Malaysia arguably has the best government infrastructure and support system for its startup ecosystem, even though it does not have the size of its immediate neighbours Indonesia and Singapore.

With many valuable measures put in place by corporations and the government, Malaysia is in a prime position to be a prosperous startup nation.

The emerging economy

Malaysia is one of the most stable and prosperous countries in Southeast Asia. For the last 25 years, GDP growth has consistently hovered around the 5% mark. GDP per capita has increased leading to increases in household income and expenditure. Such strong growth figures have also assisted in eradicating extreme poverty in Malaysia. In 2014, poverty levels were only at 0.6%.

The Malaysian economy has traditionally been rooted in its strength in exports with over 40% of all jobs linked to the industry. However, the government is taking measures to assist in transitioning the country from industry and agriculture to services, strengthening the domestic market.

Digital connectivity in Malaysia

Although Malaysia has a considerably smaller population (only around 10% of Indonesia), it has a well-developed market for tech-based products. Digital connectivity in Malaysia is, in fact, higher than some other Southeast Asian countries. 71% of the population are active internet users and 65% are active social media users. These figures are markedly higher than others in the region. For example, Indonesia’s internet and social media penetration are 51% and 40% respectively. Malaysia has a strong digital economy, ranking 24th in the 2017 Huawei Global Connectivity Index (GCI).

This is a comprehensive measure of digital economy performance based on 5 core technology “enablers” – broadband, data centres, cloud, big data and Internet of Things (IOT).

Currently, the digital economy comprises 17% of Malaysia’s GDP. With the launch of the Digital Free Trade Zone (DFTZ) and the Malaysia Digital Hub, the Malaysian Treasurer expects this figure to exceed 20% by 2020.

Startup investments

In terms of size and extent of development of the startup ecosystem, Malaysia is at a similar point to Indonesia. Both are very young ecosystems with small valuations and deals. However, Malaysia is highly attractive to investors, with its increasingly foreign-investor-friendly environment much like Singapore. Sequoia Capital and 500 Startups have both invested in Malaysian startups.

Looking at deal flow of Malaysian startups, there is a discernible ‘lag’ in comparison to the rest of the region. Funding was on an upwards trend until 2016, the first year to experience a drop in both deal count and size. That year, there were only 40 funded startups at a total deal value of US$33.1 million compared to the 63 deals valued at US$47.9 million in the previous year. Furthermore, the gap between Malaysia’s median deal size and the Southeast Asian average is widening. In 2013, the difference was US$350,000 and now it is US$870,000.

This is proving to be problematic especially for later stage startups or startups wanting to scale. In these cases, they often go to Singapore. One notable example of this is the unicorn startup GrabTaxi.

The government role in the startup ecosystem

Even before the startup ‘boom’, the Malaysian government worked towards fostering a digital-focused country. In 1996, the Malaysia Economy Digital Corporation (MDEC) was launched to pioneer the transformation of Malaysia’s digital economy with ‘Vision 2020’.

To complement this, Prime Minister Dr. Mahathir Mohammad established the MSC Malaysia (Multimedia Super Corridor) – a special economic zone and high technology business district in Selangor. He envisions MSC Malaysia as a “paramount” platform to accelerate the country’s digital progression.

“MSC is paramount to leapfrog (Malaysia) into the 21st century and to achieve Malaysia’s Vision 2020, the MSC was created to endeavour the best environment to harness the full potential of the multimedia without any artificial limits.” – Dr. Mahatir Mohammad.

In 2003, the Cradle Fund was established. It is an early stage startup influencer incorporated under the Ministry of Finance (MOF) Malaysia. At first, it provided government grants for startups but has recently expanded into venture investments and private equity. In 2017, Cradle Fund intends to invest in 13 startups through Direct Equity 800 (DEQ800) – its newest investment product, focusing on local, early-stage startups.

Perhaps the most pertinent contribution the Malaysian government has made to the startup ecosystem is through MaGIC – the Malaysian Global Innovation and Creativity Centre launched in 2014. It is Southeast Asia’s largest government-backed accelerator program positioning Malaysia as the startup capital of the region.

In addition to nurturing domestic startups, Malaysian government policies also allow foreigners to establish startups with minimal friction. Open immigration and certain tax incentives enable investors and entrepreneurs to establish themselves in Malaysia and then expand across the region.