Commercialization of R&D in Malaysia - Assignment Example

Commercialization of R&D in Malaysia I. Intro What is research in general and outline and thesis. II. Nature of R&D A. Relation to Economic Development 1. Czarl and Belovecz 2007 - It is evident that for achieving long term eco-nomics growth the amount of Research and Development (R&D) is highly important (p.25). - Consequently be-sides knowledge needed sectors like IT, the desire of improving R&D in the „original” productivity sectors, such as agriculture is also strengthened. Production improving be-comes global strategic question for the enter-prises and creates new challenges, both op-erative and strategic (25) The main goal of the state-support R&D is to improve sustainable growth throw the increasing economic efficiency and num-ber of employees (25). Strengthen of scientific and technical basic of common industry, urging improvement of the international competitiveness meanwhile support […] the sufficient research tasks.” (25) 2. Roger Svensson 2008 - First, it has been shown that the total return on R&D investments for society as a whole (the social return) is greater than the private return (i.e. the return for the company investing in R&D). This is because the company cannot utilise all the results of its R&D and some of the new knowledge gained is transferred to other companies in the form of spillovers (7) THIS IS THE REASON FOR USING COMPANIES TO PERFORM R&D INITIATIVES OF GOVERNMENT - Secondly, R&D is associated with high risks, which creates barriers and discourages companies from conducting R&D. This applies in particular to small companies, which often have difficulties to find the funding required (7) - The Government can perform R&D itself at its own universities or research institutes. However, the Government can also stimulate R&D that is conducted by companies, either by reducing the private cost for R&D or by increasing the return on R&D, or by helping companies to understand the opportunities offered by new technology, i.e. by reducing uncertainty (8) Government Instruments for funding R&D - Own R&D at Government research institutes and Universities. A primary objective of the research institutes is to satisfy public needs. The universities mainly produce basic research that can then be used by companies in their applied research. The universities, however, have a more independent research agenda compared to the research institutes, which makes them less sensitive to Government directives. The Government controls large parts of the universities’ research budgets, however, which makes them relevant to the politicians. The universities and research institutes affect the productivity of business and industry and private R&D indirectly. (9) - Direct funding of the companies’ R&D The Government can provide direct funding for R&D that is performed by companies. This form of funding aims to increase the marginal return on the companies’ R&D. There are two alternatives here Funding of contract R&D, where the funder rather than the performer owns the results of the research. This is common in the defence industry, for example. • Funding in the form of grants or subsidies where the companies that perform the R&D own the results. (9) 2.3 Tax incentives for company R&D The Government can help companies to conduct R&D by offering tax incentives that aim to reduce the costs of R&D. Most OECD countries permit R&D costs to be written-off entirely in the same year the investments are made, which means that the depreciation sum is deducted from taxable income. The Government can also provide tax credits which are deducted from the companies’ taxable profits. Another method is to permit the accelerated depreciation of machinery and buildings used for R&D purposes (Hall and van Reenen, 2000). (10) 3.1 Theory on R&D and growth - In earlier neo-classical theory, knowledge was regarded as an exogenous variable that, together with a company’s input goods, labour and capital, affects productivity (11) - In endogenous growth theory, on the other hand, investments in R&D that provide new knowledge are seen as an important factor that explains growth and increased productivity (Romer, 1990). In endogenous growth theory, investments in R&D can provide long-term growth and lead to rising returns to scale. This is because previous R&D investments that were made to generate specific knowledge do not need to be made again. The replication of previous production does not therefore have to bear the burden of any R&D costs (11) - A company that has invested in R&D to acquire new knowledge may find it difficult to prevent other companies from using this new knowledge – unless it is patented. Knowledge becomes “a public good”. It is also highly unlikely that a company will itself have the expertise required to utilise all the knowledge generated by the R&D concerned. These factors explain how R&D can lead to spillovers to other companies and can lead to rising returns to scale – which otherwise contradicts the neo-classical theory (11). - Addressing spillovers: Intellectual property rights can protect the originators of new knowledge. Patents are the most common instrument used here, but copyright and trade marks are also used. These exclude others from using the knowledge concerned. The State can assume responsibility for the funding and production of new knowledge, with the aim of ensuring that the knowledge is then disseminated. State universities and laboratories that conduct R&D are the foremost examples of this system. Sometimes the State just provides the funding and allows companies to perform the R&D (see Section 2). This is particularly effective if the private return is low and the social return high. (12) A contract can be draw up between a party that produces the new knowledge and another party that is interested in it. Contract research where the State funds companies that perform R&D in the defence industry is an example of this. (12) Implications: (Negative) Mansfield (1981) estimated that the cost of imitating a product is 65 per cent of the original innovation costs. Performing R&D also leads to further training for the company’s personnel. (12) (Positive) Another characteristic of knowledge is that it cannot always be codified but is “tacit”, i.e. the researchers/scientists know more than they can put into words (Rosenberg, 1990; Pavitt, 1991). In general, this requires the participation of the researchers concerned if new research results are to be converted into innovations. (12) Empirics: private R&D at the aggregated level (COMPANIES) Here, R&D investments – often divided into internal and external R&D – together with the production factors physical capital and labour – are the factors that determine productivity, which is measured as value added or sales. Is R&D really connected to productivity? - One problem associated with estimating how much R&D affects productivity is that R&D can hardly be regarded as an exogenous variable. The amount that is invested in R&D often depends on the expected sales level. This makes it difficult to know in which direction the causal link is working. Griliches and Mairesse (1995) believe that the problem of endogenity leads to biased estimates. Crepon et al. (1998) was the first to attempt to get around this problem by first estimating whether and how much companies invest in R&D and then test the effect of the estimated R&D on productivity. (13) - This is despite the fact that the poorest countries invest more in R&D in relation to GDP than middle-income countries (Birdsall and Ree, 1993; Gittleman and Wolff, 2001). In the case of the developed countries, there is a strong statistical link between R&D and productivity, but the elasticity is between 0.13 and 0.20, which means that if R&D increases by 1 per cent then productivity will increase by 0.13 to 0.20 per cent. This ratio applies even when spillover effects are taken into account (Verspagen, 1995; 1997; Verspagen and Meister, 2004). (13) Publicly-funded R&D, productivity and growth Publicly-funded R&D that is conducted by companies should have a similar impact on productivity, growth and the ability of companies to absorb new knowledge as the R&D funded by companies. It is not certain, however, that the Government is as good at finding promising R&D projects as the market, which could lead to a weaker impact. There is also another important difference in the case of contract research (which is common in the defence industry) as here it is the funder (the Government) that owns the results of the research. This means that companies cannot freely exploit the results of their research on the market, and that they therefore have less incentive to conduct the R&D effectively and efficiently. (15) A few studies have directly compared the return on privately-funded and publicly-funded R&D. Mansfield (1980), Griliches (1986) and Lichtenberg and Siegel (1991) all find that publicly-funded R&D has a lower return than privately-funded R&D. However, Griliches (1992), in a summary of several studies, draws the conclusion that there is no major difference in return between privately-funded and publicly-funded R&D at the company level. The total social return on publicly-funded R&D is between 20 and 65 percent and on privately-funded R&D between 28 and 80 per cent (private return of 15 to 40 per cent). (15) Lichtenberg (1993) has investigated, at the aggregated level, how R&D conducted by companies affects productivity depending on how the R&D is funded. He concludes that R&D that is funded by the Government has a much weaker impact on productivity than the companies' own R&D. Sometimes, publicly-funded R&D has no impact at all. (15) 3.5 Effects of basic research and university-funded R&D - If publicly-funded R&D is conducted at universities or laboratories the stock of knowledge available to companies and society at large increases. To enable the dissemination of this new knowledge, it is important that it is codified, e.g. published in journals. (16) - Basic research also leads to the development of new methods and instruments that will be useful in future R&D work in both the universities and the companies (17) - Knowledge produced in the universities can also be patented and then sold or licensed to companies that in turn increase their productivity, which is a direct effect of university research. An alternative is for the university researchers to start new companies themselves to exploit the new knowledge. (17) - As in the case of R&D at companies, conducting research at universities means that the personnel get further training and that their ability to absorb new knowledge increases. The ability to absorb new knowledge is extremely important to the ability to benefits from the research conducted by other (17) - Probably the most important effect is that the Government universities train and provide a pool of researchers and students that the private sector can benefit from. These researchers can subsequently take their knowledge with them – whether it is codified or tacit – when they take jobs in sectors outside the academic world (17) 3. Voolward (2010) The importance of research and development (R&D) investment has become more evident every day, among the factors directly related to the good economic performance of the so-called emerging countries around the turn of the 20th to the 21st centuries. Although there could be quite large differences between the economic growth models of these nations, for instance, consider the differences between South Korean and Chinese models, all of such models are based upon substantial investments in the production of knowledge (1) International university rankings have indicated, in recent years, an increasing participation, among the best positions, of education institutions from emerging countries, such as Taiwan, Hong Kong, China, South Korea, among others, thus reinforcing the clear connection between significant investments on scientific and technological production and an ever increasing competitiveness of the country’s industrial base. 4. Griffith (2000) MORE SOCIAL RETURN THAN PRIVATE RETURN – THUS, THIS NEEDS TO BE SUBSIDIZED In order to achieve the optimal level of R&D investment, government policy should aim to bring private incentives in line with the social rate of return - Importance of R&D for economic growth Economic theory emphasises the accumulation of R&D and human capital in explaining economic growth (2) In general, the empirical literature finds the social rates of return to R&D substantially above private rates of return.2 These findings are summarised by Griliches (1992): ‘In spite of (many) difficulties, there has been a significant number of reasonably well-done studies, all pointing in the same direction: R&D spillovers are present, their magnitude may be quite large, and social rates of return remain significantly above private rates’. (2) Private rate of return: The private rate of return can be estimated by looking at the impact of a firm’s own R&D on the firm’s output.3 Estimates of the private rate of return to R&D are made using US firm-level data in Griliches (1992). The estimated elasticity of output with respect to R&D is around 0.07. This says that for a 10% increase in R&D expenditure there will be a bit less than a 1% increase in output (0.7%). This implies a rate of return of around 27% for R&D.4 Hall (1996) reports that estimates of private rates of return to R&D cluster around 10–15% though can be as high as 30% in some studies (3). Social Rate of Return: The social rate of return is generally obtained by estimating the impact on growth in one firm of R&D done in other firms. These other firms could be within the same industry or the same country or in related industries (for example, an upstream industry that supplies parts) or related countries (for example, a trading partner). Once invented, an idea can be imitated by others (it is non-rival and only partially excludable), although patent protection and delays in the dissemination of new ideas enable the innovator to appropriate a share of the rents from a new idea. (3). Empirical results on the social rate of return to R&D are integrated into a macroeconomic model of endogenous innovation and growth by Jones and Williams (1998). They show that the estimates of the social rate of return in the R&D literature (i.e. the studies shown in Table 1) actually provide a lower bound to the true social rate of return, once we take into account the dynamic general equilibrium effects emphasised in the endogenous growth literature (3) . Innovation & Technology Griffith, Redding and Van Reenen (2000) present an empirical framework in which the rate of return to R&D is composed of an effect on productivity through innovation and an effect through increased potential for imitation. This second component will be particularly important for firms, industries and countries far behind the technological frontier. Innovation and technology transfer provide two potential sources of productivity growth for countries behind the technological frontier. A country’s distance from the technological frontier is used as a direct measure of the potential for technology transfer, where the frontier is defined for each industry as the country with the highest level of total factor productivity (TFP). The further a country lies behind the technological frontier, the greater the potential for R&D to increase TFP growth through technology transfer from more advanced countries (5) This conclusion receives independent support from Eaton, Gutierrez and Kortum (1998), who calibrate a computable general equilibrium model of endogenous innovation and growth to economy-wide data from 21 OECD countries. With the exception of Portugal, research productivity in all other OECD countries is found to be higher than in the US. This of course raises the question of why many non-frontier countries do not undertake more R&D. One answer may be the difference between private and social rates of return – if some of the technology transfer induced by R&D activity takes the form of an externality, it will not be internalised by private sector agents. B. Commercialization of R&D 1. Nor (1996) – CASE OF MALAYSIA Much reliance has been placed on the manufacturing sector to achieve the economic targets of Malaysia. For this sector to play the role of the engine of growth, it must continue to diversify, seek product definition, be export-oriented and above all be competitive. There is only one way that the above can happen: through wider application of technology. (2) Currently, the technological capability of the manufacturing sector is almost entirely held by large multinational companies that have located their operations in Malaysia. However, there are also a limited number of local companies which have developed technologically through direct or indirect technology transfer from those multinationals (2) The Government has been very active in promoting the development of SMIs especially with regard to their technological development. Malaysia cannot rely on technology imports alone to drive its industrialization plan and indigenous technology development must be strategically pursued. (2) The commercialization of indigenous technologies has the potential to be a major contributor to the overall technological development of local SMIs. The Government has for a very long time funded a large number of R&D projects undertaken by local universities and research institutions. These research projects have resulted in a number of new, commercially viable, products and processes, and could be commercialized by local SMIs. (2) - Commercialization of Research Currently, Malaysia has a total of 33 public sector R&D organizations which include statutory research institutions and 8 universities. Some of these organizations conduct a wide range of R&D activities while others are more focused on a particular sector. However, the R&D focus of these organizations are mainly in the agricultural and medical sectors. Both these sectors accounted for 56% of the entire Government R&D spending for the Sixth Malaysia Plan (1991-1995). Industrial research only accounted for 28% of the spending for the said period. (2) In the agricultural and medical sectors, public sector R&D organizations have long worked with local industries and have a some economic impact on those sectors through the commercialization of their research results and technologies. For example, the Rubber Research Institute of Malaysia (RRIM) has had a tremendous impact on the business operations of local rubber-based businesses. Breakthroughs in breeding new clones (varieties) of rubber, have benefited thousands of producers throughout the world. The Forest Research Institute of Malaysia (FRIM) has developed many techniques to add value to wood products such as particleboards, which were commercialized to at least 5 local companies. (2) There is also a small number of privately funded R&D organizations, which generally conduct R&D for their parent companies. Examples of such organizations are Petronas Research and Scientific Services, Tenaga National Research and Development and PROTON Research and Development. (2) - Commercialization Process There are many modes in the commercialization of technology. It could be in an informal way where companies approach individual researchers either to conduct R&D or to commercialize their findings. This was also quite prominent until recently, in respect of university-based research. (3) Presently, many local R&D institutions have formalized and promoted the commercialization of their technology through consultations services, collaborative and contract research projects. For the period of 1986-1995 a total of 664 contract or collaborative research agreements were conducted between private sector companies and local public sector R&D institutions (3). This usually take the form of technology licensing. For the period 1986-1995, a total of 72 technology license agreements were signed between private sector companies and local R&D institutions. (3) Another new and more effective way of commercializing technology is through the formation of joint-ventures and creation of new businesses. To date, 11 companies have been formed as spin-off businesses of public sector R&D institutions. These companies are mostly financed by the Malaysian Technology Development Corporation while others are established by the Standard and Industrial Research Institute of Malaysia (SIRIM) and MARDITECH, the venture capital arm of the Malaysian Agriculture Research and Development Institute (MARDI). They are mostly in very high-technology areas such as in the production of vaccines, bio-diagnostic, laser equipment, specialized machinery and genetic improvement of livestock.(3) - Background of Public Sector R&D Efforts have been made to centralize and coordinate research funding that culminated in the establishment of the Intensification of Research in Priority Areas (IRPA) scheme which is coordinated by the National Council for Scientific Research and Development (MPKSN) (3). Essentially, the funding of IRPA is “bottom up.” This means that researchers would propose their research projects to any of the five IRPA panels (Agriculture, Medical, Industry, Strategic and Social Science) which will decide on their proposals. In the Sixth Malaysia Plan, RM 588 million was spent on 2,329 R&D projects under the IRPA scheme where 48% were agriculture related. (3) The average allocation for research is actually relatively small to result in any kind of new products or processes. Many of the research results are product or process improvements. Out of the total number of R&D projects only 161 received an allocation above RM 1.0 million.(3) Sample projects: Example of these are: (i) The laser technology and applications program undertaken by the Institut Pengajian Tinggi, Universiti Malaya, which received an allocation of RM 1.2 million has resulted in development of various types of lasers for different industrial applications. A patent has been granted for one of the laser devices. (ii) The research on the modification of natural rubber by Universiti Kebangsaan Malaysia, which received RM 1 million, has also resulted in a new thermoplastic blend, which is in the process of patenting. (iii) The multidisciplinary research on organotin chemical compounds conducted at Universiti Malaya, which has received an allocation of RM 1.2 million, has resulted in a number of formulations, which have been granted two patents. (4) Experiences in Commercialization (creating links with private sectors) As such, various measures have been taken to streamline their operations and to ensure a business-oriented approach. These measures include: (i) the establishment of a One-Stop Business Units at all public sector R&D institutions to handle business relationship with private sector companies and also to commercialize their respective research projects and results; (ii) providing greater flexibility and authority for these organizations to commercialize their research results; and (iii) corporatizing these organizations. The first three institutions which will be corporatizd are SIRIM, Malaysian Institute for Microelectronics Systems (MIMOS) and Universiti Malaya. (4) To date, only 13 out of the 33 public sector R&D institutions have established One-Stop Business Units. Business units like the Consultancy and Development Bureau, Universiti Kebangsaan Malaysia, have been very active in promoting and selling services to the private sector. These business units have concentrated more on consultancy services since the return is faster and better than transferring technologies directly to the industry. Other business units include Consultancy Unit at Universiti Malaya, Innovation Centre at Universiti Sains Malaysia and Business and Advanced Technology Centre at Universiti Teknologi Malaysia (4). Consultancy services are the main form of technology transfer conducted by these business units. Ways to commercialize: (i) Outright sale of technology, (ii) Licensing of technology, (iii) Joint-venture, (iv) Start-up ventures. (5) From a company’s point of view, there are many reasons why they consider licensing technologies as a form of commercialization, that is less attractive than other forms. The reasons are: (i) the status of the research results or technology is very important in outright sales or licensing of technology. If the technology is not completed, it would be more difficult. The completion of a research project depends greatly on factors like funding, scaling up, pilot plant and prototyping; (ii) whether the technology provides partial solution to industry needs or should there be technological inputs from other sources. Since there is little multi-discipline and inter-institution research conducted in Malaysia, technology to be commercialized usually are not very attractive to the industry; (iii) companies in Malaysia usually lack the technical expertise and personnel to successfully absorb technology into their current manufacturing process. If a technology is meant to replace existing products and/or processes of a company, the absorption of such technology is even more difficult, since many factors on the viability of the technology need to be studied; (iv) Malaysian private sector is quite new in the areas of high-technology industries. Most of the time, there is no established industry where the technology could be commercialized. Example of these areas are in medical diagnostics, genetic improvement of animal breeds or plant varieties, and laser applications. (5) Joint ventures and start-up ventures, although harder for local universities and research institutions, provide many advantages to them. The advantages of these mechanisms include: (i) providing local researchers with the exposure and insights to the needs and requirements of the industry; (ii) creating high-technology industries which are non-existence in Malaysia; (iii) enabling the universities or research institutions to get a share in the growth of the company when the project is successful, instead of merely getting the royalty payments; and (iv) providing the researchers with greater control on the commercialization process. If a technology is licensed to a big company, the technology would only be one of many projects undertaken, therefore, the attention given to the technology is of lower priority. If the technology is the sole initial activity of a joint venture or start-up company, it would enjoy higher priority and attention. Thus, the chances of success are even greater. (6) III. Current Status of Malaysian Innovation Agency IV. Plan for Commercializing R&D in Malaysia V. Conclusion Read More