Financing Innovation – Some Experience of SME Bank Malaysia Presentation by

1. Financing Innovation – Some Experience of SME Bank Malaysia Presentation by Dr. Sheikh Ghazali Abod (CEDAR-SME Bank of Malaysia) 16th May 2013 Dushanbe, Republic of Tajikistan

2. Objectives • To share on the followings: • Innovation and it’s Malaysian Landscape; • Its Relevance to the Malaysian SMEs; • Motivating Innovation among Malaysian SMEs through Strategic High Impact Programmes; • Types & Issues of Innovation Funding in Malaysia; • Some Experience of SME Bank Malaysia

3. Some Definitions Innovation Implementation of a new or significantly improved product or process in business practices, workplace organisation or external relations. Innovation Activities Allscientific, technological, organisational, financial & commercial steps leading to the implementation of innovation.

4. Types of Innovation • Product & Service Innovation • Process Innovation • Marketing Innovation • Organisational Innovation

5. National Research and Development (R&D) Survey Source: Malaysian Science and Technology Information Center (MASTIC)

6. Global Innovation Index 2012 Malaysia ranked #32 out of 141 countries and #7 in the South-East Asia & Oceanic region.

7. Percentage of Innovation Across Industries (%) 78.95 69.62 64.29 63.64 63.27 63.04 57.82 57.36 51.28 48.28 Motor vehicle, trailers and semi trailers Radio, Television and Communication Equipment and Apparatus Wearing Apparel Medical, Precision and Optical Instrument Watches and Clocks Rubber and Plastic Products Office , Accounting and Computing Machinery Chemicals and Chemical Products Coke, Refined Petroleum Products and Nuclear Fuel Electrical Machinery and Apparatus N.E.C Food Product and Beverages Sector Source: Malaysian Science and Technology Information Center (MASTIC)

8. Percentage by Category of Innovative Companies Others 1% Sole Proprietor 7% Public Listed 4% Partnership 5% Private Limited 83% Source: Malaysian Science and Technology Information Center (MASTIC)

9. Expenditure on Innovation Activities Source: National Survey of Innovation 2005-2008 by MOSTI

10. Why Innovation is Key to Malaysian SMEs? Source:

11. Why Innovation is Key to Malaysian SMEs? Source:

12. Strategic High Impact Programmes to Encourage Innovation for SMEs

13. High Impact Programmes to SMEs Source:

14. High Impact Programmes to SMEs Source:

15. Types of Funding for Innovation in Malaysia

16. Types of Innovation Funding in Malaysia Enterprise Innovation Fund (MOSTI) Science Fund (MOSTI) TechnoFund (MOSTI) eContent Fund (MOSTI) MAVCAP Fund (MAVCAP) MSC Malaysia Research and Development Grant Scheme (MGS) (MDeC) National Creative Industry Policy (KPKK) MIDF Soft Loan Schemes (MIDF) MTDC Commercialisation of Research & Development Fund (CRDF) (MTDC) MTDC Technology Acquisition Fund (TAF) (MTDC) MSC Malaysia ICON2 (MDeC) MAC3 Co-Pro Fund (MDeC)

17. Nature of Innovation Funding By MOSTI • InnoFund is a grant scheme which funds the development or improvement of new or existing products, processes or services with elements of innovation. The project must have economic value and improves the societal well-being of the community. InnoFund can be categorized into Enterprise InnoFund (EIF) and Community InnoFund (CIF). • Scope Of Funding • The funding will cover the following: • Specialised Equipment; • Pre-Clinical/ Clinical Trial/ Field Trial (if applicable); • IP Preparation and Registration in Malaysia only (excluding maintenance); • Market Testing; • Regulatory and Standard Compliance; • Expenditure for Services not exceeding 40% of project cost (consultancy/ testing); and • Raw materials • Project Duration • The project duration is up to 12 months. • Quantum Of Funding • The quantum for each project is up to RM50,000.00 for Individual/ Sole proprietor and RM500,000.00 for Micro/ Small Companies. • Enterprise Innovation Fund • To increase the participation of micro-businesses, individuals in innovative activities and encourage technological innovation of new or existing products, process or services for commercialisation. • Science Fund • It is a grant provided to eligible entities to carry out R&D projects that can acquire and generate new knowledge in strategic basic and applied sciences. • TechnoFund • The TechnoFund is a grant for the pre-commercialization of new and/or cutting edge technologies in the areas of biotechnology, Information and Communication Technology (ICT), Industry, Sea to Space, and S&T Core. • eContent Fund • It is a fund introduced especially for the development of content mainly for entertainment, training and learning, culture and heritage, and information-based.

18. Nature of Innovation Funding By MAVCAP • Wholly owned by the Minister of Finance Incorporated, MAVCAP was allocated RM970 million under it's management. The firm provides an alternative source of high-risk financing for start-ups, seed capital and early stage ventures in the ICT sector and high-growth industries. • The Company commonly invests for a period of 5 – 8 years in seed, start-ups and early stage companies, during which it holds a Board position and drives key management decisions. Initial investments of RM1 million – RM3 million are complemented with Mezzanine allocations valued at RM5 million – RM10 million to fund companies through to the pre-IPO stage. • In later stage investments, MAVCAP typically invests between 3 - 5 years. • MAVCAP is the most active investor in the ICT and high tech industry, through its direct and seed ventures and has invested in close to 90 companies. Its core focus is: • 70% direct investments in Malaysian incorporated companies. • 30% investments in foreign companies with business interests in Malaysia. • To date MAVCAP has seen the listing of six portfolio companies in exchanges in Malaysia, Singapore and the United Kingdom. • MAVCAP Fund • MAVCAP was incorporated in 2001 by the Malaysian Government and is the nation’s largest venture capital (VC) firm which focuses on investments in the local information, communications and technology sector (ICT). • MAVCAP was established to realize the Government’s vision to develop the VC industry and encourage entrepreneurship in the technology sector. In order to deliver on the mandate given, the Company on its part has made the following its mission: • serve as an ideal training ground to groom venture capitalists; • empower entrepreneurs to create wealth; and • generate attractive returns for its investments.

19. Nature of Innovation Funding By MDeC • MSC Malaysia Research and Development Grant Scheme (MGS) • One of the main goals of the Multimedia Super Corridor (MSC) is to catalyse and nurture a competitive cluster of Malaysian ICT/multimedia companies that will become world class over time. • In line with this objective, a total sum of RM85 million has been allocated for the MSC Malaysia Research and Development Grant Scheme (MGS) to support R&D initiatives within the MSC. • Multimedia Development Corporation (MDeC) has been entrusted to manage the grant and oversee the progress and completion of funded projects. • MGS aims to: • Encourage and establish vibrant research and development activities by local companies leading to innovative ICT/multimedia products that possess significant commercial potential. • Increase the creation of Intellectual Property (IP) that enables companies to compete globally. • Strengthen the R&D capabilities of Malaysian knowledge workers. • MSC Malaysia Innovation Voucher • The innovation vouchers is a financial incentive worth of RM10,000 awarded to qualified MSC Malaysia status companies to support collaborative R&D projects from the approved collaborators. • MSC Malaysia ICON2 • ICON, under the National Broadband Initiative (NBI) was created to drive demand of broadband through increasing development of compelling local content • MAC3 Co-Pro Fund • The MAC3 Co-Production Fund (the "Fund") was launched in 2009 to support the creation and development or co-development of Intellectual Properties under the Animation, Games & Computer Graphics sectors of the creative cluster. • Product Development & Commercialisation Fund (PCF) • PCF is aimed at assisting local MSC companies to accelerate the development and commercialisation of innovative, market driven product/solutions/services as well as increasing the creation of Intellectual Property for commercialisation. Up to RM750,000 worth of funding for up to 2 years only.

20. Nature of Innovation Funding By KPKK • National Creative Industry Policy (KPKK) Ministry of Information Communications and Culture • Creative Industries Loan facility is eligible to be applied for by those directly involved in the creative industry activities such as Sole Owner, Joint Owner and private limited companies. Business entities with at least 51% equity by Malaysians. In October 2009, a total of RM200 million worth of funds have been allocated as a catalyst for the creative industry activities such as film, music, animation, and related activities. National Savings Bank (BSN) has been mandated by the Government to manage the allocated funds to provide loan facilities to fund the financial needs of those directly involved in the industry. Facilities Loans offers competitive interest rates where the application will be made to ensure the development and growth of the industry to successfully achieve the government.

21. Nature of Innovation Funding By MIDF • MIDF Soft Loan Schemes • Malaysian Industrial Development Finance Berhad (MIDF) provides the following soft loan schemes: • Soft Loan Scheme for Small & Medium Enterprises (SLSME) • This Scheme assists existing SMEs as well as newly start-up enterprises in project, fixed assets and working capital financing. • The fund for this Scheme is channelled by the Government of Malaysia via SME Corporation Malaysia to MIDF for the implementation of the Scheme. • Financing Amount: • Minimum: RM50,000. • Project Financing - Maximum RM5 million. Fixed Assets Financing - Maximum RM5 million. • Working Capital Financing - Maximum RM3 million. • IT Hardware/Software - Maximum RM500,000. • Soft Loan Scheme for Automation & Modernisation (SLSAM) via MITI to MIDF • The SLSAM was launched to encourage industries to modernise and automate their manufacturing processes; upgrade production capability and capacity; and assist companies in minimising dependence on labour-intensive activities and foreign labour; diversifying into higher value-added activities; and rationalising and streamlining their operations through mergers and acquisitions. • Financing Amount: • Minimum: RM100,000. • Maximum: RM5 million per application. • Up to 85% for new machinery and equipment. • Up to 60% for reconditioned machinery and equipment. • 6. Repayment: • 5 to 7 years including grace period of up to 1 year. • 7. Interest / Profit Rate: • 4% per annum on yearly rest (SMEs). • 5% per annum on yearly rest. (Non-SMEs).

22. Nature of Innovation Funding By MTDC MTDC Commercialisation of Research & Development Fund (CRDF1, CRDF2 and CRDF3) CRDF 1 is a grant for the commercialisation of R&D output from public and private University (PPU) / Government Research Institute (GRI) by a Spin-Off company. CRDF 1 provides funding in the form of partial grants with a maximum of RM500,000or 90%of the eligible expenses (whichever is lower). CRDF 2 is a grant for the commercialisation of R&D output from Public and Private University (PPU) / Government Research Institute (GRI) by a Start Up company. CRDF 2 provides funding in the form of partial grants with a maximum of RM500,000or 70% of the eligible expenses (whichever is lower). CRDF 3 is a grant for (a) the commercialisation of any local R&D by SME; and (b) for the commercialisation of public sector R&D by a non-SME. CRDF 3(a) provides funding in the form of partial grants with a maximum of RM4,000,000or 70% of the eligible expenses for type (a); and up to a maximum of RM4,000,000or 50%of the eligible expenses (whichever is lower) for type (b). MTDC Technology Acquisition Fund (TAF) TAF is established to facilitate eligible Malaysian companies in the acquisition of foreign technologies for immediate incorporation into the company's manufacturing activity. TAF's partial grant enables companies to avoid expensive and often risky technology development stages. TAF provides funding in the form of partial grants with a maximum of RM2 million or 50% of the eligible expenses (whichever is lower).

23. Issues & Challenges of Financing Innovation

24. Hampering Factors of Innovation • Cost factors; • Knowledge factors; • Market factors; • Regulatory factor; and • Organisational factors. • The respondents were asked to rank the importance of these factors as high, medium and low. Taking into consideration for the most frequent factors hampering innovation, the cost of doing business with an average 37.63% admission was the most important (Inset chart). • This was followed by market factors, knowledge factors, organisational factors and regulatory factor. • The most important cost factors were the high cost of innovation and high cost of financing. For the market factors, the major problem perceived was domination of markets by established companies. REGULATORY FACTOR Insufficient flexibility of regulations and standards Excessive perceived economic risks COST FACTOR Innovation costs too high High costs of finance Lack of appropriate sources of finance KNOWLEDGE FACTOR Lack of qualified personnel Lack of information on technology Lack of information on markets Difficulty in finding cooperation partners for innovation Market dominated by established firms MARKET FACTOR Uncertain demand for innovative goods and services ORGANISATIONAL FACTOR No need due to prior innovations Lack of facilities

25. Spinning Effects of Hampering Factors

26. Issues & Challenges In Financing Innovation • The effects of hampering factors of innovation poses risks to financiers of innovation; • Most innovations are thought to bring low expected returns due to inability to capture profits; • 50% or more of the R&D portion in innovation comprises wages and salaries of SMEprts. This creates intangible asset that could be lost if/when they leave • The degree of Output Uncertainty tends to be greatest at the beginning of a research program or project;

27. Issues & Challenges In Financing Innovation • As innovation investments are made over time, new information arrives impact the level of uncertainty • Most often the changes in uncertainty requires constant interaction between financier and innovator which could complicate the project if unfavorable decisions are made; • Asymmetric information problems – between the financier and the Innovator or SMEprts.

28. Some Experiences of the SME Bank Malaysia

29. Integrated Approach In Entrepreneur Development & Innovation Developing Entrepreneurs Financial assistance serves as enabler for SMEs, as engine of growth, to move up the value chain and create viral effect to the economy Hand-holding approach from the entry point to inculcate business acumen and propel SME business to the next level High Impact Developmental Programme Through Synergized Approach of Financial Assistance and Intervention Banking Development Small Medium Enterprises (SMEs) MICRO SMALL MEDIUM

30. Incubation & Innovation Programmes for Entrepreneur Development

31. Entrepreneur Development Roadmap { MATURITY Large SMEs { Medium GROWTH { Small { INFANCY Micros Identifying & Refining Idea Potential Hand-to-Mouth Strategy Capture Market Share & Getting Out of Chaos Mastery of Essential Knowledge/Skills Turning Auto-Pilot On Building a Balanced Business Diversifying Wealth Creation Stage 1 Stage 2 Stage 5 Stage 6 Stage 7 Stage 3 Stage 4 Ideation Harvesting Expansion Sustainability Growth Foundation Survivability { Startups

32. Entrepreneur Development – Programme Matrix

33. CEDAR’s Training Brochures

34. Funding for SMEs thru SME Bank

35. Objectives • To share on the followings: • Innovation and it’s Malaysian Landscape; • Its Relevance to the Malaysian SMEs; • Motivating Innovation among Malaysian SMEs through Strategic High Impact Programmes; • Types & Issues of Innovation Funding in Malaysia; • Some Experience of SME Bank Malaysia

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