Markets that are suitable for manufacturing alone will never compete effectively in today's global, knowledge-based economy. That's why Malaysia's leadership embarked in 2010 on its Economic Transformation Programme, which aims to elevate the country to high-income status by 2020. It will do this chiefly through implementing 12 National Key Economic Areas (11 critical industry sectors and the Greater Kuala Lumpur area) that contribute significantly to national income and by making Malaysia more competitive through Strategic Reform Initiatives with policies that support the country's commercial environment and global competitiveness.

Several of the NKEAs, Electronics and Engineering (E&E) and Communications Content & Infrastructure most notably, require abundant supplies of R&D talent - workers fluent in the language of innovation and steeped in the skills required to transform university-based and private-sector research into commercial success stories.

That's why Malaysia and its business development ministries and agencies are stoking the fires of innovation already burning at universities throughout the country and increasingly at companies that came to Malaysia originally just for manufacturing purposes. Helping research projects succeed through grants and other resources, applying them to Malaysia business and industry and exporting commercialized R&D to other markets in Southeast Asia and beyond will advance the nation's economic transformation agenda significantly.

R&D Spending Gains Traction

"Although services can create high-income jobs, for sustainable development in the manufacturing sector especially, you must have the R&D component," says Dato' Azman Mahmud, CEO of the Malaysian Investment Development Authority (MIDA). "We have been promoting investment in R&D spending for many years, and we now are seeing a very steady increase and a very positive trend, especially in the areas of ICT, engineering, sciences, agriculture, biotech and forestry."

R&D spending in Malaysia in 2009 was 7.2 billion ringgit (US$2.3 billion), which has increased to about 9.4 billion ringgit ($2.9 billion) in 2011. In terms of the ratio to GDP, it has increased from 0.63 percent in 2004 to 1.07 percent in 2011. "R&D spending is gaining momentum," says Azman. "We have seen companies like Motorola, Intel, Agilent Technologies and others, including local companies, start to do R&D work to support their manufacturing activities in Malaysia. In 2013 alone, we have approved 23 R&D projects, and existing companies are also spending on R&D. This is a very positive trend."

Five sectors are particularly active in R&D activity in Malaysia, says MIDA's CEO. They are ICT, engineering and technology, natural sciences, biotechnology, and agriculture and forestry. The government's involvement in agriculture and forestry is quite significant, because they have established R&D institutions in those areas, working in such areas as rubber and palm oil research. "The new area we see is in pharmaceuticals," he points out. "Generic product manufacturers are looking at Malaysia to further develop, using R&D, particularly in the field of biosimilars [also known as follow-on biologics, where the active drug substance is made by a living organism]. We also are seeing strong investment in the solar industry and renewable energy in general, which is very attractive to Malaysia."

Universities' Key Role

Dato' Azman says the government is particularly interested in encouraging research collaboration between industry and Malaysia's research institutions, such as MIMOS Berhad (established in 1985 as the Malaysian Institute of Microelectronic Systems) for electronics and the research universities, including the Universiti Malaya, Universiti Putra Malaysia, Universiti Sains Malaysia and Universiti Teknologi Malaysia.

"Collaboration is supported by policies to promote investment into more R&D spending," he explains. "We have R&D incentive programs that can be enjoyed by any investors who want to set up research as a service or if they have an R&D office within the company. Corporate tax exemptions are available relative to what they are spending in capex. These are some of the resources the government has introduced to encourage innovation, in addition to government grants given to industries in the promoted areas."

Nottingham MyResearch Sdn Bhd is a MIDA-status Research and Development (R&D) company and a fully owned subsidiary of the University of Nottingham in Malaysia that enables Malaysian companies to invest in R&D "in a very tax efficient way," says Dr. Angelina Yee Seow Voon, Director (Industry Collaboration). "MyResearch enables companies to access the expertise and knowledge that exists at the University of Nottingham, both in Malaysia and also at our international campuses. We conduct research for a variety of reasons, ranging from the curiosity of an individual researcher, through government-funded research agencies and ministries such as the Ministry of Education (MoE) and the Ministry of Science, Technology and Innovation (MOSTI). Increasingly, we are looking to work with the industrial sector. The days of academics sitting in ivory towers are long gone. It is important that the research carried out in universities finds its way into companies to enable job creation, economic growth and company development and diversification."

Growing Domestic R&D Talent

Since 2000, when the University of Nottingham established a campus in Malaysia, it has seen its research activity rise year-on-year, says Dr. Yee. "We are now an established university in Malaysia, carrying out research that has the potential to make significant changes to companies with a base in Malaysia."

R&D investment by the industrial sector in Malaysia is historically low. "There are a large number of Small and Medium Enterprises (SMEs) in Malaysia, and a large number of family-owned companies. Both of these factors, we believe, influence the perception of the value of investing in R&D," says Dr. Yee. "We hope that the ability to invest in R&D in a tax-efficient way will change that perception, and one of our primary roles is to reach out to companies, explain what services we offer and how investing in R&D has the potential to transform a business, create jobs, improve the company's long term sustainability and open up new markets."

How To Lure Innovation Workers

How can companies in Malaysia attract inward R&D talent if they cannot locate the expertise locally that they need?

"It's something of a chicken-and-egg situation," says MIDA's Azman. "Our graduates are all over the world. Whether they study abroad or here, they work at multinationals, particularly in locations like Singapore, Australia, Europe and North America. They are very talented and can work in various organizations or multinationals - our talent is at par with any outside talent. So it's a question of creating opportunities for them. As R&D investment continues to increase, more and more opportunities will be created for them to be hired here in Malaysia."

Malaysian investment policy allows companies to set up R&D centers and R&D companies in Malaysia and to take advantage of non-fiscal incentives, such as allowing them to hire anybody in the research field to work within the company, Azman elaborates. "It's about creating the opportunities that will attract foreign talent to Malaysia, which is a very competitive location in Asia in which to do R&D."

Part of the trick to getting talent based outside Malaysia to come to Kuala Lumpur, Penang, Johor Baru in the south (forecast to become a leading center of agriculture and biotech R&D) and other locations is to help workers keep more of their income by delivering a lower cost of living than other potential work locations. "The cost of living, especially for expatriates living in Malaysia, is very cheap comparatively," says Azman. "In other countries, you may get more, but you pay more."

In fact, Malaysia's capital, Kuala Lumpur, ranks 115th out of 211 cities worldwide in Mercer's 2014 Cost of Living Rankings, which were released July 10, 2014. Of the Asia-Pacific cities in the ranking, which include Australia and New Zealand metros, Kuala Lumpur ranks 28th, well behind Singapore (4th globally and 2nd in Asia-Pacific after Hong Kong) and just behind Bangkok (88th globally and 27th in Asia-Pacific).

Cities are ranked based on data from Mercer's Cost of Living Survey, which helps multinational companies and governments determine compensation allowances for employees on international assignments. It measures the comparative costs of more than 200 goods and services in each location, including housing, transportation, food, clothing, household goods and entertainment.

Engineering Firm Finds a Deep Labor Pool

DreamEDGE Sdn Bhd finds virtually all the R&D talent it needs locally, according to Khairil Adri Adnan, CEO of the digital engineering services firm that employs more than 200 engineers. The company, based in Cyberjaya - Malaysia's high-tech metropolis near Kuala Lumpur - launched operations in 2007 with three engineers. Companies in the automotive, heavy industries, rail, electronics, precision equipment and tooling design industries turn to DreamEDGE for innovative solutions in the form of digital engineering services, product design and development and creative design and production.

"With a population of about 28 million people, Malaysia has continuously produced a steady number of engineering graduates annually with basic technical skills, both from local and foreign universities," says Adri. "The Board of Engineers website [www.bem.org.my] reveals that we have around 76,679 registered graduate engineers today."

"Ever since our establishment, DreamEDGE has been sourcing and hiring almost 99 percent of its talent locally," he continues. "We're a strong believer that with the proper guidance and the right exposure our local talent is more than capable of delivering on their assigned tasks."

Adri says Malaysia is "still a tad behind on the R&D front. But Malaysia has for many years established a manufacturing ecosystem, and it would definitely make sense for these manufacturers to have their R&D closer to home. It helps in reducing turnaround from a few weeks to a few days, for example, in terms of prototyping a new product."

Some companies shy away from engaging local capabilities or simply forego building an R&D team due to the high cost of setup, opting to outsource or offshore that work overseas, Adri observes. "We're a firm believer that Malaysia has some of the best engineers in the world, who are technically competent and can easily work anywhere and for anyone in the world. Malaysia has a lot of potential to be the hub of the digital engineering services for the region. To become global players, we need to increase our focus on R&D with more exposure from the industry."

Adri credits the Malaysian government for making available programs and other resources that have enabled DreamEDGE to expand so rapidly. "Through the collective effort of the Malaysian Government's programs, such as the ETP, NKEAs and the NTEP [National Talent Enhancement Programme] to name a few, we have been engaging extensively in human capital development activities to increase the skills and build the necessary capabilities of our engineers to become world class through industry-specific technical skills training, technology and knowledge transfer, as well as international exposure in order to attract high-value engineering work to Malaysia. Further to this, our business-friendly government policies have boosted our clients' confidence and facilitated smart collaboration with companies from all over the world."

Destination of Choice

R&D talent has always been the top labor requirement of Info Kinetics Sdn Bhd, a pioneer specialist pharmacokinetics (clinical trials) services company based at Gleneagles Penang, Malaysia. Founded in 2001, the company today employs 50 full time and 20 part time Malaysian researchers and medical professionals involved in bioequivalence, ADME (absorption, distribution, metabolism and excretion), Phase 1 clinical trials and pharmaceutical and bioanlytical analyses.

"Malaysia is definitely the destination of choice for Clinical Research," says Prof. Dr. Lee Toong Chow, Info Kinetics' Managing Director, "with an abundance of patient pools in different ethnicities, a work force with overseas [experience], readily available technology, a business friendly environment, and low costs.

"Infrastructure is ready, and new start-up companies are provided with great incentives," he adds. "We have been working closely with government agencies, such as AIM [Agensi Inovasi Malaysia] to explore more innovative ideas, the Ministry of Health to lead at bioavailability/bioequivalence in the ASEAN regulatory arena, and Good Laboratory Practice capability in terms of testing."

Think Globally

Outside the medical R&D arena, the government is no less eager to facilitate innovation in its R&D-intensive industries. Like aerospace.

"We receive a lot of support in training and software," says Naguib Mohd. Nor, Chief Operating Officer at Strand Aerospace Malaysia Sdn Bhd, an engineering services company that does design and analysis work for aerospace OEMs in Europe, mainly. "We are unique in our ability to link effectively with global clients in order to facilitate high-end technology transfer. The government supports us well in this through facilitating introductions and linkages globally."

Can Malaysia be considered an R&D hub today?

"Malaysia is developing into this," says Naguib. "It will take continued, focused effort, particularly as part of the ETP, to ensure that we continue attracting back our talent and that we have industry in country that can develop such capabilities. We will certainly need to do this in partnership with global organizations if we want to achieve this soon."

About The Author Mark Arend

Mark Arend is Editor in Chief of Atlanta-based Site Selection magazine and its monthly e-newsletters, The Site Selection Energy Report, Life Sciences Report, Aerospace Report and Site Selection International.