OCTOBER 24 — The 2027 budget’s strategic areas — AI, digital services, the energy transition — all sound right. But beneath these ambitions lies a stark, uncomfortable reality that has gone under-addressed for years: Malaysia’s R&D spending is stuck at roughly 1 per cent of GDP, and more critically, it is overwhelmingly shouldered by the government.

Malaysia’s public-to-private R&D funding ratio stands at an inverted 59:41, with the government bearing the bulk of a burden. South Korea spends nearly 5.2 per cent of its GDP on R&D — roughly RM368 billion in 2022 — compared to Malaysia’s approximately RM20 billion. In Japan, the United States, the United Kingdom, and Germany, the private sector funds the vast majority of business enterprise R&D: close to 90 per cent. Malaysia’s 1 per cent stagnation is not merely a shortfall in quantum; it is a structural failure in who pays, who benefits, and who commercialises.

Budget 2027 should be judged whether it can finally flip the ratio and incentivise the private sector to take the lead.

The government knows the diagnosis. The NSTIP 2021-2030 targets a 30:70 public-private contribution ratio, requiring roughly RM25.7 billion from the public sector and RM60 billion from the private sector by 2030. Yet with only a few years left in the policy horizon, the private sector’s share is not just lagging — it is moving in the wrong direction.

The usual explanation — that Malaysian firms simply do not invest enough in R&D — is incomplete. The deeper problem is that existing incentives have failed to shift the risk calculus for firms. Malaysia already offers a veritable alphabet soup of tax incentives: double deductions for in-house R&D, deductions for contributions to approved research institutes, Pioneer Status for contract R&D companies, and tax exemptions for the commercialisation of public research findings. These are not nothing. But if they were working, the numbers would show it.

The flaw is that most of these incentives are addressing only the cost of R&D while ignoring the far larger obstacles: uncertainty of commercial returns, shortage of industry-ready researchers, and the weak connective tissue between public research institutions and private firms. A double deduction on an R&D expense is cold comfort to a firm that cannot find skilled researchers.

Budget 2027 can begin to fix this by targeting the demand side.

First, procurement must become an innovation instrument. Government procurement rules remain overwhelmingly focused on lowest cost and proven solutions, leaving little room for firms to co-develop novel technologies with government as an anchor customer. Budget 2027 should introduce explicit innovation procurement targets — a percentage of public contracts reserved for solutions developed through R&D collaborations with local firms, particularly in strategic sectors like cybersecurity, digital services, and the energy transition. This creates a predictable demand signal.

Second, commercialisation incentives must be redesigned around outcomes, not activities. Malaysia’s R&D problem is not a shortage of research output; it is a shortage of translation. The government itself acknowledges that the key challenge is turning research into commercial results. Yet most incentives reward the spending of money on R&D, not the successful commercialisation of its outputs. A more effective approach would tie a significant portion of R&D incentives to actual market outcomes—patents granted, products commercialised, revenue generated. The existing tax incentive for commercialisation of R&D findings, which offers a 100 per cent income tax exemption for 10 years on commercialised public research, is a step in the right direction. Budget 2027 should expand this principle.

Third, the government must confront the talent gap that keeps private R&D capacity anaemic. The shortage of industry-ready researchers in Malaysia is not a new problem. Budget 2027 should fund large-scale, structured industry-researcher mobility programmes — not ad-hoc exchanges, but sustained secondments where researchers spend meaningful time embedded in firms and industry engineers co-locate in public labs. The Researcher-Industry Scientific Exchange (RISE) programme is a model, but its scale remains far too small. Budget 2027 should expand it by an order of magnitude.

Fourth, the fiscal architecture of R&D support needs consolidation. Malaysia’s innovation ecosystem is fragmented across multiple ministries, agencies, and funds — Mosti, Mida, Cradle, MRANTI, and others — each with its own grant schemes and tax incentives. For a private firm seeking to invest in R&D, navigating this maze is itself a deterrent. The government has begun centralising public R&D funds under a Research Management Unit, but Budget 2027 should accelerate this consolidation and create a single point of entry for private-sector R&D incentives.

None of this will be cheap. But the cost of continuing the status quo is higher. The government’s own projections suggest that achieving the 3.5 per cent GERD target by 2030 requires RM60 billion from the private sector. Budget 2027 must send a clear signal that Malaysia’s R&D future cannot be financed by government grants alone.

* The author is affiliated with the Tan Sri Omar Centre for STI Policy Studies at UCSI University and is an Adjunct Professor at the Ungku Aziz Centre for Development Studies, Universiti Malaya. He can be reached at ahmadibrahim@ucsiuniversity.edu.my.

** This is the personal opinion of the writer or publication and does not necessarily represent the views of Malay Mail.