Navigating Geopolitical and Economic CrosscurrentNavigating Geopolitical and Economic Crosscurrents

The recent tariff rollbacks between US and China in May 2025 offer only a temporary reprieve in their protracted trade war. Underlying tensions persist, particularly in the technology sector, where semiconductors and artificial intelligence (AI) have become battlegrounds for global supremacy. For Malaysia-already the world’s sixth largest semiconductor exporters-this presents both risks and opportunities.

The US-China conflict has evolved beyond tariffs into a technological decoupling, with semiconductors at its core. China’s push for self-reliance as shown by Huawei’s breakthroughs in AI and chip design has intensified global competition, forcing third-party nations to navigate a bifurcated supply chain.

For countries such as Malaysia, alignment with either bloc risks losing access to critical markets. Instead, Malaysia has positioned itself as a trusted, neutral hub—similar to its role in semiconductor packaging—where US, Chinese, and European firms can coexist without geopolitical friction.  However, sustaining neutrality will require cautiously balancing increasingly heightened geopolitical pressures.

While Malaysia cannot outcompete the US or China in cutting-edge AI foundational models, its strategic neutrality and established role in semiconductor packaging (accounting for 23% of U.S chip packaging) positions it as a trusted manufacturing hub. Major firms like Intel, Micron and Infineon have deepened their investments, with Intel committing USD7 billion expansion in Penang and Micron’s building a USD1 billion memory chip facility.

However, reliance on foreign direct investment (FDI) alone is insufficient. To transition from a manufacturing outpost to an innovation-driven leader, Malaysia must cultivate a robust domestic private investment ecosystem, with a stronger role for capital markets.

The National Semiconductor Strategy (NSS) launched in 2024, provides a framework and roadmap to elevate Malaysia’s role in the global tech ecosystem. This is very timely, as the global semiconductor industry is expected to grow exponentially, driven by soaring demand for generative AI which is poised to explode, growing to USD 1.3 trillion by 2032. However, its success hinges on being able to create a successful ecosystem that can integrate capital markets that helps unlock domestic investment alongside FDI.

Building synergies between FDI and private investments

While FDI in manufacturing thrives in Malaysia, the domestic private investment industry still struggles to mobilize long-term foreign capital for strategic industries like semiconductors and technology—limiting FDI’s positive spillovers. To strengthen its semiconductors and technology ecosystem, Malaysia’s capital markets must bridge FDI and domestic players through direct equity investments into SME and startups, more R&D, and talent development.

A robust domestic private investment ecosystem requires a thriving VC/PE industry with a clear role for institutional investors, streamlined regulations, and an active and robust stock market that supports innovative, higher-risk tech listings. Structural policies—from cultivating an entrepreneurial class to developing financial talent—are equally critical. Ultimately, a synergistic approach—harnessing foreign capital while empowering domestic investment—is vital for Malaysia to solidify its role as a regional high-tech hub.

From State to Market: Lessons from Taiwan’s PlaybookFrom State to Market: Lessons from Taiwan’s Playbook

The rise of Taiwan into a global semiconductor powerhouse is notable and can serve as a successful example of a developmental state, with targeted government industrial policy that became the architect of Taiwan’s semiconductor ecosystem. The journey of Taiwan becoming a global leader in chip manufacturing began in the late 1970s when the Taiwanese government made a strategic decision to shift focus away from agriculture to the semiconductor as a key industry.

Like many other countries that successfully transitioned from developing to developed status, Taiwan used a mix of policies which involved strategic measures but also included liberalisation policies and incentives designed to promote certain industries, especially those considered vital for economic growth and technology advancement to create a world-class ecosystem.

Some of the critical factors for Taiwan’s success story in creating a semiconductor ecosystem of talent, technology and innovation which helped cultivate a world-class leader, Taiwan Semiconductor Manufacturing Co (TSMC), include but is not limited to:

1. Government as provider of early equity: The initial seed capital for TSMC was provided by government’s National Development Fund (NDF) who owned a 48% equity stake in TSMC. The government made an intentional decision to keep its stake below 50% to ensure that TSMC would not be perceived as a state-owned enterprise and could attract private investments and build international partnerships. In essence, the state had to act as venture capitalist in the initial stages. Lacking sufficient private funds initially, government made an offer to Philips (provider of the technology) which owned a 28% stake in TSMC. The significant investment from a reputable international player, such as Philips helped to encourage the local investors to join, including local banks and wealthy Taiwanese families.

2. Set up of Industrial Technology Research Institute (ITRI): In deciding to strategically grow Taiwan’s semiconductor industry, the government first studied previous transfer technology failures and determined that the most common reasons for failure were insufficient R&D investment, lack of peripheral support after the transfer, and untrained personnel.So, the government set up a research and development body, the ITRI in the early 1970s to thoroughly acquire, introduce and transfer new technologies to the private industry. They would oversee the whole process like a project manager and was strategically designed to bridge the gap between academic research and industrial commercialization. Under ITRI, there were 10 different laboratories, including Electronic Research and Service Organisation (ERSO), the primary laboratory doing semiconductor research under ITRI. ITRI eventually played a key role in successfully reshaping the nation’s economy.[1]

3. Facilitate technology transfer and market access: With ITRI as the interface, ERSO first acquired the semiconductor technology licensing from Radio Corporation of America (RCA) which not only helped train Taiwanese engineers in the use of the technology but eventually transferred the emerging CMOS technology to Taiwan. From 1976 to 1980, ITRI spent USD120 million to acquire IC design and manufacturing technologies from abroad. Soon thereafter, they set about transferring its acquisitions to the private industry. Thus, came about Taiwan’s first private semiconductor company, United Microelectronics Corporation (UMC). The Taiwanese also created another private spin-off in 1987 with the launch of its second semiconductor company, TSMC. It is important to note that early equity in TSMC ensured government control and technology transfer as ITRI absorbed the R&D costs for early-stage innovations (e.g. ITRI licensed submicron lithography IP to TSMC at subsidised costs). The strategic tie-up with Philips also facilitated market access by leveraging on Philips’ global sales network to secure TSMC’s first client, Texas Instruments.

4. Build talent pipeline: ITRI also operated as a de facto training ground. Located in one of the most successful technology “clusters” in the world, ITRI was grouped in and around Hsinchu Science Park (HSP), a research and high technology industrial zone established by the government in 1980 together with two world class research universities, National Tsing Hua University (NTHU) and National Chiao Tung University (NCTU). NCTU, NTHU and ITRI train large numbers of workers for the industries in HSP. [2] For example, company executives and ITRI officials teach in the two universities; and university professors turn to ITRI for assistance in developing practical applications of new ideas and sit on advisory boards of local companies.ITRI has also been praised as a “talent incubator” with the transition of Morris Chang, president of ITRI into TSMC. In addition, over 50% of HSP company executives in the 1990s–2000s were ITRI alumni, including MediaTek’s early leadership. ITRI’s partnerships with leading universities such as MIT and Stanford also attracted diaspora talent back to Taiwan.

5. Role of science and industrial parks: Inspired by Silicon Valley, the Taiwanese government’s approach in building a successful semiconductor ecosystem included the HSP, a science and technology park in 1980 with the primary goal of facilitating cluster dynamics and knowledge spillovers. Located near the two of Taiwan’s leading universities and ITRI, Taiwan could attract foreign and overseas Chinese investments in research-oriented companies based at HSP. In 1983, the park had 37 firms. By 2016, there were 487 companies and HSP was estimated to contribute to 15% of GDP[3]. An important point to note about the success of HSP is the link from R&D to production. When it was first conceived as an idea, it was intended as a high-tech park focused on R&D work but much of the success of the park has stemmed from bringing research and production together.

6. Catalyse private semiconductor industry: Another unique feature of Taiwan’s state involvement is its strategy to create spin-offs by underwriting the cost of R&D to benefit the private industry, in addition to providing early equity. The Taiwanese government also incubated the semiconductor industry through incentives and tax breaks, provision of land and infrastructure and talent cultivation but with the ultimate aim was to encourage privatisation and competition, rather than retaining perpetual government control. Once the semiconductor industry gained traction in the private sector, the state reduced its support. Eventually, the government’s stake in TSMC (from the National Development Fund) was significantly diluted over time since its founding in 1987 via its IPO on the Taiwan Stock Exchange (TSE) in 1993 and New York Stock Exchange IPO in1997 and secondary offerings. This was at a time when the private VC and PE industry in Taiwan was still relatively underdeveloped.

7. Diffusion from state to private industry: The TSMC success demonstrates a diffusion from state to the private sector, with government’s share decreasing from 48% to approximately 6.4% from 2005 onwards, ensuring TSMC is no longer reliant on industrial policy and remained competitive in the market. This was evident in the 1990s when both TSMC and UMC faced financial hardship and the government did not intervene to help them. Both companies had to respond using market mechanisms to drive business decision-making. The government adopting a “no safety net” approach fostered an entrepreneurial environment and innovation that prioritised meeting customer demands, not political goals.

8. Engineering a venture capital industry and an ecosystem of startups: Taiwan’s dominance in the semiconductor manufacturing provides a strong foundation for a thriving startup ecosystem. The existing tech and research infrastructure makes the country a conducive place for tech startups looking to begin their journey. The promotion of Taiwan as a technological hub that encourages innovation, and an entrepreneurial spirit combined with government policies supporting startups and SMEs naturally contributed to the development of a class of entrepreneurs with high-quality talent from universities and research institutions opting to join startups or start their own businesses after graduation.However, Taiwan’s venture capital market did not really begin to take off until the mid-1990s even though the Ministry of Finance had created the institutional framework for a Taiwanese venture-capital industry, through the Regulations Governing Venture Capital Investment Enterprises (Regulations) in the early 1980s. It is notable that government involvement in the early Taiwanese venture capital market was extensive- through direct investments and management in the venture capital funds, the Regulations which became the medium through which the government chose to control venture capital funds, and subsidisation through tax incentives.  A crucial aspect of the Regulations was that venture capital funds could “opt out” of the Regulations, limiting government control and monitoring but would then they would not be eligible for tax incentives or government investment.The Regulations also defined the role of venture capitalists as financial intermediaries that specialise in selecting and monitoring investments and expressly required the venture capital enterprise to perform due diligence on the portfolio company’s management, technology, financial conditions, operations and research and development. This clear vision of the role of venture capital recognises the non-financial contributions or “smart capital” that venture capital typically makes to portfolio companies. [4] These provisions in the Regulations may seem unnecessary for more liberal markets such as the US because of the rationale that venture capital markets would naturally gravitate to high-tech investments due its growth prospects. However, nascent venture capital market may take years before it reaches a point of maturation. In Taiwan, government involvement was seen as necessary to promote the establishment of venture capital funds due to its traditional emphasis on the development of the manufacturing industry over the development of the financial sector. This economic policy resulted in the persistence of rigid corporate legal systems, at the expense of encouraging the innovation required for the establishment of venture capital enterprises. However, it is important to note that while the 1983 Regulations limited the freedom of venture capital funds to select investments, the subsequent revisions in 1986 and 1993 allowed for more autonomy and diversification to the Taiwanese venture capitalists. Though the Regulations were seen as a deliberate effort by the Taiwanese government to channel venture capital funds to high-technology enterprises, it did not operate to reduce the market-driven incentives of the investor and fund managers.

Conclusion

Malaysia stands at a pivotal juncture in the global semiconductor and AI supply chain, with its strategic neutrality and robust manufacturing base positioning it as a trusted hub for multinational firms. However, to solidify its role as a regional high-tech leader, Malaysia must bridge the gap between foreign direct investment (FDI) and domestic private capital. The National Semiconductor Strategy (NSS) provides a visionary roadmap, but its success hinges on fostering a synergistic ecosystem where smart policies translate into smart capital.

Key takeaways from this perspective include:

1. Balancing FDI with Domestic Private Investment: While FDI has driven Malaysia’s semiconductor manufacturing growth, domestic private investment remains underdeveloped. Strengthening VC and PE industries, streamlining regulations, and supporting tech listings on the stock market are critical to mobilizing long-term capital for strategic industries.
2. Role of Government to Engineer an Ecosystem: Taiwan’s success demonstrates the importance of state-led initiatives—such as early equity injections, R&D support, and talent pipelines—that eventually transition to private-sector leadership. Malaysia should emulate this model by fostering collaborations between government, academia, and industry to de-risk innovation and attract more private capital.
3. Building a Thriving VC/PE Ecosystem: A robust VC/PE and public market is essential to channel capital into high-growth tech startups. Malaysia can learn from Taiwan’s phased approach, where government incentives initially guided VC investments but gradually gave way to market-driven mechanisms.
4. Talent and Infrastructure Synergies: Science parks, research institutions, and universities must align with industry needs to create a talent pipeline and spur innovation clusters, akin to Taiwan’s Hsinchu Science Park.

To sustain its competitive edge, Malaysia must move beyond passive FDI reliance and actively engineer a capital markets ecosystem that empowers domestic players. By linking smart policies—such as direct equity financing, SME support, and R&D incentives—with private investment, Malaysia can transform from a manufacturing hub into a self-sustaining, innovation-driven semiconductor powerhouse.