Malaysia aims to raise its gross expenditure on research and development (GERD) to 3.5% of gross domestic product (GDP) by 2030. Yet, its GERD-to-GDP ratio has stagnated between 0.9% and 1.4% since 2010, hovering at just 1% in 2022. 

By comparison, tech-driven economies spent more on research and development: South Korea at 5.1%, Taiwan at 4.1%, Japan at 3.6%, and China at 2.7% in 2024.

Despite various government funding facilities designed to spur research activities, Malaysia’s R&D intensity remains critically low. While private-sector financing of R&D rose to 51% in 2022, the core question is whether spending on innovation has translated into real-world economic output. 

In the World Intellectual Property Organisation (WIPO) Global Innovation Index (GII) 2025, Malaysia ranks 34th — a position virtually unchanged from 33rd–36th over the past decade. Last year, Malaysia ranked 30th for innovation inputs but lagged at 39th for innovation outputs.

While Malaysia scores well in market sophistication (18th), institutions (30th), and knowledge and technology outputs (34th), it lags in infrastructure (54th), human capital (46th), and creative outputs (41st). More alarmingly, venture capital deal flow and international patent filings have dropped noticeably, despite scientific publications growing by 3.1% over the last decade. 

This decoupling points to a systemic bottleneck, which is due to a lack of robust institutional mechanisms to commercialise academic research and build a high-value R&D ecosystem. 

Small and medium enterprises (SMEs) account for 97% of Malaysia’s businesses, employ close to half of the workforce, and contribute nearly 40% of GDP. If SMEs cannot innovate at scale, Malaysia will not reach its 2030 target. Therefore, targeted intervention is no longer optional — it is urgent.  

A poll of 117 respondents at the Penang Economic Forum 2026 offered a clear signal into the ground reality. SMEs overwhelmingly identify innovation, along with artificial intelligence (AI), automation, and technology, as key drivers of operational efficiency, with cost savings following closely behind. 

However, when asked about obstacles to innovation, half of respondents cited access to R&D grants and financing as their primary barrier, followed by rigid regulatory compliance and talent shortages. 

This implies that access to finance remains the primary catalyst for SME innovation. However, awareness of financial options and ease of navigation are equally critical.  

In Penang, SMEs pragmatically prioritise clear return on investment (ROI). However, this pattern differs nationally, where high operational costs often overshadow growth considerations, as highlighted by Small and Medium Enterprises Association (Samenta) national president Datuk William Ng during the forum. For many SMEs, investing hundreds of thousands of ringgit in new hires, machinery, and processes without a guaranteed payoff remains an unrealistic risk.

When executed effectively, R&D can offer an immediate boost to competitiveness. For instance, Berjayapak’s industrial packaging division recognised a significant bottleneck due to an eight- to 12-hour heat-treatment process. By adopting radio-frequency heat-treatment technology, the company reduced cycle times to 20-30 minutes while consistently maintaining quality. Such innovations demonstrate the crucial role of strategic R&D investments in driving operational excellence and competitive advantage. 

When technology simultaneously cuts costs, raises quality, and speeds up turnaround, R&D ceases to be a discretionary expense — it becomes a strategic necessity. Innovation does not always mean technological breakthroughs; often, it is about continuous operational improvements across a business lifecycle. 

Bridging the R&D gap requires effective policy delivery. Government interventions should focus on addressing the capital gap while minimising bureaucratic interference in business and invention management and ownership. 

Global evidence shows that direct fiscal incentives and infrastructure support drive innovation. Conversely, fragmented, multi-agency governance reduces patent generation efficiency due to murky ownership rights.  

To achieve the 3.5% GERD target, smart tax structures are vital. Tax incentives — such as double tax deductions, investment tax allowances, and pioneer status — have been shown to boost R&D spending and patent filings. 

While the incentives have supported high-tech manufacturing and digital startups, the broader SME ecosystem faces structural barriers. 

First, there is a lack of awareness, navigation support, and long-term compliance capacity.

Second, many SMEs simply lack knowledge of R&D grants and rigorous documentation requirements for applications. 

Third, the tax framework skews towards large corporations. SMEs face a complex approval process with heavy technical paperwork. Dedicated legal or tax compliance skillsets are often not available to handle submissions. 

This calls for an SME-friendly tax and grant framework to spur innovation among SMEs. Perhaps a streamlined review process is essential for smaller grants. Understanding SME needs is necessary, and dedicated SME agencies should proactively assist micro and mid-tier enterprises in primary and secondary growth sectors. 

The data shows signs of progress. The private sector’s share of national R&D expenditure rose from 36.6% in 2020 to 51% in 2022. However, shifting from 51% to the business-led R&D intensity required for a 3.5% GERD target demands far more than stabilisation funding.

While banks and regulatory bodies have introduced initial programme, R&D-specific financing remains inadequate. The use of intellectual property (IP) to raise capital is not fully unlocked due to a lack of market awareness and the specialised industry expertise required to value and assess the risks of IP assets. This is a critical gap where technology firms, software developers, and creative businesses hold significant value in patents, brands, tech know-how, and data — intangible assets that do not show up on balance sheets.

IP-backed lending offers a viable path forward to fuel innovation growth. In fact, the concept is not entirely new; as early as the 1880s, Thomas Edison’s incandescent light bulb patent was used to secure project financing. Globally, countries such as the UK, China, Japan, and Korea have already developed mature frameworks to leverage IP for capital access.

Positively, some financial institutions alongside the World Intellectual Property Organisation have begun drafting a pilot framework for IP-backed loans. Accepting IP as a recognised, legitimate collateral allows asset-light tech firms without physical warehouses to secure loans. This initiative must be actively advocated for among financiers, banks, and venture capitalists to transform traditional collateral requirements for modern asset-light innovators/SMEs. 

Beyond financing, a robust triple-helix collaboration between government, industry and university is imperative. Industry partners simply choose to conduct R&D in-house or look abroad — directly stalling national R&D intensity targets. To make this work, private firms co-funding university research and technology development must be guaranteed clear ownership rights and autonomy in managing inventions. 

Malaysia’s SME innovation deficit is not caused by a fundamental lack of technology or input. The 3.5% GERD target is well within reach if the nation allocates capital smartly, streamlines compliance, and introduces targeted, SME-focused innovation strategies. 

Crucially, raising the floor and the ceiling concurrently would require a coordinated policy framework across government departments with a single aim: to raise the competitiveness of SMEs through innovation. From patenting fee subsidies to operational support across ministries, an aligned framework is essential to reduce friction and build systemic capability.

Without decisive policy action today, Malaysia risks seeing these exact same innovation rankings a decade from now. It is time to treat SME innovation as a core pillar of national economic competitiveness. 

Ong Wooi Leng is the head of Socioeconomics and Statistics Programme at Penang Institute.