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STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS 
An assessment of the influence of incubators on the 
entrepreneurship environment for innovators in 
Malaysia 
Final Report 
June 2011 
Authors : 
Prof. Stephen Ong, MINDS 
Ms. Sahar Hassani, Multimedia University 
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STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS 
Table of Contents 
Executive Summary 3 
Chapter 1 : Introduction 4 
Chapter 2 : Technology Parks and Incubators in Malaysia 10 
Chapter 3 : Incubators and Innovation Funding in Malaysia 25 
Chapter 4 : Evaluation of the Incubators of Innovation 70 
Conclusion 83 
Appendix – Incubators Survey Questionnaires 84 
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EXECUTIVE SUMMARY 
This study was undertaken to assess the impact of incubators on the commercialisation efforts 
of innovators under incubation in Malaysia. The study involved the detailed background 
research of twenty-seven (27) incubator organizations, and the active participation, 
interviews and responses from twenty-one (21) incubator organizations. These incubator 
organizations are deemed representative of the incubator activities in the national innovation 
eco-system. 
The findings of this study give a firm base of evidence and understanding to support our 
recommendations of forward-looking strategy measures to improve the rate of successful 
commercialisation of innovations and business survivability of innovative start-ups in 
Malaysia through a more focused framework for business and technology incubation 
activities and organisations. 
The strategy measures recommended address three broad areas, principally – 
1. The establishment of a national agency as a focal point and mechanism for the 
coordination of incubation activities and the continued management of the innovation 
eco-system; 
2. The strengthening of human capital in the areas of management, entrepreneurship, 
commercial competence, technical expertise and financial capabilities among players 
in the incubation industry; 
3. The deepening of financial involvement among innovators, successful entrepreneurs 
and investors through global networking; and the broadening of capital marketplaces 
and instruments to facilitate investment flows to readily support innovative activities. 
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CHAPTER 1 : INTRODUCTION 
Overview 
Since the late 1990s, business and technology incubation in Malaysia has been actively 
promoted by government national and state agencies, universities and the private sector. To 
date, the National Incubator Network Association estimates that there are 106 incubators in 
Malaysia, of which 24 incubators provide third generation services that include facilities 
management, business advisory services and acceleration labs to innovators planning to 
commercialise their innovations as tenant companies in the technology incubator parks. 
However, few companies under incubation have achieved global commercial success. 
Research Study Approach 
This study on the role of incubators in Malaysia - “An assessment of the influence of 
incubators on the entrepreneurship environment for innovators in Malaysia” – was 
commissioned by Unit Inovasi Khas (UNIK) to identify improvements to the existing 
incubator models and practices that affect the rate of successful commercialisation of 
innovations in Malaysia. 
Over the course of this eight week study, the research team set to establish answers to the 
following questions : 
1. What are the challenges that incubators and innovators face today? 
2. What are the entrepreneurship characteristics of incubators and innovators? 
3. What alternative models and practices can be observed from existing global 
incubation clusters that can be introduced? 
4. What are the strategy measures that can be recommended to improve the rate of 
successful commercialisation of innovations and business survivability of innovative 
start-ups? 
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Methodology of Study 
The study was conducted through several self-administered questionnaires; selected one-to-one 
structured interviews; and directed discussion at focus group workshop sessions. The 
workshop sessions organised with UNIK, consisted of key government representatives, 
incubator managers, and fund managers of funding programs. The list of organisations from 
the public, university and private sectors that participated actively in the study are listed in 
Exhibit 1. The information on other organisations that are included in this study was through 
available public information sources, previous studies and other survey data. 
Additionally, a survey of Malaysian innovators participating in the annual International, 
Innovation & Technology Exhibition (ITEX 2011) was carried out through a self-administered 
questionnaire and selected one-to-one interviews to provide a basis of 
understanding of the characteristics of innovators, innovation capacity and growth in 
Malaysia. 
Exhibit 1 : Active Participating organizations over the course of this study. 
Organisation Stakeholders Engagement 
Technology Park Malaysia Government, MOF Survey, Interview,Workshop 
Plug & Play Technology Garden Sdn 
Government, MOF Survey, Workshop 
Bhd, KMP 
Kumpulan Modal Perdana Sdn Bhd 
(KMP) 
Government, MOF Workshop 
MAVCAP Government, MOF Workshop 
MTDC Government, Khazanah Workshop 
MDEC Government, MOSTI Survey, Workshop 
SIRIM Government, MOSTI Survey, Interview,Workshop 
MARDI Government, MOA Workshop 
Furniture Industry Technology 
Government, MRRD Workshop 
Centre Sdn Bhd (FITEC) 
MARA Government, MRRD Workshop 
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USAINS Group, Universiti Sains 
Malaysia (USM) 
University Survey , Interview 
Sanggar Sains Sdn Bhd, Universiti 
Sains Malaysia (USM) 
University Survey 
UKM Technology Sdn Bhd, 
Universiti Kebangsaan Malaysia 
(UKM) 
University Workshop 
Innovation and Commercialisation 
Centre, Universiti Teknologi 
Malaysia (UTM) 
University Workshop 
Technology Transfer & 
Commercialization (TTC), 
Universiti Teknologi MARA (UiTM) 
University Workshop 
MAD Incubator Sdn Bhd Private Survey, Interview, Workshop 
ICT Incubator Centre Sdn Bhd Private Survey, Workshop 
Expedient Equity Sdn Bhd Private Workshop 
Teak Capital Sdn Bhd Private Workshop 
Astra Partners Sdn Bhd Private Workshop 
CIMB Private Equity, CIMB Group 
GLC, Khazanah Workshop 
Berhad 
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Summary of Key Findings and Recommendations 
INNOVATION 
ECO-SYSTEM 
CHALLENGES RECOMMENDED STRATEGY 
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MEASURES 
Role of Technology 
Parks and Incubators 
Lack integrated and comprehensive 
services to grow sustainable business 
enterprises 
Establish Global Industry 
Innovation Centres of Excellence 
between multinationals and 
universities in Key Sectors 
Government incubators have limited 
budget and qualified personnel 
Establish a National Centre for 
Incubator Management 
Private incubators established to 
enjoy incentives (MSC status) have 
failed to execute incubation 
programmes 
Incentives for Investment in 
Incubators and Technology Parks 
in Key Sectors. 
Entrepreneurial leadership and 
Management capacity limitations 
Incentives for Business Mentors; 
Retired experts and Returnees 
Limited managerial and financial 
resources to support business start-ups 
at seed and early stages 
Incentives for smart partnership 
with Angel investors 
Role of Innovation 
Grants 
Improve National Innovation 
Funding Strategy 
Agency is required to shape the 
national public sector funding 
strategy and act as a portfolio 
manager to track performance 
Streamlining grant funding vehicles 
to be specialized, either according to 
sector focus or recipient type 
Reduce the number of early stage 
innovation grants to three 
Overcome gaps in the fund 
disbursement process and 
performance. 
Implement a systematic 
performance management 
measurement metrics and 
scorecard across all funds 
Role of Venture 
Capital 
Overcome gaps in industry specific 
investment capacity 
Re-establishing the proven public-private 
partnership model through 
incentives for foreign venture 
capital partnership and corporate 
venturing
STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS 
Improve accountability and 
performance of government funding 
in priority areas 
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Committing public sector 
financing based on clear 
developmental and technology 
transfer assessment criteria 
Increase private sector funding 
exposure 
Mitigate risk and investment 
allocation in high risk venture 
capital funds by savings 
institutions through dividend 
income tax rebates. 
Access to capital markets for high-tech 
start-ups 
Establish linkages into global 
capital markets for high-tech 
start-ups 
Role of Private 
Equity 
Lack of focus for private equity 
investors on developing capacity in 
present or future sunrise industries 
Focus PE funding strategy on 
three key sectors to build 
innovation capacity 
Lack of Malaysians with cross-border 
PE skills in hi-tech industries 
Require experienced Malaysian 
managers to be joint-venture 
partners of the Fund Management 
team 
Orphaned hi-tech projects will turn 
into “Problem children” without 
government support 
Implement management 
turnaround and consolidation 
strategy through the Funds 
Role of Debt 
Financing 
Gaps in the credit evaluation and 
monitoring system 
Implement community based credit 
assessment and monitoring 
Valuation and collateralization of 
intellectual property 
Encourage the establishment of 
community of professional IP and 
Technology Valuers 
Poor asset management and recovery 
of intellectual property of defaulters 
Establish an Intellectual Property 
Technology Exchange with global 
networks 
Role of Angel 
Investors 
Limited managerial and financial 
resources to support business start-ups 
at seed and early stages 
Incentives for smart partnership 
with Angel investors and a central 
data base of angel networks
STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS 
Increase involvement of business 
angel investors 
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Incentives for Angel investors and 
Angel networks. 
Mitigate the high risks of angel 
investment activities 
Support a capital market 
framework for angel investments
STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS 
CHAPTER 2 : TECHNOLOGY PARKS AND INCUBATORS 
Overview 
The rationale for technology incubators is to give business support to techno-entrepreneurs 
who may have the technology business idea but lack the know-how and access to facilities to 
make it a reality. Technology incubators typically offer a nurturing environment for resident 
companies – providing assistance in forming a company, training and mentoring, 
management, business planning, market analysis, technical and legal assistance and 
facilitating access to finance, networking, IPR-related assistance, equipment and 
infrastructure facilities of the host institution and other shared services. Most residents 
graduate out after two to three years. 
Technology Parks also provide more than physical facilities. The most successful provide 
state-of the art research facilities such as labs and virtual information centers connected to a 
host of academic institutions around the world. The Parks also solicit venture funds, host 
incubators, prepare business pans and assess market opportunities for up-and-coming firms. 
Examples include Hsinchu Science Park in Taiwan, ICICI (Genome Valley) in Hyderabad in 
India. 
Spin-offs from Universities and public research institutes often locate themselves in 
technology parks. These consist of researchers at universities and public research institutes 
that leave to set up new high-technology companies. In China over 2000 high technology 
companies have spun off from universities and public R&D centers. 
Malaysia’s program for Incubators and Technology Parks have had mixed results. Many 
provide facilities and some business advice. But most lack the capability to provide 
comprehensive services as provided by other best practice institutions in its class. 
Challenges 
i) Lack integrated and comprehensive services to grow sustainable business 
enterprises 
ii) Government incubators have limited budget and qualified personnel 
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iii) Private incubators established to enjoy incentives (MSC status) have failed to 
execute 
iv) Entrepreneurial leadership and Management capacity limitations 
v) Limited managerial and financial resources to support business start-ups at seed 
and early stages 
Challenge 1: Lack integrated and comprehensive services to grow sustainable business 
enterprises 
Generally, the government and university run incubators offer an office space at subsidized 
rates; general administrative services; outsourced business support services and basic 
training. The staff at these incubators lack commercial experience; have weak relationships to 
industry and supply chains; and limited knowledge of global markets. Furthermore, managers 
at these incubators who have either civil service or academic backgrounds, tend to be 
administrators, rather than entrepreneurial. Yet, they are expected to perform the initial 
screening of incubatee applications for admission to their incubation programmes. As a result 
of this “blind leading the blind” system, the lack of successful entrepreneurial characteristics 
in the incubatee is not recognized early on and eventually leads to business failure in the 
absence of appropriate countervailing measures. 
Over the past few years, another disconcerting trend has emerged where universities have 
formed their own investment holding subsidiary to assume full ownership and control of 
incubatees in commercialization projects after they either failed to license or collaborate with 
industry partners, particularly in global marketing. This approach utilizing university funds 
has been taken in spite of clear evidence showing that very few academics have 
entrepreneurial leadership and the university organizational culture does not support 
entrepreneurial decision-making. 
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Recommended Strategy Measure: Establish Global Industry Innovation Centres of 
Excellence between multinationals and universities in Key Sectors 
The Agency should coordinate a strategic industry-academia research partnering programme 
between multinationals operating in the region with local universities to set up Innovation 
Centres of Excellence funded by each party on a 50:50 basis. The Centres will house both 
industry and university researchers as well as technology facilities. The effort will help 
university management to strengthen networking with industry and increase exposure to 
global supply chain requirements. 
This Global Industry Innovation Centres of Excellence programme should focus on the 
twelve (12) National Key Economic Areas, namely - Oil, Gas and Energy; Palm Oil; 
Financial Services; Tourism; Business Services; Electronics and Electrical; Wholesale and 
Retail; Education; Healthcare; Communications Content and Infrastructure; Agriculture; and 
Greater Kuala Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation). 
The Agency will identify suitable multinational companies operating in Malaysia for this 
partnering programme with local universities. This programme will elevate the focus of R&D 
and commercialization of innovation to a global level, which should drive out a higher 
quality of innovation from local researchers to meet the needs of global businesses. It will 
also force greater effectiveness in the use of university funds in the commercialization of 
their innovations. A successful programme will create spin-out companies with higher quality 
innovations and market relevant business propositions. 
The programme should be incorporated in the list of pioneer status privileges to attract 
follow-on investments by multinationals in R&D and innovation activities to supplement 
their current production/services operations in Malaysia; and promote the setting up of the 
multinational’s global product/service innovation hub. 
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Specific programme incentives can include extension of pioneer status of multinational for 
another ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower 
personal income tax rates (similar to the 15% income tax rate for knowledge workers in 
Iskandar Malaysia) for full-time knowledge workers from the multinational and the local 
university employed in the Centre (on an unconditional, non-discriminatory basis); access to 
employment of foreign knowledge workers; duty free imports of capital equipment and 
consumables for the Centre; exemptions from government service tax and withholding tax on 
technical and consulting services provided to the Centre; and access to the Agency’s human 
capital development innovation grants to subsidise fifty percent (50%) of salaries of PhD or 
technical specialists. 
The Agency will have a strategic matching service to assist Universities to team up with 
Angel investors to co-manage their available funds to invest in spin-outs from the Centre or 
other faculties. This Seed Capital Fund can be on a one to one (1:1) matching basis between 
the Agency and the University-Angel Capital Partnership. Angel investors will drive 
assessment of business viability and survivability of innovation spin-outs; lead commercial 
negotiations and investment decisions; provide mentoring, build management teams and be 
ultimately accountable to stakeholders for investment returns. Where a single university’s 
innovation output lacks critical mass, the Fund can be partnered with several universities or 
research institutes with innovations in the same sector. 
In general, the university should the Agency to own a small minority stake or less than 
twenty-five percent (25%) of the spin-out company as compensation for developing the 
intellectual property (based on a cost recovery valuation formula), allowing the balance of 
equity to be utilized to raise working capital and to incentivize management. 
This strategy measure will refocus university strategic role in incubation of innovation and 
reinforce relevance on its commercialization efforts in the global marketplace through smart 
partnership with multinationals; encourage technology transfer and best practice synergies 
between partners; and strengthen entrepreneurial leadership and decision-making in the 
organization. 
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Challenge 2: Government incubators have limited budget and qualified personnel 
There is too much variation in the management and performance of government incubators. 
Many face similar problems and challenges such as; obsolescence of facilities due to 
budgetary constraints, lack of management capabilities (i.e. unsuitable personnel with limited 
technical and commercial expertise, unable to execute plans, lack business linkages, agency 
conflict of interest issues, co-ordination issues with other government and public funding 
agencies, etc.). Generally, the value proposition and service offering are not valued by 
incubatees. 
The incubator projects also face a host of similar problems; unable to commercialize 
products, lack of demand from venture capitalist, lack of endorsement for products and 
contacts for international markets, etc. Some of the more specialized technological incubators 
require enhanced specific infrastructure e.g. bio-tech/pharmaceutical and ICT. 
Around the world most incubators receive public subsidies. However, there should be 
incentives to make them increase their sources of revenue so that they are self sustainable 
especially on the operating expenditure side. 
Recommended Strategy Measure: Establish a National Centre for Incubator Management 
This national center should be an independent entity to put in place best practice incubator 
management practices across all government run incubators. It should promote a model “one-stop” 
incubator program where a comprehensive set of services are provided as practiced in 
the other world class incubators. 
It should develop extensive international linkages so that it can bring linkages to all 
incubators. Establish alliances with foreign incubators so as to promote technology transfer as 
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well as exchanges of personnel. It should prepare and obtain all approvals of incentives 
necessary to promote Malaysia as a new location for foreign incubators to operate. 
The Centre should also put in place standard operating procedures, performance management 
systems, service offerings, control measures to prevent conflict of interest and appropriate 
targets and associated KPIs to promote better management and success of incubators in 
Malaysia. 
The Centre should have immediate oversight of all new development projects currently 
undertaken by government run incubators with MoF development grants. It should manage 
the transformation of the development project with new stakeholders and incubator 
management organization in line with this strategy measure. Given the present state of public 
incubators, their inexperienced managers are unlikely to execute in accordance to the new 
mind-set. 
The Centre should also create a national data base of experts (technical and commercial) who 
can act as mentors and consultants to incubators and other start-up firms. In order to recruit 
business mentors and coaches, it should design promotional campaigns with incentive 
packages to convince target corporates in key sectors to commit fifteen percent (15%) of their 
management time to innovation-related activities.(a.k.a. the 3M way) 
The successful entrepreneurs and general managers who commit up to fifteen percent (15%) 
of their time mentoring the Agency’s approved incubatee, will enjoy an equivalent 
percentage (up to 15% of their salaries from permanent employment) of personal income tax 
relief, on condition the mentor does not hold any shares or stock options in the incubatee. 
Mentors that hold shares or stock options are already incentivized to ensure the success of the 
incubatee. 
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The Center should create programs to leverage government research institutes and institutions 
of higher learning for technological expertise and scientific equipment. Additionally, it 
should be the “one-stop” agency to promote and coordinate the recruitment of foreign retired 
experts or Malaysian experts resident overseas under the various government programmes, 
i.e. Malaysia My 2nd Home (MM2H) and Talent Corp., and match these experts to the 
incubator programmes. 
It would provide independent yearly evaluation of all programs and activities of incubators 
and the performance of incubatees. It will be the “one-stop” agency to qualify and certify 
private incubators, mentors and angel investors for tax incentives covering both corporate 
double tax relief and personal income tax relief, thus creating the Agensi Inovasi Malaysia or 
“AIM Status” approved incubator. Poor performing private incubators should also be 
removed from the MSC and BioNexus approved status listings which will reduce confusion 
in the eco-system. 
The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create 
incubator seed funds at the public and private incubators on a one-to-one (1:1) matching 
basis. To form the Seed Capital Fund, public incubators can match from their retained profits 
achieved through rentals, while private incubators can source from their own capital and third 
party investors. 
The Agency will have a strategic matching service to assist incubators to team up with Angel 
investors to co-manage their available funds to invest in incubatees in the seed and early 
stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the 
Agency and the Incubator-Angel Capital Partnership. Angel investors will drive assessment 
of business viability and survivability of business start-ups; lead investment decisions; 
provide mentoring; strengthen management teams and be ultimately accountable to 
stakeholders for investment returns. 
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Finally, the Centre will prepare government run incubators for privatization within a three (3) 
year timeframe. In the strategic re-alignment programme, government run incubators and 
technology parks will be re-organised to be cluster and location specific in their scope of 
activities. Privatisation will include a partial sale or complete disposal to existing 
management; private or foreign incubators; or public listed companies. In situations, where 
the technology park or incubation centre is situated on strategic land owned by the 
government or university, the privatization should only involve the incubator management 
company to avoid investors with a property agenda. 
This strategy measure will transform government run incubators through best practice 
development; implement greater oversight and accountability measures; expand the 
availability and access of expert human capital resources; make available financing of seed 
and early stage ventures; and strengthen entrepreneurial leadership and decision-making in 
the organization in preparation for a more market oriented culture as a private entity. 
Challenge 3: Private incubators established to enjoy incentives (MSC status) have failed 
to execute incubation programmes 
The growth of private incubators is associated with MSC development in the country. The 
key benefits to incubator operators include; access to world class telecommunications 
infrastructure, employment of foreign workers, income tax exemption, tendering for MSC 
infrastructure projects. Most of the tenants are early stage growth firms. The private 
incubators provide shared facilities and limited business advisory support. 
Many of the private incubators are also facing similar issues as public incubators. Their 
shortcomings include – a lack of focus and core competences, limited financial partnerships, 
weak linkages with incubators overseas, low leveraging on existing industry players, lack of 
experienced account managers to mentor and manage incubatees, etc. 
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Several private incubators set up by large Malaysian public listed conglomerates to take 
advantage of pioneer status tax exemptions have also failed to collaborate and execute 
successful incubation programmes, but instead pursued narrow internal agendas exclusively. 
Recommended Strategy Measure: Incentives for Investment in Incubators and Technology 
Parks in Key Sectors. 
The private sector should be encouraged not only to invest in incubatees but also in owning 
incubators and technology parks as businesses. There are several incubator revenue models 
where royalty sharing arrangements can be made with incubatee graduates; or where 
incubatees are provided with capital in exchange for equity stakes and the proceeds from 
successful investments can be used to subsidize future capital expenditure of the incubator. 
This initiative should focus on developing private incubators in the twelve (12) National Key 
Economic Areas (NKEA), namely - Oil, Gas and Energy; Palm Oil; Financial Services; 
Tourism; Business Services; Electronics and Electrical; Wholesale and Retail; Education; 
Healthcare; Communications Content and Infrastructure; Agriculture; and Greater Kuala 
Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation). 
Each private incubator cluster will be anchored with a leading public listed company 
providing the incubator facilities developed based on tax incentives; with formal linkages to 
one or more supporting Universities/Research Institutes with technical expertise focused on 
innovations specific to the sector; and managed by the private incubator management staffed 
by managers or retirees with industry experience. 
The Agency will identify suitable Malaysian public listed companies as anchors to the sector 
cluster. This programme will drive the commercialization of innovation to meet the needs of 
the industry, and kick start the growth of industry led corporate innovation activities. 
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Specific programme incentives can include pioneer status of anchor public listed company 
for ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower 
personal income tax rates (similar to the 15% income tax rate for knowledge workers in 
Iskandar Malaysia) for full-time knowledge workers employed in the private incubator 
cluster (on a unconditional, non-discriminatory basis); access to employment of foreign 
knowledge workers; duty free imports of capital equipment and consumables for the private 
incubator cluster; exemptions from government service tax and withholding tax on technical 
and consulting services provided to the private incubator cluster; and access to the Agency’s 
human capital development innovation grants to subsidise fifty percent (50%) of salaries of 
Ph.D or technical specialists. 
The programme should adopt a “carrot and stick” approach to mobilize the Malaysian large 
corporate sector to build up innovative capacity to compete globally. An innovation tax 
equivalent to one percent (1%) of revenues will be imposed on Malaysian public listed 
companies (similar to the MPOB palm oil cess for funding R&D) in all the 12 NKEA sectors 
and Gaming sector. The innovation tax proceeds will be administered by the Agency for 
funding the NIP programmes. (similar to the utilization of UK’s National Lottery proceeds.) 
Any Malaysian public listed company can qualify for tax exemption from the innovation tax 
through utilization for capital and operating expenditures related to the setting up of R&D 
facilities at a technology park or incubation centre; and by way of procurement of product 
innovations or technology licences from the private incubator clusters or local universities. 
To set the pace for the private sector, Government-Linked Corporations where Khazanah 
Nasional has substantial stakes in, will provide the initial ten (10) private incubator clusters in 
the following sectors – Agriculture; Automotive & Transportation; Basic materials; Financial 
Services; Healthcare; Infrastructure & Construction; Media & Communications; Electronics 
(Wafer); Retail; and Utilities (Energy). 
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In the private incubator clusters where Malaysia faces intense global competition and lack 
critical mass in innovations, foreign incubator management companies will be actively 
sought through incentives, joint ventures or acquisition to set up operations locally. The six 
(6) sectors that need special attention are : Oil, Gas and Energy (including Renewable Energy 
and Cleantech); Electronics and Electrical; Healthcare (including Biotech, Pharmaceuticals 
and Medical Devices); Communications Content and Infrastructure; Business Services; and 
Wholesale and Retail. The foreign incubator management companies’ role will include 
strengthening collaboration and facilitating technology transfer between incubatees in their 
home countries with incubatees in Malaysia; as well as leveraging Malaysia’s comparative 
advantages as an outsourcing partner. 
This strategy measure will develop innovation capacity in key economic sectors; mobilize 
domestic industry investment into innovation activities; create a self-funding mechanism for 
innovation programmes; build core competencies of private incubators in focus sectors; 
encourage transfer of foreign incubator expertise to enhance global competitiveness of 
product innovation; and unleash under-utilised domestic expert and entrepreneurial human 
capital. 
Challenge 4: Entrepreneurial leadership and management capacity limitations 
The lack of experienced account managers to mentor and manage incubatees by incubators 
has led inevitably to the low survival rate of start-up businesses. Evidence confirms that the 
overwhelming majority of innovators, especially from academia, lack successful 
entrepreneurial characteristics and leadership potential. Without the support of experienced 
mentors and managers from industry, the chances of survival of any business formed to 
commercialise an innovation are extremely limited. 
The availability of mentors and managers from larger companies is constrained due to time 
committed to developing their businesses; and the absence of a reward system aligned to the 
overall CSR mission. 
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Recommended Strategy Measure: Incentives for Business Mentors; Retired experts and 
Returnees 
In order to recruit business mentors and coaches, the Agency should structure incentive 
packages to convince target corporations in key sectors to commit fifteen percent (15%) of 
their management time to innovation-related activities.(a.k.a. the 3M way) 
The successful entrepreneurs and general managers who commit up to fifteen percent (15%) 
of their time mentoring an the Agency approved incubatee, will enjoy an equivalent 
percentage (up to 15% of their salaries or compensation from permanent employment) of 
personal income tax relief. 
The Malaysian retired expert who mentors an the Agency approved incubatee, will qualify 
for a tax holiday in terms of personal income tax relief for the duration of the contract. 
The retired foreign experts for any key sectors will be eligible to work as a permanent 
resident under an augmented MM2M programme. The foreign experts working in any the 
Agency approved programme will qualify for a tax holiday in terms of personal income tax 
relief for the duration of the contract. 
The Malaysian returnees under government programmes, such as Talent Corp., who mentors 
an the Agency approved incubatee or works in any the Agency approved programme, will 
qualify for a tax holiday in terms of personal income tax relief for the duration of the 
contract. 
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The income tax relief provisions are subject to the condition that the mentor does not hold 
any shares or stock options in the incubatee. Mentors that hold shares or stock options are 
already incentivized to ensure the success of the incubatee. 
However, full-time or contract employees who are eligible for employee stock options in the 
incubatee will not be excluded from qualifying for their tax holidays. This is to enhance the 
attractiveness of the employment conditions at high risk business enterprises. 
This strategy measure will transform corporate culture to align with innovation prerogatives; 
improve corporate social responsibilities to nurturing infant industries; and unleash under-utilised 
domestic experts and incentivise brain gain efforts to recruit the Malaysian diaspora. 
Challenge 5: Limited managerial and financial resources to support business start-ups 
at seed and early stages 
The early efforts of Government venture capital agencies to develop a venture financing eco-system 
for seed and early stage businesses through direct investments and outsourcing to 
investment professionals have met with limited success. The government venture capital 
capacity building programmes (under MTDC and MAVCAP) concluded that financing of 
seed and start-up businesses have resulted in significant investment losses and a high rate of 
business failure. The bitter lessons learnt demonstrate that neither top-down driven direct 
investment in priority sectors, nor outsourcing to smaller private sector teams of qualified 
investment professionals can improve business survival of start-ups at seed and early stages. 
Neither managers of government agencies nor private sector venture capital funds have the 
commercial experience to assist and mentor business start-ups irrespective of the strength of 
their innovation or technology platforms. 
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Furthermore, a new strategy by way of co-investment by government (through Khazanah, 
MTDC) as limited partners of foreign managed venture/seed capital funds (MLSF, 
SpringHill) focused on life sciences have to-date yielded little impact in terms of technology 
transfer, knowledge spill-overs, domestic capacity development, jobs creation or investment 
returns. The problems lie in the wrong choice of competent partners; poor enforcement of 
obligations; lack of critical evaluation and monitoring; limited transparency and 
accountability; and failure to ascend the learning curve. The government’s failure is in stark 
contrast to Singapore’s qualified success in a similar programme (Bio*One Capital) 
implemented at around the same time. 
To date, all financial investors involved have lacked successful entrepreneurial characteristics 
and leadership; as well as experience as entrepreneurs. 
Without combining funding with relevant mentors from industry, the long term survivability 
of these businesses formed to commercialise innovations is destined to fail. 
Recommended Strategy Measure: Incentives for smart partnership with Angel investors 
While it is necessary for the Agency will coordinate and maintain a directory of mentors and 
experts as a resource facilitator, most mentors in current incubator programmes are rewarded 
through low, risk-free basic compensation on terms dictated by government grant schemes, 
such as CIP. 
Such risk-reward compensation structures are unlikely to attract the “best of breed” mentors 
and insufficient to incentivize passionate commitment to grow incubatees. 
Mentors drawn from Angel investors remain the most balanced risk-reward formula for 
successful business incubation support. Since angel investors have a direct financial exposure 
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to the business survival and growth of the start-up, motivation and commitment to business 
success remain high. 
The Agency should structure tax incentive packages for Angel investors to invest some seed 
capital and their time mentoring an the Agency approved incubatee. Their investment will be 
entitled to one hundred percent (100%) deduction as personal income tax relief. 
The Angel investor who mentors an the Agency approved incubatee will qualify for a tax 
holiday in terms of personal income tax relief for the duration of the contract. 
The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create 
incubator seed funds at the public and private incubators on a one-to-one (1:1) matching 
basis. The Fund of Funds programme will seek to develop smart partnerships with Angel 
investors for each of the NKEA sectors. 
The Agency will have a strategic matching service to assist Angel investors to team up with 
incubators or Universities to co-manage funds to invest in incubatees in the seed and early 
stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the 
Agency and the Incubator/University-Angel Capital Partnership. Angel investors will drive 
assessment of business viability and survivability of business start-ups; lead investment 
decisions; provide mentoring; strengthen management teams and be ultimately accountable to 
stakeholders for investment returns. 
This strategy measure will align financing with business expertise; expand the availability 
and access of experienced entrepreneurs; accelerate the rate of success of seed and early stage 
ventures; and strengthen entrepreneurial leadership and decision-making in incubators. 
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CHAPTER 3 : INCUBATORS AND INNOVATION FINANCE 
Overview – Cross-cutting challenges 
Malaysia has evolved in the past 15 years a range of risk capital instruments in the form of 
grants, equity or loans. There are gaps in providing a comprehensive innovation funding 
landscape so that firms can obtain capital through all stages of its life-cycle. If gaps persist, 
firms will fail. 
Access to finance for innovation is an important link in the innovation cycle. Early stage 
financing is a big challenge even for economies with well developed capital markets. The 
perceived risks arising from introduction of unproven products and business models into 
markets makes financiers less comfortable. Risk capital is typically provided by government 
grant institutions, angel investors and venture capital (VC). Late stage funding is provided by 
private equity (PE), debt financing and public equity market. 
Government funding has played an important role in Malaysia’s early-stage technology 
development. However, it has not achieved the desired output. There is considerable scope in 
strengthening the capital market instruments for innovation funding. Malaysia’s risk capital 
base appears to be more weighted on start-up and seed financing. The government has 
attempted to fill the gap in the private capital market for supporting knowledge creation and 
commercialization in the form of grants, soft loan, equity and government-funded incubators. 
Financing from wealthy individuals, early stage private VC, corporate venturing, insurance 
and pension funds has been lacking in early stage funding. International early stage capital 
funds have not witnessed significant presence may be because the demand side, it terms of 
quality deal flows has not been attractive. In the best practice early stage capital market 
model, governments provide 25 to 30 per cent, angel investors 20 to 25 per cent, and venture 
capital about 5 to 10 per cent. 
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The supply from other funding sources for different stages of the innovation lifecycle also is 
conspicuously underdeveloped. PE, project financing, debt financing, loan guarantees and 
public equity markets for innovation-driven firms are less developed. Innovation strategy will 
address the shortcomings in all these innovation funding instruments. 
There should seamless connectivity between the different components in the innovation 
funding ecosystem. This should also be supported by a healthy rate of firm formation with a 
well populated pipeline of potential ‘quality deal flows’ that ensures that the funding 
ecosystem is nourished in a virtuous circle. Risk capital and late stage funding are equally 
important. 
Risk capital instruments are extremely important to fund firms from start-ups through to 
commercialization. Well before they have revenues, entrepreneurs seek funding to conduct 
the R&D needed to demonstrate the value of their idea, build prototypes, conduct trials, 
obtain patents and launch their products or technologies into market-ready products and 
applications. At the stage of pre-revenue and pre-commercialization, risk capital plays a 
crucial role in selecting viable value propositions, nurturing them into commercial engines of 
innovation and economy growth. 
There are several innovation funding challenges to that need to be overcome for the country 
to achieve an innovation economy. These include; 
• Decrease Government role as provider of risk capital 
In Malaysia, the end goal of innovation strategy is to have the private sector assume a 
leadership role in innovation funding. The aim of innovation strategy is to facilitate the 
development of private-sector led risk capital. Currently, there is minimal private funding at 
the early stage. The desired aim of the strategy is the emergence of a comprehensive 
spectrum of risk capital with specific roles by the government in the early stage and with a 
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declining role at the later stages. Hence, role of government as a player, facilitator and 
regulator should have an optimal balance. 
Presently, the bulk of risk capital is sourced mainly from the government. Going forward, the 
strategy focus is to accelerate the growth of private sector capital in innovation funding. 
There is a need for a broader investor base and to incentivize financial institutions and private 
sector corporations to invest. Wherever possible, even at early stage funding, private sector 
involvement should be invited. 
• Eliminate the Structural Issues Hindering Deployment of Risk Capital 
There is inadequate private capital to fund nascent firms. There are structural issues within 
the VC industry that limit the growth of the industry and the extent of risk taking. The 
establishment of angel network to finance seed stage has not happened. The other alternative 
risk capital instruments such as private equity, debt back guarantees, debt financing 
(convertible soft loans) and exit markets have not developed despite government initiatives to 
foster their development. 
• Limited Impact of Innovation Funding 
The government has invested a sizeable amount in early stage grants but this has not resulted 
in commercially viable products/processes. The recipients of these grants have a low 
commercialization rate. It is crucial that all innovation funding programs should identify 
within its mandate priority areas taking into account the leverage from Malaysia’s core 
strengths where it has a sustainable competitive advantage. Currently heavy focus is on ICT 
and biotechnology. There are concerns that the sectors that generate meaningful impact on 
the economy are not well covered by existing early stage innovation funds. 
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• Improve Management of Funds 
Another challenge facing Malaysia is in the quality of innovation funding management. Risk 
capital, be it a VC fund or grant program, should be managed by a team with strong 
capabilities. They should be skilled in financial matters, possess domain expertise, 
capabilities in nurturing skills and experience in bringing early stage innovation-based firms 
all the way through to commercialization success. Most managers have strong financial 
background but lack competencies in other areas. 
There is inadequate linkage support from innovation funding to recipients. The linkage 
support to foster growth is an essential part of early stage financing. The range of linkage 
support starts with idea development (i.e. linking to academics, industry specialists, etc). It 
then leads to capability building (i.e. commercial mentors, etc.), and access to infrastructure 
(i.e. hard-asset tools such as laboratories or IT systems, etc.). Finally the most important 
component is commercialization (i.e. potential customers, prospective investors or ‘exit’ 
partners). These linkages areas need considerable improvement by innovation fund 
institutions. 
• Improve Accountability and Performance 
The funding vehicle should be designed to match the risks and cash flow profiles of the 
recipients in each stage. It is also important to mitigate potential moral hazards where 
innovators in the R&D stage typically have no cash-flow and limited financial resources to 
contribute to the funding. They have also have limited assets on their balance sheets to be 
used as collaterals, making it hard to access private sector funding. Thus, herein lays the 
difficulty for public funding agencies to use matching grant. However, there must be a 
strategy in place for funding vehicles to move from pure grant to matching grant to soft loan 
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to equity financing. Fund recipients should also be gradually required to make funding 
contributions (‘skin in the game’). 
There should sufficient incentives within each fund to be performance driven. There should 
be disincentives when milestones are not met. Independent audits by third parties should be 
used to conduct ex-ante, intermediate and post-project monitoring. 
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INNOVATION GRANTS 
Overview 
Effective funding of grants by the public innovation organizations is one of the key factors 
that will define the success of the national innovation agenda. Individuals, businesses, 
educational and research institutions, and even government agencies all need access to 
adequate early stage funding to help catalyze commercialization. 
Early stage funding is one area where market failure prevails as private sector funding 
inadequately addresses the needs of innovation agents. The government has realized the 
needs and benefits of innovation grants and funding to help plug the funding gaps 
insufficiently addressed by the private sector. It has allocated RM2.45 billion across fourteen 
funding programs along the entire innovation lifecycle, to be utilized over a period of two 
years from 2011 and 2012. 
Challenges: 
i) Improve National Innovation Funding Strategy 
ii) Streamlining grant funding vehicles to be specialized, either according to sector 
focus or recipient type 
iii) Overcome gaps in the fund disbursement process and performance. 
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Challenge 1: Improve national innovation funding strategy 
The national grant funding strategy should have a clear focus on sectors where Malaysia can 
potentially develop sustainable competitive advantage. The limited resources need to be 
prioritized to leverage Malaysia’s core strengths in the past and in the future. The national 
grant funding strategy must also align itself to the overall national economic strategy. 
Recommended Strategy Measure: Agency is required to shape the national public sector 
funding strategy and act as a portfolio manager to track performance 
EPU and MOF should continue their role as the country’s economic and finance master 
planner and for disbursing budgets related to innovation grants. The National Research 
Science Council (NRSC) will identify, monitor and evaluate priority fundamental/scientific 
research areas and expenditure at the national level. MOSTI and MOHE would continue to 
plan and execute the Science and Technology (S&T) agenda of the country. 
In addition, there is a need to for a specialized agency to plan, drive and monitor the 
government’s innovation funding strategy across multiple government ministries and 
agencies. This agency could be Agency Innovasi Malaysia (the Agency). 
There is also the need for continuously improvement of the public innovation funding 
organizations. Internal organizational reform is vital to ensure it is stakeholder driven with 
alignment with national strategic interest. Improving linkages across the funding ecosystem 
(public and private) is equally important. 
Implementation evaluation tools such performance metrics and innovation scorecards need to 
be established for each agency and its funding programs. With appropriate key performance 
indicators (KPIs) in place quarterly/annual tracking of the performance of public innovation 
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funding agencies should be undertaken. It is equally important to assess their impact on 
stakeholders and society at large. Independent third party audit and evaluation across all 
funding programs and projects should be the norm. 
Coherence in strategy design and implementation is a prominent characteristic of all 
successful innovation funding initiatives. In Malaysia there is a need to execute better what is 
planned. The apex agency should have a high-powered strategy monitoring and evaluation 
board (with inter-ministry and inter-industry private sector representation) where all 
evaluation reports are tabled for remedial action. With all these mechanisms in place the 
reform and transformation agenda of innovation funding should flourish. 
Challenge 2: Streamlining grant funding vehicles to be specialized, either according to 
sector focus or recipient type 
As a result of mapping of the existing programs against their industries of focus and stages 
along the innovation lifecycle the following problems were observed: 
i) Existing funds target a few sectors (ICT and Biotech). There is limited funding 
provided to all stages in the innovation lifecycle across all sectors. Those sectors 
that are critically important (i.e. electronics, resource based industries such as 
palm oil, rubber and wood, etc.) lack public funding support at the early stage. 
ii) Multiple agencies are providing funds to a particular sector (such as ICT). These 
agencies are unable to have cohesive accountability or responsibility to generate 
the desired impact on the particular sector. 
iii) There is more than one funding agency targeting the same group of recipients. 
iv) Within certain sectors or sub-sectors, there is a problem of disjointed funding 
effort from one stage to another in the innovation. This is especially prominent 
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between the pre-commercialization and commercialization stages. There is the 
absence of seamless access to funding from one stage to another to foster the 
growth of the firm. 
The transformation of the existing government grant funding institutions cannot be done in a 
piece meal. Simply maintaining the existing funds and eliminating overlaps will not lead to 
any significant improvement in the efficiency and effectiveness of public funding for 
innovation. A comprehensive overhaul is required. 
The real effective option requires the reduction and re-organizing of the funds to overcome 
all the shortcomings in the present grant funding landscape. The limited national resources 
should be better deployed in a cohesive manner so that there is greater impact on a sector and 
stage in the innovation life cycle. 
There are several strategic principles that should be observed; 
i) When creating sector specific fund, the fund managers must have domain 
knowledge to nurture development of early stage firms. 
ii) Targeted funding should be where Malaysia can create present or future 
sustainable competitive advantage. Given the resource constraint, it is unlikely 
that Malaysia will be able to dedicate a fund or a cluster of fund to every sector of 
the economy. Hence the sector selected must be able to exploit the existing 
economic base (i.e. electronics and resource base) and its core strengths to build 
new industries. Alternatively, it could focus on new industries where the prospects 
for future sustainable competitive advantage can be realistically created (i.e. ICT 
and agri-biotechnology). 
iii) The fund should provide comprehensive innovation funding along different stages 
of the innovation lifecycle. 
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iv) In the event the fund is focused on a specific stage in the innovation life cycle (i.e. 
pre-seed stage, etc.) across all sectors, linkages to next stage of funding should be 
effectively be in place. It should enhance the efficiencies in the funding process as 
it is dealing with recipients with similar profiles and needs. 
Recommended Strategy Measure: Reduce the number of early stage innovation grants to 
three 
The number of funds should be reduced to give greater depth and scope in funding. The 
mandates should also be re-scoped to eliminate overlaps in sector focus, target recipient 
groups and fund all stages along the innovation lifecycle. 
It is recommended that the three funds be structured in the following manner; 
i) Bio-Medical Fund 
This is a sector-specialized fund similar to the Biotech Corp’s Biotechnology 
Commercialization Grant Scheme (and its cluster of sub funds). As this is a highly technical 
sector it should continue to remain a technically competent agency like Biotech Corporation. 
The fund should be managed by domain experts who have deep technical knowledge and are 
business savvy. This fund provides cross-stage (pre-seed to commercialization) funding to 
ensure seamless transition from one stage to the next within this sector. Since this is a ‘green-field’ 
sector with higher risks, it attracts low-private sector funding. It should also model after 
the Malaysian Life Sciences Capital Fund (MLSCF) where some of its sub-sectors can be co-managed 
by Malaysian VC/PE together with a globally recognized firm/group of individuals 
in the bio-technology sector. The foreign partners must be linked to global networks that can 
enhance the quality and quantity of deal flows. The sub-funds must be structured as private 
entities; investments are decided in an independent, transparent and consistent manner. 
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ii) ICT and IT Technology Enabling Fund 
The fund would have the same characteristics as the above bio-medical fund accept it will 
focus on the ICT sector and to IT technological enablement across all sectors. It would also 
provide end-to end funding with a sub-funds with a public-private sector funding (seed 
fund/VC/PE) partnership model. ICT as a sector requires a lot of sector-specific expertise. 
There is also no funding program with a dedicated focus on technological IT enablement. 
This fund will cluster all previous funds that have a focus on IT. By having one fund 
dedicated to the ICT sector (rather than multiple funding as present) will ensure 
cohesiveness, accountability and impact for this sector. 
iii) A General Early-Stage Fund 
This is a general end-to-end fund that will focus on all sectors apart from bio-medical and 
ICT. This fund is also a merger of three existing funds namely; MOSTI’s Pre- 
Commercialization Fund, MTDC’s Commercialization of Research and Development Fund, 
and MTDC’s Technology Acquisition Fund. 
It will also adopt all the characteristics of the above parts especially the public-private 
partnership model in its sub-sector funds. One of the sub-sector funds will be to shift the 
scope of the existing Cradle Fund to provide seed funding to all sectors apart from bio-medical 
and ICT. It is important to have a fund specialized for this specific recipient type 
across multiple sectors. The strengths and lessons in managing the existing Cradle Fund 
should be leveraged upon across a broader range of sectors. 
There is a risk of generalization and risk of linkage loss; by focusing on a broad range of 
sectors. The Fund risks losing strategic focus or the necessary domain expertise, and may not 
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be able to add value and nurture recipients into growth firms. In order to mitigate these risks, 
the Fund managers must decide on a few priority sectors/recipients based on a bottom-up and 
market conforming approach. It should invest where there is demand and the potential for 
Malaysia to build its sustainable competitive advantage position. Also prioritization is needed 
to create impact and domain expertise. 
It is envisaged that within the Fund, there will be multiple sector-specific teams, each with a 
dedicated focus on a particular sector or clusters of sectors. This will ensure sector expertise 
and to elevate up to a separate funding program once it has become sufficiently large or 
strategically important to warrant the establishment of a separate fund – dedicated to that 
particular sector or cluster. 
Challenge 3: Gaps in the fund disbursement process and performance 
There is a need to improve the disbursement of funds across the entire landscape. There are 
process gaps and operational challenges. There is inadequate commercial and technical 
expertise among staff, lack of linkages between entrepreneurs and the broader innovation 
system. There is a need for performance tracking to map outcomes to funds. 
There can be considerable improvement in the efficiency and effectiveness in the current 
disbursement of public innovation funds. After mapping of all the application evaluation, 
fund disbursement and post-project processes across all public early funding programs – it is 
evident some funds adopt best practice processes across the entire disbursement process 
while in others there are multiple gaps. 
Some of the glaring shortcomings include; pre-disbursement stage (insufficient due diligence 
conducted on applicants, proposal evaluation is outsourced with funding agency staff having 
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little accountability), disbursement stage (quarterly monitoring of pre-agreed milestones 
undertaken by outsource partners with agency staff with little accountability, limited 
capability building support) and post disbursement stage (lack of strong monitoring, no 
linkages to subsequent sources of funding). Hence, there is a need for consistence 
performance metrics and availability of aggregate data in the public domain on allocation 
decisions and performance of all funds. 
Recommended Strategy Measure: Implement a systematic performance management 
measurement metrics and scorecard across all funds. 
A suitable set of performance metrics to track the performance of each fund can be 
introduced to effectively monitor the input, throughput and output performance of the fund 
disbursement process and the fund managers. The performance metrics will be important as 
a management tool to assess operational efficiencies and compliance to the required 
standards. Furthermore, the performance metrics should ultimately measure the 
developmental impact of the investments on the successful commercialisation of innovations 
and high technology enterprise growth in Malaysia. It should be noted that successful foreign 
direct investments into high technology start-ups that may give a decent Return On 
Investment (ROI) but yields no technology transfer or knowledge jobs through the 
localisation of commercial activities in Malaysia should still rate poorly on output 
performance metrics due to the lack of an economic developmental impact for the nation. 
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VENTURE CAPITAL 
Overview 
Venture Capital (VC) plays an instrumental role in nurturing the next generation technology 
and innovation driven entrepreneurial firms. Apart from providing financing, VC provide 
other invaluable support services such as management support, advice, mentoring and 
linkages to domestic and international partners. They are also important in planning for the 
growth of the firm through exit and other value realization strategies. 
The challenge is in creating a healthy and vibrant early stage VC in Malaysia. In most 
instances, VC does not fund R&D but prefer to support firms that have moved beyond the 
product development stage and those with attractive business models. There is a bias toward 
later-stage ventures and their reluctance to do smaller transactions. 
Venture capital firms in Malaysia are under capitalized. 
The impact of funding innovation-based early stage firms on the US economy has been extra-ordinary. 
As of 2008, eleven percent of private sector jobs are in firms backed by venture 
capital. In comparison, the revenues of these firms contributed 21% to US GDP – evidence of 
the high value created per person employed by VC-backed firms. 
Challenges: 
i) Overcome gaps in industry specific investment capacity 
ii) Improve accountability and performance of government funding in priority areas 
iii) Increase private sector funding exposure 
iv) Access to capital markets for high-tech start-ups 
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Challenge 1: Overcome gaps in industry specific investment capacity 
The government’s efforts spanning twenty (20) years initially through specialized enabling 
agencies MTDC and MAVCAP to build up emerging high-tech industries; venture capital 
investment capacity; and human capital capabilities have neither created critical mass in this 
financial services sub-sector nor developed a portfolio of globally competitive high-technology 
firms. 
The early success met by MTDC in the initiation stage was primarily due to the public-private 
partnership model with large Malaysian public listed corporations’ investor 
participation (Sime Darby, Berjaya) as co-funders and the leveraging of foreign venture 
capital management expertise through a joint venture. This accountable and professional 
management structure strengthened with in-depth business experience, was supplemented by 
attractive deal flows from the growth and maturing of firms in the global supply chain in the 
export oriented sectors, particularly Electrical & Electronics. In the New Economic Strategy 
(NEP) regulated environment then, the venture fund was well positioned to benefit as a 
qualified Bumiputra institutional investor, and selected the best mezzanine pre-IPO deals in 
the market. 
The next generation follow on funding programmes failed to follow the proven public-private 
partnership model but instead promoted a “know-who” rather than a “know-how” investment 
management process. Due to the growing agency, conflict of interest and lack of transparency 
issues by MITI-related parties that resulted in substantial investment write-offs, the 
government attempted to redress the strategy instrument implementation with the subsequent 
creation of MAVCAP directly under the purview of the MoF. Again, the proven public-private 
partnership model was not adopted but instead a top-down directed strategy deployed 
through government administrators in the management of the majority (70%) of direct 
investments, with the balance of funds outsourced to local venture capital fund start-ups on a 
“know-who” basis, evident by the number of outsourcing partners who are related to former 
employees of MAVCAP. The recent performance assessment of this venture capital 
development agenda speaks loudly of the overall implementation failure evident in the high 
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number of investment write-offs and the breeding of a “It’s OK to Fail since it’s OPM 
(Other People’s Money)” mindset in a deviant version of the entrepreneurial “Not Afraid to 
Fail” culture. 
Recommended Strategy Measure : Re-establishing the proven public-private partnership 
model through incentives for foreign venture capital partnership and corporate venturing 
The Agency should implement a strategic initiative to identify the best of breed foreign 
venture capital management firms in three (3) high technology areas, particularly Bio- 
Medical & Pharmaceutical (BMP), ICT and Renewable Energy, Environmental & Clean 
Technology (RECT), from established venture capital eco-systems in USA, Europe and Asia. 
In terms of alignment with the National Key Economic Areas (NKEA), innovation projects 
undertaken in the following eight (8) sectors will receive attention from the venture capital 
funds focused in the three (3) strategic technology areas namely - RECT (Oil, Gas and 
Energy; Palm Oil; Greater Kuala Lumpur/Klang Valley - Infrastructure & Construction; 
Transportation); BMP (Healthcare; Agriculture;); ICT (Electronics and Electrical; 
Communications Content and Infrastructure;) and the developmental agenda will address 
capacity building of venture capital services in the Financial Services sector. 
At the outset, the incentives supporting this capacity building initiative must differentiate 
Malaysia (Kuala Lumpur) as the preferred destination to the current regional investment hubs 
like Singapore, Hong Kong, Dubai, Shanghai and Beijing. The opportunity exists as there is 
enough pull factors for global venture capital firms from USA, Europe and Japan attracted to 
the increasing deal flows of high growth firms in the hi-tech sectors of the emerging markets 
of China, India and Indonesia. There are push factors for global venture capital firms already 
present in the region who are seeking to expand back-office, due diligence and compliance 
support, rising costs of regional operations and deteriorating quality of life in these hubs are 
driving “road/sky warriors” to seek out new “oasis” hubs with a comparable quality of living 
for expatriate communities; and transportation economies through well connected regional 
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flight routes to emerging markets of interest (similar to how Ryanair consolidated London’s 
position in Europe, Air Asia is Kuala Lumpur’s comparative advantage). 
The incentive package will offer pioneer status, corporate tax exemption and double tax relief 
for investment write-downs for foreign venture capital management operations located in 
Malaysia. Tax holidays on personal income tax will also be offered to principals, fund 
managers and general partners resident in Malaysia; as well as a five (5) year tax holiday 
applicable to firm employees on a non-discriminatory basis (ie inclusive of Malaysian 
residents) the aim is to attract/retain talent and knowledge workers (both local and foreign) to 
build up capacity in this financial services sub-sector. 
The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to 
promote the establishment of the venture capital funds with foreign venture capital 
management firms on a one-to-one (1:1) matching basis. Some of the matching funds will 
likely be raised from Malaysian provident, mutual funds and life insurance institutions. As a 
guiding principle to promote this sector, a soft-loan of RM1.0 billion drawn down over five 
(5) years will attract a minimum of three (3) foreign venture funds to be located in Malaysia, 
and result in about 30 to 60 investee companies in the first year. However, an attractive 
proposition to regional venture capital firms will be to allow up to seventy percent (70%) of 
funds to be invested in hi-tech companies residing outside Malaysia but with a proviso that 
the investee company will set up a Malaysian operating (R&D or Production) office (similar 
to conditions of Singapore’s Bio*One Fund) in any of the new incubator clusters. The net 
impact will be at least 10 to 20 homegrown global hi-tech companies backed by domain and 
network rich global venture capitalists; and job creation and knowledge transfers from the 
balance of 20 to 40 representative offices at incubator clusters. 
The Agency can add a second strategic initiative to attract the corporate venturing 
subsidiaries of global multinational companies already with business presence in Malaysia. 
The overall objective of corporate venturing activities has been to expand their innovative 
product portfolios; to enhance existing intellectual property banks; and discover new markets, 
business models or disruptive technologies, in order to maintain their competitive position in 
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global industry. Corporate venturing tends to be exclusive rather than inclusive of the market 
demands of other players in their industry (existing competitors or potential competitive 
threats from new entrant firms); and is therefore focused on leveraging on strengths of 
member firms in their own global supply chain; or acquiring smaller firms and intellectual 
property portfolios seen as potential threats to their bargaining position in the industry, thus 
promoting concentration of market power. 
In order to accelerate corporate venturing, the Agency should offer incentives including a ten 
(10) year pioneer status, corporate tax exemption and double tax relief for the parent 
company to invest in their own corporate ventures subsidiary or related corporate venture 
partner. The parent company will also be able to claim double tax relief on investment write-downs 
arising from the corporate venturing activities. Capital gains arising from investment 
disposals and dividend income received are tax exempted. A five (5) year tax holiday 
applicable to the employees of the corporate ventures arm on an unconditional, non-discriminatory 
basis (ie inclusive of Malaysian residents) aimed to attract/retain talent and 
knowledge workers (both local and foreign) to build up capacity in this financial services 
sub-sector. However, given the extensive global supply chain managed by multinationals 
today, there will be no localisation on the investee companies of corporate ventures operating 
outside Malaysia. 
the Agency will be the central coordinator to pro-actively engage with leading multinationals 
in the 12 NKEA sectors to promote the setting up of their corporate venturing arms in 
Malaysia; and arrange for additional tailor-made incentive packages for their investee 
companies considering re-location to Malaysia, which may cover financing, facilities, capital 
equipment, human resources, university/research institute collaboration, trade issues. 
This strategy measure will re-establish a framework for knowledge transfer of global best 
practices; bridge the gap between local innovations and global industry with domain specific 
investors; and allow private sector to drive informed investment decisions across key 
economic sectors. 
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Challenge 2: Improve accountability and performance of government funding in 
priority areas 
Over the last two decades, the government has directed the funding of projects in priority 
areas through direct allocation to Ministries and indirect financial support through the special 
purpose agencies MTDC, MAVCAP and Khazanah disbursed as “@venture capital”. A sober 
performance assessment of these past and continuing projects will show that none have 
achieved their intended development agenda to build a global champion that will lead a 
sustainable sunrise industry. Investment lessons from top-down strategy initiatives in steel, 
automotive, wafer, utilities, transportation, financial services, agriculture, ICT and biotech 
industries have failed to change the prevailing public sector “Big Brother” mindset. The 
earlier success of private sector driven initiatives in resource based industries like palm oil 
and wood, E&E, hospitality, gaming, education and business services, have not gained wide 
acceptance as a model for future public-private sector partnerships. 
Instead, the government has focused on concentrating market power in a portfolio of 
Government-linked Corporations. Although, it was commendable that through this 
restructuring process, greater management oversight was put in place through CEOs who are 
qualified accountants, the leadership of GLCs have focused on rationalization and cost 
accounting based performance measurement systems to the detrimental neglect of innovation 
and entrepreneurship. The “bean counting” culture has resulted in under investment in 
innovation activities and lower innovation output, even at GLC owned universities and R&D 
centres. When compared with their global peers, the GLCs continue to underperform in 
innovation capacity, and are performing at a level worse off than local research universities. 
At this rate, none of the GLCs can sustain their global competitiveness in the longer run, 
when their peers from emerging markets are accelerating investments in innovation. 
A second unintended effect of continued government preferential support of GLCs 
dominance and increased market power in local industry is the crowding out of private sector 
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investment from competitors who perceive the loss of a level playing field. This will lead to a 
continued deterioration of private sector investments in R&D and innovation activities in the 
absence of government grant funding. Evidence of “crowding out” symptoms for example is 
the growing state of neglect of corporate R&D by the majority of cash-rich players in the 
palm oil industry; leaving it in the hands of a government research institute due to the “cess 
mentality”; and the low innovation output and under-utilisation of internal R&D funds by a 
GLC (Sime Darby). 
Recommended Strategy Measure : Committing public sector financing based on clear 
developmental and technology transfer assessment criteria 
The Agency should form the Innovation Performance Unit (IPU) to implement a performance 
assessment system based on international criteria, to review all on-going top-down projects in 
priority areas, particularly in the automotive, wafer manufacturing, power generation, public 
transportation, agriculture (aquaculture), ICT (e-government), healthcare (biopharmaceutical; 
vaccines; diagnostics) and biotech (herbal; MLSF; SpringHill) ; and the GLCs’ innovation 
capacity. 
The IPU assessment will determine the achievement of intended developmental outcomes 
measuring innovation outputs, knowledge transfers, knowledge workers, technology 
transfers, new jobs creation, export performance, etc. This assessment will form a fair basis 
for decision-making by government on the continuation or otherwise of committed financing; 
consider alternative financing structures including privatization; and a re-negotiation of 
performance contracts (KPIs) and CSR obligations within the public-private relationship 
social contract. 
This strategy measure will allow re-alignment of public funding with developmental mission; 
demonstrate the need for transparency, accountability and performance; create the 
opportunity to re-negotiate the public-private partnership; and re-balance private sector 
contribution to innovation capacity building. 
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Challenge 3: Increase private sector funding exposure 
The intended role of government intervention in the development of the venture capital 
industry was to be a catalyst in the mobilization of investment funds from the private sector, 
particularly long term savings institutions in the financial services sector. While the necessary 
regulations have been in place to allow these financial institutions, ranging from public sector 
provident, pension, mutual and life insurance funds, to invest in venture capital funds, few 
institutional investors are attracted to the present proposition. This is due to a combination of 
the perceived high risk/low return from venture capital activities; and the absence of 
successful venture capital management teams. Given the recent examples set by the 
government run venture funds, such a conclusion by institutional investors is not that far from 
reality. 
Recommended Strategy Measure : Mitigate risk and investment allocation in high risk 
venture capital funds by savings institutions through dividend income tax rebates. 
As the Agency will promote the establishment of venture capital funds with foreign venture 
capital management firms on a one-to-one (1:1) matching basis, it is important that an 
incentive package with risk mitigation measures is in place to mobilize matching funds from 
Malaysian long-term savings institutions. 
The incentive package will include allowing an income tax rebate on dividend income 
payable by the institutional fund equivalent to a hundred percent (100%) of the investment 
committed to the venture capital fund. Perceived investment losses from venture capital 
investment are fully provided for from the annual tax liabilities of the fund. 
Most savings institutions maintain that they are long term investors in the equity market. In 
reality, fund managers often turnover a significant portion of their stock portfolios more than 
once within the reporting year (a practice known as “churning”) to perform window dressing 
of portfolio valuation for reporting purposes. This practice increases market volatility and 
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increases intermediation costs and is not in the public interest. The absence of capital gains 
taxes and transaction stamp duties has reinforced this practice, as well as short-term “hot 
money” flows into the stockmarket. 
The Agency should introduce an innovation tax on such capital market practices in the form 
of an equities capital gains tax. The equities capital gains tax should be imposed on 
institutional funds (but not individual investors) that disposed of any stocks and shares held 
for a period not exceeding one (1) year (equivalent to real property gains tax provisions). 
This will reduce short-term speculative behavior but not completely stamp it out. However, 
as a result these tax receipts can be ironically channeled to longer term investments in 
innovation programmes for the economy. 
This strategy measure seeks to introduce a risk/reward mitigation mechanism to increase 
private sector funding involvement; and to re-align investor mentality for the public good. 
Challenge 4: Access to capital markets for high-tech start-ups 
Over two decades ago, the venture capital community had proposed a plan to the Malaysian 
Securities Commission to establish an open marketplace platform that will provide the 
necessary liquidity for the shares of unlisted private hi-tech companies invested by venture 
capital and angel investors on a market maker system, similar to London’s Unlisted 
Securities Market (USM). The eventual proposal mooted by the SC and KLSE after 
intervention by several opportunistic stockbrokers to monopolise control, succeeded in 
alienating venture capital firms, culminated in an unworkable business model named 
MESDAQ. The failure of MESDAQ (now ACE) as a platform to galvanise financing for 
early stage hi-tech start-ups demonstrates the lack of understanding by government regulators 
and rent-seeking intermediaries of the development financing needs of the hi-tech industry. 
Another significant barrier to access capital for qualified SMEs has been intermediation fees 
(advisory and listing expenses) charged by investment banks and stockbrokers, where in 
many cases the majority of the proceeds have been paid to intermediaries, instead of being 
applied to working capital. 
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In the meantime, Singapore, Hong Kong, Tokyo, Osaka and Shenzhen have all established 
electronic marketplaces for early stage companies as part of the eco-system to access capital, 
Malaysia lags behind again due to implementation. 
While Malaysia should not re-invent the expensive MESDAQ wheel, neither can Malaysia 
ignore re-discovering an important missing piece in the innovation eco-system if a vibrant 
venture capital and angel investor community is to be established over the next five (5) years. 
The recent valuation of Facebook Inc. on alternative private investor electronic marketplace 
highlights the important role of a functioning Over-The-Counter (OTC) market. 
Recommended Strategy Measure : Establish linkages into global capital markets 
for high-tech start-ups 
The Agency has a central role as a coordinator for the setting up of an open electronic 
platform marketplace for (OTC) trading of private company equities of hi-tech start-ups. The 
OTC Market should be organized like London’s PLUS market on a self-regulated basis by 
founding members from the venture capital community, and adopt best practice market 
regulations. 
Given the new globalized economic environment and the proliferation of the internet 
connectivity, the OTC Market can be linked into all major OTC markets in the world. the 
Agency will seek out alliances and network connectivity with other OTC markets in Asia, 
North America and Europe, in order to access deeper pools of investors and maintaining 
relevance in the global hi-tech industry. 
The Agency will perform as a “one-stop agency” on behalf of the SC, for purposes of 
membership of venture capital firms, angel investors, corporate advisory firms and 
stockbrokers. However, the old market-making system has been made obsolescent by self-directed 
internet trading technology. 
The Agency will promote the OTC Market with an incentive package which covers tax 
exemptions from capital gains and dividend income arising from both local and foreign OTC 
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trading. Also, investment losses arising will qualify for double tax relief for funds; or 
equivalent to 100% for personal income tax relief. 
In order to reduce intermediation costs, the Agency will promote an incentive package for 
advisory firms which includes pioneer status and tax exemption for ten (10) years; and a five 
(5) year tax holiday applicable to the employees of the advisory firm on an unconditional, 
non-discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent 
and knowledge workers (both local and foreign) to build up capacity in this financial services 
sub-sector. As an admission condition to the OTC Market, the advisory firm must follow the 
fee schedule charges not exceeding twenty-five percent (25%) of the capital raised for the 
investee company. 
This strategy measure seeks to establish a marketplace for the trading of private company 
equities to enhance liquidity and marketability; access a greater pool of liquidity to support 
hi-tech start-ups; and to promote access via lower cost intermediaries. 
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PRIVATE EQUITY 
Overview 
The government’s early experience in mobilizing private equity was to fund Malaysia’s basic 
infrastructure projects in the 1990s. In its early privatization efforts to develop public goods 
such as highways; transportation systems; healthcare; energy and water utilities, the 
government structured attractive long term (25 to 30 year) concessionaire agreements 
yielding high returns with the selected private sector players, supported by government 
guaranteed debt; and private equity participation from public pension funds; as well as 
liberalized access to capital markets. As a result of this strategy, private equity financing 
from Malaysia’s public pension funds, life insurance funds and foreign PE funds (eg. AIG) 
seeking predictable long term returns, with low risk (mitigated by government guarantees) 
invested in toll roads, subways (LRT), power plants (IPPs) and water treatment plants. 
This effort has been lauded by developmental economists as the model for other developing 
economies that needed a successful public-private partnership scheme to improve basic 
public infrastructure as a platform for higher economic growth. 
Fast forward to the end of the concessionaire agreements beginning 2010, the government 
has been forced to redress the unequal nature of these concessionaire agreements due for 
renewal, which continue to impose a rising social cost on the public, without incremental 
improvements of public goods provision. In fact quite the opposite effect of under-investment 
by the private sector has led to higher costs, waste and inefficiencies in the provision of 
poorly distributed electricity; deteriorating water quality; lower quality of public healthcare 
services and uncoordinated public transportation systems. This privatization strategy with 
little regulatory oversight and a public accountability framework, had encouraged the rent 
seeking behaviour of favoured private sector players without trackrecords, in their 
negotiations with ill-advised government officials to create a maze of privatized pubic goods 
providers that fuels the present inflationary environment with underperforming social 
contract obligations. 
With the exception of toll highways and IPPs, private equity investors have largely been 
disappointed with investment returns on public transportation systems. Private investors are 
thwarted by the ill-conceived awards for public transportation systems projects, particularly 
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the then three (3), now four (4) Kuala Lumpur centric urban mass transit projects and toll 
roads. While Singapore and Hong Kong mass transit systems have all gone public reaping 
handsome returns for investors, and are able to re-invest in the continued expansion of their 
networks without charging unreasonable ticket prices yet remaining profitable, , Malaysia’s 
own systems are still mired in the red, awaiting the fourth MRT system to bail out investors. 
Therefore, over the last five (5) years, private equity investors have sought predictable returns 
from real estate. With the introduction of new capital market regulations, the government 
mobilized private equity funds into real estate asset-backed investment trusts (REIT) to 
support an overheated and flagging property market for domestic economic stimulus reasons. 
However, this strategy has emboldened public pensions and institutional funds to venture into 
REITs and commercial real estate in distressed developed economies seeking arbitrage 
opportunities in capital gains over the last two (2) years. These private equity outflows have 
little developmental impact for an emerging economy like Malaysia, that still needs to focus 
on capacity building and spill-overs for its priority economic sectors from its foreign direct 
investment activities. 
In the present landscape of private equity investors, Khazanah Nasional represents the single 
largest government run private equity investor controlling a portfolio of the largest 
corporations in priority sectors aligned to the NKEA, namely – Agriculture; Automotive & 
Transportation; Basic materials; Financial Services; Healthcare; Infrastructure & 
Construction; Media & Communications; Electronics (Wafer); Retail; and Utilities (Energy). 
Similar to Singapore’s experience with SGIC and Temasek, this dominance by a government 
agency essentially crowds out any other private sector led PE fund. 
The recent attempts by other public institutional and pension funds to create their own private 
equity operations (CIMB, Ekuinas, KWP, LTAT) are bound to fail due to the lack of 
commercial competence and specific industry management experience which are pre-requisites 
for successful private equity investing. The entry of these inexperienced private 
equity investors can be seen as opportunistic, as they seek short-term gains in taking over 
monopolistic GLCs as Khazanah streamlines its portfolio and embarks on asset reshuffling to 
favored public institutions. In short, the current development of the domestic focused private 
equity activity is anti-competitive by maintaining market power; and therefore continues the 
legacy of declining innovation growth, as already evident in the innovation performance of 
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GLCs in key industries, ie telecommunications; energy, oil & gas; pharmaceuticals, 
healthcare services; palm oil oleochemicals; automotive; and electronics. The dominance of 
GLCs in public sector contract awards breeds a less competitive environment where they 
operate, leading to management focus on cost based rationalization to improve corporate 
profitability, instead of innovation led growth, and foreign market expansion from successful 
competition with global peers. 
The raison d'être of PE funds is to seek out control of undervalued market leaders in 
particular targeted sectors who are “cash cows” (that generate substantial cashflows) facing 
declining profit margins, run by poorly performing management unable to respond to the fast 
changing marketplace caused by disruptive innovations and intense competition; or who 
possess under exploited resources that do not contribute to their competitive advantage. The 
new management teams put in place by PE funds are central to the successful turnaround of 
their investee companies and subsequent higher valuations upon exit. 
Challenges: 
i) Lack of focus for private equity investors on developing capacity in present or 
future sunrise industries 
ii) Lack of Malaysians with cross-border PE skills in hi-tech industries 
iii) Orphaned hi-tech projects will turn into “Problem children” without government 
support 
Challenge 1: Lack of focus for private equity investors on developing capacity in 
present or future sunrise industries 
The government’s initial strategy initiative to involve private equity investors, both public 
and foreign, was successful in channeling funds to Malaysia’s developmental capital needs in 
the upgrading of basic infrastructure for a broad base economic growth in the manufacturing 
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and services sectors. The infrastructure sector was characterized by huge upfront capital 
investments, mitigated risks and moderate returns over the long term. This risk-reward profile 
matched the investment objectives of many long term investors, particularly funds with long 
term liabilities such as pension and life insurance funds. 
However, the subsequent strategy support of poorly implemented projects (LRT, Bakun, 
Klang Valley highways, PKFTZ, Iskandar), growing agency problems and loss of focus by 
forays into real estate, have de-railed much of the attractiveness for private equity investors. 
It is timely to re-channel efforts to re-gain the support of domestic and foreign private equity 
funds of Malaysia’s broader development agenda of building innovative capacity. 
Recommended Strategy Measure : Focus PE funding strategy on three key sectors to build 
innovation capacity 
The Agency should implement the strategic initiative to form three (3) private equity funds 
that have industry sector specific focus, namely - 
i) Life Sciences & Bio-Medical Fund 
ii) Electronics (E&E) & ICT Fund 
iii) Renewable Energy & Clean Technology Fund 
In general, these funds will be structured on a tripartite matching basis (1:1:1), with 
government fund; anchor GLCs or public listed corporations; and foreign private equity fund 
manager. The Agency will coordinate its funding in the form of a ten (10) year soft loan to 
establish these funds with competent parties. The private equity funds will be managed by 
experienced “best in class” private equity managers with established sector specific portfolios 
in the developed economies of USA, EU and Japan; or in the emerging markets of BRIC 
(Brazil, Russia, India, China). Due to the deal size of private equity investing, the average 
committed capital of private equity funds is in the region of USD1.0 billion. With a draw 
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down schedule over five (5) years, the Agency will need to arrange a facility of RM600 
million for initial matching of the three funds. 
The overall strategy of this fund will be to acquire (or be the largest shareholder of) 
companies in the developed and emerging markets with on-going product development 
pipelines or innovative platforms; product portfolios; manufacturing/services capabilities; 
national distribution channels; and niche market supply networks. This investment activities 
will augment the innovation capacity of Malaysia’s nascent industry through technology 
transfer; knowledge spill-overs and management exchange. The longer term mission will be 
to sell these investee companies to Malaysian corporations in order to strengthen their global 
competitiveness and market position. 
This strategy measure will re-focus innovation capacity building in the human capital 
intensive industries; strengthen public-private-global partnership in investing; and 
consolidate the nation’s comparative advantages. 
Challenge 2: Lack of Malaysians with cross-border PE skills in hi-tech industries 
There are but few Malaysian professionals with cross-border PE experience and skills in the 
hi-tech industries. The majority of professionals with Khazanah are accountants and 
corporate finance specialists who have little entrepreneurial or industry sector experience. 
The low innovation performance as a result of the GLC transformation programme bears 
testimony to these managerial skill-sets. 
Recommended Strategy Measure : Require experienced Malaysian managers to be joint-venture 
partners of the Fund Management team 
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The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
The role of incubators in entrepreneurship and innovation
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The role of incubators in entrepreneurship and innovation

  • 1. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS An assessment of the influence of incubators on the entrepreneurship environment for innovators in Malaysia Final Report June 2011 Authors : Prof. Stephen Ong, MINDS Ms. Sahar Hassani, Multimedia University Copyright S.Ong and S.Hassani 2011 1 of 84
  • 2. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Table of Contents Executive Summary 3 Chapter 1 : Introduction 4 Chapter 2 : Technology Parks and Incubators in Malaysia 10 Chapter 3 : Incubators and Innovation Funding in Malaysia 25 Chapter 4 : Evaluation of the Incubators of Innovation 70 Conclusion 83 Appendix – Incubators Survey Questionnaires 84 Copyright S.Ong and S.Hassani 2011 2 of 84
  • 3. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS EXECUTIVE SUMMARY This study was undertaken to assess the impact of incubators on the commercialisation efforts of innovators under incubation in Malaysia. The study involved the detailed background research of twenty-seven (27) incubator organizations, and the active participation, interviews and responses from twenty-one (21) incubator organizations. These incubator organizations are deemed representative of the incubator activities in the national innovation eco-system. The findings of this study give a firm base of evidence and understanding to support our recommendations of forward-looking strategy measures to improve the rate of successful commercialisation of innovations and business survivability of innovative start-ups in Malaysia through a more focused framework for business and technology incubation activities and organisations. The strategy measures recommended address three broad areas, principally – 1. The establishment of a national agency as a focal point and mechanism for the coordination of incubation activities and the continued management of the innovation eco-system; 2. The strengthening of human capital in the areas of management, entrepreneurship, commercial competence, technical expertise and financial capabilities among players in the incubation industry; 3. The deepening of financial involvement among innovators, successful entrepreneurs and investors through global networking; and the broadening of capital marketplaces and instruments to facilitate investment flows to readily support innovative activities. Copyright S.Ong and S.Hassani 2011 3 of 84
  • 4. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS CHAPTER 1 : INTRODUCTION Overview Since the late 1990s, business and technology incubation in Malaysia has been actively promoted by government national and state agencies, universities and the private sector. To date, the National Incubator Network Association estimates that there are 106 incubators in Malaysia, of which 24 incubators provide third generation services that include facilities management, business advisory services and acceleration labs to innovators planning to commercialise their innovations as tenant companies in the technology incubator parks. However, few companies under incubation have achieved global commercial success. Research Study Approach This study on the role of incubators in Malaysia - “An assessment of the influence of incubators on the entrepreneurship environment for innovators in Malaysia” – was commissioned by Unit Inovasi Khas (UNIK) to identify improvements to the existing incubator models and practices that affect the rate of successful commercialisation of innovations in Malaysia. Over the course of this eight week study, the research team set to establish answers to the following questions : 1. What are the challenges that incubators and innovators face today? 2. What are the entrepreneurship characteristics of incubators and innovators? 3. What alternative models and practices can be observed from existing global incubation clusters that can be introduced? 4. What are the strategy measures that can be recommended to improve the rate of successful commercialisation of innovations and business survivability of innovative start-ups? Copyright S.Ong and S.Hassani 2011 4 of 84
  • 5. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Methodology of Study The study was conducted through several self-administered questionnaires; selected one-to-one structured interviews; and directed discussion at focus group workshop sessions. The workshop sessions organised with UNIK, consisted of key government representatives, incubator managers, and fund managers of funding programs. The list of organisations from the public, university and private sectors that participated actively in the study are listed in Exhibit 1. The information on other organisations that are included in this study was through available public information sources, previous studies and other survey data. Additionally, a survey of Malaysian innovators participating in the annual International, Innovation & Technology Exhibition (ITEX 2011) was carried out through a self-administered questionnaire and selected one-to-one interviews to provide a basis of understanding of the characteristics of innovators, innovation capacity and growth in Malaysia. Exhibit 1 : Active Participating organizations over the course of this study. Organisation Stakeholders Engagement Technology Park Malaysia Government, MOF Survey, Interview,Workshop Plug & Play Technology Garden Sdn Government, MOF Survey, Workshop Bhd, KMP Kumpulan Modal Perdana Sdn Bhd (KMP) Government, MOF Workshop MAVCAP Government, MOF Workshop MTDC Government, Khazanah Workshop MDEC Government, MOSTI Survey, Workshop SIRIM Government, MOSTI Survey, Interview,Workshop MARDI Government, MOA Workshop Furniture Industry Technology Government, MRRD Workshop Centre Sdn Bhd (FITEC) MARA Government, MRRD Workshop Copyright S.Ong and S.Hassani 2011 5 of 84
  • 6. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS USAINS Group, Universiti Sains Malaysia (USM) University Survey , Interview Sanggar Sains Sdn Bhd, Universiti Sains Malaysia (USM) University Survey UKM Technology Sdn Bhd, Universiti Kebangsaan Malaysia (UKM) University Workshop Innovation and Commercialisation Centre, Universiti Teknologi Malaysia (UTM) University Workshop Technology Transfer & Commercialization (TTC), Universiti Teknologi MARA (UiTM) University Workshop MAD Incubator Sdn Bhd Private Survey, Interview, Workshop ICT Incubator Centre Sdn Bhd Private Survey, Workshop Expedient Equity Sdn Bhd Private Workshop Teak Capital Sdn Bhd Private Workshop Astra Partners Sdn Bhd Private Workshop CIMB Private Equity, CIMB Group GLC, Khazanah Workshop Berhad Copyright S.Ong and S.Hassani 2011 6 of 84
  • 7. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Summary of Key Findings and Recommendations INNOVATION ECO-SYSTEM CHALLENGES RECOMMENDED STRATEGY Copyright S.Ong and S.Hassani 2011 7 of 84 MEASURES Role of Technology Parks and Incubators Lack integrated and comprehensive services to grow sustainable business enterprises Establish Global Industry Innovation Centres of Excellence between multinationals and universities in Key Sectors Government incubators have limited budget and qualified personnel Establish a National Centre for Incubator Management Private incubators established to enjoy incentives (MSC status) have failed to execute incubation programmes Incentives for Investment in Incubators and Technology Parks in Key Sectors. Entrepreneurial leadership and Management capacity limitations Incentives for Business Mentors; Retired experts and Returnees Limited managerial and financial resources to support business start-ups at seed and early stages Incentives for smart partnership with Angel investors Role of Innovation Grants Improve National Innovation Funding Strategy Agency is required to shape the national public sector funding strategy and act as a portfolio manager to track performance Streamlining grant funding vehicles to be specialized, either according to sector focus or recipient type Reduce the number of early stage innovation grants to three Overcome gaps in the fund disbursement process and performance. Implement a systematic performance management measurement metrics and scorecard across all funds Role of Venture Capital Overcome gaps in industry specific investment capacity Re-establishing the proven public-private partnership model through incentives for foreign venture capital partnership and corporate venturing
  • 8. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Improve accountability and performance of government funding in priority areas Copyright S.Ong and S.Hassani 2011 8 of 84 Committing public sector financing based on clear developmental and technology transfer assessment criteria Increase private sector funding exposure Mitigate risk and investment allocation in high risk venture capital funds by savings institutions through dividend income tax rebates. Access to capital markets for high-tech start-ups Establish linkages into global capital markets for high-tech start-ups Role of Private Equity Lack of focus for private equity investors on developing capacity in present or future sunrise industries Focus PE funding strategy on three key sectors to build innovation capacity Lack of Malaysians with cross-border PE skills in hi-tech industries Require experienced Malaysian managers to be joint-venture partners of the Fund Management team Orphaned hi-tech projects will turn into “Problem children” without government support Implement management turnaround and consolidation strategy through the Funds Role of Debt Financing Gaps in the credit evaluation and monitoring system Implement community based credit assessment and monitoring Valuation and collateralization of intellectual property Encourage the establishment of community of professional IP and Technology Valuers Poor asset management and recovery of intellectual property of defaulters Establish an Intellectual Property Technology Exchange with global networks Role of Angel Investors Limited managerial and financial resources to support business start-ups at seed and early stages Incentives for smart partnership with Angel investors and a central data base of angel networks
  • 9. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Increase involvement of business angel investors Copyright S.Ong and S.Hassani 2011 9 of 84 Incentives for Angel investors and Angel networks. Mitigate the high risks of angel investment activities Support a capital market framework for angel investments
  • 10. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS CHAPTER 2 : TECHNOLOGY PARKS AND INCUBATORS Overview The rationale for technology incubators is to give business support to techno-entrepreneurs who may have the technology business idea but lack the know-how and access to facilities to make it a reality. Technology incubators typically offer a nurturing environment for resident companies – providing assistance in forming a company, training and mentoring, management, business planning, market analysis, technical and legal assistance and facilitating access to finance, networking, IPR-related assistance, equipment and infrastructure facilities of the host institution and other shared services. Most residents graduate out after two to three years. Technology Parks also provide more than physical facilities. The most successful provide state-of the art research facilities such as labs and virtual information centers connected to a host of academic institutions around the world. The Parks also solicit venture funds, host incubators, prepare business pans and assess market opportunities for up-and-coming firms. Examples include Hsinchu Science Park in Taiwan, ICICI (Genome Valley) in Hyderabad in India. Spin-offs from Universities and public research institutes often locate themselves in technology parks. These consist of researchers at universities and public research institutes that leave to set up new high-technology companies. In China over 2000 high technology companies have spun off from universities and public R&D centers. Malaysia’s program for Incubators and Technology Parks have had mixed results. Many provide facilities and some business advice. But most lack the capability to provide comprehensive services as provided by other best practice institutions in its class. Challenges i) Lack integrated and comprehensive services to grow sustainable business enterprises ii) Government incubators have limited budget and qualified personnel Copyright S.Ong and S.Hassani 2011 10 of 84
  • 11. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS iii) Private incubators established to enjoy incentives (MSC status) have failed to execute iv) Entrepreneurial leadership and Management capacity limitations v) Limited managerial and financial resources to support business start-ups at seed and early stages Challenge 1: Lack integrated and comprehensive services to grow sustainable business enterprises Generally, the government and university run incubators offer an office space at subsidized rates; general administrative services; outsourced business support services and basic training. The staff at these incubators lack commercial experience; have weak relationships to industry and supply chains; and limited knowledge of global markets. Furthermore, managers at these incubators who have either civil service or academic backgrounds, tend to be administrators, rather than entrepreneurial. Yet, they are expected to perform the initial screening of incubatee applications for admission to their incubation programmes. As a result of this “blind leading the blind” system, the lack of successful entrepreneurial characteristics in the incubatee is not recognized early on and eventually leads to business failure in the absence of appropriate countervailing measures. Over the past few years, another disconcerting trend has emerged where universities have formed their own investment holding subsidiary to assume full ownership and control of incubatees in commercialization projects after they either failed to license or collaborate with industry partners, particularly in global marketing. This approach utilizing university funds has been taken in spite of clear evidence showing that very few academics have entrepreneurial leadership and the university organizational culture does not support entrepreneurial decision-making. Copyright S.Ong and S.Hassani 2011 11 of 84
  • 12. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Recommended Strategy Measure: Establish Global Industry Innovation Centres of Excellence between multinationals and universities in Key Sectors The Agency should coordinate a strategic industry-academia research partnering programme between multinationals operating in the region with local universities to set up Innovation Centres of Excellence funded by each party on a 50:50 basis. The Centres will house both industry and university researchers as well as technology facilities. The effort will help university management to strengthen networking with industry and increase exposure to global supply chain requirements. This Global Industry Innovation Centres of Excellence programme should focus on the twelve (12) National Key Economic Areas, namely - Oil, Gas and Energy; Palm Oil; Financial Services; Tourism; Business Services; Electronics and Electrical; Wholesale and Retail; Education; Healthcare; Communications Content and Infrastructure; Agriculture; and Greater Kuala Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation). The Agency will identify suitable multinational companies operating in Malaysia for this partnering programme with local universities. This programme will elevate the focus of R&D and commercialization of innovation to a global level, which should drive out a higher quality of innovation from local researchers to meet the needs of global businesses. It will also force greater effectiveness in the use of university funds in the commercialization of their innovations. A successful programme will create spin-out companies with higher quality innovations and market relevant business propositions. The programme should be incorporated in the list of pioneer status privileges to attract follow-on investments by multinationals in R&D and innovation activities to supplement their current production/services operations in Malaysia; and promote the setting up of the multinational’s global product/service innovation hub. Copyright S.Ong and S.Hassani 2011 12 of 84
  • 13. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Specific programme incentives can include extension of pioneer status of multinational for another ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower personal income tax rates (similar to the 15% income tax rate for knowledge workers in Iskandar Malaysia) for full-time knowledge workers from the multinational and the local university employed in the Centre (on an unconditional, non-discriminatory basis); access to employment of foreign knowledge workers; duty free imports of capital equipment and consumables for the Centre; exemptions from government service tax and withholding tax on technical and consulting services provided to the Centre; and access to the Agency’s human capital development innovation grants to subsidise fifty percent (50%) of salaries of PhD or technical specialists. The Agency will have a strategic matching service to assist Universities to team up with Angel investors to co-manage their available funds to invest in spin-outs from the Centre or other faculties. This Seed Capital Fund can be on a one to one (1:1) matching basis between the Agency and the University-Angel Capital Partnership. Angel investors will drive assessment of business viability and survivability of innovation spin-outs; lead commercial negotiations and investment decisions; provide mentoring, build management teams and be ultimately accountable to stakeholders for investment returns. Where a single university’s innovation output lacks critical mass, the Fund can be partnered with several universities or research institutes with innovations in the same sector. In general, the university should the Agency to own a small minority stake or less than twenty-five percent (25%) of the spin-out company as compensation for developing the intellectual property (based on a cost recovery valuation formula), allowing the balance of equity to be utilized to raise working capital and to incentivize management. This strategy measure will refocus university strategic role in incubation of innovation and reinforce relevance on its commercialization efforts in the global marketplace through smart partnership with multinationals; encourage technology transfer and best practice synergies between partners; and strengthen entrepreneurial leadership and decision-making in the organization. Copyright S.Ong and S.Hassani 2011 13 of 84
  • 14. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Challenge 2: Government incubators have limited budget and qualified personnel There is too much variation in the management and performance of government incubators. Many face similar problems and challenges such as; obsolescence of facilities due to budgetary constraints, lack of management capabilities (i.e. unsuitable personnel with limited technical and commercial expertise, unable to execute plans, lack business linkages, agency conflict of interest issues, co-ordination issues with other government and public funding agencies, etc.). Generally, the value proposition and service offering are not valued by incubatees. The incubator projects also face a host of similar problems; unable to commercialize products, lack of demand from venture capitalist, lack of endorsement for products and contacts for international markets, etc. Some of the more specialized technological incubators require enhanced specific infrastructure e.g. bio-tech/pharmaceutical and ICT. Around the world most incubators receive public subsidies. However, there should be incentives to make them increase their sources of revenue so that they are self sustainable especially on the operating expenditure side. Recommended Strategy Measure: Establish a National Centre for Incubator Management This national center should be an independent entity to put in place best practice incubator management practices across all government run incubators. It should promote a model “one-stop” incubator program where a comprehensive set of services are provided as practiced in the other world class incubators. It should develop extensive international linkages so that it can bring linkages to all incubators. Establish alliances with foreign incubators so as to promote technology transfer as Copyright S.Ong and S.Hassani 2011 14 of 84
  • 15. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS well as exchanges of personnel. It should prepare and obtain all approvals of incentives necessary to promote Malaysia as a new location for foreign incubators to operate. The Centre should also put in place standard operating procedures, performance management systems, service offerings, control measures to prevent conflict of interest and appropriate targets and associated KPIs to promote better management and success of incubators in Malaysia. The Centre should have immediate oversight of all new development projects currently undertaken by government run incubators with MoF development grants. It should manage the transformation of the development project with new stakeholders and incubator management organization in line with this strategy measure. Given the present state of public incubators, their inexperienced managers are unlikely to execute in accordance to the new mind-set. The Centre should also create a national data base of experts (technical and commercial) who can act as mentors and consultants to incubators and other start-up firms. In order to recruit business mentors and coaches, it should design promotional campaigns with incentive packages to convince target corporates in key sectors to commit fifteen percent (15%) of their management time to innovation-related activities.(a.k.a. the 3M way) The successful entrepreneurs and general managers who commit up to fifteen percent (15%) of their time mentoring the Agency’s approved incubatee, will enjoy an equivalent percentage (up to 15% of their salaries from permanent employment) of personal income tax relief, on condition the mentor does not hold any shares or stock options in the incubatee. Mentors that hold shares or stock options are already incentivized to ensure the success of the incubatee. Copyright S.Ong and S.Hassani 2011 15 of 84
  • 16. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS The Center should create programs to leverage government research institutes and institutions of higher learning for technological expertise and scientific equipment. Additionally, it should be the “one-stop” agency to promote and coordinate the recruitment of foreign retired experts or Malaysian experts resident overseas under the various government programmes, i.e. Malaysia My 2nd Home (MM2H) and Talent Corp., and match these experts to the incubator programmes. It would provide independent yearly evaluation of all programs and activities of incubators and the performance of incubatees. It will be the “one-stop” agency to qualify and certify private incubators, mentors and angel investors for tax incentives covering both corporate double tax relief and personal income tax relief, thus creating the Agensi Inovasi Malaysia or “AIM Status” approved incubator. Poor performing private incubators should also be removed from the MSC and BioNexus approved status listings which will reduce confusion in the eco-system. The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create incubator seed funds at the public and private incubators on a one-to-one (1:1) matching basis. To form the Seed Capital Fund, public incubators can match from their retained profits achieved through rentals, while private incubators can source from their own capital and third party investors. The Agency will have a strategic matching service to assist incubators to team up with Angel investors to co-manage their available funds to invest in incubatees in the seed and early stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the Agency and the Incubator-Angel Capital Partnership. Angel investors will drive assessment of business viability and survivability of business start-ups; lead investment decisions; provide mentoring; strengthen management teams and be ultimately accountable to stakeholders for investment returns. Copyright S.Ong and S.Hassani 2011 16 of 84
  • 17. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Finally, the Centre will prepare government run incubators for privatization within a three (3) year timeframe. In the strategic re-alignment programme, government run incubators and technology parks will be re-organised to be cluster and location specific in their scope of activities. Privatisation will include a partial sale or complete disposal to existing management; private or foreign incubators; or public listed companies. In situations, where the technology park or incubation centre is situated on strategic land owned by the government or university, the privatization should only involve the incubator management company to avoid investors with a property agenda. This strategy measure will transform government run incubators through best practice development; implement greater oversight and accountability measures; expand the availability and access of expert human capital resources; make available financing of seed and early stage ventures; and strengthen entrepreneurial leadership and decision-making in the organization in preparation for a more market oriented culture as a private entity. Challenge 3: Private incubators established to enjoy incentives (MSC status) have failed to execute incubation programmes The growth of private incubators is associated with MSC development in the country. The key benefits to incubator operators include; access to world class telecommunications infrastructure, employment of foreign workers, income tax exemption, tendering for MSC infrastructure projects. Most of the tenants are early stage growth firms. The private incubators provide shared facilities and limited business advisory support. Many of the private incubators are also facing similar issues as public incubators. Their shortcomings include – a lack of focus and core competences, limited financial partnerships, weak linkages with incubators overseas, low leveraging on existing industry players, lack of experienced account managers to mentor and manage incubatees, etc. Copyright S.Ong and S.Hassani 2011 17 of 84
  • 18. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Several private incubators set up by large Malaysian public listed conglomerates to take advantage of pioneer status tax exemptions have also failed to collaborate and execute successful incubation programmes, but instead pursued narrow internal agendas exclusively. Recommended Strategy Measure: Incentives for Investment in Incubators and Technology Parks in Key Sectors. The private sector should be encouraged not only to invest in incubatees but also in owning incubators and technology parks as businesses. There are several incubator revenue models where royalty sharing arrangements can be made with incubatee graduates; or where incubatees are provided with capital in exchange for equity stakes and the proceeds from successful investments can be used to subsidize future capital expenditure of the incubator. This initiative should focus on developing private incubators in the twelve (12) National Key Economic Areas (NKEA), namely - Oil, Gas and Energy; Palm Oil; Financial Services; Tourism; Business Services; Electronics and Electrical; Wholesale and Retail; Education; Healthcare; Communications Content and Infrastructure; Agriculture; and Greater Kuala Lumpur/Klang Valley (i.e. Infrastructure & Construction; and Transportation). Each private incubator cluster will be anchored with a leading public listed company providing the incubator facilities developed based on tax incentives; with formal linkages to one or more supporting Universities/Research Institutes with technical expertise focused on innovations specific to the sector; and managed by the private incubator management staffed by managers or retirees with industry experience. The Agency will identify suitable Malaysian public listed companies as anchors to the sector cluster. This programme will drive the commercialization of innovation to meet the needs of the industry, and kick start the growth of industry led corporate innovation activities. Copyright S.Ong and S.Hassani 2011 18 of 84
  • 19. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Specific programme incentives can include pioneer status of anchor public listed company for ten (10) years on corporate income tax exemption; five (5) year tax holidays or lower personal income tax rates (similar to the 15% income tax rate for knowledge workers in Iskandar Malaysia) for full-time knowledge workers employed in the private incubator cluster (on a unconditional, non-discriminatory basis); access to employment of foreign knowledge workers; duty free imports of capital equipment and consumables for the private incubator cluster; exemptions from government service tax and withholding tax on technical and consulting services provided to the private incubator cluster; and access to the Agency’s human capital development innovation grants to subsidise fifty percent (50%) of salaries of Ph.D or technical specialists. The programme should adopt a “carrot and stick” approach to mobilize the Malaysian large corporate sector to build up innovative capacity to compete globally. An innovation tax equivalent to one percent (1%) of revenues will be imposed on Malaysian public listed companies (similar to the MPOB palm oil cess for funding R&D) in all the 12 NKEA sectors and Gaming sector. The innovation tax proceeds will be administered by the Agency for funding the NIP programmes. (similar to the utilization of UK’s National Lottery proceeds.) Any Malaysian public listed company can qualify for tax exemption from the innovation tax through utilization for capital and operating expenditures related to the setting up of R&D facilities at a technology park or incubation centre; and by way of procurement of product innovations or technology licences from the private incubator clusters or local universities. To set the pace for the private sector, Government-Linked Corporations where Khazanah Nasional has substantial stakes in, will provide the initial ten (10) private incubator clusters in the following sectors – Agriculture; Automotive & Transportation; Basic materials; Financial Services; Healthcare; Infrastructure & Construction; Media & Communications; Electronics (Wafer); Retail; and Utilities (Energy). Copyright S.Ong and S.Hassani 2011 19 of 84
  • 20. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS In the private incubator clusters where Malaysia faces intense global competition and lack critical mass in innovations, foreign incubator management companies will be actively sought through incentives, joint ventures or acquisition to set up operations locally. The six (6) sectors that need special attention are : Oil, Gas and Energy (including Renewable Energy and Cleantech); Electronics and Electrical; Healthcare (including Biotech, Pharmaceuticals and Medical Devices); Communications Content and Infrastructure; Business Services; and Wholesale and Retail. The foreign incubator management companies’ role will include strengthening collaboration and facilitating technology transfer between incubatees in their home countries with incubatees in Malaysia; as well as leveraging Malaysia’s comparative advantages as an outsourcing partner. This strategy measure will develop innovation capacity in key economic sectors; mobilize domestic industry investment into innovation activities; create a self-funding mechanism for innovation programmes; build core competencies of private incubators in focus sectors; encourage transfer of foreign incubator expertise to enhance global competitiveness of product innovation; and unleash under-utilised domestic expert and entrepreneurial human capital. Challenge 4: Entrepreneurial leadership and management capacity limitations The lack of experienced account managers to mentor and manage incubatees by incubators has led inevitably to the low survival rate of start-up businesses. Evidence confirms that the overwhelming majority of innovators, especially from academia, lack successful entrepreneurial characteristics and leadership potential. Without the support of experienced mentors and managers from industry, the chances of survival of any business formed to commercialise an innovation are extremely limited. The availability of mentors and managers from larger companies is constrained due to time committed to developing their businesses; and the absence of a reward system aligned to the overall CSR mission. Copyright S.Ong and S.Hassani 2011 20 of 84
  • 21. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Recommended Strategy Measure: Incentives for Business Mentors; Retired experts and Returnees In order to recruit business mentors and coaches, the Agency should structure incentive packages to convince target corporations in key sectors to commit fifteen percent (15%) of their management time to innovation-related activities.(a.k.a. the 3M way) The successful entrepreneurs and general managers who commit up to fifteen percent (15%) of their time mentoring an the Agency approved incubatee, will enjoy an equivalent percentage (up to 15% of their salaries or compensation from permanent employment) of personal income tax relief. The Malaysian retired expert who mentors an the Agency approved incubatee, will qualify for a tax holiday in terms of personal income tax relief for the duration of the contract. The retired foreign experts for any key sectors will be eligible to work as a permanent resident under an augmented MM2M programme. The foreign experts working in any the Agency approved programme will qualify for a tax holiday in terms of personal income tax relief for the duration of the contract. The Malaysian returnees under government programmes, such as Talent Corp., who mentors an the Agency approved incubatee or works in any the Agency approved programme, will qualify for a tax holiday in terms of personal income tax relief for the duration of the contract. Copyright S.Ong and S.Hassani 2011 21 of 84
  • 22. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS The income tax relief provisions are subject to the condition that the mentor does not hold any shares or stock options in the incubatee. Mentors that hold shares or stock options are already incentivized to ensure the success of the incubatee. However, full-time or contract employees who are eligible for employee stock options in the incubatee will not be excluded from qualifying for their tax holidays. This is to enhance the attractiveness of the employment conditions at high risk business enterprises. This strategy measure will transform corporate culture to align with innovation prerogatives; improve corporate social responsibilities to nurturing infant industries; and unleash under-utilised domestic experts and incentivise brain gain efforts to recruit the Malaysian diaspora. Challenge 5: Limited managerial and financial resources to support business start-ups at seed and early stages The early efforts of Government venture capital agencies to develop a venture financing eco-system for seed and early stage businesses through direct investments and outsourcing to investment professionals have met with limited success. The government venture capital capacity building programmes (under MTDC and MAVCAP) concluded that financing of seed and start-up businesses have resulted in significant investment losses and a high rate of business failure. The bitter lessons learnt demonstrate that neither top-down driven direct investment in priority sectors, nor outsourcing to smaller private sector teams of qualified investment professionals can improve business survival of start-ups at seed and early stages. Neither managers of government agencies nor private sector venture capital funds have the commercial experience to assist and mentor business start-ups irrespective of the strength of their innovation or technology platforms. Copyright S.Ong and S.Hassani 2011 22 of 84
  • 23. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Furthermore, a new strategy by way of co-investment by government (through Khazanah, MTDC) as limited partners of foreign managed venture/seed capital funds (MLSF, SpringHill) focused on life sciences have to-date yielded little impact in terms of technology transfer, knowledge spill-overs, domestic capacity development, jobs creation or investment returns. The problems lie in the wrong choice of competent partners; poor enforcement of obligations; lack of critical evaluation and monitoring; limited transparency and accountability; and failure to ascend the learning curve. The government’s failure is in stark contrast to Singapore’s qualified success in a similar programme (Bio*One Capital) implemented at around the same time. To date, all financial investors involved have lacked successful entrepreneurial characteristics and leadership; as well as experience as entrepreneurs. Without combining funding with relevant mentors from industry, the long term survivability of these businesses formed to commercialise innovations is destined to fail. Recommended Strategy Measure: Incentives for smart partnership with Angel investors While it is necessary for the Agency will coordinate and maintain a directory of mentors and experts as a resource facilitator, most mentors in current incubator programmes are rewarded through low, risk-free basic compensation on terms dictated by government grant schemes, such as CIP. Such risk-reward compensation structures are unlikely to attract the “best of breed” mentors and insufficient to incentivize passionate commitment to grow incubatees. Mentors drawn from Angel investors remain the most balanced risk-reward formula for successful business incubation support. Since angel investors have a direct financial exposure Copyright S.Ong and S.Hassani 2011 23 of 84
  • 24. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS to the business survival and growth of the start-up, motivation and commitment to business success remain high. The Agency should structure tax incentive packages for Angel investors to invest some seed capital and their time mentoring an the Agency approved incubatee. Their investment will be entitled to one hundred percent (100%) deduction as personal income tax relief. The Angel investor who mentors an the Agency approved incubatee will qualify for a tax holiday in terms of personal income tax relief for the duration of the contract. The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to create incubator seed funds at the public and private incubators on a one-to-one (1:1) matching basis. The Fund of Funds programme will seek to develop smart partnerships with Angel investors for each of the NKEA sectors. The Agency will have a strategic matching service to assist Angel investors to team up with incubators or Universities to co-manage funds to invest in incubatees in the seed and early stages. This Seed Capital Fund will be on a one to one (1:1) matching basis between the Agency and the Incubator/University-Angel Capital Partnership. Angel investors will drive assessment of business viability and survivability of business start-ups; lead investment decisions; provide mentoring; strengthen management teams and be ultimately accountable to stakeholders for investment returns. This strategy measure will align financing with business expertise; expand the availability and access of experienced entrepreneurs; accelerate the rate of success of seed and early stage ventures; and strengthen entrepreneurial leadership and decision-making in incubators. Copyright S.Ong and S.Hassani 2011 24 of 84
  • 25. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS CHAPTER 3 : INCUBATORS AND INNOVATION FINANCE Overview – Cross-cutting challenges Malaysia has evolved in the past 15 years a range of risk capital instruments in the form of grants, equity or loans. There are gaps in providing a comprehensive innovation funding landscape so that firms can obtain capital through all stages of its life-cycle. If gaps persist, firms will fail. Access to finance for innovation is an important link in the innovation cycle. Early stage financing is a big challenge even for economies with well developed capital markets. The perceived risks arising from introduction of unproven products and business models into markets makes financiers less comfortable. Risk capital is typically provided by government grant institutions, angel investors and venture capital (VC). Late stage funding is provided by private equity (PE), debt financing and public equity market. Government funding has played an important role in Malaysia’s early-stage technology development. However, it has not achieved the desired output. There is considerable scope in strengthening the capital market instruments for innovation funding. Malaysia’s risk capital base appears to be more weighted on start-up and seed financing. The government has attempted to fill the gap in the private capital market for supporting knowledge creation and commercialization in the form of grants, soft loan, equity and government-funded incubators. Financing from wealthy individuals, early stage private VC, corporate venturing, insurance and pension funds has been lacking in early stage funding. International early stage capital funds have not witnessed significant presence may be because the demand side, it terms of quality deal flows has not been attractive. In the best practice early stage capital market model, governments provide 25 to 30 per cent, angel investors 20 to 25 per cent, and venture capital about 5 to 10 per cent. Copyright S.Ong and S.Hassani 2011 25 of 84
  • 26. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS The supply from other funding sources for different stages of the innovation lifecycle also is conspicuously underdeveloped. PE, project financing, debt financing, loan guarantees and public equity markets for innovation-driven firms are less developed. Innovation strategy will address the shortcomings in all these innovation funding instruments. There should seamless connectivity between the different components in the innovation funding ecosystem. This should also be supported by a healthy rate of firm formation with a well populated pipeline of potential ‘quality deal flows’ that ensures that the funding ecosystem is nourished in a virtuous circle. Risk capital and late stage funding are equally important. Risk capital instruments are extremely important to fund firms from start-ups through to commercialization. Well before they have revenues, entrepreneurs seek funding to conduct the R&D needed to demonstrate the value of their idea, build prototypes, conduct trials, obtain patents and launch their products or technologies into market-ready products and applications. At the stage of pre-revenue and pre-commercialization, risk capital plays a crucial role in selecting viable value propositions, nurturing them into commercial engines of innovation and economy growth. There are several innovation funding challenges to that need to be overcome for the country to achieve an innovation economy. These include; • Decrease Government role as provider of risk capital In Malaysia, the end goal of innovation strategy is to have the private sector assume a leadership role in innovation funding. The aim of innovation strategy is to facilitate the development of private-sector led risk capital. Currently, there is minimal private funding at the early stage. The desired aim of the strategy is the emergence of a comprehensive spectrum of risk capital with specific roles by the government in the early stage and with a Copyright S.Ong and S.Hassani 2011 26 of 84
  • 27. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS declining role at the later stages. Hence, role of government as a player, facilitator and regulator should have an optimal balance. Presently, the bulk of risk capital is sourced mainly from the government. Going forward, the strategy focus is to accelerate the growth of private sector capital in innovation funding. There is a need for a broader investor base and to incentivize financial institutions and private sector corporations to invest. Wherever possible, even at early stage funding, private sector involvement should be invited. • Eliminate the Structural Issues Hindering Deployment of Risk Capital There is inadequate private capital to fund nascent firms. There are structural issues within the VC industry that limit the growth of the industry and the extent of risk taking. The establishment of angel network to finance seed stage has not happened. The other alternative risk capital instruments such as private equity, debt back guarantees, debt financing (convertible soft loans) and exit markets have not developed despite government initiatives to foster their development. • Limited Impact of Innovation Funding The government has invested a sizeable amount in early stage grants but this has not resulted in commercially viable products/processes. The recipients of these grants have a low commercialization rate. It is crucial that all innovation funding programs should identify within its mandate priority areas taking into account the leverage from Malaysia’s core strengths where it has a sustainable competitive advantage. Currently heavy focus is on ICT and biotechnology. There are concerns that the sectors that generate meaningful impact on the economy are not well covered by existing early stage innovation funds. Copyright S.Ong and S.Hassani 2011 27 of 84
  • 28. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS • Improve Management of Funds Another challenge facing Malaysia is in the quality of innovation funding management. Risk capital, be it a VC fund or grant program, should be managed by a team with strong capabilities. They should be skilled in financial matters, possess domain expertise, capabilities in nurturing skills and experience in bringing early stage innovation-based firms all the way through to commercialization success. Most managers have strong financial background but lack competencies in other areas. There is inadequate linkage support from innovation funding to recipients. The linkage support to foster growth is an essential part of early stage financing. The range of linkage support starts with idea development (i.e. linking to academics, industry specialists, etc). It then leads to capability building (i.e. commercial mentors, etc.), and access to infrastructure (i.e. hard-asset tools such as laboratories or IT systems, etc.). Finally the most important component is commercialization (i.e. potential customers, prospective investors or ‘exit’ partners). These linkages areas need considerable improvement by innovation fund institutions. • Improve Accountability and Performance The funding vehicle should be designed to match the risks and cash flow profiles of the recipients in each stage. It is also important to mitigate potential moral hazards where innovators in the R&D stage typically have no cash-flow and limited financial resources to contribute to the funding. They have also have limited assets on their balance sheets to be used as collaterals, making it hard to access private sector funding. Thus, herein lays the difficulty for public funding agencies to use matching grant. However, there must be a strategy in place for funding vehicles to move from pure grant to matching grant to soft loan Copyright S.Ong and S.Hassani 2011 28 of 84
  • 29. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS to equity financing. Fund recipients should also be gradually required to make funding contributions (‘skin in the game’). There should sufficient incentives within each fund to be performance driven. There should be disincentives when milestones are not met. Independent audits by third parties should be used to conduct ex-ante, intermediate and post-project monitoring. Copyright S.Ong and S.Hassani 2011 29 of 84
  • 30. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS INNOVATION GRANTS Overview Effective funding of grants by the public innovation organizations is one of the key factors that will define the success of the national innovation agenda. Individuals, businesses, educational and research institutions, and even government agencies all need access to adequate early stage funding to help catalyze commercialization. Early stage funding is one area where market failure prevails as private sector funding inadequately addresses the needs of innovation agents. The government has realized the needs and benefits of innovation grants and funding to help plug the funding gaps insufficiently addressed by the private sector. It has allocated RM2.45 billion across fourteen funding programs along the entire innovation lifecycle, to be utilized over a period of two years from 2011 and 2012. Challenges: i) Improve National Innovation Funding Strategy ii) Streamlining grant funding vehicles to be specialized, either according to sector focus or recipient type iii) Overcome gaps in the fund disbursement process and performance. Copyright S.Ong and S.Hassani 2011 30 of 84
  • 31. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Challenge 1: Improve national innovation funding strategy The national grant funding strategy should have a clear focus on sectors where Malaysia can potentially develop sustainable competitive advantage. The limited resources need to be prioritized to leverage Malaysia’s core strengths in the past and in the future. The national grant funding strategy must also align itself to the overall national economic strategy. Recommended Strategy Measure: Agency is required to shape the national public sector funding strategy and act as a portfolio manager to track performance EPU and MOF should continue their role as the country’s economic and finance master planner and for disbursing budgets related to innovation grants. The National Research Science Council (NRSC) will identify, monitor and evaluate priority fundamental/scientific research areas and expenditure at the national level. MOSTI and MOHE would continue to plan and execute the Science and Technology (S&T) agenda of the country. In addition, there is a need to for a specialized agency to plan, drive and monitor the government’s innovation funding strategy across multiple government ministries and agencies. This agency could be Agency Innovasi Malaysia (the Agency). There is also the need for continuously improvement of the public innovation funding organizations. Internal organizational reform is vital to ensure it is stakeholder driven with alignment with national strategic interest. Improving linkages across the funding ecosystem (public and private) is equally important. Implementation evaluation tools such performance metrics and innovation scorecards need to be established for each agency and its funding programs. With appropriate key performance indicators (KPIs) in place quarterly/annual tracking of the performance of public innovation Copyright S.Ong and S.Hassani 2011 31 of 84
  • 32. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS funding agencies should be undertaken. It is equally important to assess their impact on stakeholders and society at large. Independent third party audit and evaluation across all funding programs and projects should be the norm. Coherence in strategy design and implementation is a prominent characteristic of all successful innovation funding initiatives. In Malaysia there is a need to execute better what is planned. The apex agency should have a high-powered strategy monitoring and evaluation board (with inter-ministry and inter-industry private sector representation) where all evaluation reports are tabled for remedial action. With all these mechanisms in place the reform and transformation agenda of innovation funding should flourish. Challenge 2: Streamlining grant funding vehicles to be specialized, either according to sector focus or recipient type As a result of mapping of the existing programs against their industries of focus and stages along the innovation lifecycle the following problems were observed: i) Existing funds target a few sectors (ICT and Biotech). There is limited funding provided to all stages in the innovation lifecycle across all sectors. Those sectors that are critically important (i.e. electronics, resource based industries such as palm oil, rubber and wood, etc.) lack public funding support at the early stage. ii) Multiple agencies are providing funds to a particular sector (such as ICT). These agencies are unable to have cohesive accountability or responsibility to generate the desired impact on the particular sector. iii) There is more than one funding agency targeting the same group of recipients. iv) Within certain sectors or sub-sectors, there is a problem of disjointed funding effort from one stage to another in the innovation. This is especially prominent Copyright S.Ong and S.Hassani 2011 32 of 84
  • 33. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS between the pre-commercialization and commercialization stages. There is the absence of seamless access to funding from one stage to another to foster the growth of the firm. The transformation of the existing government grant funding institutions cannot be done in a piece meal. Simply maintaining the existing funds and eliminating overlaps will not lead to any significant improvement in the efficiency and effectiveness of public funding for innovation. A comprehensive overhaul is required. The real effective option requires the reduction and re-organizing of the funds to overcome all the shortcomings in the present grant funding landscape. The limited national resources should be better deployed in a cohesive manner so that there is greater impact on a sector and stage in the innovation life cycle. There are several strategic principles that should be observed; i) When creating sector specific fund, the fund managers must have domain knowledge to nurture development of early stage firms. ii) Targeted funding should be where Malaysia can create present or future sustainable competitive advantage. Given the resource constraint, it is unlikely that Malaysia will be able to dedicate a fund or a cluster of fund to every sector of the economy. Hence the sector selected must be able to exploit the existing economic base (i.e. electronics and resource base) and its core strengths to build new industries. Alternatively, it could focus on new industries where the prospects for future sustainable competitive advantage can be realistically created (i.e. ICT and agri-biotechnology). iii) The fund should provide comprehensive innovation funding along different stages of the innovation lifecycle. Copyright S.Ong and S.Hassani 2011 33 of 84
  • 34. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS iv) In the event the fund is focused on a specific stage in the innovation life cycle (i.e. pre-seed stage, etc.) across all sectors, linkages to next stage of funding should be effectively be in place. It should enhance the efficiencies in the funding process as it is dealing with recipients with similar profiles and needs. Recommended Strategy Measure: Reduce the number of early stage innovation grants to three The number of funds should be reduced to give greater depth and scope in funding. The mandates should also be re-scoped to eliminate overlaps in sector focus, target recipient groups and fund all stages along the innovation lifecycle. It is recommended that the three funds be structured in the following manner; i) Bio-Medical Fund This is a sector-specialized fund similar to the Biotech Corp’s Biotechnology Commercialization Grant Scheme (and its cluster of sub funds). As this is a highly technical sector it should continue to remain a technically competent agency like Biotech Corporation. The fund should be managed by domain experts who have deep technical knowledge and are business savvy. This fund provides cross-stage (pre-seed to commercialization) funding to ensure seamless transition from one stage to the next within this sector. Since this is a ‘green-field’ sector with higher risks, it attracts low-private sector funding. It should also model after the Malaysian Life Sciences Capital Fund (MLSCF) where some of its sub-sectors can be co-managed by Malaysian VC/PE together with a globally recognized firm/group of individuals in the bio-technology sector. The foreign partners must be linked to global networks that can enhance the quality and quantity of deal flows. The sub-funds must be structured as private entities; investments are decided in an independent, transparent and consistent manner. Copyright S.Ong and S.Hassani 2011 34 of 84
  • 35. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS ii) ICT and IT Technology Enabling Fund The fund would have the same characteristics as the above bio-medical fund accept it will focus on the ICT sector and to IT technological enablement across all sectors. It would also provide end-to end funding with a sub-funds with a public-private sector funding (seed fund/VC/PE) partnership model. ICT as a sector requires a lot of sector-specific expertise. There is also no funding program with a dedicated focus on technological IT enablement. This fund will cluster all previous funds that have a focus on IT. By having one fund dedicated to the ICT sector (rather than multiple funding as present) will ensure cohesiveness, accountability and impact for this sector. iii) A General Early-Stage Fund This is a general end-to-end fund that will focus on all sectors apart from bio-medical and ICT. This fund is also a merger of three existing funds namely; MOSTI’s Pre- Commercialization Fund, MTDC’s Commercialization of Research and Development Fund, and MTDC’s Technology Acquisition Fund. It will also adopt all the characteristics of the above parts especially the public-private partnership model in its sub-sector funds. One of the sub-sector funds will be to shift the scope of the existing Cradle Fund to provide seed funding to all sectors apart from bio-medical and ICT. It is important to have a fund specialized for this specific recipient type across multiple sectors. The strengths and lessons in managing the existing Cradle Fund should be leveraged upon across a broader range of sectors. There is a risk of generalization and risk of linkage loss; by focusing on a broad range of sectors. The Fund risks losing strategic focus or the necessary domain expertise, and may not Copyright S.Ong and S.Hassani 2011 35 of 84
  • 36. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS be able to add value and nurture recipients into growth firms. In order to mitigate these risks, the Fund managers must decide on a few priority sectors/recipients based on a bottom-up and market conforming approach. It should invest where there is demand and the potential for Malaysia to build its sustainable competitive advantage position. Also prioritization is needed to create impact and domain expertise. It is envisaged that within the Fund, there will be multiple sector-specific teams, each with a dedicated focus on a particular sector or clusters of sectors. This will ensure sector expertise and to elevate up to a separate funding program once it has become sufficiently large or strategically important to warrant the establishment of a separate fund – dedicated to that particular sector or cluster. Challenge 3: Gaps in the fund disbursement process and performance There is a need to improve the disbursement of funds across the entire landscape. There are process gaps and operational challenges. There is inadequate commercial and technical expertise among staff, lack of linkages between entrepreneurs and the broader innovation system. There is a need for performance tracking to map outcomes to funds. There can be considerable improvement in the efficiency and effectiveness in the current disbursement of public innovation funds. After mapping of all the application evaluation, fund disbursement and post-project processes across all public early funding programs – it is evident some funds adopt best practice processes across the entire disbursement process while in others there are multiple gaps. Some of the glaring shortcomings include; pre-disbursement stage (insufficient due diligence conducted on applicants, proposal evaluation is outsourced with funding agency staff having Copyright S.Ong and S.Hassani 2011 36 of 84
  • 37. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS little accountability), disbursement stage (quarterly monitoring of pre-agreed milestones undertaken by outsource partners with agency staff with little accountability, limited capability building support) and post disbursement stage (lack of strong monitoring, no linkages to subsequent sources of funding). Hence, there is a need for consistence performance metrics and availability of aggregate data in the public domain on allocation decisions and performance of all funds. Recommended Strategy Measure: Implement a systematic performance management measurement metrics and scorecard across all funds. A suitable set of performance metrics to track the performance of each fund can be introduced to effectively monitor the input, throughput and output performance of the fund disbursement process and the fund managers. The performance metrics will be important as a management tool to assess operational efficiencies and compliance to the required standards. Furthermore, the performance metrics should ultimately measure the developmental impact of the investments on the successful commercialisation of innovations and high technology enterprise growth in Malaysia. It should be noted that successful foreign direct investments into high technology start-ups that may give a decent Return On Investment (ROI) but yields no technology transfer or knowledge jobs through the localisation of commercial activities in Malaysia should still rate poorly on output performance metrics due to the lack of an economic developmental impact for the nation. Copyright S.Ong and S.Hassani 2011 37 of 84
  • 38. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS VENTURE CAPITAL Overview Venture Capital (VC) plays an instrumental role in nurturing the next generation technology and innovation driven entrepreneurial firms. Apart from providing financing, VC provide other invaluable support services such as management support, advice, mentoring and linkages to domestic and international partners. They are also important in planning for the growth of the firm through exit and other value realization strategies. The challenge is in creating a healthy and vibrant early stage VC in Malaysia. In most instances, VC does not fund R&D but prefer to support firms that have moved beyond the product development stage and those with attractive business models. There is a bias toward later-stage ventures and their reluctance to do smaller transactions. Venture capital firms in Malaysia are under capitalized. The impact of funding innovation-based early stage firms on the US economy has been extra-ordinary. As of 2008, eleven percent of private sector jobs are in firms backed by venture capital. In comparison, the revenues of these firms contributed 21% to US GDP – evidence of the high value created per person employed by VC-backed firms. Challenges: i) Overcome gaps in industry specific investment capacity ii) Improve accountability and performance of government funding in priority areas iii) Increase private sector funding exposure iv) Access to capital markets for high-tech start-ups Copyright S.Ong and S.Hassani 2011 38 of 84
  • 39. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Challenge 1: Overcome gaps in industry specific investment capacity The government’s efforts spanning twenty (20) years initially through specialized enabling agencies MTDC and MAVCAP to build up emerging high-tech industries; venture capital investment capacity; and human capital capabilities have neither created critical mass in this financial services sub-sector nor developed a portfolio of globally competitive high-technology firms. The early success met by MTDC in the initiation stage was primarily due to the public-private partnership model with large Malaysian public listed corporations’ investor participation (Sime Darby, Berjaya) as co-funders and the leveraging of foreign venture capital management expertise through a joint venture. This accountable and professional management structure strengthened with in-depth business experience, was supplemented by attractive deal flows from the growth and maturing of firms in the global supply chain in the export oriented sectors, particularly Electrical & Electronics. In the New Economic Strategy (NEP) regulated environment then, the venture fund was well positioned to benefit as a qualified Bumiputra institutional investor, and selected the best mezzanine pre-IPO deals in the market. The next generation follow on funding programmes failed to follow the proven public-private partnership model but instead promoted a “know-who” rather than a “know-how” investment management process. Due to the growing agency, conflict of interest and lack of transparency issues by MITI-related parties that resulted in substantial investment write-offs, the government attempted to redress the strategy instrument implementation with the subsequent creation of MAVCAP directly under the purview of the MoF. Again, the proven public-private partnership model was not adopted but instead a top-down directed strategy deployed through government administrators in the management of the majority (70%) of direct investments, with the balance of funds outsourced to local venture capital fund start-ups on a “know-who” basis, evident by the number of outsourcing partners who are related to former employees of MAVCAP. The recent performance assessment of this venture capital development agenda speaks loudly of the overall implementation failure evident in the high Copyright S.Ong and S.Hassani 2011 39 of 84
  • 40. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS number of investment write-offs and the breeding of a “It’s OK to Fail since it’s OPM (Other People’s Money)” mindset in a deviant version of the entrepreneurial “Not Afraid to Fail” culture. Recommended Strategy Measure : Re-establishing the proven public-private partnership model through incentives for foreign venture capital partnership and corporate venturing The Agency should implement a strategic initiative to identify the best of breed foreign venture capital management firms in three (3) high technology areas, particularly Bio- Medical & Pharmaceutical (BMP), ICT and Renewable Energy, Environmental & Clean Technology (RECT), from established venture capital eco-systems in USA, Europe and Asia. In terms of alignment with the National Key Economic Areas (NKEA), innovation projects undertaken in the following eight (8) sectors will receive attention from the venture capital funds focused in the three (3) strategic technology areas namely - RECT (Oil, Gas and Energy; Palm Oil; Greater Kuala Lumpur/Klang Valley - Infrastructure & Construction; Transportation); BMP (Healthcare; Agriculture;); ICT (Electronics and Electrical; Communications Content and Infrastructure;) and the developmental agenda will address capacity building of venture capital services in the Financial Services sector. At the outset, the incentives supporting this capacity building initiative must differentiate Malaysia (Kuala Lumpur) as the preferred destination to the current regional investment hubs like Singapore, Hong Kong, Dubai, Shanghai and Beijing. The opportunity exists as there is enough pull factors for global venture capital firms from USA, Europe and Japan attracted to the increasing deal flows of high growth firms in the hi-tech sectors of the emerging markets of China, India and Indonesia. There are push factors for global venture capital firms already present in the region who are seeking to expand back-office, due diligence and compliance support, rising costs of regional operations and deteriorating quality of life in these hubs are driving “road/sky warriors” to seek out new “oasis” hubs with a comparable quality of living for expatriate communities; and transportation economies through well connected regional Copyright S.Ong and S.Hassani 2011 40 of 84
  • 41. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS flight routes to emerging markets of interest (similar to how Ryanair consolidated London’s position in Europe, Air Asia is Kuala Lumpur’s comparative advantage). The incentive package will offer pioneer status, corporate tax exemption and double tax relief for investment write-downs for foreign venture capital management operations located in Malaysia. Tax holidays on personal income tax will also be offered to principals, fund managers and general partners resident in Malaysia; as well as a five (5) year tax holiday applicable to firm employees on a non-discriminatory basis (ie inclusive of Malaysian residents) the aim is to attract/retain talent and knowledge workers (both local and foreign) to build up capacity in this financial services sub-sector. The Agency will manage a ten (10) year soft-loan based Fund of Funds programme to promote the establishment of the venture capital funds with foreign venture capital management firms on a one-to-one (1:1) matching basis. Some of the matching funds will likely be raised from Malaysian provident, mutual funds and life insurance institutions. As a guiding principle to promote this sector, a soft-loan of RM1.0 billion drawn down over five (5) years will attract a minimum of three (3) foreign venture funds to be located in Malaysia, and result in about 30 to 60 investee companies in the first year. However, an attractive proposition to regional venture capital firms will be to allow up to seventy percent (70%) of funds to be invested in hi-tech companies residing outside Malaysia but with a proviso that the investee company will set up a Malaysian operating (R&D or Production) office (similar to conditions of Singapore’s Bio*One Fund) in any of the new incubator clusters. The net impact will be at least 10 to 20 homegrown global hi-tech companies backed by domain and network rich global venture capitalists; and job creation and knowledge transfers from the balance of 20 to 40 representative offices at incubator clusters. The Agency can add a second strategic initiative to attract the corporate venturing subsidiaries of global multinational companies already with business presence in Malaysia. The overall objective of corporate venturing activities has been to expand their innovative product portfolios; to enhance existing intellectual property banks; and discover new markets, business models or disruptive technologies, in order to maintain their competitive position in Copyright S.Ong and S.Hassani 2011 41 of 84
  • 42. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS global industry. Corporate venturing tends to be exclusive rather than inclusive of the market demands of other players in their industry (existing competitors or potential competitive threats from new entrant firms); and is therefore focused on leveraging on strengths of member firms in their own global supply chain; or acquiring smaller firms and intellectual property portfolios seen as potential threats to their bargaining position in the industry, thus promoting concentration of market power. In order to accelerate corporate venturing, the Agency should offer incentives including a ten (10) year pioneer status, corporate tax exemption and double tax relief for the parent company to invest in their own corporate ventures subsidiary or related corporate venture partner. The parent company will also be able to claim double tax relief on investment write-downs arising from the corporate venturing activities. Capital gains arising from investment disposals and dividend income received are tax exempted. A five (5) year tax holiday applicable to the employees of the corporate ventures arm on an unconditional, non-discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent and knowledge workers (both local and foreign) to build up capacity in this financial services sub-sector. However, given the extensive global supply chain managed by multinationals today, there will be no localisation on the investee companies of corporate ventures operating outside Malaysia. the Agency will be the central coordinator to pro-actively engage with leading multinationals in the 12 NKEA sectors to promote the setting up of their corporate venturing arms in Malaysia; and arrange for additional tailor-made incentive packages for their investee companies considering re-location to Malaysia, which may cover financing, facilities, capital equipment, human resources, university/research institute collaboration, trade issues. This strategy measure will re-establish a framework for knowledge transfer of global best practices; bridge the gap between local innovations and global industry with domain specific investors; and allow private sector to drive informed investment decisions across key economic sectors. Copyright S.Ong and S.Hassani 2011 42 of 84
  • 43. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Challenge 2: Improve accountability and performance of government funding in priority areas Over the last two decades, the government has directed the funding of projects in priority areas through direct allocation to Ministries and indirect financial support through the special purpose agencies MTDC, MAVCAP and Khazanah disbursed as “@venture capital”. A sober performance assessment of these past and continuing projects will show that none have achieved their intended development agenda to build a global champion that will lead a sustainable sunrise industry. Investment lessons from top-down strategy initiatives in steel, automotive, wafer, utilities, transportation, financial services, agriculture, ICT and biotech industries have failed to change the prevailing public sector “Big Brother” mindset. The earlier success of private sector driven initiatives in resource based industries like palm oil and wood, E&E, hospitality, gaming, education and business services, have not gained wide acceptance as a model for future public-private sector partnerships. Instead, the government has focused on concentrating market power in a portfolio of Government-linked Corporations. Although, it was commendable that through this restructuring process, greater management oversight was put in place through CEOs who are qualified accountants, the leadership of GLCs have focused on rationalization and cost accounting based performance measurement systems to the detrimental neglect of innovation and entrepreneurship. The “bean counting” culture has resulted in under investment in innovation activities and lower innovation output, even at GLC owned universities and R&D centres. When compared with their global peers, the GLCs continue to underperform in innovation capacity, and are performing at a level worse off than local research universities. At this rate, none of the GLCs can sustain their global competitiveness in the longer run, when their peers from emerging markets are accelerating investments in innovation. A second unintended effect of continued government preferential support of GLCs dominance and increased market power in local industry is the crowding out of private sector Copyright S.Ong and S.Hassani 2011 43 of 84
  • 44. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS investment from competitors who perceive the loss of a level playing field. This will lead to a continued deterioration of private sector investments in R&D and innovation activities in the absence of government grant funding. Evidence of “crowding out” symptoms for example is the growing state of neglect of corporate R&D by the majority of cash-rich players in the palm oil industry; leaving it in the hands of a government research institute due to the “cess mentality”; and the low innovation output and under-utilisation of internal R&D funds by a GLC (Sime Darby). Recommended Strategy Measure : Committing public sector financing based on clear developmental and technology transfer assessment criteria The Agency should form the Innovation Performance Unit (IPU) to implement a performance assessment system based on international criteria, to review all on-going top-down projects in priority areas, particularly in the automotive, wafer manufacturing, power generation, public transportation, agriculture (aquaculture), ICT (e-government), healthcare (biopharmaceutical; vaccines; diagnostics) and biotech (herbal; MLSF; SpringHill) ; and the GLCs’ innovation capacity. The IPU assessment will determine the achievement of intended developmental outcomes measuring innovation outputs, knowledge transfers, knowledge workers, technology transfers, new jobs creation, export performance, etc. This assessment will form a fair basis for decision-making by government on the continuation or otherwise of committed financing; consider alternative financing structures including privatization; and a re-negotiation of performance contracts (KPIs) and CSR obligations within the public-private relationship social contract. This strategy measure will allow re-alignment of public funding with developmental mission; demonstrate the need for transparency, accountability and performance; create the opportunity to re-negotiate the public-private partnership; and re-balance private sector contribution to innovation capacity building. Copyright S.Ong and S.Hassani 2011 44 of 84
  • 45. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS Challenge 3: Increase private sector funding exposure The intended role of government intervention in the development of the venture capital industry was to be a catalyst in the mobilization of investment funds from the private sector, particularly long term savings institutions in the financial services sector. While the necessary regulations have been in place to allow these financial institutions, ranging from public sector provident, pension, mutual and life insurance funds, to invest in venture capital funds, few institutional investors are attracted to the present proposition. This is due to a combination of the perceived high risk/low return from venture capital activities; and the absence of successful venture capital management teams. Given the recent examples set by the government run venture funds, such a conclusion by institutional investors is not that far from reality. Recommended Strategy Measure : Mitigate risk and investment allocation in high risk venture capital funds by savings institutions through dividend income tax rebates. As the Agency will promote the establishment of venture capital funds with foreign venture capital management firms on a one-to-one (1:1) matching basis, it is important that an incentive package with risk mitigation measures is in place to mobilize matching funds from Malaysian long-term savings institutions. The incentive package will include allowing an income tax rebate on dividend income payable by the institutional fund equivalent to a hundred percent (100%) of the investment committed to the venture capital fund. Perceived investment losses from venture capital investment are fully provided for from the annual tax liabilities of the fund. Most savings institutions maintain that they are long term investors in the equity market. In reality, fund managers often turnover a significant portion of their stock portfolios more than once within the reporting year (a practice known as “churning”) to perform window dressing of portfolio valuation for reporting purposes. This practice increases market volatility and Copyright S.Ong and S.Hassani 2011 45 of 84
  • 46. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS increases intermediation costs and is not in the public interest. The absence of capital gains taxes and transaction stamp duties has reinforced this practice, as well as short-term “hot money” flows into the stockmarket. The Agency should introduce an innovation tax on such capital market practices in the form of an equities capital gains tax. The equities capital gains tax should be imposed on institutional funds (but not individual investors) that disposed of any stocks and shares held for a period not exceeding one (1) year (equivalent to real property gains tax provisions). This will reduce short-term speculative behavior but not completely stamp it out. However, as a result these tax receipts can be ironically channeled to longer term investments in innovation programmes for the economy. This strategy measure seeks to introduce a risk/reward mitigation mechanism to increase private sector funding involvement; and to re-align investor mentality for the public good. Challenge 4: Access to capital markets for high-tech start-ups Over two decades ago, the venture capital community had proposed a plan to the Malaysian Securities Commission to establish an open marketplace platform that will provide the necessary liquidity for the shares of unlisted private hi-tech companies invested by venture capital and angel investors on a market maker system, similar to London’s Unlisted Securities Market (USM). The eventual proposal mooted by the SC and KLSE after intervention by several opportunistic stockbrokers to monopolise control, succeeded in alienating venture capital firms, culminated in an unworkable business model named MESDAQ. The failure of MESDAQ (now ACE) as a platform to galvanise financing for early stage hi-tech start-ups demonstrates the lack of understanding by government regulators and rent-seeking intermediaries of the development financing needs of the hi-tech industry. Another significant barrier to access capital for qualified SMEs has been intermediation fees (advisory and listing expenses) charged by investment banks and stockbrokers, where in many cases the majority of the proceeds have been paid to intermediaries, instead of being applied to working capital. Copyright S.Ong and S.Hassani 2011 46 of 84
  • 47. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS In the meantime, Singapore, Hong Kong, Tokyo, Osaka and Shenzhen have all established electronic marketplaces for early stage companies as part of the eco-system to access capital, Malaysia lags behind again due to implementation. While Malaysia should not re-invent the expensive MESDAQ wheel, neither can Malaysia ignore re-discovering an important missing piece in the innovation eco-system if a vibrant venture capital and angel investor community is to be established over the next five (5) years. The recent valuation of Facebook Inc. on alternative private investor electronic marketplace highlights the important role of a functioning Over-The-Counter (OTC) market. Recommended Strategy Measure : Establish linkages into global capital markets for high-tech start-ups The Agency has a central role as a coordinator for the setting up of an open electronic platform marketplace for (OTC) trading of private company equities of hi-tech start-ups. The OTC Market should be organized like London’s PLUS market on a self-regulated basis by founding members from the venture capital community, and adopt best practice market regulations. Given the new globalized economic environment and the proliferation of the internet connectivity, the OTC Market can be linked into all major OTC markets in the world. the Agency will seek out alliances and network connectivity with other OTC markets in Asia, North America and Europe, in order to access deeper pools of investors and maintaining relevance in the global hi-tech industry. The Agency will perform as a “one-stop agency” on behalf of the SC, for purposes of membership of venture capital firms, angel investors, corporate advisory firms and stockbrokers. However, the old market-making system has been made obsolescent by self-directed internet trading technology. The Agency will promote the OTC Market with an incentive package which covers tax exemptions from capital gains and dividend income arising from both local and foreign OTC Copyright S.Ong and S.Hassani 2011 47 of 84
  • 48. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS trading. Also, investment losses arising will qualify for double tax relief for funds; or equivalent to 100% for personal income tax relief. In order to reduce intermediation costs, the Agency will promote an incentive package for advisory firms which includes pioneer status and tax exemption for ten (10) years; and a five (5) year tax holiday applicable to the employees of the advisory firm on an unconditional, non-discriminatory basis (ie inclusive of Malaysian residents) aimed to attract/retain talent and knowledge workers (both local and foreign) to build up capacity in this financial services sub-sector. As an admission condition to the OTC Market, the advisory firm must follow the fee schedule charges not exceeding twenty-five percent (25%) of the capital raised for the investee company. This strategy measure seeks to establish a marketplace for the trading of private company equities to enhance liquidity and marketability; access a greater pool of liquidity to support hi-tech start-ups; and to promote access via lower cost intermediaries. Copyright S.Ong and S.Hassani 2011 48 of 84
  • 49. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS PRIVATE EQUITY Overview The government’s early experience in mobilizing private equity was to fund Malaysia’s basic infrastructure projects in the 1990s. In its early privatization efforts to develop public goods such as highways; transportation systems; healthcare; energy and water utilities, the government structured attractive long term (25 to 30 year) concessionaire agreements yielding high returns with the selected private sector players, supported by government guaranteed debt; and private equity participation from public pension funds; as well as liberalized access to capital markets. As a result of this strategy, private equity financing from Malaysia’s public pension funds, life insurance funds and foreign PE funds (eg. AIG) seeking predictable long term returns, with low risk (mitigated by government guarantees) invested in toll roads, subways (LRT), power plants (IPPs) and water treatment plants. This effort has been lauded by developmental economists as the model for other developing economies that needed a successful public-private partnership scheme to improve basic public infrastructure as a platform for higher economic growth. Fast forward to the end of the concessionaire agreements beginning 2010, the government has been forced to redress the unequal nature of these concessionaire agreements due for renewal, which continue to impose a rising social cost on the public, without incremental improvements of public goods provision. In fact quite the opposite effect of under-investment by the private sector has led to higher costs, waste and inefficiencies in the provision of poorly distributed electricity; deteriorating water quality; lower quality of public healthcare services and uncoordinated public transportation systems. This privatization strategy with little regulatory oversight and a public accountability framework, had encouraged the rent seeking behaviour of favoured private sector players without trackrecords, in their negotiations with ill-advised government officials to create a maze of privatized pubic goods providers that fuels the present inflationary environment with underperforming social contract obligations. With the exception of toll highways and IPPs, private equity investors have largely been disappointed with investment returns on public transportation systems. Private investors are thwarted by the ill-conceived awards for public transportation systems projects, particularly Copyright S.Ong and S.Hassani 2011 49 of 84
  • 50. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS the then three (3), now four (4) Kuala Lumpur centric urban mass transit projects and toll roads. While Singapore and Hong Kong mass transit systems have all gone public reaping handsome returns for investors, and are able to re-invest in the continued expansion of their networks without charging unreasonable ticket prices yet remaining profitable, , Malaysia’s own systems are still mired in the red, awaiting the fourth MRT system to bail out investors. Therefore, over the last five (5) years, private equity investors have sought predictable returns from real estate. With the introduction of new capital market regulations, the government mobilized private equity funds into real estate asset-backed investment trusts (REIT) to support an overheated and flagging property market for domestic economic stimulus reasons. However, this strategy has emboldened public pensions and institutional funds to venture into REITs and commercial real estate in distressed developed economies seeking arbitrage opportunities in capital gains over the last two (2) years. These private equity outflows have little developmental impact for an emerging economy like Malaysia, that still needs to focus on capacity building and spill-overs for its priority economic sectors from its foreign direct investment activities. In the present landscape of private equity investors, Khazanah Nasional represents the single largest government run private equity investor controlling a portfolio of the largest corporations in priority sectors aligned to the NKEA, namely – Agriculture; Automotive & Transportation; Basic materials; Financial Services; Healthcare; Infrastructure & Construction; Media & Communications; Electronics (Wafer); Retail; and Utilities (Energy). Similar to Singapore’s experience with SGIC and Temasek, this dominance by a government agency essentially crowds out any other private sector led PE fund. The recent attempts by other public institutional and pension funds to create their own private equity operations (CIMB, Ekuinas, KWP, LTAT) are bound to fail due to the lack of commercial competence and specific industry management experience which are pre-requisites for successful private equity investing. The entry of these inexperienced private equity investors can be seen as opportunistic, as they seek short-term gains in taking over monopolistic GLCs as Khazanah streamlines its portfolio and embarks on asset reshuffling to favored public institutions. In short, the current development of the domestic focused private equity activity is anti-competitive by maintaining market power; and therefore continues the legacy of declining innovation growth, as already evident in the innovation performance of Copyright S.Ong and S.Hassani 2011 50 of 84
  • 51. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS GLCs in key industries, ie telecommunications; energy, oil & gas; pharmaceuticals, healthcare services; palm oil oleochemicals; automotive; and electronics. The dominance of GLCs in public sector contract awards breeds a less competitive environment where they operate, leading to management focus on cost based rationalization to improve corporate profitability, instead of innovation led growth, and foreign market expansion from successful competition with global peers. The raison d'être of PE funds is to seek out control of undervalued market leaders in particular targeted sectors who are “cash cows” (that generate substantial cashflows) facing declining profit margins, run by poorly performing management unable to respond to the fast changing marketplace caused by disruptive innovations and intense competition; or who possess under exploited resources that do not contribute to their competitive advantage. The new management teams put in place by PE funds are central to the successful turnaround of their investee companies and subsequent higher valuations upon exit. Challenges: i) Lack of focus for private equity investors on developing capacity in present or future sunrise industries ii) Lack of Malaysians with cross-border PE skills in hi-tech industries iii) Orphaned hi-tech projects will turn into “Problem children” without government support Challenge 1: Lack of focus for private equity investors on developing capacity in present or future sunrise industries The government’s initial strategy initiative to involve private equity investors, both public and foreign, was successful in channeling funds to Malaysia’s developmental capital needs in the upgrading of basic infrastructure for a broad base economic growth in the manufacturing Copyright S.Ong and S.Hassani 2011 51 of 84
  • 52. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS and services sectors. The infrastructure sector was characterized by huge upfront capital investments, mitigated risks and moderate returns over the long term. This risk-reward profile matched the investment objectives of many long term investors, particularly funds with long term liabilities such as pension and life insurance funds. However, the subsequent strategy support of poorly implemented projects (LRT, Bakun, Klang Valley highways, PKFTZ, Iskandar), growing agency problems and loss of focus by forays into real estate, have de-railed much of the attractiveness for private equity investors. It is timely to re-channel efforts to re-gain the support of domestic and foreign private equity funds of Malaysia’s broader development agenda of building innovative capacity. Recommended Strategy Measure : Focus PE funding strategy on three key sectors to build innovation capacity The Agency should implement the strategic initiative to form three (3) private equity funds that have industry sector specific focus, namely - i) Life Sciences & Bio-Medical Fund ii) Electronics (E&E) & ICT Fund iii) Renewable Energy & Clean Technology Fund In general, these funds will be structured on a tripartite matching basis (1:1:1), with government fund; anchor GLCs or public listed corporations; and foreign private equity fund manager. The Agency will coordinate its funding in the form of a ten (10) year soft loan to establish these funds with competent parties. The private equity funds will be managed by experienced “best in class” private equity managers with established sector specific portfolios in the developed economies of USA, EU and Japan; or in the emerging markets of BRIC (Brazil, Russia, India, China). Due to the deal size of private equity investing, the average committed capital of private equity funds is in the region of USD1.0 billion. With a draw Copyright S.Ong and S.Hassani 2011 52 of 84
  • 53. STUDY TOWARDS THE NATIONAL INNOVATION STRATEGY : INCUBATORS down schedule over five (5) years, the Agency will need to arrange a facility of RM600 million for initial matching of the three funds. The overall strategy of this fund will be to acquire (or be the largest shareholder of) companies in the developed and emerging markets with on-going product development pipelines or innovative platforms; product portfolios; manufacturing/services capabilities; national distribution channels; and niche market supply networks. This investment activities will augment the innovation capacity of Malaysia’s nascent industry through technology transfer; knowledge spill-overs and management exchange. The longer term mission will be to sell these investee companies to Malaysian corporations in order to strengthen their global competitiveness and market position. This strategy measure will re-focus innovation capacity building in the human capital intensive industries; strengthen public-private-global partnership in investing; and consolidate the nation’s comparative advantages. Challenge 2: Lack of Malaysians with cross-border PE skills in hi-tech industries There are but few Malaysian professionals with cross-border PE experience and skills in the hi-tech industries. The majority of professionals with Khazanah are accountants and corporate finance specialists who have little entrepreneurial or industry sector experience. The low innovation performance as a result of the GLC transformation programme bears testimony to these managerial skill-sets. Recommended Strategy Measure : Require experienced Malaysian managers to be joint-venture partners of the Fund Management team Copyright S.Ong and S.Hassani 2011 53 of 84