn ($80bn) by 2020 and employ up to 160,000 people. Current investment totals RM4.5bn ($1.45bn), of which RM1.9bn ($612.9m) is from private sources and RM2.6bn ($838.8m) is public funding. To date, over 650 patents have been granted to biotechnology-related research in Malaysia, and the sector contributed 2.2% of the country’s 2011 GDP.

Private sector funding for research and innovation are chiefly present in the form of foreign capital, while domestic sources are dominated by government or government-linked institutions. The Ministry of Science, Technology and Innovation (MOSTI) is the lead partner for many technical, funding and organisational matters in research and innovation. One of the 10th Malaysia Plan’s objectives is “supporting innovation-led growth by shaping a supportive ecosystem for innovation, creating innovation opportunities, putting in place innovation enablers and funding innovation”, as well as encouraging the growth of SMEs.

Research and innovation components are present in six of the National Key Economic Areas (NKEAs) (oil, gas and energy; palm oil; electronics and electrical; health care; communications content and infrastructure; and agriculture), as well as being part and parcel of a seventh NKEA, education. The 2012 budget earmarked RM100m ($32.3m) for encouraging innovation, which includes the 1Malaysia Award that rewards student-led innovation. This is also a way the government is acting to address the shortage of human capital, a bottleneck that has been identified in Malaysia’s research sector.

GOVERNMENT FUNDING: A multitude of funds, bursaries, grants, technical assistance, incentives and tax breaks have been provided by the government to help develop research and innovation of the past few years. Dividends of this strong top-level buy-in are starting to show: in 2008-11, the government received 13,213 applications for research, development and commercialisation grants worth RM7.34bn ($2.4bn), and RM1.59bn ($512.9m) had been approved for 2029 projects. “Until now, a total of 310 products from 1862 (16.65%) R&D projects under MOSTI grants have been successfully marketed in Malaysia and overseas,” Muhyiddin Yassin, the deputy prime minister and education minister, told local press.

In keeping with the government’s strategy to foster a better environment for research and innovation, legislative changes have begun to take place. The National Pharmaceutical Control Bureau recently adopted the guidance document and guidelines for the registration of biosimilars, making Malaysia only the second country (after Australia) in the Asia-Pacific region to adopt regulations for biosimilar registration. The Medical Device Act, passed by parliament in February 2012, will also set standards for this industry and allow it to better compete on the global health care market, as the “Made in Malaysia” brand is gradually built up as a sign of both quality and affordability.

CAPITAL CONCERNS: One of the main bottlenecks in research and innovation in Malaysia is the lack of venture capital, which explains the country’s relatively low R&D spending; domestic banks and private investors tend to shy away from high-yield, high-risk investments. There are just two private venture capital institutions in Malaysia, and seven government-funded schemes. These public agencies, such as the Malaysian Innovation Agency and Cradle Fund, work to fill a gap between innovators and the market by supporting small and medium-sized enterprises (SMEs) and individual entrepreneurs in building prototypes, testing and providing seed grants for commercialisation of new products. “Our seed grant provides a maximum of RM500,000 ($161,300) for commercialisation, while our pre-seed grant provides up to RM150,000 ($48,930) for prototype creation,” Nazrin Hassan, the CEO of Cradle Fund, told OBG. Cradle, which is under the Ministry of Finance, handles the RM145m ($46.8m) Cradle Investment Programme. It targets a wide variety of sectors, but over 70% of Cradle’s funding goes to information and communications technology (ICT). The fund boasts a successful commercialisation rate of 57%.

All Cradle grants are conditional grants and equipped with a payback element if a certain “success trigger” is achieved. However, there have been few incidents to date where seed money has been recouped. “The main issues entrepreneurs face in scaling up their concepts into commercially viable and self-sufficient businesses are the lack of human capital, scant private sector venture capital funding for early stage investments and risk-aversion on behalf of Malaysian banks, which are not properly incentivised by the government to invest in home-grown innovation,” said Nazrin.

ANGELS: As an institutional angel, Cradle has been trying to catalyse and grow the pool of angel investors in Malaysia. It has identified over 120 Malaysian angels, but, according to Nazrin, they invest too little in ICT. “Malaysia’s angel community is now roughly where the UK’s was in 2000, so there is room for improvement,” he said, noting that other models are being investigated: “We are also looking into crowd funding as a potential source of venture capital, but there are regulatory barriers to be addressed first.” In the meantime, new tax incentives were instituted in September 2012 that give angel investors a tax relief for all income equivalent to the amount invested in a technology company, up to a maximum of RM500,000 ($161,300) per year.

Diversifying sources and increasing funding to the sector should spur growth, but results will not appear overnight. “Experience has shown that a fertile climate for innovation cannot be engineered overnight; it requires a long-term commitment from all stakeholders in the innovation system and the maturing of relevant institutions,” Francis Gurry, the director-general of the World Intellectual Property Organisation, told OBG.

PATENTLY INNOVATIVE: In 2011 the number of international patents filed by Malaysian innovators under the World Trade Organisation treaty dipped compared to 2010, but the trend over the 2000s is still positive. As for patents granted in Malaysia, it is noteworthy that 90% of them belong to foreign, not domestic, entities. But this is set to change, as domestic patent filing went from 10% to 20% of total filings in the past five years.

One of the most notable transformations in attitudes and policies with regards to intellectual property (IP) and commercialisation has been taking place in universities. One of the largest public players in the innovation and research fields, Universiti Sains Malaysia (USM) has had 18 national and 21 international patents granted. It had filed a further 125 national and 168 international patents as of December 2011. Most of the patents USM has filed are the result of research undertaken in its specialised departments, such as the Institute for Research in Molecular Medicine, the Schools of Biological Sciences, Electric and Electronic Engineering, Materials and Mineral Resources Engineering, Chemical Engineering and Pharmaceutical Sciences (as well as, in the case of national patents, USM’s IT Centre of Excellence, the National Advanced IPv6 Centre). Filing dates for the overwhelming majority of the patents are from 2008 onwards, with the bulk of these from 2010 and 2011. This shows the academic sector’s increasing interest in patenting, commercialisation and return on investment for research undertakings, something that was not evident a decade ago.

TECHNOPRENEURS UNITE: Malaysia is a regional powerhouse in ICT production, and the sector contributes 8% of GDP. Malaysian Institute of Microelectronic Systems (MIMOS), funded by MOSTI and by its own activities, is the leading ICT research and innovation agency in Malaysia. It has filed over 160 patents, making it the second-biggest patent-filing entity in the country. Other players are not forgotten, and MIMOS works with foreign and domestic firms, SMEs and universities. Funds such as Cradle also help innovators in ICT to launch projects and commercialise their ideas.

Enabling research through ICT is one way to ensure that R&D grows. The Malaysian Research and Education Network (MYREN) provides a high-speed network for its 88 members (universities, community colleges, polytechnics and laboratories) in the country. Members collaborate to carry out research teleconferencing, run data-intensive applications and share resources within a high-capacity broadband network. Plans were recently unveiled to start using MYREN’s capacity to begin tele-health and remote surgery services.

HEALTHY PROSPECTS: The medical devices industry is dependent on research and innovation to continue growing and remain competitive. Manufacturers located in Malaysia produce the whole gamut of medical devices, from relatively simple products such as rubber gloves (which is one of Malaysia’s dominant exports in this sector), to more complex machines and electronic components and to the assembly of extremely complex devices such as defibrillators. One Malaysian firm specialising in orthopaedic implants recently developed more advanced and competitive devices through cooperation with Malaysian machining, electronics and engineering industries. The new machines now produce, to a high standard of accuracy and precision, “tailor-made” orthopaedic devices it exports worldwide.

The other key player in research and innovation in the health sector is the pharmaceuticals industry. Around 250 Malaysian pharmaceuticals companies have been licensed by the Drug Control Authority, although more than two-thirds of these focus on traditional medicine. Strict regulations, which may well be loosened in the coming years, have limited the number of multinational players setting up manufacturing in the country to only two, namely Ranbaxy and GSK.

Home-grown research in pharmaceuticals products is still in its infancy, and most of the new wave of clinical trials are undertaken by foreign companies – a model which could also be beneficial for domestic firms thanks to technology transfer deals. As per Malaysian law, all clinical trials in the country must take place in a Ministry of Health facility, of which there are sufficient numbers and well-suited to trials.

The number of trials is on the increase, in line with policies to develop this activity. According to the Clinical Research Centre, the government’s regulatory body, 143 industry-funded clinical trials took place in 2011. The revenue generated from these trials explains the state support. For example, dengue fever vaccine clinical trials conducted in Malaysia by French pharmaceuticals giant Sanofi generated some RM380m ($122.6m) of revenue in 2011. That year also saw the launch of Clinical Research Malaysia, a not-for-profit trial management network that pools universities, Ministry of Health hospitals and private hospital specialists to facilitate clinical trials in Malaysia. Publicly-funded clinical trials are also on the rise. The Ministry of Plantation Industries and Commodities is investing nearly RM20m ($6.5m) in six clinical trials on tocotrienols, which is found in palm oil and could bring benefits in treating breast, prostate and colorectal cancer, diabetes mellitus, strokes and attention deficit hyperactive disorder.

FIELDS OF PLENTY: In the 2012 budget the government dedicated RM29.8bn ($9.6bn) for infrastructural, industrial, agriculture and rural development. The Malaysian Agricultural Research and Development Institute, the crop research agency, has a strong presence in the field of plant and animal health, biodiversity and crop selection research. However, agrochemical, biomass and genetic engineering studies are also undertaken by other public or private entities. For the past 20 years, the Malaysian Palm Oil Board has been funding oil palm genetic research to build on the crop’s multiple applications while making it cheaper and easier to grow and process. The growing thrust in research and innovation is the rush towards biomass, as fossil fuel price fluctuations and environmental concerns mount worldwide. The “National Biomass Strategy 2020” expects this innovation-driven sector to grow to RM30bn ($9.7bn) in the next eight years (see analysis).

GREEN LIGHT FOR ENERGY: The opportunities offered in the vast global demand for renewable energy are not lost on Malaysia’s solar panel manufacturers. The country has made substantial progress in claiming global market share for wafer, cell, and module production and is on its way to supply 10% of these components globally. The photovoltaic industry is in a very strong position in Malaysia thanks to its attractive features (incentives, location, labour costs, political stability and infrastructure), which have led to the establishment of local plants by innovative global solar panel manufacturers. Photovoltaic modules produced in Malaysia are already some of the world’s cheapest. Domestic R&D growth in this sector is likely to be in downstream applications for locally-produced photovoltaic technology, which could be exported and would also have the considerable side benefit of hedging the country against volatile fossil fuel prices when used domestically, as would the burgeoning biomass sector (see analysis).

The car industry is jumping into the fray of innovation – through a contest. The Proton Green Mobility Challenge, in which 10 domestic university teams competed, seeks to turn a conventional Proton Saga car into the best performing electric vehicle (in terms of acceleration, top speed and autonomy). Teams are provided with a car, batteries, an electric motor, a telematic unit and a RM20,000 ($6452) grant to take on the challenge. The revamped vehicles were tested at the Sepang Formula 1 racetrack in October 2012, where the competition was won by the team from the International Islamic University Malaysia.

BIOTECHNOLOGY: The UN Environment Programme has put Malaysia in its list if 17 countries that have over half of the world’s biodiversity. Taking advantage of this wealth and the potential for innovation of its most iconic agricultural products (like oil palm, rice, rubber and coconut), Malaysian scientists, innovators and industrialists have been carving a niche for themselves in the biotechnology sector over the past decade. The Malaysian Biotechnology Corporation (BiotechCorp), a government-sponsored agency, was created alongside the National Biotechnology Policy to work with the sector and award the “BioNexus” status to domestic and foreign companies operating in Malaysia. BioNexus status enables biotechnology concerns to access expertise, private and/or public funding, assistance in IP rights filing and protection, as well as laboratory facilities. Since 2005, 215 firms have received BioNexus status, with combined investments of RM2.6bn ($838.8m), and revenues close to RM2.2bn ($709.7m) to date. With half of the 215 companies foreign-owned, investment from Australia, China, the EU, India, Japan, the UK and the US is arriving to benefit from the government’s incentive. These firms’ fields of interest range from plant genomics, animal breeding and nutraceuticals, to stem-cell engineering, bio-remediation and bio-fuels.

OUTLOOK: Research and innovation look set to see strong growth in Malaysia, although some challenges, such as skilled labour shortages, timid universities and a generally low appetite for financial risk, are likely to remain in the short term. But these are being addressed by a government whose ambitious goals for Malaysia’s development mean positive federal interventions (in the shape of specialised agencies, incentives and regulatory reform) are more than likely to continue.

With its multiple applications in virtually all key industries, biotechnology will remain a strong driving force in research and innovation, and could reach the government’s set goal of 5% GDP by 2020. The launch of the BioXCell mega-project, which will combine 10 biotechnology labs and manufacturing facilities at one site, is also a clear sign that the best is yet to come. Private investors are already set to invest RM3bn ($967.8m) over the next three to five years, and government funding is unlikely to diminish. Biomass research in oil palm alone is expected to generate an additional RM14bn ($4.5bn) annually to the palm oil industry by 2015.