Samsung or LG or the Taiwanese electronics firms such as ACER or Asustek or Foxcon. New entry into electronics or the life sciences is no more than a trickle from the deal flow reported by venture capitalists. Detailed information from industrial censuses would cast more light but is unavailable. Thus the key part of Penang’s innovation system – which is comprised of Malaysian business firms that do the actual upgrading, innovating and diversifying – is weak in numbers and in scale. Why this is so is hard to say.<sup>15</sup> It is not apparent that financial resources for expanding capacity or launching a new firm are scarcer than in say Shanghai or Guangzhou or Shenzhen. It is also not apparent that the binding constraint is the government incentive regime. Incentives and public venture capital in Malaysia are not less generous than those of comparators and interviews did not uncover concerns regarding the paucity of incentives. But no systematic evaluation of incentives has been conducted to identify shortcomings and improve its effectiveness.

# **Research Universities and University-Industry Linkages**

Could intermediaries help drive the upgrading of technology and industrial diversification in Penang? There are three types of intermediaries which could contribute in this regard: research universities; research institutes;16 and institutes offering training such as the Penang Skills Development Center,<sup>17</sup> extension and testing services. A growing importance is attached to universities, for two reasons. One is that the quality and skills of the workforce are major determinants of technological and innovative capacity. They also influence the supply of entrepreneurship and in particular, entry into 1997) and Thailand (in 1998) (Hiratsuka 2006). All of Eng Teknologi’s expansion seems to be occurring outside of Penang ("Eng Teknologi counts" 2007). In addition, the development of local suppliers in China is threatening the traditional suppliers based in Penang. While in the past, about 80% of the inputs used in actuator production came from other Penang-based firms, Eng Teknologi currently sources about 50% from Chinese suppliers. With the rapid development of suppliers in China, Eng Teknologi may source the majority of its inputs from China and the share of domestic components (mainly from Penang) may become as small as 20% ("As China Makes" 2007). Furthermore, Eng Teknologi is setting up two R&D centers: one in Senai, Malaysia and the other in Dongguan, China.

> 14 Pentamaster spends 10% of its revenue on R&D with 40 workers dedicated to R&D, although up to 200 workers may be engaged in R&D related activities (P. K. Wong, Chang and Cheng 2007).

> 15 One could argue that firms in Malaysia are still at an early stage of development.  It took a long time for the emergence of innovative firms in Japan.  Similarly, it is only recently that one find innovation-driven firms in Korea and Taiwan (China).

> 16 There are only two research institutes in Penang: the Fishery Research Institute and the Malaysian Institute of Pharmaceuticals and Nutraceuticals at USM

> 17 PSDC actively engages with the industries to design and conduct training to enhance the relevance of its programs.

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