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THE GOVERNMENT’S ROLE IN TECHNOLOGICAL DEVELOPMENT Varsakelis’s (2006) research on innovation in 29 countries has shown that education and Varsakelis’s (2006) research on innovation in 29 countries has shown that education and

OVERVIEW OF MALAYSIA’S HISTORY, POLITICS, ECONOMY AND INNOVATION

3.6 THE GOVERNMENT’S ROLE IN TECHNOLOGICAL DEVELOPMENT Varsakelis’s (2006) research on innovation in 29 countries has shown that education and Varsakelis’s (2006) research on innovation in 29 countries has shown that education and

political institutions are the two major elements that can contribute to the success of an innovative activity. This research also shows that the government support institutions are crucial to the country’s innovation productivity.

The government is involved in many aspects of a country’s technological development.

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The reasons government intervention is required include; dealing with international competition, and the potential high cost of risks involved in research and development (Coombs et al., 1987). In order to allow local industries to grow and compete, the government has to support them in terms of funding or by setting up supportive infrastructures for R&D activities to take place (Edquist & Johnson, 1997 and Johnson, 2001). Government intervention also helps to reduce the rate and number of technologies transferred from other countries.

According to Coombs, Saviotti and Walsh (1987) the government is engaged in the technological development process both directly and indirectly. Directly through policies that are formulated specifically for technological development. Indirect support on the other hand, provides policies that are implemented to assist economic growth, in a way to also support technological development.

Through the NDP, the government has started to pay more attention to direct measures such as improving technological infrastructure and increasing skilled human capital. In this context there have been numerous initiatives. The establishment of the Vendor Development Program under the Malaysian Industrial Development Authority (MIDA) and the formation of a Small and Medium Scale Industries Development (SMIDEC) plan (Ritchie, 2005). The Malaysian government has also established research institutions, technology parks and business incubators, to further facilitate and stimulate the industrial sector towards more technologically advance activities. These institutions include the Malaysian Science and Technology Information Centre (MASTIC),

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Malaysian Institute of Microelectronic System (MIMOS), Malaysian Industry-Government Group for High (MIGHT), Khazanah Holdings, Malaysian Technology Development Corporation (MTDC) and the Multimedia Super Corridor (MSC). Table 3.5 shows the government support policies with respect to Malaysian technological development. In addition, the Malaysian government has introduced the Human Resource Development Corporation (HRDC) in 1993. After four years of its establishment, the scheme has trained about 533, 227 workers (Ritchie, 2005).

Table 3.5

Major Policy Support with Respect to Industrial Technology Development Key State Support Measures Main Objectives Fiscal Incentive

Across-the board tax incentive provided since 1984 for R&D activities that include double deduction for R&D expenses incurred, an industrial building allowance for building utilized for R&D activities and capital allowance for plan and machinery used in R&D.

Pioneer status for new investment in selected high-technology activities that meet R&D intensity and other criteria were introduced in 1994. Other incentives were also tied to selected high-tech investment.

Technical Assistance

MASTIC (Malaysian Science and Technology Information Centre) formed in 1992

MIGHT (Malaysian Industry-Government Group for High Technology established in 1993

To encourage R&D activities among private firms

To induce companies to achieve R&D expenditure of one percent of sales revenue within a year. Also 7 percent total workforce must include science and technical graduates within one year

A national science and technology information centre within MOSTI (Ministry of Science, Technology and Innovation) charged within collecting data through biennial national survey A consultative committee consisting of top government and business leaders to forge consensus on technology development priorities

109 Financial Assistance

IRPA (Intensification of Research in Priority Areas) introduced in 1986

ITAF (Industrial Technical Assistance Fund) introduced in 1989

Vendor Development Programme introduced in 1993 by Ministry of International Trade and Industry (MITI) and Ministry of Finance (MOF)

Malaysian Technology Development Corporation (MTDC) established in 1993

Khazanah Holdings established in 1994 as an investment arm of the MOF

MESDAQ (Malaysian Exchange of Securities Dealing and Automated Quotation) launched in 1996

Establishment of Technology Parks

Technology Park Malaysia established in 1988

Kulim High Technology Park Multimedia Super Corridor established in 1996

To centralise management of public funds for R&D and set technology priorities

An R&D subsidy scheme that provides matching grants to small-medium industries (SMIs) for innovative projects

To raise technological capability of local SMIs to enhance linkage development. Multinational Corporations (MNCs) and large local companies sign agreement with MITI and designated banks to provide supplier firms with procurement contracts, technical assistance and subsidized finance

A public-private venture capital to commercialise public research institutes research findings. Two RM100 million matching grant funds allocated under the 7MP (Malaysian Plan)

To spearhead direct government investment in key strategic and high-technology areas

An automated stock exchange for high-technology firms

To house and support private research facilities and technology intensive companies. Administers at RM10 million venture capital fund allocated under the 7MP

To attract technology-based foreign and local projects. To stimulate emerging IT development and research. A RM200 million multimedia matching grant scheme and a venture capital for investment in Multimedia Super Corridor (MSC)-status companies

Source: Kanapathy (2000)

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At the same time, the government’s intervention through incentives, protection, tariffs and regulations have also encouraged local industry to become more innovative and competent. This can be seen through the government’s decision to transform some of the public agencies into corporate enterprises through the privatization policy. This action is one of the government’s strategic plans to stimulate entrepreneurial skills and increase the country’s economic income.

Furthermore, as a step to increase the participation of industries in research and development activities, the government has also taken several other measures, namely introducing fiscal incentives and research grants. A number of financial incentives namely the Industry R&D Grant Scheme (IGS), Multimedia Grant Scheme (MGS), Demonstrator Application Grant Scheme (DAGS), Technology Acquisition Fund (TAF), Industrial Technical Assistance Fund (ITAF), Intensification of Research in Priority Areas (IRPA) Program and Commercialization of R&D Fund (CRDF) have been put forward to further supplement the growth of technology and innovation activities in Malaysia (Mani, 2002) (see Table 3.6 and Table 3.7).

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Table 3.6

Financial Incentives for R&D Provided by Government Grant

Schemes

IRPA MGS IGS DAGS

Purpose To support R&D activities in the public sector on areas which address the need of Malaysian industry for the enhancement of the national socio-economic position

To help innovate local companies or joint venture companies developing relevant multimedia technologies and applications which would contribute to the overall MSC’s development

To encourage Malaysian companies to be more innovative in using the adopting existing technologies and creating new technologies, products and processes which will benefit the national economy

To encourage Malaysians to adapt and customize existing IT and multimedia technologies in applications compatible with local culture and to promote the development of the local software and content industries for greater

competitiveness in global market Implementing

Agency

MOSTI MDC MOSTI MIMOS

Priority Areas Priority research areas of Seventh Malaysia Plan

Multimedia Key technology areas that support Industrial Master Plan 2 clusters with prospect for early

commercialisation

Information technology

Eligibility Public R&D institutions, universities government and statutory body

MSC-Status Companies (SMIs) which are, at least 51%

Malaysian-owned

Malaysian Majority-owned companies

Malaysian Citizen or locally registered organizations with at least 51%

Malaysian equity and/or government agency

Collaboration Inter-agencies and private sector

Not specified Local

GRIs/Universities

Hosts/user

community at once or more local agencies Funding

Duration

1-3 years or more in exceptional cases

2 years 3 years 1 year

Max. grant support

100% direct cost 50% of total project cost

70% approved cost

70% of total project cost

Source: Academy of Sciences Malaysia (2000)

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Table 3.7

Government’s Incentives for Commercialization and Technology Upgrading Grant

Schemes

CRDF TAF ITAF

Purpose To enhance

competitiveness and capability of the Malaysian industrial sector by promoting the commercialization of indigenous technology;

and to accelerate the commercialization of R&D result undertaken by local universities and research institutions, companies and individual researchers or inventors

To promote technology upgrading through the introduction and

utilisation of modern and efficient technology in the manufacturing and physical development of existing and new

products’ processes, and;

to enhance the

competitiveness level of firms to enable them to compete globally

-development of new product, new design or new processes

-improvement and upgrading of existing process

-improvement of existing products and designs

Implementing Agency

MTDC MTDC SMIDEC, SIRIM,

MATRADE Eligibility -company is locally

incorporated and has at least 51% Malaysian equity/ownership -joint venture companies between local firms and universities/ research institutions (both local and foreign)

-company is locally incorporated and has at least 51% Malaysian equity/ownership -company must produce evidence of the signed technology agreement, where applicable

-a consortium of firms can also apply

-company incorporated under the Companies Act 1965 -a manufacturing company with an annual sales turnover of not exceeding RM25 million and with full time employees of not exceeding 150

-at least 70% of their equity is held by Malaysian, of which not more than 25%

held by large companies Amount

supported

50-70% of the total cost 50-70 of the total cost 50% matching grant Activity

funded

The eligible project costs are market survey and research; product/ process design and development;

and standards and regulatory compliance and intellectual property protection

Purchase of high-tech equipment and

machinery; technology licensing; acquisition of patent rights; prototypes and design; placement of Malaysians in foreign technology based companies and foreign technology institutes;

expert sourcing program, and information

dissemination seminar/

workshops

Consultancy costs: cost of acquiring technology and skills through training;

service cost for related schemes, testing and calibration; cost of testing materials and developmental equipment used in designing and prototypes; other costs as per contract

Source: Academy of Sciences Malaysia (2000)

113 Box 3.2:

The History of R&D Funding in Malaysia

One component of the first National S&T Policy introduced in 1986 was R&D funding. The discussion on national R&D highlighted the various issues including management, resource allocation and priorities. These concerns were first captured in the Fifth Malaysia Plan (FMP) and it called for the strengthening of the management system to enable a more centralised planning demand of the FMP for strengthening of the R&D management system. IRP A (Intensification of Research in Priority Areas) was introduced in 1988. When first introduce IRPA was intended to:

Determine R&D priority at national institution level

Formulated of research proposals based on agreed priorities

Peer group appraisals of proposals and continuing monitoring and evaluation

Prior to IRPA, funding for R&D was drawn from both the “Development Vote” and the

“Operational Vote”. For R&D purposes, the Development Vote can be expended to finance the establishment of new laboratory or purchase of new scientific equipment at the initiation of new projects. Fund of the actual conduct of R&D came from the Operational Vote. While this mechanism operated well under normal circumstances, difficulties were encountered in times of budgetary constraints as available funds were directed to finance essential overheads with very little for R&D activities (Omar, 1987).

The introduction of IRPA was against the nation’s economic background that was slowly emerging out of the agricultural sector into the industrial era. During the dominance period of agriculture, agriculture-based research institutions were well established but with a focus to alleviate poverty and reduce the income gap between rural and urban areas. As such R&D were primarily motivated to help solve the social economic problem of the rural segment of the population. Therefore institutions like MARDI and Department of Agriculture have a very strong social component in their missions and competitiveness was not a priority.

As for industrial crops such as Oil Palm and Rubber, R&D activities were centered in PORIM [Palm Oil Research Institute Malaysia] and RRIM [Rubber Research Institute Malaysia]. They fund their R&D through cess collected from the industry. Still their R&D focus was towards solving generic problems faced by the industry. Again competitiveness was not the main feature of R&D activities in the industrial crop sector. The desired increase in the production of both rubber and palm oil can be easily achieved through conversion of land to plantations.

The migration of the nation’s economy to manufacturing in the early 1980s changed the R&D priority in the country. As consequences, the national R&D priority must be re-focussed to embrace new and emerging priority areas in support the industrialization process. New institutions such as Standard and Industrial institute of Malaysia (SIRIM) and Malaysia Institute for Nuclear Technology (MINT) were established to drive the R&D activities in the industrial sector. However since the manufacturing sector concentrated mainly in production capitalising on the cheap labour force of the country, attaining competitiveness was never an objective aggressively pursued. Furthermore, economically, the expanding economy provided ample growth opportunity through capital expansion. The liberalization of the capital market in the 80s allowed the country to draw in foreign capital into the country fuel economic growth.

R&D was not seen as a crucial factor for economic growth in the short and medium term but rather as an instrument for capacity building in new and emerging areas of industries. IRPA

114 was therefore introduced in 1988 for such purpose.

The private sector participation in R&D during the early years of IRPA was very low. Because of the industrial structure prevailing at the time, most R&D activities in the private sector centred around the agriculture sector with multinationals such ad Guthrie and Sime Darby taking the leading role. There was very little incentive for the private sector to invest in building their R&D capacity and capability for the future. The government therefore assumed the role in developing the capacity and capability in S&T for the future by investing heavily in establishing and financing new public sector research institutions. The public sector research institutions were the main driver of R&D activities during that time and IRPA funds were made available to them for that purpose. Because of this circumstantial reason, IRPA evolved over the years as a public sector funding mechanism with very little private sector participation.

Source: Academy of Sciences Malaysia 2000, National Science and Technology Policy II: 2001-2010:

Building Competitiveness in a Knowledge-Driven Economy, Report to the Ministry of Science, Technology and the Environment, Academy of Sciences Malaysia, Kuala Lumpur, ppCHPIII-2-CHPIII-3

Malaysia’s political leadership has also encouraged technological initiatives. For example, the country’s ex-Prime Minister, Mahathir Mohamad initiated important changes to the country’s science and technology policies. Mahathir was Malaysia’s fourth Prime Minister. During his 22 years tenure (1981-2003) he initiated a series of science and technology infrastructure developments. These included the ‘Look East Policy’ which was launched in 1982 at the beginning of his career as Prime Minister, to strengthen the national innovative infrastructure by looking at technological skills in Japan, Korea and Taiwan. Later initiatives included the formation of the Science Advisor Office under the Prime Minister’s Department, integration of science and technology policy into national development planning (for example: Fifth, Sixth, Seventh, Eighth Malaysia Plans; Second Outlines Perspective Plan (OPP2); Second Industrial Master Plan (IMP2); K-Economy Master Plan, Vision 2020), the establishment of National Council for Scientific Research and Development (NCSRD); Academy of Sciences Malaysia (ASM); MIGHT; MASTIC, MIMOS, and the introduction of the IRPA fund (Omar, 2008).

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Mahathir also initiated many specific science and technology projects namely the MSC project, the national car project - Perusahaan Otomobil Nasional Sendirian Berhad (PROTON), second national car project – Perusahaan Otomobil Kedua Sendirian Berhad (PERODUA) and the micro satellite project (Omar, 2008). One of the outcomes of this policy was the foundation of Malaysia’s automobile industry.

The first national automotive project, PROTON was a joint venture between the Heavy Industry Corporation of Malaysia (HICOM), Mitsubishi Motor Corporation and Mitsubishi Corporation of Japan (Wad & Govindaraju, 2011). In 1996, the government launched PROTON City as a way of supporting the emerging automobile industry. It consisted of a 4,000 hectare area with a R&D centre, skills development centre and vendor complex (Abdul Aziz & Sumangala, 1996).

Despite a generally positive appraisal of these initiatives, there have been some views that these government’s policies have not always been as successful in contributing to technological growth as often believed and have sometimes been more orientated to gaining short term political favour than encouraging innovation (Jomo, 1999, Doner &

Ritchie, 2003 and Ritchie, 2005). For instance, the NEP was not only applied to resolving challenges of economic restructuring but was also always underpinned by political concerns such as managing ethnic tensions which may have not always been in the best interests of the country in terms of good science and technology policy. For

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example whilst politically popular, the introduction of the education ‘quota system’30 also lowered the quality of higher education. Micheaux (1997) for example, claims:

The system of quota tends to undermine the quality of higher education due to over-privileging according to race rather than on academic merit over the decades. Due to this, non-Bumiputera students must have been pushed aside in spite of their scholarly result - which could have been superior to those of Malay students’ entering University. The inequity of the system has therefore forced them to leave the country and study overseas in foreign Universities, on condition that they are able to afford it. An original system called twinning program has been developed by the private higher education institutions subjugated to the University and College Act 1971: these private institutions were not allowed to deliver First Degree in Malaysia which opens access to professions such as engineering and to high level management….M.Lee is discussing the question of the quality of these twinning programs which is mainly related to a couple of institutions involved therein, quality varying from institution to institution both in local Malaysian colleges and in foreign partners.

The quota system bore also a consequence in that higher education and become very heterogeneous in the country, with no global consistency in the programs and no guarantee of quality either in public or in private sector (p6-7).

Indeed, the quota system applied to students’ enrolment in the local tertiary educational institutions during the NEP period plan has resulted in students who have been pursuing their studies abroad not wanting to return after completing their studies. They prefer to stay back and work in the country they have studied in. As a consequence, the supply of skilled human capital in Malaysia has reduced and many job opportunities mainly in the

30The ethnic quota system was imposed on admission of students into public university in order to balance the distribution between Bumiputera and non-Bumiputera students in the university. As stated in Micheaux (1997), “in early 1970s, most of the Bumiputera formed a rural community and, according to the 1970 census, they represented 74% of the peninsular population living below the poverty line. This population was subsequently far removed from the tertiary education world and from the social mobility that it allows. The Malay participation in the professions was very low in 1970: their proposition amongst doctors was 4%, dentists 3%, architects 4%, engineers ad accountants 7%” (p5). The policy is based on the ratio of 55:45 for Bumiputera and non-Bumiputera students (This topic is further discussed in the

‘Higher Education in Malaysia’ section of this chapter). However, in the year of 2002, the quota system has been replaced with ‘merit system’. The introduction of meritocracy system means that students’

enrolment into public institutions of higher learning is will be based on their academic performance. Co-curricular activities are only taken into consideration if more of one student has same academic points. For further reading on this topic please see Micheaux (1997), Lee (2004) and Daily Express 11 January 2003, at http://www.dailyexpress.com.my/news.cfm?NewsID=16221)

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scientific and technological based sectors (Ritchie, 2005) have been left vacant.

The implementation of the heavy industries policy was also claimed as not contributing much to the country’s technological development. As mentioned earlier, the government had formed HICOM with the purpose to support the development of heavy industries in the country by facilitating the sector with incentives and tariff protection. However, HICOM has not brought a huge effect to domestic technological development due to the reluctance of MNCs to perform research and development activities in Malaysia (Ritchie, 2005).

The introduction of financial incentives is undeniable to ensure continuous growth in technology, yet due to the weaknesses in the system, some of these incentives were unable to contribute to internal technological progress. As an example, the IRPA program designed to provide funding for research projects conducted in collaboration between universities and the government research institutions with the industrial sector appeared to be unsuccessful. In the Seventh Malaysian Plan (1999-2000), about RM1 billion was allocated for the program, however due to the low capability of skilled human capital to carry out research activities in the fields emphasized, only 60 percent of the allocation was utilised (Mani, 2002).

Although it has been suggested that the government’s intervention in the country’s technological development was influenced by its political agenda, most of the policies and decisions made by the government have still contributed to the growth of Malaysia’s

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technological capacities. For instance, the decision on the formation of HICOM although open to criticism has still contributed to the introduction of the local automobile industry.