Collaborative research and development (R&D) activities between public universities and industry are of importance for the sustainable development of the innovation ecosystem. However, policymakers especially in developing countries show little knowledge on the issues. In this paper, we analyse the level of university–industry collaboration in Malaysia. We further examine the fundamental conditions that hinder university–industry collaboration despite the government’s initiatives to improve such linkages. We show that the low collaboration is a result of an R&D gap between the entities. While (...) the universities engage in basic and fundamental R&D, the private sectors involved in incremental innovation that requires less R&D investments. The different nature of the industries’ R&D requires closer cooperation between firms namely buyers, suppliers and technical service providers and not the universities. Among others, the lack of an intermediary role, absorptive capacity and collaborative initiative by the industry also contribute to the problem. The study suggests that the collaborative activities can benefit both if deliberate and effective efforts on reducing the R&D mismatch are made between the universities and industry. Likewise, proper institutional arrangements in coordinating these activities are required. This result seems to reflect the nature of many developing countries’ national innovation systems, and therefore, lessons from Malaysia may serve as a good case study. (shrink)