OUR beloved Malaysia competes to occupy a prominent position within the global innovation ecosystem. Its wealth of talent, resources, and opportunities is undeniable, despite facing brain drain and criticism.

In light of these obstacles, policymakers must overhaul several fiscal policies. It is advantageous for our small and medium enterprises (SMEs) to be centred when formulating policies that promote innovation. To bring this scenario to fruition, we must introduce a robust research and development (R&D) tax incentive structure in Budget 2024, which can serve as both overdue relief and stimulus for the sector.

Gazing across our borders to the United States and Canada, companies and their employees can claim tax credits based on a percentage of their R&D expenditure, which is currently set at 15-20%. This allows them to offset income or payroll taxes. This has been in practice since 1981 and 1986, respectively. In 2015, the US passed a law to expand coverage and provide additional support for small businesses. In Canada, these incentives facilitated the transition of the country from a resource-based economy to a knowledge-based economy within two decades of their introduction.

We cannot help but admire other countries’ pragmatic approaches. Australia’s 43.5% tax offset and the United Kingdom’s notable deduction of up to 33 pence for every pound spent on R&D underline their commitment to grassroots innovation. Taking the cake is Singapore’s mind-blowing 100-400% tax deduction. It is no wonder the city-state’s venture capital scene is highly active and liquid, with numerous early-stage companies ready for investment despite the global climate.

Closer to home, the broad overview reveals the overtone of our current R&D stance. Without tailored fiscal incentives, our spirited SMEs are largely forced to play it safe, opting for familiar paths instead of venturing into new and unexplored territories. The situation will further curtail our capacity for innovation and cause venture capitalists to hesitate when considering Malaysia’s prospects. Singapore’s success illustrates the combination of R&D tax incentives and venture capital funding can be potent.

While the Malaysian Investment Development Authority does support R&D activities, its incentives incline toward large corporations. As a result, our SMEs, the true “harimau muda” of disruption, have been sidelined. It is crucial to understand that these major players, with ample resources, benefit from R&D tax incentives much less than SMEs do. For the latter group, with leaner budgets, such incentives can significantly improve the bottom line and enhance the competitive market position of the SME, making them more appealing to venture capitalists.

Recently, there has been much debate on the progressive wage policy. There is a proclivity towards innovation and progressive wages. Increased competency is tied to knowledge transformation and practical wisdom, which in turn leads to higher salaries.

Let us take a page from the introduction of the minimum wage policy. SMEs, primarily in the manufacturing sector, were compelled to be innovative by incorporating technology and implementing efficient operational best practices. SMEs were pushed into the R&D sphere to pay their employees the new minimum wage. Therefore, it stands to reason the results will pay off when we tie R&D tax incentives to progressive wage policies.

It is important to note the potential of robust R&D incentives extends beyond tax policies, serving as a pivotal strategy for attracting and preserving elite talent crucial for technological and economic advancement. However, rigorous implementation must be put into practice to circumvent the pitfalls of potentially wasteful R&D expenditure, thereby securing meaningful and impactful investments in innovation rather than enabling a box-ticking exercise to take advantage of tax benefits.

There are several possible approaches to negate this outcome. One approach entails focusing the incentives on tangible outputs. Instead of offering tax breaks for R&D spending alone, the government could provide incentives for specific outcomes like patents, as practised in Singapore, and publications with successful product launches. A wholesome incentive would encourage SMEs to focus on their employment structure, operational processes, and ramifications of their output, rather than viewing the incentive solely as a means to generate profit.

The recently announced New Industrial Master Plan 2030 should include several tax incentives designed for SMEs to encourage R&D. Policymakers ought to establish a 200% tax deduction for R&D expenses incurred by SMEs.

It is time to double down on our SMEs’ future, our growth, and, consequently, our innovation powerhouses of tomorrow.

At this crucial juncture, we must leverage astute policies, targeted incentives, and steadfast support to harness the dynamic force of innovation, thereby crafting a defining chapter in our trajectory towards a flourishing knowledge-based economy. – October 12, 2023.

* Dewan Arumugam reads The Malaysian Insight.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.