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The creation, retention and management of intangible assets or intellectual capital is now seen as vital for sustaining competitive advantage in an increasingly competitive world. This is particularly important for developing nations such as Malaysia, which is a relatively small country with an open economy competing in the global arena. Moitra and Krishnamoorthy (2004) indicate that research and development (R&D) is central for maintaining the competitive positions of firms in a world that is increasingly aggressive and technology driven. The importance of knowledge and knowledge based assets (a synonym for intangible assets) in driving economic performance is widely acknowledged. Bosworth and Rogers (1998) mentioned that change in technology has been acknowledged to improve the performance of firms for a long time. Such changes are generally the result of R&D activities. When the performance of a large proportion of the firms in an economy improves, the performance of the economy itself will improve. Hulya (2004) points out that economic growth patterns have been explained by endogenous technological growth. R&D activities are related to enduring growth in output rates. The phenomenal growth of the US economy can be attributed to technology driven by firm level research and development. Research and development carried out by American firms helps the US to continue to dominate the world’s economy. The Silicon Valley remains as an impressive example of the exceptional ability of firm level research and development to uplift entire regional economies. The level of research and development activities in Malaysia is relatively low. Malaysia lagged behind Indonesia and the Philippines in percentage of sales contributed by new products and percentage of R&D to sales in the year 2000 (Jefferson and Zhong, 2004). Malaysia’s Gross research and development expenditure as percentage of GDP (GERD) was 0.5 in the year 2000, as opposed to Singapore’s 1.89 (APEC, 2004). The private sector’s contribution to research and development expenditure was 58.8 percent in Malaysia, as opposed to Singapore’s 62%. As such, R&D generally, and firm level R&D specifically, can be harnessed much more in Malaysia and similar developing economies to drive firm level performance which will in turn drive economic growth and stability. This study examines the determinants of reported R&D expenditure (where R&D expenditure proxies for R&D activities) in listed Malaysian firms, to gain insights into factors that promote R&D in Malaysian firms. It examines the characteristics of listed firms that undertake R&D in Malaysia and offers policy recommendations for promoting firm level R&D in Malaysia and other developing nations that suffer from similar low levels of R&D. Successful promotion of research and development in private firms can lead to the creation of intangible assets that can boost the growth of local companies and help to establish a competitive edge for the local economy. This competitive edge will enable local firms to successfully match the growing top-notch, international level competition resulting from increasing globalisation, and do well in the global arena. The next section reviews the literature in this area. The following section looks at data and methodology. This is followed by the presentation and discussion of the results and the final part concludes with a summary and discussion.

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Creating competitive advantage through research and development: An empirical investigation of the determinants of research and development reported on annual financial statements