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Innovation and Entrepreneurship Policy Framework:

The Malaysian Experience in Building Sustainable Incubation Industry (Movement)

By

Mr Annuar Mohd Saffar

Honorary President

National Incubator Network Association

Malaysia

Asia Regional WorkshopInnovation: The Role of Business IncubationOctober 3-6, 2007 / Hanoi, Vietnam

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BACKGROUND OF SPEAKERBACKGROUND OF SPEAKER…… 14 Years in Business of Incubation14 Years in Business of Incubation

Engineer (Plant & Project) Mar 87-Oct 93National Petroleum Co. (Petronas)

Director Nov 93-Sep 96Taman Teknologi Malaysia, - Ministry of Science, Technology & EnvironmentGovernment of Malaysia & UNDP Project- “Strengthening Incubation Management in Malaysia”

Vice President Oct 96- Nov 99Technology Park Malaysia Corporation

Executive Director & General Manager Dec 99-PresentKulim Hi-Tech Park Incubator

President, National Incubator Network Association (NINA)Vice President, Asia Association of Business Incubation (AABI)

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CONTENT OF PRESENTATIONCONTENT OF PRESENTATION

History and BackgroundHistory and Background

Weaknesses in the Malaysian Incubator Weaknesses in the Malaysian Incubator ProgrammeProgramme

Reforms to Overcome WeaknessesReforms to Overcome Weaknesses

VC Funds to Assist (Tech) Incubation VC Funds to Assist (Tech) Incubation CompaniesCompanies

Concluding RemarksConcluding Remarks

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Background… Malaysia Being Left Behind

1100+ USA/Canada

20+Uzbekistan10+Indonesia

72 +Malaysia60+India

98+Taiwan200+Japan270+South Korea500+China

Nos. of IncubatorsCountry

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1988 1988 -- 19941994 1995 1995 -- 19981998 1999 1999 -- 20042004 2005 2005 -- 20102010

Technology Park Technology Park Malaysia (TPM)Malaysia (TPM)

•• MM’’siansian Tech Dev Tech Dev Corp (MTDC)Corp (MTDC)••SIRIMSIRIM

•• Multimedia Development CorporationMultimedia Development Corporation•• KulimKulim HiHi--Tech ParkTech Park

3rd Generation Model:-Facilities + Business Advisory Services and

mentoring services

Characteristics:

Real estate,

Shared facilities

Proactive support

Access to Funding

Co-Venturing

Mentoring & Coaching

Business Acceleration process

Technology Labs

Focused Technopreneur Development Programs

Technology & Business Incubator Development

Consulting

Incubator Industry Development Consulting

2nd Generation Model:-Landlord +

consulting/advisory model

Characteristics:

Real estate,

Shared facilities

Proactive support

Business Advisory

Services

In operation:-

3 (tech) incubators

30+ incubators overall

1st Generation Model

Landlord model

Characteristics:

Real estate,

Shared facilities

Reactive support

In operation:-

1 (tech) incubator

NIDP as the nucleus for the nationwide roll-out of the MSC:-

MSC Status Incubator

Cybercentre

Cybercity

Incubator Industry Development Targetby 2010 : -• 100 Incubators Nationwide

(currently 55)• 30 MSC Status Incubators

(currently 20)

Historical BackgroundHistorical Background……Malaysian Incubation Industry and Major StakeholdersMalaysian Incubation Industry and Major Stakeholders

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Weaknesses in MalaysiaWeaknesses in Malaysia’’s s Incubator Incubator ProgrammeProgramme**

Problem 1. All Incubators were/are funded by Federal Government.

- Lack of Experience on the Part of the Incubator Managers - Managed by bureaucrats with little knowledge in entreprenuership. - Start-ups Getting out of business.

Problem 2. Some Technology Parks (incubators) started as Technology-Based Initiative but ended up being Real Estate Development.

- “Noble” initiative in the beginning.- Deteriorate to “Tenant- Landlord” Relationship.

*Jusoh, Sufian. (2006). Incubators as Catalysts in Developing High Tech Businesses: Malaysia’s Experience, Africa Tech Development Forum Journal, Vol 3(1).

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Weaknesses in MalaysiaWeaknesses in Malaysia’’s s Incubator Incubator ProgrammeProgramme (cont(cont’’d) d)

3. Technoprenuer Development Undertaken by Various Ministries and Agencies. Lack of coordination, implementation procedures and wastage of resources.Tasks are duplicated in various other agencies within different ministries such as MECD, and MDeC within MOSTI.Min of Science, Tech & Innovation – Technology IncubatorsMin Enterpreneur & Coop Development - General IncubatorsMin of Agriculture and Agro-based Industries - Agro Incubators

4. Incubators in some states may not have the same facilities as in technology parks in Kuala Lumpur area.

No longer true as there are more than 20 technology incubators in the country.Kulim Hi-Tech Park, Perak Tech Park, Iskandar Tech Park, Sarawak Tech Park.

*Jusoh, Sufian.Barrister at Law (LLB. Wales), (LLB. London)NCCR Research Fellow, World Trade Institute, Bern

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Weaknesses in MalaysiaWeaknesses in Malaysia’’s s Incubator Incubator ProgrammeProgramme (cont(cont’’d) d)

5. Technopreneurs suffer from Lack of Funding opportunitiesBanks approach to technopreneurs & their technology. Banks do not fund ‘developmental work’Entrepreneurs must match loans with personal guarantees or collateral. (Private) Venture Companies reluctant to provide seed capital fund.

6. Various Govt Set-up Funds (VC) are not properly disbursed.

Application processes NOT conducted in transparent manners. Difficult bureaucratic measures/grants issued to tech companies which employ ‘know-who’, rather than ‘know how’.Grants being issued to non-deserving ‘know who’ individuals .Depletion of the amount available to those with the ‘know-how’.

*Jusoh, Sufian. (2006). Incubators as Catalysts in Developing High Tech Businesses: Malaysia’s Experience, Africa Tech Development Forum Journal Vol 3(1).

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Reforms to Overcome Weaknesses (Problem 1): Reforms to Overcome Weaknesses (Problem 1): …… All Incubators were funded by Federal Government.All Incubators were funded by Federal Government.

Federal Government’s Concern Over Progress of Incubation (1996-1999)

Up to 1996/99, ALL (36) incubators were federal or state supported incubators.

Too much dependence on federal government funding (both development and operation budget).

No private-owned incubator.

Success stories were lacking/not forthcoming.

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Reforms to Overcome Weaknesses (Problem 1): : Reforms to Overcome Weaknesses (Problem 1): : …… ““All Incubators were funded by Federal GovernmentAll Incubators were funded by Federal Government”” (cont(cont’’d)d)

Effort 1 Effort 1 –– CorporatizationsCorporatizations of Government Departments and Agencies Related to of Government Departments and Agencies Related to Research, Technology and Entrepreneur Development.Research, Technology and Entrepreneur Development.

e.ge.g Technology Park Malaysia, SIRIM, Technology Park Malaysia, SIRIM, KulimKulim HiHi--Tech Park, Tech Park, SEDCsSEDCs, etc., etc.Collect own Revenue (previously collection by AccountantCollect own Revenue (previously collection by Accountant--General Office).General Office).Staff given OptionStaff given Option to join government or to join government or ““corporatizedcorporatized entity with better pay and schemeentity with better pay and scheme””..Partially supportedPartially supported by Federal Malaysian Government.by Federal Malaysian Government.Receive Launching Budget and Development Budget ONLY, but Receive Launching Budget and Development Budget ONLY, but NO Operations Budget. NO Operations Budget.

Agencies must be creative to generate their sources of revenue.Agencies must be creative to generate their sources of revenue.

Effort 2 Effort 2 –– New State GNew State Government linkedovernment linked--incubators are Private Limitedincubators are Private Limited Companies.Companies.e.ge.g PerakPerak TechnoTechno--Trade, Trade, MelakaMelaka ICT Holdings, etc.ICT Holdings, etc.

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Reforms to Overcome Weaknesses (Problem 1): : Reforms to Overcome Weaknesses (Problem 1): : …… ““All Incubators were funded by Federal GovernmentAll Incubators were funded by Federal Government”” (cont(cont’’d)d)

Effort 3 Effort 3 –– Encourage Establishment of Private Incubators via MSCEncourage Establishment of Private Incubators via MSC--Status Status IncubatorsIncubators

MULTIMEDIA SUPER CORRIDOR MULTIMEDIA SUPER CORRIDOR -- MSC.MSC.MSC MSC –– 50km x 15 km Development to Promote Growth of ICT.50km x 15 km Development to Promote Growth of ICT.Introduction of Introduction of ““MSCMSC--Status IncubatorsStatus Incubators”” to promote growth of more to promote growth of more ““privateprivate--ownedowned”” incubators.incubators.MSCMSC--Status Incubators receives same incentives as MSC StatusStatus Incubators receives same incentives as MSC Status--Companies:Companies:

NO INCOME TAX for up to 10 years .or an investment tax allowance, and no duties on import of multimedia equipment.UNRESTRICTED EMPLOYMENT of local and foreign knowledge workers.FREEDOM of ownership by exempting companies with MSC Status from local ownership requirements. FREEDOM to source capital globally for MSC infrastructure, and the right to borrow funds globally. No Internet censorship. Receive competitive telecommunications tariffs. Participation in Tender key MSC infrastructure contracts.

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Status as at 31Status as at 31stst Dec 2006 Dec 2006 .. Breakdown of Incubators in Malaysia .. Breakdown of Incubators in Malaysia According to Type & SponsorsAccording to Type & Sponsors

Technology Incubators 20

All are MSC Status Incubators/NINAAll are MSC Status Incubators/NINAPrivate owned Incubators Private owned Incubators = NINE (9)= NINE (9)

StateState--owned Incubatorsowned Incubators 14+14+

State Econ State Econ DevmtDevmt CorporationsCorporationsMARA Incubators 18 +

Ministry of Entrepreneur Ministry of Entrepreneur DevmtDevmtCraft Incubators Craft Incubators 66

Agro-tech Incubators 3

Others (UUM, UKM, UPM) 11

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TOTAL 72 +

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Weaknesses in MalaysiaWeaknesses in Malaysia’’s s Incubator Incubator ProgrammeProgramme (cont(cont’’d) d)

5. Technopreneurs suffer from Lack of Funding opportunitiesBanks approach to technopreneurs & their technology. Banks do not fund ‘developmental work’Entrepreneurs must match loans with personal guarantees or collateral. (Private) Venture Companies reluctant to provide seed capital fund.

6. Various Govt Set-up Funds (VC) are not properly disbursed.

Application processes NOT conducted in transparent manners. Difficult bureaucratic measures/grants issued to tech companies which employ ‘know-who’, rather than ‘know how’.Grants being issued to non-deserving ‘know who’ individuals .Depletion of the amount available to those with the ‘know-how’.

*Jusoh, Sufian. (2006). Incubators as Catalysts in Developing High Tech Businesses: Malaysia’s Experience, Africa Tech Development Forum Journal Vol 3(1).

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VC Industry Participants (2005VC Industry Participants (2005--2006)2006)

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83

156

380

39

48

31 Dec 2005

461Number of Investee companies

4Joint Ventures

87100% local ownership

Shareholding Structure

184Number of VC professionals

42Number of registered VCMCs

49Number of registered VC funds companies

31 Dec 2006

Source: Malaysian Venture Capital Development Council

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Source of VC Funds (2006: USD 1.0 Source of VC Funds (2006: USD 1.0 bilbil))…… Government is Still the Largest Contributor (40.7%)Government is Still the Largest Contributor (40.7%)

Government, 40.7%

Corporations, 37.6%

Foreign, 7.5%

Banks, 7.3%

Individuals, 5.0%

Pensions, 0.7%Insurance,

1.2%

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Expenditure and Development Budget for Expenditure and Development Budget for Financial Sector, 2001Financial Sector, 2001--2010 (in RM million)2010 (in RM million)

6,380.07,090.0Total

480.0468.0Others2,000.0-Property Fund1,200.04,520.2Government Equity

1,100.01,412.2SME Development1,600.0690.0Venture Capital

9th MP (2006-2010)

Allocation

8th MP (2001-2005)

Expenditure

Programmes

Source: Economic Planning Unit

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These funds are provided by government and managed by its agencies:Current Fund Size:

MTDC Venture Capital Fund RM 1,000 m/USD 293 mMalaysian Venture Capital (MAVCAP) RM 500 m/USD 147mMDeC Pre Seed Fund. RM 80 m/USD 23m

Past Failures and Setbacks:XXX VC Fund (TDCVF) >RM 100m/USD 30mXX Venture Fund (SCVF) RM 120m/USD 35mXX Venture Capital Fund (TTM) RM 10m/USD 3m

Reforms to Overcome Weaknesses: Reforms to Overcome Weaknesses: Lack of Funding Opportunities/VC FundsLack of Funding Opportunities/VC Funds

…… (Problem 5 & 6)(Problem 5 & 6)

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Comment on Best Practices (BP)Comment on Best Practices (BP)……. VC Fund for Specific Incubator . VC Fund for Specific Incubator

Best Practices for Incubator ManagementNumerous Publication on Best Practices Successful BP elsewhere MAY NOT be appropriate for Local Implementation.

“Incubator only earn rental revenue even when Incubatee Companies are Successful”.Hence, Need for Incubator to have own VC Fund.The Case of Incubators Managing VC Funds specific for their Incubatee Companies.

Failures and Setbacks:XXX VC Fund (TDCVF) >RM 100m/USD 30mXX Venture Fund (SCVF) RM 120m/USD 35mXX Venture Capital Fund (TTM) RM 10m/USD 3m

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Considerations on Incubators Managing Considerations on Incubators Managing Own VC Funds and Limited for Own VC Funds and Limited for IncubateeIncubatee Cos.Cos.…… (addressing Problems 5 & 6)(addressing Problems 5 & 6)

“Arms-Length” Approach

VC Evaluation Team must be separate entity from Incubator Management.

The Company Must Become VC Recipient First, before Becoming Tenant/Incubatee Company.

Should not allow current incubatee to become recipient.Use External Third-Party Evaluators if Current IncubateeCompany is being recommended for own VC Funding.VC Fund should be opened to external parties as well.

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Recent Successes of IncubationRecent Successes of Incubationin Malaysiain Malaysia

Technology Park Malaysia has more than Technology Park Malaysia has more than 20 public-listedcompanies in their incubator program.companies in their incubator program.MSCMSC--Tech Tech CommComm Centre has Centre has 5 public-listed companies companies that graduated from their incubator program.that graduated from their incubator program.16 new incubators formed in last 10 years.16 new incubators formed in last 10 years.Nine (Nine (9) are 9) are privateprivate--ownedowned incubators formed in last 3 incubators formed in last 3 years.years.

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Impact Assessment StudyImpact Assessment Study…… Incubator Association (NINA) is also involved.Incubator Association (NINA) is also involved.

Economic Planning Unit (EPU)Economic Planning Unit (EPU) of Prime Ministerof Prime Minister’’s Dept is s Dept is conducting an Impact Assessment Study on Incubators in Wealth conducting an Impact Assessment Study on Incubators in Wealth Creation.Creation.Opportunity for Opportunity for NatlNatl Incubator Network Association to Incubator Network Association to provide input to Government.provide input to Government.

Meeting Held Last April 07.Meeting Held Last April 07.Last Baseline Review Study done in 2004.Last Baseline Review Study done in 2004.Malaysia was a part of earlier study conducted by UNDP in 1999.Malaysia was a part of earlier study conducted by UNDP in 1999.Interesting to Interesting to ““RERE--LOOKLOOK”” at how Malaysian Incubation Industry at how Malaysian Incubation Industry perform and progress against the Four (4) Key Success Factors.perform and progress against the Four (4) Key Success Factors.Are current Incubator Operations sustainable??.Are current Incubator Operations sustainable??.

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Benchmarking Against Benchmarking Against Key Success FactorsKey Success Factors

A.A. In Preparatory ProcessIn Preparatory ProcessB.B. In Implementation ProcessIn Implementation ProcessC.C. Start of Initial OperationsStart of Initial OperationsD.D. Sustainability of Incubator OperationsSustainability of Incubator Operations

LalkakaLalkaka, R. and P , R. and P AbettiAbetti (1999). (1999). Business Incubation and Enterprise Support Business Incubation and Enterprise Support Systems in Restructuring CountriesSystems in Restructuring Countries. UNDP Report.. UNDP Report.

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Benchmarking Against Benchmarking Against Key Success Factors (contKey Success Factors (cont’’d)d)

A.A. In Preparatory ProcessIn Preparatory Process1.1. Reconnaissance Surveys (locations, benefit/cost, etc.)Reconnaissance Surveys (locations, benefit/cost, etc.)2.2. Local consultantsLocal consultants3.3. Identification of Strong SponsorIdentification of Strong Sponsor4.4. Feasibility (entrepreneurial spirit, talent pool, linkages, etc.Feasibility (entrepreneurial spirit, talent pool, linkages, etc.))5.5. Commitment of agencies (federal, state, local, etc.)Commitment of agencies (federal, state, local, etc.)

B.B. In Implementation ProcessIn Implementation Process1.1. Strong Mgmt linkage with Advisory GroupStrong Mgmt linkage with Advisory Group2.2. Careful selection, appointment and remuneration of MgrsCareful selection, appointment and remuneration of Mgrs3.3. Screening potentials of tenants (tech, business, marketing) Screening potentials of tenants (tech, business, marketing) 4.4. Sound tech assistance to supplement local skillsSound tech assistance to supplement local skills

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Benchmarking Against Benchmarking Against Key Success FactorsKey Success Factors

C.C. Start of Initial OperationsStart of Initial Operations1.1. Access to equity, credit and royalty facilitiesAccess to equity, credit and royalty facilities2.2. Involvement of private sectorInvolvement of private sector3.3. Continuing program for improving mgmt skills of incubator staffContinuing program for improving mgmt skills of incubator staff4.4. Links to other SME programs and support systems.Links to other SME programs and support systems.

D.D. Sustainability of Incubator OperationsSustainability of Incubator Operations1.1. Proactive pursuits of opportunities (home/abroad)Proactive pursuits of opportunities (home/abroad)2.2. Creative ways of raising incomes (corporate memberships, fees, Creative ways of raising incomes (corporate memberships, fees,

etc.)etc.)3.3. Political Stability (macroPolitical Stability (macro--econ policies that encourages econ policies that encourages

entrepreneurship, market stimulation, etc.)entrepreneurship, market stimulation, etc.)4.4. Objective reObjective re--evaluation of incubator experience.evaluation of incubator experience.

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Benchmarking NINA Members Against Key Success FactorsBenchmarking NINA Members Against Key Success Factors…… A Personal AssessmentA Personal Assessment

YTL e-Solutions

Usains Holding

Sohosuite

SKALI E-Ventures

SIRIM Technology Incubator

Perak Multimedia Dotcom

N2N Venture Solutions

MSC-M’sia TCC

Melaka K-Economy Incubator

MCA ICT Resource Centre

KHTP Techno centre

Ispring Capital

Eastworld Multimedia

Creative Cluster

BT Multimedia (M)

BIP UTM

BioEnterprise Asia

SustainabilityInitial OperationsImplementationPreparatoryIncubator Name

Overall Rating From Scale of 5 (i.e Low =1, and Very High = 5) = 3.19

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CONCLUSION… Incubation Movement Enjoy HUGE SUPPORT from

Federal Government of Malaysia

Out of Total 72, Out of Total 72, 63 Incubators63 Incubators are supported by Federal Government.are supported by Federal Government.

Introduction of NEW INCENTIVES (MSCIntroduction of NEW INCENTIVES (MSC--Status Incubator) resulted in Status Incubator) resulted in Nine (9) Nine (9) Private IncubatorsPrivate Incubators being formed.being formed.

Tech Incubators & Tech ParksTech Incubators & Tech Parks continue to receive funding/grant for continue to receive funding/grant for establishment of new technology establishment of new technology centrescentres, ,

KulimKulim HiHi--Tech Park Tech Park -- USD 12 milUSD 12 mil for new centres/for new centres/USD1.7 milUSD1.7 mil for for Incubator/Incubator/TechnopreneurTechnopreneur

Programs.Programs.Tech Park MalaysiaTech Park Malaysia –– USD 12 mil for upgrading existing USD 12 mil for upgrading existing centrescentres

Government increased Venture Capital Fund from RM 690m/USD202m Government increased Venture Capital Fund from RM 690m/USD202m to to RM RM 1600m/USD4701600m/USD470 mm for Period 2006for Period 2006--2010, 2010, despite past setbacks.despite past setbacks.

Federal Government Federal Government continue to solicitcontinue to solicit Views/Advice from Incubator Association Views/Advice from Incubator Association (NINA).(NINA).

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521st Generation Incubators

Real Estate, Landlord, Shared facilities, Reactive Support

16YTL EYTL E--Solutions/N2N Venture Solutions/Solutions/N2N Venture Solutions/

BT Multimedia/BIP/UTMBT Multimedia/BIP/UTMBioEnterprise Asia/MICTH/BioEnterprise Asia/MICTH/USAINS/SKALI EUSAINS/SKALI E--VenturesVenturesISpring Capital/Eastern MSC/ISpring Capital/Eastern MSC/

PTTC/Creative ClusterPTTC/Creative ClusterMIRC/MIRC/SohosuiteSohosuite

2nd Generation Incubators

Real Estate, Landlord, Shared facilities, Reactive Support + Consulting/Advisory

7272Number of Incubators

4MSC Tech Com/MSC Tech Com/

KTMSB/KTMSB/SIRIM (STI)/SIRIM (STI)/

Tech Park Tech Park MsiaMsia

3rd Generation Incubators

Facilities + business advisory services + Acceleration Technology Labs

Caution/DangerCaution/Danger…… Majority of Incubators are in Majority of Incubators are in ““11stst Generation versus Generation versus in in ““33rdrd GenerationGeneration”” Category.Category.

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CLOSING REMARKSCLOSING REMARKS…… Assisting Entrepreneurs is a NeverAssisting Entrepreneurs is a Never--Ending ProcessEnding Process

Caution/Danger: Majority of Incubators are in Caution/Danger: Majority of Incubators are in ““11stst GenerationGeneration””Category versus in Category versus in ““33rdrd GenerationGeneration”” Category. Category.

““IncubatorIncubator”” versus versus ““IncubationIncubation””..

Malaysia must create an environment of opportunities that Malaysia must create an environment of opportunities that supports aspiring supports aspiring technoprenuerstechnoprenuers, tolerate failures, and rewards , tolerate failures, and rewards success across different regions.success across different regions.

Incubation and Innovation Support System are needed to form Incubation and Innovation Support System are needed to form PILLARS for Strong National Innovation System.PILLARS for Strong National Innovation System.

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END OF PRESENTATIONEND OF PRESENTATION

THANK YOUannuar62@gmail.com

www.nina.com.my

See also www.btds.biz (publications)

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11stst GenerationGenerationReal estate, shared facilitiesReal estate, shared facilitiesReactive support, Reactive support, LandlordLandlord--Tenant Relationship Tenant Relationship

22ndnd GenerationGeneration++ Advisory services,Advisory services,

Proactive supportProactive support

33rdrd GenerationGeneration++ Access to funding, CoAccess to funding, Co--venturingventuringAccelerating progress, Mentoring + Accelerating progress, Mentoring + Technology LabsTechnology Labs

1990 - 1994 1995 - 1999 2000 - 2010MSC Status Incubators

Incubator/(Physical Facility)Effective Incubation Process and Conducive Ecosystem

Evolution of IncubatorsEvolution of Incubators…… Transformation from 1Transformation from 1stst to 3to 3rdrd Generation IncubatorsGeneration Incubators

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National Innovation System Architecture… Source: Yeoh Beng Keat (MOSTI)

InnovationSupport System

R & DSector

EnterpriseSector

FinancialSector

Strong National Innovation System

Education Sector

Government Sector

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National Innovation SystemNational Innovation System…… Interaction among StakeholdersInteraction among Stakeholders

ENTERPRISEManufacturers/ Service ProvidersEntrepreneursManagersCustomersSuppliers

R & D SECTORUniversities Govt Research

InstitutionsIndustry R&D

FINANCIAL SECTORVenture CapitalistsBanksBusiness AngelsInvestors

INNOVATION SUPPORTTech Commercialisationoffices/centresINCUBATORSTECHNOLOGY PARKSIP Laws/RegulationsBusiness Consultants Clusters/Networks

EDUCATION & TRAININGSchools (Pri/Sec)Vocational/TertiaryCorporate trainingFamily/CommunityService Org/NGO

GOVERNMENTPolicy CoordinationRegulatory & Admin

EnvironmentR&D Funding (Grants/Tax)

Innovation Role Model Delivery System