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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.


(2002) is projected in Figure 3.1.

The framework of Malaysian scientific and technological institutions is represented in Figure 3.2. In this system, the Malaysian government plays the most important role in planning and managing the system. The important role of government in system of innovation is not only practised by Malaysia. In fact, according to Ivaniashvili-Orbeliani (2009), Finland, Canada, South Africa and China rely on political support in strengthening their country’s innovation systems.

Figure 3.1

The Components of Malaysian System of Innovation

Source: Mohan, Aliza and Kamarulzaman, (2002)

Malaysia’s innovation system was formally introduced in the 1980s with the launch of the First Industrial Master Plan (IMP1) (1985-1995) (Academy Sciences Malaysia, 2000). The objective was to support Malaysia’s innovative capacity as a step to excel in


Education System Financial


Private Enterprises Research



national economic development. Starting from the First Industrial Master Plan, a separate chapter on science and technology was put forward to prioritize the scientific and technological fields in the Fifth Malaysia Plan (1986-1990). In this plan, the general science and technology policy goal was outlined and in the same year the government launched the First National Science and Technology Policy Plan (Felker, 1999). Since then Malaysia’s science and technology planning systems have grown rapidly. Table 3.8 shows how the economic development plan in Malaysia and the focus of national science and technology is interrelated.

Although scientific activities are managed and co-ordinated by several ministries in Malaysia, as shown in Figure 3.3, the Ministry of Science, Technology and Innovation (MOSTI) and National Council for Scientific Research and Development (NCSRD) are the two major players. NCSRD’s membership is made up from various government agencies which include people from the Ministry of International Trade and Industry (MITI), Economic Planning Unit (EPU), Ministry of Education and also representatives from the industries. NCSRD’s function is to give recommendations and directions for Malaysian science and technology development. The council was responsible to ensure all scientific activities are geared to national needs (Anuwar, 1992). These include ensuring maximum utilization of the country’s resources and developing the work force for R&D activities.


Figure 3.2

The Framework of the Malaysian Innovation System

Source: Adapted from Academy of Sciences Malaysia (2000)

Source: Academy Sciences of Malaysia (2000)

Private research centres Offset programme on

government contract

New research institutions IRPA - NFRD

Technology transfer training

New universities

Technology research institutes

Science-based R&D Reverse


Technology parks and incubation centres MPKSN, MOSTI, ASM,

MASTIC, science awareness Local technology

generation (make some)


development bank Products,

processes, services, system Business

entrepreneurs and government services Knowledge &

Technology development application

Technology importation (buy some)

International collaboration

Acquisition, JV, FDI, purchase of firms


Table 3.8

The Transition of Malaysian Economic and National Innovation System Period Economic Development National Innovation System


Beginning of import substitution policy

Primary focus on provision of basic infrastructure as well as developing operational capabilities to promote labour-intensive manufacturing activities


-Export led industrialization -gradual shift to heavy industries;

-export processing zones;


-launch of IMP1

Focus on learning as well as developing duplicate imitation and adaptive capabilities as well as human capital development


-continuation of export led industrialization

-shift to new and emerging technologies

-promotion of clusters

Primary focus on developing creative duplication and

innovative capabilities to enhance productivity. Applied and

developmental research promoted.

From 2000 onwards

-Transition to innovation led economy

-service sector engine of economy -launch of National Science and Technology Plan

Primary focus on developing knowledge creating (basic research) and transformation capabilities to support knowledge based economy

Source: Thiruchelvam, Ng and Wong, (2009)

On the other hand, MOSTI has played a major role as the agent promoting science and technology to the public. Its major function is to formulate science and technology policies that suit the country’s development objectives. Finance mechanisms, ‘conducive technology facilities’, training schemes and consultation services, are among the programs implemented by the Malaysian government through MOSTI.


Figure 3.3

Agencies Linked to Science and Technology Development in Malaysia

Source: Academy Sciences of Malaysia (2000)

National Council for Scientific Research &


-Coordination & monitoring of research in science &

technology activities -Management and implementation of IRPA -Propose measure to enhance capabilities in the key technologies

Prime Minister Department

-Promote development in science & technology Ministry of International Trade & Industry

-Plan, formulate & implement policies on industrial &

technological development, international trade & investment -Coordinates industries

development through IMP -Increase national productivity &

competitiveness Ministry of Science,

Technology and Innovation -Promote understanding, awareness & appreciation of science & technology -Implement science &

technology research development

Ministry of Domestic Trade and

Consumer Affairs -Patents trademarks &

industrial design

National Science &

Technology Policy

Ministry of Education

-Curriculum design -Encourage research Ministry of Human

Resources -Human Resource Development Fund -Manpower training

Ministry of Health -Health care & services Ministry of Finance

-Providing fiscal incentive

-Providing monetary

incentive Ministry of Agriculture

and Agro Based Industry

-Increase food production -Increase revenue from nation’s resources

Ministry of Plantation Industries and Commodities

-Issuance of licences &



The government has taken various actions to encourage the public and the private sector to invest in scientific and technological activities. These have included: workforce training programs, incentives and tax deduction. These actions have also included the establishment of the HRDF and the setting up of several technology parks. HRDF was established in helping to stimulate the development of technology parks as the mechanism to encourage the growth of Malaysia’s high-tech industries. In addition, the government has also offered several finance mechanisms for R&D and high technological development in order to attract the industrial sector to invest in science and technology based activities (Jomo & Felker, 1999).

Besides those two government bodies, the Malaysian national innovation system framework has also been supported by several other actors who have been major stakeholders in the system. These stakeholders include the education system, research institutions, financial system and the industry/private sector (Academy Sciences of Malaysia, 2000, Mohan, Aliza & Kamarulzaman, 2002 and Chaves & Moro, 2007). As stressed by Chaves and Moro (2007), science and technology have an interdependent connection. A dynamic flow of information from science will influence technological development and progress in technology will influence scientific development (Chaves

& Moro, 2007).

In supporting innovation systems, the education system has also been undergoing restructuring (Mohan et al., 2002). In the Eight Malaysia Plan (2001-2005) for instance, about 20 percent of total governmental expenditure was allocated for educational


purposes (Economic Planning Unit & World Bank, 2007). Various programs and initiatives have been taken to carry out this goal, among them have been: formulating standardize curriculum; providing educational support programs such as textbooks-on-loan; the introduction of National Higher Education Fund as a financial support for students at tertiary education level; upgrading the skills of teachers and educators; and increasing the number of institutions of higher learning in order to give greater opportunity for continuous learning (Malaysia, 2001).

As a way to support an improved research climate among the universities, the government has also made an effort to build incubators centres within university areas.

For instance, there are technology parks located near the University Technology of Malaysia (known as Universiti Teknologi Malaysia, UTM) in Johor, and also the Multimedia University in Cyberjaya, Selangor (Mohan et al., 2002). Additionally, in 2005, the Malaysian government established the Academia-Industry Consultative Council under the purview of the Malaysian Ministry of International Trade and Industry to strengthen the networking between higher education and the industrial sector (Yogeesvaran, 2005).

Research institutions, either public or private, are another element that are crucial in supporting the development of innovation in Malaysia. Effective networking between these institutions and the private sector opens the opportunity of more innovative work and the flow of knowledge. Among research institutions that belong to the government are: Institute for Medical Research (IMR), Palm Oil Research Institute of Malaysia


(PORIM), Malaysian Agriculture Research Institute (MARDI), Forest Research Institute of Malaysia (FRIM) and Standard and Industrial Research Institute of Malaysia (SIRIM) (Academy Sciences of Malaysia, 2000). These public research institutions have been involved in various areas of cutting-edge research, overlooked by the private sector, because of budget limitations and high risks. Private research institutions have nevertheless, also given significant contribution to the national system of innovation, (Academy Sciences of Malaysia, 2000). Research activities in these private research institutions have mainly focussed on applied research which is more cost effective and market oriented.

Despite these numerous positive indications of the emergence of a robust Malaysian National Innovation System, analysts such as Felker have highlighted several ongoing challenges. According to Felker (1999), the Malaysian government’s technological development agenda is not easy to achieve and has an uncertain future. He explains this claim by stressing that existing facilities that are designed to support the industrial sector are not adequate in areas where there are weak inter-industry linkages such as the poorly developed capital goods sector.

Furthermore, according to Felker, the private sectors’ role, particularly in the National Council and in other private institutions of the innovation system, has been not very effective in closing the gaps between public science and technology investment and the demand from the industrial sector. This situation has been encouraged because representatives from firms have been acting as individual experts rather than


representing their firms. The intervention of the government has also at times lead to too much interference in science and technology strategies and created economic inconsistencies.

Rasiah (1999) has supported Felker’s views by noting that whilst Malaysia has a rich resource base it has lacked capabilities to adopt and transfer technology. Several weaknesses in Malaysia’s innovation institutions have constrained the process of technology assimilation: First, R&D activities are not emphasized in firms or in MNCs.

Secondly, innovative initiatives which are offered by the government are not fully used as a tool to stimulate the country’s innovative culture. The role of NPC for instance was not fully equipped to improve the firms and organizations productivity. Lack of technical support and low participation of the private sector have contributed to this situation (Rasiah, 1999). Thirdly there has been the failure of the country’s technology parks. The parks were conceived as playing the role of being incubator centres acting to stimulate research activities in industry, providing research facilities to support new industries with an innovation culture, and nurturing the growth of local technology driven industries and helping create entrepreneurs in technology: or technopreneurs. However, research done by Rasiah (1999) had found that technology parks in Malaysia have not been capable of attracting firms to conduct their research there. Only small scale innovation activities have been undertaken in parks. A situation contributed to by a lack of funding opportunities and conducive facilities at certain parks (Annuar, 2007).

Similarly, networking between industry and universities has also been weak. The


cooperation between these two agencies is still inadequate (Academy of Sciences Malaysia, 2000). Mohd Ghazali (2009) has underlined three reasons for this scenario.

First is a lack of awareness on the part of industry of the role of the university as a potential research centre. Secondly, lack of economic capacity, particularly in the case of smaller firms which has resulted in smaller firms preferring to use technology which is already in the market instead of becoming involved in innovation themselves. Thirdly, almost 90 percent of academia in Malaysia does not have knowledge in industry which makes it hard for industry to approach them (Mohd Ghazali, 2009).

According to Thiruchelvam (2004), several factors contributed to these problems with Industry and University collaborations. Thiruchelvam put the blame on both sets of institutions for this situation. Universities are guilty for not taking the initiative to approach industry, and at the same time, unattractive incentives offered by the industrial sector fail to attract the academician to cooperate with industry. Thiruchelvam, Ng and Wong (2009) argue that poor management in those organizations of the Malaysian innovation system has weakened the linkages among the players, both in public and private sector. They make this point in their paper, An Overview of Malaysia’s National Innovation System: Policies, Institutions and Performance (2009):

These weak linkages stemmed from not only lack of initiative on the part of government research institutions and universities to reach out to industry but also weaknesses within industry itself….these deficiencies within industry associations have contributed to the poor articulation of technology issues among members ( Thiruchelvam et al., 2009, p13).

129 Box 3.3:

Key Factors for Successful University-Industry Collaboration

University –industry partnership is essential component of the strategic plan

Commitment to work towards common goals and mutual interest

Clear deliverables & expectations (e.g. recruitment of graduates, internship, research collaboration, commercial ventures

Must be willing to reassess and revise goals and strategies regularly

Understanding each other’s work culture

University leadership – aware of constraints imposed on industry (e.g.

government regulations, shareholders interest)

Industry leaders must appreciate the primary mission of university &

constraints of an academic unit (e.g. response time not as fast)

Identification of “champions” and assignment of contact person (s)

Both assign contact person (s) who are committees to university –industry partnership – continuity and clarity of collaboration, confidence building

Establishment of specific unit e.g. university-industry partnership, innovation unit, commercialization unit

Involvement at all levels

Not just some departments but whole management, operational staff &

students → sustainable relationship

Multiple and diverse collaborative activities

Internships (both for students and faculty)

Faculty development programme


Curriculum development

Maintain open communication to reinforce trust

Discussion of issues, suggestions, plans etc

Source: Sharifah Hapsah Syed Hasan Shahabudin 2006, ‘University-industry collaboration in curriculum development’ http://eprints.ukm.my/53/1/Session1-1-Prof.Shahabudin.pdf

The other obstacle of Malaysian innovation system is its limited ability in successful technological transfer. According to Rasiah (1999), the process of technology transferred in Malaysia has not been properly managed. Rasiah provides the Industrial Co-ordination Acts of 1975 as an example. The acts, which were used as a tool to monitor technological transfer in the manufacturing sector, had several limitations. Firstly, they were poorly implemented due to the lack of capable employees, and secondly, they only provided a legal framework for foreign transfer activities without providing sufficient practical guidance for how such activities could be developed. More recently the


government would appear to be aware of these problems and has attempted to improve the situation by sending local expertise to learn from foreign experts, forming the MTDC as a step to commercialize research and development, and also establishing MIGHT in order to promote new technology and identify marketing opportunities (Rasiah, 1999).

The availability of skilled human capital has also had an important influence on the shape of systems of innovation in Malaysia (Felker, 1999). For Malaysia, a major barrier has, not only been a shortage of skilled human capital, but also insufficient skills to match market demand. Although there is 12 years of compulsory education in Malaysia this training system has not been shaped to meet the demand from the industrial sector but rather been shaped by political and cultural objectives. Ritchie (2002) explains the situation in the following terms:

Malaysia, Thailand, Indonesia, and the Philippines, on the other hand, could rely on rich natural resource endowments to generate foreign exchange, so acquiring technological skills was less pressing. Accordingly, each of these countries focussed its education and training system primarily on political, as opposed to economic, objective, albeit to varying degrees. These political objectives include maintaining national unity, independence, ethnic equality, and political power. As a consequence, there is a dearth of science and engineering skills and knowledge, making it difficult for these countries to fully support or leverage FDI for technological progress (Pang and Hill, 1992) (Ritchie, 2002, p24).

Interestingly these political /cultural barriers have led to the situation where MNCs in Malaysia have been more actively involved in investment of human capital and technological development than local firms (Wan Aziz, 1994).


The introduction of the HRDF scheme is one of the Malaysian government’s initiatives designed to encourage training activity at the firm level. Since it was first introduced in 1993, the scheme has been successfully applied to and benefited participating firms in upgrading workers’ knowledge and skills (see Box 3.4). For example, in 2008 the scheme has approved a total of 736,410 training places (Abd Hair, Rahmah & Zulridah, 2010). However, the implementation of HRDF still has several limitations, including that its training focus is only on medium and large sized firms, and that rather than private firms directly participating in formulating and implementing the HRDF policies, instead they only act as consultants (Ritchie, 2002). These problems were not present nevertheless, in its implementation in Penang where The HRDF scheme was particularly successful.

Penang is a state which is situated in the north of peninsular Malaysia. The state’s economic activity depends heavily on a manufacturing sector dominated by MNCs (Fold

& Wangel, 1997). The electronics industry is the key industrial sector in Penang, during the 1990s; the sector contributed about 55 percent of total employment in Penang.

According to Felker (1999) the success of the state in high technology industrial activity was encouraged by strong cooperation between the state government and the industry.

Close relationships among the staff from the government, MNCs and local entrepreneurs helped created effective networking.

Penang has also been one of the states in Malaysia that has actively contributed to innovation activity (Wong & Ping, 2009). Wong and Ping (2009) report that during the


period of 2001 until 2006, about 37 percent of patents applied in Malaysia were from Penang and most of the patents were applied for by MNCs.

Box 3.4:

Complementarities between Skills and Technology: Training Interventions to Boost Firm Productivity in Malaysia

In 1993, Malaysia replaced its scheme for promoting training (double deduction for approved training-related expenses in calculating taxable income), which had been in operation since 1987 but found to be largely ineffective, with a training levy administered by a council of representatives of the private sector and selected government agencies. To start the scheme, the government provided a sizeable grant that matched company levies.

Was the HRDF scheme effective in raising training and firm productivity? To answer this question, Tan (2002) uses firm-level data from 1988, 1994, and 1997, namely, comparing the training decisions and productivity outcomes before and after the intervention. However, this was a period of considerable dynamism for Malaysia, and other things that would affect training and firm productivity changed as well. In particular, the percentage of firms introducing new technology in the panel rose from 53 to 75 percent during the decade, and those using advanced process IT rose from 48 to 83 percent. The education level of the workforce also rose rapidly. The analysis considers these changes in assessing the effectiveness of the intervention.

By reimbursing some of the approved training expenses of participating firms and hence lowering cost of training, the HRDF creates incentives to train on the cost side. In contrast, technological change creates incentives to train and to hire educated workers on the revenue side. The analysis yields the following findings:

First, probity estimates show that training is significantly higher in firms that introduce new technology and that employed a higher proportion of skilled workers.

The estimates also show that large and medium-size firms train more frequently, and that participation in the HRDF scheme is associated with more frequent training.

Second, simulations indicate that training increased more owing to the enactment of HRDF as compared, with the effect of introducing new technology. The exception is for small firms, for which these two effects are roughly similar. The impact of HRDF is most pronounced for medium-size firms, while the impact of technical change is greatest among all small firms.

Third, the productivity impacts of training are sizeable; even more important, there is evidence of strong complementarity between training and technology. The productivity impacts – of 50 and 23 percent, respectively – are twice as high in firms with new technology as compared with firms without new technology, providing

“dramatic confirmation of the key intermediating role that training plays in realizing the productivity potential of new technology.”

Finally, productivity impacts of training are about half as large in small firms as in medium-size and large firms, suggesting an explanation for the frequent observation that training is less common in small firms because they do not make complementary investments in new and potentially more productive technologies. To address this, the


HRDF has introduced group training schemes for small firm, and the national SME agency has stepped up its efforts to provide integrated business, training, and technology development services.

Source: De Ferranti et al. 2003, Closing the Gap in Education and Technology, World Bank, Latin American and Caribbean Studies, Washington, pp126

Penang is one of the most modern and fast developing states in Malaysia. Penang’s initial economic strength can be partially explained by its strategic location as an important port during British colonial rule. However, due to Malaysia’s economic restructuring which took place in the 1970s, the government closed the port and opened a new port in Klang (situated in Selangor, the capital state of Malaysia). In order to maintain its economic development Penang was compelled to change its economic direction by focusing on building an infrastructure base capable of attracting foreign investors to open their businesses there (Ritchie, 2005). These efforts were largely successful and according to Fold and Wangel (1997), Penang was the first state in Malaysia to receive investors from United State of America.

To organize and manage the development in Penang, the state government has created the Penang Development Corporation (PDC). It is responsible for organizing industrial related activity in Penang. Among its functions the PDC manages the Free Trade Zone (FTZ) and industrial parks in the state (Fold & Wangel, 1997). It is a self-funding semi government body that was formed in 1969 under the Penang Development Cooperation Enactment 1971. Its core activities have been land development, services investment and entrepreneur development.

134 Box 3.5:

Governance Structure: The State of Penang

The Malaysian government is run based on a federal framework. This refers to the three-tier government structure, namely, federal, state and local. While one of the strength of federalism is that diffusion of power to the regional or local government is guaranteed under the constitution, a close scrutiny of the Malaysian Constitution reveals that federalism as practiced in Malaysia has an inbuilt federal bias whereby all effective powers rest with the federal government. The more substantive provisions under the “state list” include land, logging, water and mining (Table 1.9). In other words, state governments in Malaysia have limited capacity to carry out development projects which further undermines their independence from the federal government.

Table 1.9

Constitutional divisions of powers between the federal and state government

Federal List State List Concurrent List

External affairs Islamic affair Social welfare Defence and security Land ownership and use Public health Trade, commerce and


Agriculture and forestry Town and country planning Water supply, rivers and


Malay reservation and custom

Rehabilitation of mining land and soil erosion Finance and taxation Local government National parks and wildlife

Education and health Labour and social security

Public works and utilities

The federal government has also established a number of national councils to assist and coordinate programmes. These national councils include the National Economic Council, National Security Council, National Local Government Council, National Land Council and National Finance Council.

Although many state governments are headed by rulers, as a practice, the ruler acts on the advice of the Chief Minister who is the chairman of the State Executive Council. However, Penang, being a former British settlement, is a state without a hereditary state ruler. Therefore, a governor is appointed by the constitutional king as the Head of State.

Penang’s local government comprises of local authorities who are normally referred to as municipalities and district councils. Another level is the district administration, the functional body for the state and federal government at the district level who coordinates development activities through different types of committees.

In the matters of economic and social development, the state government has autonomy to decide and implement all policies and programs that they deem necessary for the development of the state. However, the extent of its autonomy is determined by the federal government through various policies and regulations. The local authorities (municipalities and district councils) have a certain degree of discretionary power on local development issues but they are subordinates to the state government. The municipalities have to submit their local plans to the state government for approval. In the context of Penang, the state government is assisted by the State Secretariat and State Economic Planning Unit as well as other departments in planning and implementing its socio-economic development programmes.