Randall S. Jones
OECD Economic Surveys: Viet Nam 2025
Abstract
Achieving Viet Nam’s objective of reaching high-income status by 2045 requires faster productivity gains to support economic growth as demographic trends become less favourable. A key priority is to leverage inflows of foreign direct investment (FDI) to boost productivity. First, it is essential to promote continued FDI inflows, which will become more challenging after recent tariff increases for Viet Nam’s exports. Reducing FDI restrictions, notably in network industries and ensuring adequate infrastructure can help to reap new opportunities. Second, deepening the linkages between domestic companies and foreign-owned firms offers important opportunities for productivity spillovers. This requires expanding firms’ absorptive capacity for foreign technology by upgrading the education system, especially at the tertiary level, improving domestic firms’ innovation capacity, and boosting the export contribution of services. Government policies to help domestic suppliers achieve global standards and to match domestic suppliers with foreign-owned firms would also promote technology transfers. Given that 70% of firms are micro-enterprises, helping small firms scale up would create opportunities for joining GVCs while achieving productivity gains through economies of scale. Increasing their access to financing would promote scaling up. Finally, declining capital productivity suggests a misallocation of resources. Scaling down the state-owned enterprise sector, which gets preferential access to credit, and ensuring fair regulation of state-owned banks and enterprises, would boost productivity.
The Doi Moi reforms launched in 1986 laid the foundation for rapid growth, transforming Viet Nam from a virtually closed, centrally-planned agrarian economy to a major exporter and destination for foreign direct investment (FDI). Real GDP rose at a 6.7% annual average rate between 1990 and 2023 (Figure 4.1, Panel A). On a per capita basis, it rose by 5.7 times over that period, surpassing the Philippines and nearly matching Indonesia (Panel B). Economic growth improved well-being as reflected in the increase in life expectancy from 69 to 75 years over the same period and a reduction in poverty. In 1990, around half of the population lived in extreme poverty. By 2020, the share had fallen below 1%. Still, 19% had incomes below the Upper Middle-Income Country poverty rate (USD 6.85 per day) (World Bank, 2024b).
Note: Panel B shows GDP per capita in PPP exchange rates (constant 2021 USD).
Source: Panel A, OECD Economic Outlook 116 database; Panel B, World Bank, GDP per capita, PPP (constant 2021 international $) | Data, accessed 5 November 2024. Panel C and D, World Bank, World Development Indicators.
Large capital and labour inputs fuelled Viet Nam’s economic take-off as workers shifted from agriculture to manufacturing. The manufacturing sector was driven by FDI inflows that amounted to 4.8% of GDP over 2015-23, exceeding its ASEAN peers, as well as India and China (Figure 4.1, Panel C). During the past decade, FDI accounted for 15% of Viet Nam’s total investment, exceeding domestic private investment at 14% (World Bank, 2024b).
With respect to trade flows, Viet Nam is one of Southeast Asia’s most open markets following its accession to the World Trade Organisation (WTO) in 2007 and 17 bilateral and plurilateral free trade agreements (FTAs), with three more under negotiation. Agreements cover 53 countries that account for 87% of world GDP. These agreements, which cover 85% of Viet Nam’s imports and 70% of exports, cut its average applied tariff on manufactured goods from 16.6% to 1.1% (World Bank, 2024b). Total trade flows (the sum of imports and exports) rose from 19% of Viet Nam’s GDP in 1988 to 184% in 2022, making it Asia’s most trade-dependent economy after Singapore. Viet Nam’s share of world trade climbed from 0.1% in 1996 to 1.5% in 2023, surpassing its ASEAN peers (Panel D). Viet Nam is now the 19th largest exporter in the world. The composition of exports has changed over the years. Initially dominated by agricultural products in the 1980s, it shifted to textiles and footwear in the 1990s and 2000s. By now, electronics and machinery account for nearly half of exports as Viet Nam moves up the value chain and away from labour-intensive exports (see Chapter 1). Foreign-owned firms (i.e., affiliates of multinational enterprises), which produce 73% of Viet Nam’s exports, have driven Viet Nam’s integration in world trade. Their share of imports, primarily parts and components, is also high at 56% despite government incentives for foreign-owned firms to purchase from local suppliers.
Viet Nam, one of the poorest countries in the world in 1985, achieved “lower middle-income country” status in 2011, as defined by the World Bank (Figure 4.2). The government has set a target of reaching upper middle-income status by 2030 and high-income status by 2045. The 2045 target is ambitious, as the relevant threshold is 3.3 times Viet Nam’s 2023 per capita income level, requiring per capita incomes to increase at an annual rate of 6% over the next 20 years. Given the decline in the share of the working-age population, labour productivity would have to increase at a 6.3% annual growth rate. The required growth rates are higher than those achieved during 1990-2010. The difficulty is heightened by the deceleration in world trade; after growing at 1.5 times faster than world GDP over 1990-2011, world trade growth has been slower during the past decade. In addition, global FDI flows have declined.
Note: Gross national income per capita is expressed in US dollars using the Atlas Method. details. The World Bank’s high-income threshold is set at a GNI per capita of USD 13 845 USD as of 2022.
Source: World Bank, GNI per capita, Atlas method (current US$) | Data, accessed 5 November 2024.
The following sections discuss the benefits of Viet Nam’s opening to FDI and international trade and its productivity performance in recent decades. Viet Nam’s growth strategy based on FDI and exports is threatened by recently imposed tariffs for exports to the United States, which can reach up to 46%. This makes it even more important to implement policies to sustain FDI inflows by reducing restrictions, improving infrastructure and easing regulations, as discussed in section 4.4. Policies to deepen the connections between domestic firms and foreign-owned firms (i.e., affiliates of multinational enterprises) in Viet Nam are even more crucial given the likely challenges in attracting FDI in the future. Beyond its direct contribution to capital and employment, FDI can benefit host economies through knowledge and technology spillovers that increase domestic firms’ productivity. A range of policies could help increase productivity spillovers from FDI, including upgrading education and training, strengthening domestic firms’ technological and innovation capacity, increasing the share of domestic services embedded in exports and implementing policies to improve supplier firms and match them with foreign investors, as discussed in section 4.5. Section 4.6 focuses on policies to promote the scaling up of small firms, thereby facilitating their connections to foreign-owned firms and allowing them to boost productivity through economies of scale. Policies to improve resource allocation, in part through a more level playing field between private firms and state-owned enterprises, and reducing corruption, are discussed in the sections 4.7 and 4.8. The chapter concludes with policy recommendations to boost productivity growth.
Viet Nam’s FDI inward stock has increased at a 13.1% annual rate since 2007, when the country became a WTO member (Figure 4.3). The surge in inflows has been supported by: i) Viet Nam’s integration in the world trading system with a global network of FTAs, including CPTPP, Regional Comprehensive Economic Partnership, and FTAs with the EU and the United Kingdom; ii) Viet Nam’s location near major suppliers and consumer markets; iii) a stable political and macroeconomic environment; iv) a rapidly growing domestic economy with a rising middle class; v) a long coastline with major ports; and vi) a young and affordable workforce, with wages below many neighbouring countries (Figure 4.4).
In addition, the government offers corporate income tax (CIT) incentives, such as preferential rates. The standard CIT rate in Viet Nam is 20%, but some projects are taxed at 10%, 15%, or 17% for 15 years, depending on the sector, location, and investment size. Some projects can qualify for tax holidays, where they do not have to pay CIT for a certain period, usually four years, followed by a partial tax holiday, where they only pay 50% of the payable tax for nine years (ADB, 2024). Foreign investors also receive favourable treatment on import duties and the use of land. The provincial level Investment Promotion Agencies (IPAs) can also offer incentives independently of the national government. However, provincial IPAs should not trigger unhealthy cross-regional competition for foreign investment (World Bank, 2022a). While tax incentives have helped attract FDI inflows, they also have drawbacks from a domestic and international perspective and there may be a case for re-evaluating their broader costs and benefits. Tax incentives reduce much-needed fiscal revenues and shift more of the tax burden to the domestic economy, including local companies. In addition, the OECD-led global tax agreement that requires a minimum 15% effective tax rate may reduce the scope for these incentives in the future (Lenain and Redonda, 2022).
Source: UNCTAD (2024), World Investment Report | UNCTAD.
Monthly average wages of manufacturing workers in 2024
Note: TWN indicates Chinese Taipei and HKG indicates Hong Kong SAR (China), including Macau.
Sources: Panel A --JETRO (2024), Fact-finding Survey of Japanese Companies Expanding Overseas Asia and Oceania; Panel B--2024 OECD Economic Survey of Malaysia.
In recent years, FDI inflows to Viet Nam have been stimulated by the diversification of many multinational enterprises (MNEs) away from China and toward other regions, particularly Southeast Asia. This shift was driven in part by the imposition of tariffs on Chinese imports by the United States in 2018. The ad valorem duty on Chinese goods (on top of the standard tariff rate) was 25% on 6 874 goods and 10% on 3 771 items. In response, many companies, including some in the United States, have adopted a diversification strategy of moving production out of China to avoid tariffs barriers imposed by the United States. Viet Nam appears to have gained more FDI inflows from the US-China trade dispute than any other nation as it is a key alternative destination for global firms (Kahn et al., 2024).
FDI inflows have brought significant benefits to Viet Nam’s economy which will be important to sustain in a changing global economy. They provide key resources, including capital, technology, management skills, entrepreneurship, brand and market access (Cong et al., 2017). This leads to higher labour productivity growth and greater research and development (R&D) intensity in sectors receiving more FDI (OECD, 2023c).
Source: CEIC.
The higher productivity in foreign-owned firms reflects their larger size and participation in international trade. Indeed, Vietnamese firms that are exporters and importers have productivity levels that are 27% and 45% higher, respectively, than domestic firms that are not engaged in international trade, after controlling for firm size and sector (Figure 4.6). For firms participating in GVCs, which can be done directly through trade (i.e., by supplying companies located abroad) or indirectly (i.e., by establishing linkages with foreign-owned firms located in Viet Nam), the productivity premium is 55% (domestic firms) and 70% (foreign-owned firms). The premia are higher for firms in advanced manufacturing sectors, such as chemicals, transport and electrical equipment, and lower in labour-intensive sectors, such as apparel. The significant productivity differences are reflected in the wage premia for firms involved in international trade and global value chains (World Bank, 2024b).
Note: Productivity and wage premia measured relative to firms operating in the domestic market (not engaged in imports or exports) after controlling for firm size and sectoral differences.
Source: World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future.
FDI inflows have had a positive impact on productivity through numerous channels:
FDI has been concentrated in the manufacturing sector, which accounted for 61% of the stock of inward FDI in 2023 (Ministry of Planning and Investment, 2023). Consequently, the share of manufacturing – a high-productivity sector – in GDP jumped from less than 8% in 1990 to 27% in 2022, while agriculture’s share declined sharply (Figure 4.7).
Foreign firms in Viet Nam accounted for nearly three-quarters of the country’s exports in 2023. Their share was 90% in key products, such as phones, computers, machinery, apparel and textiles (VietnamPlus, 2024). One firm alone (Samsung) accounts for about one-fifth of Viet Nam’s exports. Viet Nam is now the second-largest smartphone exporter in the world.
Foreign-owned firms’ share of Viet Nam’s formal workforce rose at a 5.6% annual average rate between 1995 and 2019, boosting its share to 35%. About half of employment depends -- directly or indirectly -- on exports, reflecting foreign-owned firms’ large share of exports (World Bank, 2024b) In contrast, employment growth linked to domestic demand fell between 1995 and 2019.
FDI inflows have boosted Viet Nam’s human capital through training and education by leading MNEs, with spillovers to other parts of the economy. For example, Samsung has made major investments in education and training whose benefits extend beyond the areas in which its manufacturing facilities operate, to populations that the company does not employ (Box 4.1).
Foreign-owned firms play a large role in innovation, as around 26% invest in R&D compared to 15% of domestic firms.
FDI has promoted urbanisation, (Testard, 2024) which has been a source of economic growth. More than two-thirds of FDI inflows over 1988-2017 were in areas around Ho Chi Minh City and Hanoi, helping to double the urban area’s share of the population for less than 20% in 1986 to 40% in 2023 (Kim, 2024). Overall, the surge in Chinese FDI in Viet Nam has been concentrated in the northern part of the country, which has traditionally been less prosperous than the south. Consequently, many provinces in the north are now rapidly catching up with those in the south.
Percentage of GDP by sector
Source: Asian Productivity Organisation (2024), APO-Productivity-Databook-2024_PUB.pdf.
Boosting productivity is the key to avoiding the “middle-income trap” and achieving high-income status. Indeed, productivity accounts for half of the gap in income per capita between high-income and developing countries (Grover Goswami, Medvedev and Olafsen, 2019). Before the Doi Moi reforms, labour inputs accounted for over half of the then much lower output growth. Viet Nam’s robust growth since 1990 has been based primarily on capital accumulation. With fixed investment accounting for around one-third of GDP, capital accounted for 62% of output growth over 2010-22 (Figure 4.8).
Total factor productivity (TFP), which measures the efficiency with which labour and capital inputs are used together in the production process, has played a more modest role, contributing 0.3 percentage points to GDP growth between 1970-2022, accounting for only 5% of GDP. In contrast, TFP contributed 1.8 points to China’s GDP growth (equivalent to 25% of GDP over the same period) (Asia Productivity Organisation, 2024). TFP in Viet Nam has made a larger contribution since 2010, accounting for more than one-fifth of growth (Figure 4.8). However, this is below the 45% target set in the Socio-economic Development Plan for 2021-2025 (Government of Viet Nam, 2021).
Source: Asian Productivity Organisation (2024), APO-Productivity-Databook-2024_PUB.pdf.
Labour productivity, which reflects both growth in TFP and capital per worker, grew at an annualised rate of 5.7% over 1990-2022 in Viet Nam, exceeding its ASEAN peers (Figure 4.9, Panel A), supported by significant capital investment. Nevertheless, Viet Nam’s productivity level was relatively low in 2022 (Panel B). Moreover, the productivity growth rate slowed from an annual rate of 5.9% between 2000 and 2010 to 4.6% between 2010 and 2022, well below the 6.5% target set by the Socio-economic Development Plan for 2021-2025. Achieving faster productivity growth depends partly on increasing technology spillovers from FDI inflows and international trade. Indeed, the 2021-25 Plan aims to “improve productivity, quality, efficiency and competitiveness of the economy”.
Viet Nam’s changing demographics underline the importance of productivity growth in achieving high-income status. During the quarter century from 1995 to 2020, the working-age population (20-64) increased by 75%, more than twice as fast as the total population. Consequently, Viet Nam benefitted from a “demographic dividend” as the working-age group’s share of the total population climbed from 48% in 1995 to 61% in 2020 (Figure 4.10). Such a transition is typical in largely agrarian developing economies with historically high fertility rates. The shift to a more urban society with lower fertility is reducing the share of the dependent population and boosting per capita income growth (Lee and Mason, 2006). Looking ahead, the population pyramid will become more of a rectangle, reflecting the decline in Viet Nam’s fertility rate from 6.3 children per woman in 1960 to 2.0 by 2005. Consequently, demography will become a headwind, as the working-age group’s share of the total population is projected to edge down to 59% by 2045. The elderly dependency ratio (persons aged 65 and over as a share of the working-age population) will rise from 12% in 2020 to 30% in 2045. In contrast, China benefited from the demographic dividend until 2010, when its per capita income was 48% higher than Viet Nam in 2023 (Testard, 2024).
Samsung, the largest foreign investor in Viet Nam, began producing colour television sets for the Vietnamese market in 1996. Its presence has expanded significantly since 2009 with the creation of four wholly-owned subsidiaries in mobile phone manufacturing. In 2023, Samsung was the top investor in Viet Nam with USD 22 billion and one of the biggest employers with 112 000 workers. Consequently, Samsung and Viet Nam have become increasingly interdependent: Viet Nam accounts for around half of Samsung’s global production of mobile telephones while Samsung alone comprised 30% of Viet Nam’s merchandise exports in 2017.
Samsung has also been a catalyst for additional FDI inflows from the major suppliers in its global supply chains. In 2014, Samsung had 67 tier-1 suppliers located in Viet Nam, of which 63 were foreign firms (and 53 were Korean). The four Vietnamese tier-1 suppliers were relegated to supplying packaging materials. By 2017, Samsung had 25 tier-1 Vietnamese suppliers, but none produced parts and components for Samsung’s final products. Instead, they provided services such as meal catering, recreational travel, cleaning and security, as well as packaging. The government estimated in 2017 that the value of goods and services procured locally by Samsung as a proportion of the value of goods produced by Samsung in Viet Nam was around 30%. Foreign suppliers that had followed Samsung to Viet Nam produced most of this domestic value-added.
Despite Samsung’s strong impact on Vietnamese employment and exports, the overall benefit fell short of government expectations that FDI would generate the positive spillovers necessary to create sustainable industrial development in Viet Nam. Domestic firms faced growing competition in product and factor markets as a result of foreign-owned firms’ entry. The majority of Samsung employees in Viet Nam were semi-skilled workers, as they mainly worked in assembling products. Indeed, 89% were secondary school graduates and only 4% had university degrees.
Some developing countries have turned to coercive measures, such as local content and technology transfer requirements, to increase the domestic value-added in products produced by foreign-owned firms and technology spillovers. However, international trade agreements and Vietnamese law prohibits such measures. Instead, the government has used persuasion to encourage Samsung and other major foreign-owned firms to engage with local companies. For example, since 2014, Samsung has collaborated with the government in organising “The Samsung Sourcing Fair”, which allows Vietnamese firms to showcase their products. Although more than 200 domestic suppliers at the Fair expressed interest in supplying parts to Samsung, none of them met Samsung’s exacting standards.
The need to strengthen the capabilities of local firms has been highlighted repeatedly by foreign investors. Provincial governments have largely failed to provide sufficient investment in local technical and vocational education and training (TVET) institutions to meet the rising skills demands that their own FDI policies generate. While improved TVET was not needed to fill the low-skilled assembly jobs, it is necessary to expand access to higher-skilled jobs. Foreign-owned firms also called for more emphasis on science and technology and bringing more foreign tier-1 suppliers to Viet Nam to create more opportunities for domestic firms to become tier-2 suppliers. In response, the government launched the Programme on the Development of Supporting Industry for 2016-25 (Box 4.5).
Samsung has made major investments in education and training whose benefits extend beyond its employees. It created the “Samsung Smart School” programme in rural and remote areas, “New Hope Schools” in impoverished areas, Samsung’s “Innovation Campus” to provide ICT education and a programme to embed digital resources in schools. Samsung also invested USD 220 million to create a research centre in Hanoi in 2022. The cooperative relationship between Samsung and Viet Nam brings benefits to both.
Source: Sheldon and Kwon, 2023; Tong et al., 2019.
Note: TWN indicates Chinese Taipei and HKG indicates Hong Kong SAR (China).
Source: Asian Productivity Organisation (2024), APO-Productivity-Databook-2024_PUB.pdf.
Source: United Nations, Department of Economic and Social Affairs, Population Division (2024). Data Portal, available at https://population.un.org/DataPortal/ (accessed 15 November 2024).
Given the significant benefits from FDI in Viet Nam, policies to promote continued FDI inflows are a priority. Global FDI flows have fallen by more than one-third since their peak in 2015, from USD 2.06 trillion to USD 1.33 trillion in 2023. Geopolitical and technological trends are disrupting the world economy, fragmenting and disrupting trade networks and global supply chains and undermining the stability and predictability of global investment flows (UNCTAD, 2024). The concept of "reshoring" (sometimes called “onshoring”) – the relocation of production back to the investor's home country – appears to have become more prevalent as firms rethink their global supply chains, especially in light of recent tariff increases.
Addressing quality challenges with respect to Viet Nam’s domestic suppliers may support future FDI inflows and strengthen supplier linkages with local firms. The innovation capacities of local firms influence FDI location decisions (OECD, 2023e). Resilient, reliable and innovative SMEs have become a strategic asset in multinationals’ investment strategies. The World Economic Forum (WEF) executive opinion survey on “local supplier quality” ranked Viet Nam 116th out of 137 countries, trailing far behind Malaysia (23rd), Indonesia (54th), the Philippines (73rd) and Thailand (74th) (World Economic Forum, 2024). Lower-quality suppliers and rising wages may prompt some MNEs to shift their investment away from Viet Nam to countries at an earlier stage of development and lower wages. Indeed, real wages in Viet Nam have risen at a 5% annual average rate since 2006, more than double its ASEAN peers, though still below the 8% rate in China (Figure 4.4, Panel B). Labour retention has emerged as a problem for many firms amid inter-firm competition for workers (Sheldon and Kwon, 2022).
Recently announced high US tariffs on Vietnamese exports to the US could constitute risks for sustained FDI inflows. Sustaining foreign investment will more than ever depend on policy improvements, including easing restrictions on FDI inflows, improving infrastructure and easing licensing and regulatory requirements, in addition to addressing corruption (Section 4.7) and ensuring adequate energy supply (Chapter 3).
4.4.1. Easing restrictions on foreign direct investment
Viet Nam’s restrictions on FDI inflows in 2023 were more than four times higher than the OECD average, though slightly below China and the ASEAN average (Figure 4.11, Panel A). Much of the more restrictive policy stance than in OECD economies can be traced back to restrictions in service sectors. Opening up services markets to competition and FDI will be key for moving into higher-value ladders of global value chains. Productivity benefits from FDI can arise from the adoption of best technologies within the same sector, but they can also work across sectors through sourcing relationships, as improvements in intermediate goods markets can improve productivity downstream (Bourlès et al., 2013). Evidence suggests that access to more competitive service inputs, including as a result of FDI in services, can have significant productivity benefits for downstream manufacturing companies (Arnold et al., 2016; Arnold et al., 2011). In India, for example, stronger competition in service sectors has brought large productivity gains to downstream manufacturing sectors using these services as inputs (Arnold et al., 2016). Viet Nam’s membership in the CPTPP will require it to reduce barriers to FDI, including in services.
Viet Nam’s FDI regulations on the telecommunications sector are significantly higher than in the OECD and ASEAN averages (Figure 4.11, Panel B). Communications services must be offered through commercial arrangements with an entity established in Viet Nam and licensed to provide international telecommunication services. While foreign ownership of up to 65% is allowed in non-facilities-based services, the prohibition on majority ownership in facilities-based telecommunications services limits foreign investors’ interest in Viet Nam. Moreover, investment in services with network infrastructure are subject to strong policy discretion as it requires the Prime Minister’s approval (OECD, 2023b). The telecommunications market should be further opened to foreign and domestic investors by reducing entry barriers and lifting the foreign ownership ceiling. RCEP and the ASEAN Framework Agreement on Services require Viet Nam to widen market access to foreign investors in this sector. FDI in the telecommunications sector is crucial to promote progress in digitalisation. It is also essential to create a level playing field between private firms and the state-owned enterprises that dominate the telecommunications market. The Telecom Law asserts that the state must hold a controlling number of shares in important communication network service providers. Consequently, the government owns shares in all three of the main fixed operators and three of the four main mobile operators (OECD, 2023a).
Note: The OECD FDI Regulatory Restrictiveness Index covers only statutory measures discriminating against foreign investors (e.g., foreign equity limits, screening and approval procedures, restrictions on key foreign personnel, and other operational measures).
Some other key service sectors, including banking, are still partly off limits to foreign investors (Figure 4.11, Panel B), holding back potential economy-wide productivity gains. Financial, banking and insurance activities accounted for only 0.2% of Viet Nam’s stock of inward FDI at the end of 2023. Potential foreign competition is limited by the government’s large ownership shares in key commercial banks: 80.9% in BIDV, 74.8% in Vietcombank, 64.5% in Vietinbank, and 100% in Agribank. The shares of total bank assets in 2022 was 42.0% for the seven state-owned banks combined in 2022, 43.8% for private banks and 9.7% for foreign banks. Foreign banks appear anxious to enter the Vietnamese market to service foreign-owned investors in Viet Nam. However, their ownership in Vietnamese banks remains capped at 30%, although the Prime Minister can authorise a higher ceiling for restructuring weak financial institutions. While some major international banks have entered the Vietnamese market, their minority shareholding position reduces the scope for meaningful changes to internal management and corporate governance systems in the acquired firms (OECD, 2018).
Opening the financial sector to foreign participation may raise concerns among national authorities and local financial institutions that foreign-owned banks will ignore SMEs and rural clients, and cherry-pick the best clients, thereby weakening local banks. While the client profile of foreign-owned banks usually differs considerably from that of local banks, the role of foreign-owned banks often expands SMEs’ access to finance from local banks. Faced with more intense competition from foreign banks in the upper segments of the market, local banks frequently focus more on SMEs (OECD, 2018).
International experience shows that foreign banks tend to have positive effects on competition, stability and financial development in their host countries, stemming from numerous positive effects: i) lower costs of financial intermediation and lower rents; ii) increased access to financial services, including for SMEs; iii) enhanced economic and financial performance of borrowers resulting from the introduction of new and more diverse products and services; iv) accelerated domestic reform as a consequence of pressures on governments to increase transparency and improve regulation and supervision to achieve international best practice; and v) greater financial stability as foreign banks are generally more capable of absorbing shocks occurring in the host market, and hence providing a more stable source of capital. Foreign banks also help reduce connected lending, as they are usually not as politically connected as local banks, thereby improving resource allocation (see below).
Scope for reducing entry restrictions may also exist in the distribution sector (Figure 4.11, Panel B). In Mexico, the market entry of multinational retail chains demonstrated the potential of FDI to reduce input prices, resulting in productivity gains for domestic suppliers and cost-of-living benefits for households (Javorcik, Keller, and Tybout, 2008; Iacovone et al., 2015; Maloney et al., 2024).
4.4.2. Improving infrastructure
Transport and storage accounted for only 1.3% of the stock of inward FDI at the end of 2023 (Ministry of Planning and Investment, 2023). In the World Bank’s 2023 Logistics Performance Index, Viet Nam ranked 43rd out of 140 countries and behind Malaysia, Thailand and the Philippines (World Bank, 2023). As with telecommunications and banking, transportation has large spillovers on other sectors. Continued FDI inflows and urbanisation require major infrastructure upgrades (Vina Capital, 2021). While real GDP rose about 3.5 times over 2004-22, freight transport jumped eight-fold (World Bank, 2024b). Viet Nam is ranked 103rd out of 160 countries in road quality (World Economic Forum, 2022), as only two-thirds of its roads are paved. The government envisions major projects, such as a highway and a high-speed train connecting Hanoi and Ho Chi Minh City, a distance of around 1 500 kilometers. It also plans to expand the current 1 290 kilometers of national highway to 5 000 kilometers by 2030, while upgrading road surfaces and expanding connections to major ports, airports, and rail stations (Viet Nam Briefing, 2022b). Road infrastructure’s limited quantity and quality is problematic because 79% of domestic and international freight shipments (on a tonnage basis) are carried by road, with railways and airways accounting for only 0.6% (Kahn, Liao and Zheng, 2024). Developing transportation infrastructure was cited as the third-highest priority by US companies in Viet Nam (American Chamber of Commerce in Viet Nam, 2024).
Private investment in infrastructure has been relatively low in Viet Nam at about 10% of the total. Its share is expected to rise to 20% in coming years, in part through public-private partnerships. Allowing more private, including foreign, investment to support transportation and other infrastructure projects would be beneficial, although lessons from OECD countries point to the importance of achieving the right degree of risk-sharing between the public and private sectors and properly accounting for all present and future contingent fiscal liabilities in the national budget. In addition to the low level of private infrastructure investment, a relatively small share has been in transportation, due in part to the large number of state-owned enterprises (SOEs) in this sector (Figure 4.12). Indeed, there are still 37 SOEs under the auspices of the Ministry of Transportation, despite the government’s equitisation programme. Foreign majority ownership of enterprises providing maritime, surface and air transportation is not allowed. Moreover, participation in maritime, railway and air transportation and the construction of seaports, airports, railways, and national highways require approval from the Council of Ministers and the State Committee for Co-operation and Investment (OECD, 2018).
A second key infrastructure concern is energy, sparked by power outages in the summer of 2023 and May-June 2024. Shortages are particularly a concern in energy-intensive industries, such as semiconductors. Investment in power infrastructure, both generation and transmission, is essential to ensure energy security, particularly in the northern part of the country. At the same time, it also offers opportunities to accelerate the shift towards renewable energy sources (see Chapter 3).
Note: Percentage shares of private infrastructure investment by sector over 1999-2023.
Source: World Development Indicators database.
4.4.3. Easing the burden of licenses and regulation on foreign firms
Regulatory and governance challenges were cited as the most pressing issue in a company survey (American Chamber of Commerce in Viet Nam, 2024). Viet Nam’s investment law applies to both domestic and foreign investors. FDI is further regulated by the Enterprise Law, sector-specific laws and policies and international agreements (World Bank, 2022b). The main concerns in the 2024 survey of firms were: i) inconsistent laws, regulations, and enforcement (69%); ii) an inefficient government bureaucracy (49%); and iii) regulatory compliance risks and insufficient time to comply with new regulations (47%). It is essential to simplify business regulations, including through stronger use of digital technologies in areas such as tax payments and insolvency procedures (OECD, 2023b).
Enhancing business linkages between domestic companies and foreign-owned firms can provide strong benefits for all parties involved:
Domestic companies can increase employment, improve their competitiveness and move up the value chain. Foreign-owned firms’ requirements for higher product quality can drive local suppliers to upgrade their production management and technology. Demonstration effects are important as local companies observe MNEs’ products and technology.
Foreign investors can reduce costs by sourcing more parts and components from local companies.
The Vietnamese economy can upgrade its competitiveness through gains in productivity, innovation, skills and wages.
Productivity spillovers from foreign-owned firms to domestic firms often materialise through supplier relationships (Javorcik, 2004; Haskel, Pereira and Slaughter, 2007; Keller and Yeaple, 2009). The scope will depend on the degree to which the foreign firms are embedded in the local economy, in addition to the size of the productivity gap between the foreign-owned firms and local firms (OECD, 2023d).
4.5.1. The positive impact of FDI is limited by the low domestic content of exports
Although FDI has brought important gains to Viet Nam by boosting economic growth, exports and jobs, it has been less successful in developing backward linkages with the domestic economy. Overall, imports account for about four-fifths of the inputs into Viet Nam’s final exports (OECD, 2021a). Taking account of assembly and other processing, the foreign value-added accounted for 48% of Viet Nam’s gross exports in 2020, up from 36% in 2005 (Figure 4.13, Panel A). In other words, Viet Nam produces only about half of the value in the goods that it exports. The foreign value-added in Viet Nam’s exports is high compared to Indonesia, Malaysia and Thailand, where it has drifted down since 2005. In sum, foreign foreign-owned firms operate, to some extent, in “enclaves” that import much of the intermediate inputs or invite their global suppliers to establish affiliates, thus limiting the integration with the local economy and its potential as a catalyst for growth. By industry, the foreign value added as a share of Viet Nam’s gross exports is highest in the more technology-intensive sectors of machinery and electronics (Figure 4.13, Panel B), which have expanded as Viet Nam has moved up the value chain. However, even for apparel exports, the foreign value-added has risen since 2005 and is much higher than its ASEAN peers.
Sources: Panels A and B: OECD’s Trade in Value Added (TIVA) database, 2023 edition.
4.5.2. Policies to strengthen the links between foreign-owned firms and local firms
Policies intended to attract FDI are very different from those aimed at capturing gains from deeper connections between local domestic firms and foreign-owned firms to raise productivity. The large gap between domestic companies that are connected to foreign-owned firms and those that are not provides an important opportunity for productivity gains. The government’s objective has been for domestic firms to become successful exporters, in part by participating in global value chains. However, domestic firms tend to record significant trade deficits that are more than offset by large surpluses by foreign-owned firms. In 2023, domestic companies incurred a trade deficit of USD 21.7 billion while foreign-owned firms in Viet Nam recorded a merchandise trade surplus of USD 49.7 billion.Over the medium term, stronger links between domestic firms and foreign-owned firms would reduce Viet Nam’s reliance on FDI inflows and enhance its resilience to global shocks.
The experience of major FDI recipients, including Viet Nam, shows that the strength of business linkages between foreign-owned firms and domestic companies is influenced by: i) the characteristics and institutional framework of the host country, such as its domestic innovation system, labour market regulations, intellectual property rights, access to finance and industrial policy; ii) the characteristics of foreign investors, notably the length of their presence in the country, their technological intensity, the motivation behind their investments, their global sourcing and production strategies and their degree of foreign ownership; and iii) the characteristics of the domestic firms, including their human resources, technological and R&D capacity, and scale of production (Farole et al., 2014). This implies the need to focus policy efforts on five major issues to deepen the connections between domestic firms and promote productivity spillovers – education and training, increasing the innovation capacity of domestic firms, promoting technological transfers from advanced countries, increasing the contribution of the service sector, and government policies to develop supplier firms and match them with domestic firms. In addition, helping small firms scale up would also facilitate their partnership with foreign-owned firms.
Upgrading education and training and increasing the innovation capacity of domestic firms
Viet Nam’s growth based on FDI inflows and international trade has made ample use of its comparative advantage – an abundant supply of low-skilled workers producing low-valued-added goods. Indeed, about 85% of the manufacturing jobs in 2018 in the export sector were lower-skilled production jobs, with the remainder in engineering and managerial positions and support services (Figure 4.14, Panel A). The share of production workers in Viet Nam is substantially higher than in other ASEAN countries, including those at an earlier stage of development (Panel B). Moreover, over 90% of manufacturing jobs are classified as low-skilled (World Bank, 2024b). According to a government survey, 72% of the labour force had no technical qualification. Viet Nam should aspire to the rapid development of some East Asian economies based on a strong symbiotic relationship among education, innovation, and economic growth.
Source: World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future.
The weakness in human capital at the upper secondary and tertiary levels in combination with rising manufacturing wages, which almost tripled to nearly USD 5 per hour over 2010-22 (Figure 4.4), may pose risks to Viet Nam’s international competitiveness. Upgrading education and training to increase the supply of high-skilled workers is a priority to sustain FDI inflows and strengthen connections between foreign-owned firms and domestic companies. A study of 60 Vietnamese provinces from 2000 to 2016 found that human capital is the key determinant of domestic firms’ ability to benefit through productivity spillovers from foreign-owned firms (Huynh et al., 2021). Furthermore, human capital must surpass a critical threshold before a province can realise productivity spillovers generated by the foreign-owned firms.
Strengthening secondary education
Spending per student between the ages of 6 and 15 was USD 13 000 (PPP) in 2019, less than one-fifth of the OECD average. Nevertheless, Viet Nam ranked close to the OECD average in the assessment of the skills of 15-year-olds in the 2022 Programme for International Student Assessment (PISA) and well above the average in low and middle-income countries (Figure 4.15). Moreover, academic performance showed relatively minor variations across students from different socio-economic status, which is a challenge for many other countries including in the OECD. For example, students in the top quarter of socio-economic status outperformed the bottom 25% in mathematics by 78 points, compared to an average difference of 93 points across OECD countries. The share of low-performing students was below the OECD average, as was the share of high-performing students (OECD, 2023d). However, school enrolment rates are lower for students from low-income households. For lower secondary schools, the percentage of out-of-school children was 17.9% for the lowest income quintile compared to 1.7% for the top quintile (UNICEF, 2018).
Source: OECD PISA 2022 database.
The average number of years of school in Viet Nam has risen rapidly from 3.8 years in 1970 to 9.3 years in 2021 (Figure 4.16), but still well below the 13.4-year average in Japan and Korea. The lower number in Viet Nam reflects a low secondary school graduation rate. A household survey measuring the secondary school completion rate for the first time found that it was only 58.1% in 2021. One reason may be the low return on a secondary school degree, both in terms of the probability of finding wage employment and higher earnings (Demombynes and Testaverde, 2018). In 2017, the median income of a secondary school graduate was only 7% more than a worker who only completed middle school. However, obtaining a university degree boosted earnings by 25% above a middle school graduate (OECD, 2020). Continued increases in enrolment rates, by better enforcing lower secondary school attendance and making upper secondary school mandatory, are a priority. At the same time, enhancing the quality of education by raising spending per student and focusing more on STEM subjects is essential to boost the financial rewards attached to upper secondary education and improve the quality of the labour force.
Source: Asian Productivity Organisation (2024), Asia QALI database, Asian Productivity Databook 2024.
Expanding tertiary education and professional training
A 2020 survey found that 80% of manufacturing companies faced difficulties hiring skilled workers (World Bank, 2024b). In 2022, only 5% of the manufacturing workforce was considered high-skilled. Moreover, 10% of the population held a bachelor’s degree and 3% held tertiary vocational degrees (Figure 4.17, Panel A). In these two measures, Viet Nam ranks below all of its ASEAN peers (except Indonesia). In 2009, 9% of firms and 6% of exporters identified an inadequately educated workforce as a major constraint. By 2023, this had risen to 12% of firms and 20% of exporters (OECD, 2024). The government has recently taken steps to boost the number of engineers in the semiconductor industry (Box 4.2). Given the intense worldwide competition in this industry, a broad-based effort to develop human capital is needed.
University enrolment in 1990 accounted for less than 3% of the university-aged population (Figure 4.17, Panel B). Over 2000-21, enrolment surged from 0.9 million to 2.15 million. The government has implemented measures to improve university education while enhancing the autonomy of universities. In addition, pathways were created among vocational education institutions, and between vocational colleges and universities, which are under the responsibility of different ministries. Six foreign universities have established branches in Viet Nam. The government recently announced that universities among the top 500 in the World University Rankings will be allowed to establish branches in Viet Nam. Further internationalisation of the university sector would improve its quality.
Enrolment as a share of the university-aged population rose to nearly 30%, though it is still one of the lowest in East Asia (Figure 4.17, Panel B). The government target of increasing the number of university students to 3 million by 2030 faces a number of obstacles: i) the absence of a clear financing plan to achieve quantitative targets; ii) a fragmented tertiary education system consisting of universities, colleges, and TVET institutions managed by multiple ministries; iii) a regulatory framework that is inconsistent with the planned private sector expansion of tertiary institutions; and iv) under-development of alternative modes of education including e-learning and open online courses.
Demographics make an expansion of tertiary education urgent. Viet Nam’s population aged 20 and below amounted to 30.6 million in 2020, accounting for 31.2% of the total population (Figure 4.10). By 2045, the size of this age cohort will fall by more than 8 million and its share of the total population will drop to 23%. Providing tertiary education to the large cohort of young people is an opportunity to accelerate Viet Nam’s progress to high-income status.
Achieving the government’s goal of boosting university enrolment to 4.5 million requires increasing the capacity of the university system and lowering the cost, which makes it difficult for students from lower-income households to enroll. Government spending on education fell from 4.9% of GDP in 2008 (around 18% of government spending) to 2.9% in 2021, below many of its ASEAN peers (Figure 4.18). Much of the decline was due to reductions in spending at the tertiary level, as increased autonomy for tertiary institutions reduced the government’s share of public spending for tertiary education from 68% in 2004 to 22% in 2017. Public expenditure on tertiary education was estimated at 0.3% of GDP in 2016 (1.1% of total government spending and 6.1% of total government spending on education and training) (World Bank, 2020). This is well below the 0.6% in Indonesia and Thailand, 0.9% in China and more than 1.0% in Singapore and Malaysia. The OECD average was 1.5% in 2021 (OECD, 2024a).
Source: Panel A --World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future; Panel B-. UNESCO Institute for Statistics (UIS) database.
Source: World Bank, Government expenditure on education, total (% of GDP) - World | Data, accessed on 12 December 2024.
Most of the decline in public spending was offset by rising tuition fees, which now account for 55% of tertiary education funding, making Viet Nam an outlier in this regard. In OECD countries, government spending accounts for two-thirds of financing for tertiary education (OECD, 2024a). The low level of public funding and the overreliance on tuition fees places severe financial constraints on poorer households. Moreover, current scholarships and need-based loans suffer from low coverage, low amounts, and unattractive repayment terms (World Bank, 2020).
Consequently, Viet Nam has significant inequalities with respect to access to tertiary education and the final stages of secondary education, in contrast to the remarkably equal access to quality education at age 15 revealed by the country’s PISA scores. A pressing challenge is to reduce the 67 percentage-point gap in enrolment rates between students from the top income quintile and those in the bottom quintile. About 40% of the gap is due to differences in secondary school graduation rates and the remainder is explained by less access to university education for lower-income students (World Bank, 2024b). Policies to make university more accessible should thus be accompanied by measures to raise enrolment and graduation rates for secondary school, which is not compulsory, as noted above. In addition to boosting productivity, expanding university education would enhance inclusiveness. Indeed, just one in four workers who complete upper secondary education find employment in the formal sector. Workers with tertiary education are less likely to work in farming and much more likely to hold formal jobs. Almost 90% of people with a university or higher degree hold a wage job with a contract (Demombynes and Testaverde, 2018).
Expanding tertiary enrolment should be accompanied by measures to improve the quality of education and its alignment with the skills demanded by firms. The high unemployment rates of recent university graduates have raised concern about a mismatch between skills and employers’ needs (Demombynes and Testaverde, 2018), This requires a market-driven and competency-based approach that allows employers, who currently have little role in curriculum development, to play a key role in ensuring that education meets their evolving needs (World Bank, 2020). In Viet Nam, student enrolment in tertiary programmes in natural sciences, mathematics and statistics, and ICT is only 0.6% and 1.0%, respectively, compared to OECD averages of 5.0% and 6.4%. The low share is surprising, given that the employment rate of ICT graduates was the highest of the ten fields of study at 93% in 2017. Moreover, their earnings were the second highest, suggesting a lack of information about the job market that could be ameliorated with better career guidance for students (OECD, 2020).
Less than 6% of tertiary education graduates worked for foreign-owned firms in 2017, as foreign firms hired mainly low-skilled workers. This suggests that university education does not develop valuable skills for foreign-owned firms. Instead, more than two-thirds of university graduates work in the state sector. Increasing the role of Vietnamese workers in foreign-owned firms requires adjusting the curriculum to make it more relevant to foreign-owned firms. Sector skills councils that involve employers and training institutions can facilitate this alignment, ensuring that educational offerings meet the evolving needs of employers and prepare workers for emerging jobs and skills. The approach should be results-oriented and evidence-based (World Bank, 2024b).
In addition to expanding tertiary education, there is a need to strengthen the TVET system. In 2021, less than 7% of Viet Nam’s labour force had received vocational training at TVET institutions. Skill mismatches in the labour market are significant; 43% of young people said their training did not match their job (OECD, 2021a). TVET has been too theory-based and lacking in practical experience. The shift of control of vocational education from the Ministry of Labour to the Ministry of Education and Training in 2025 should improve the quality of vocational education. Viet Nam could benefit from the Meister School approach used in German-speaking countries that has been successfully introduced in Korea (Box 4.3).
Given the weakness in vocational education, most TVET graduates need additional training (Sheldon and Kwon, 2023). However, Viet Nam does not have public programmes aimed at improving the skills of workers, which has prompted some large foreign-owned firms in Viet Nam to create their own vocational training programmes to fill the gap (Box 4.1). There is also scope to boost on-the-job training. In 2023, 8.7% of firms provided training in 2023, well below Singapore and the Philippines, where the share tops 40% (Figure 4.20, Panel A).
Semiconductors, a critical input into a wide range of industries, including the information communications technology (ICT) industry, electronics, and motor vehicles, is a highly geographically concentrated industry in which the top five economies account for about three-quarters of global semiconductor value added (Haramboure et al., 2023). In 2021, Viet Nam was the tenth-largest semiconductor exporter, with 2% of global export value (Figure 4.19). Semiconductors account for 7% of the country’s exports. Viet Nam currently has around 26 000 engineers in the semiconductor industry, which consists of approximately 50 chip-design companies and seven assembly, packaging and testing facilities. However, Viet Nam does not produce semiconductors. Without a semiconductor foundry, Viet Nam relies heavily on semiconductor imports. Indeed, it had a semiconductor trade deficit of USD 25 billion in 2022, compared to a surplus twenty years earlier.
The government has ambitious plans to make Viet Nam a hub of the semiconductor industry despite its shortage of skilled engineers and workers. In its planned three-phase programme, Viet Nam intends to train 50 000 engineers between 2024 and 2030. In 2024, around 20 universities began creating a major in chip design. It will also focus on attracting foreign investment and forming a network of at least 100 chip design firms, one semiconductor manufacturing factory, and ten chip packaging and testing facilities. During the second phase of the strategy (2030-40), Viet Nam plans to boost the semiconductor industry by combining self-reliance and FDI inflows. By the final phase (2040-50), Viet Nam aims to complete an autonomous semiconductor ecosystem, master semiconductor R&D and become a leader in some stages and segments of the global chip manufacturing chain.
Under the 2023 U.S.-Viet Nam Comprehensive Strategic Partnership, the two countries signed a Memorandum of Cooperation on Semiconductor Supply Chains, Workforce and Ecosystem Development that “will formalise this bilateral partnership to expand the capacity of the semiconductor ecosystem in Vietnam”.
Source: World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future
Global competition in the semiconductor industry will remain intense, in part as some countries offer generous subsidies in this sector, and it is difficult to foresee Viet Nam’s future opportunities in this sector will be. The availability of skilled labour will be an important factor. In addition, the large amount of electricity needed to produce semiconductors has been a roadblock in the past, making adequate generation capacity a priority.
In 2010, Korea introduced Meister secondary schools, which follow the German dual system of combining education and work experience to improve vocational education at the secondary level. Their curriculum is developed jointly with industry representatives, and internships are mandatory. The focus on practical skills taught in classes is accompanied by hands-on experience acquired at partner companies. Meister schools aim to make vocational education more attractive in a country where parents spend large amounts on after-school tutoring to enable their children to enter elite universities. Indeed, more than 80% of secondary school graduates in Korea continue to college or universities, creating labour market mismatches and an “over-education problem”. One of the objectives of Meister schools is to enable students to be hired directly from secondary school, thus avoiding excessive and unnecessary competition to obtain additional educational qualifications.
Thus far, Korea has established more than 50 Meister schools and their graduates have achieved employment rates of more than 90%. In contrast, only about one third of graduates of regular vocational secondary schools enter the job market, while the remainder enroll in colleges or universities. In addition, the 2013 Work-Study Dual Programme and the 2018 Work First-Study Later scheme have allowed secondary school students to combine study with internships.
Source: 2022 OECD Economic Survey of Korea.
Source: Panel A -- World Bank (2023), Enterprise Surveys Indicators Data; Panel B – World Bank, Research and development expenditure (% of GDP) | Data, accessed 12 December 2024.
Promoting firms’ technological capacity
Enhanced labour force quality should be accompanied by policies to expand the ability of local firms to absorb foreign technology and innovate. Viet Nam ranked 44th out of 133 economies in the 2024 Global Innovation Index of the World Intellectual Property Rights Organisation. Viet Nam was the second highest among 38 lower middle-income countries and 10th among 17 economies in East Asia and Oceania (WIPO, 2024). Viet Nam’s R&D spending as a percentage of GDP nearly tripled from 0.15% of GDP in 2011 to 0.43% in 2021, though it remains below the average of lower-middle income countries, as well as China (2.4%) and Korea (4.9%) (Figure 4.20, Panel B). Moreover, the number of R&D researchers at 779 per million population in 2021 lags behind Thailand (1 699) and Korea (9 082) (World Bank, 2024a).
The increase in Viet Nam’s R&D intensity was driven by the business sector, which increased its share of R&D spending from 26% to 73% between 2011 and 2021. Nevertheless, 84% of Viet Nam’s R&D workforce is in the state-owned sector, which has a network of 478 science and technology institutions R&D spending. Until the mid-1990s, scientific research in Viet Nam was performed primarily outside of universities in the “Academy of Science” and its 38 affiliates, in line with the Soviet model. However, their output has had minimal impact (World Bank, 2020). The Politburo’s Resolution No. 57-NQ/TW in January 2025 calls for developing science, technology and innovation and achieving a digital transformation.
Private R&D is concentrated among large multinational companies operating in Viet Nam, such as Samsung, Apple and Panasonic. For example, Samsung Electronics built a USD 220 million R&D center in Hanoi that employs 3 000 engineers. While such R&D investment is important, it may not be sufficient to bring domestic firms into global value chains, given the weak R&D connections between foreign-owned firms and domestic firms (OECD, 2020). Most private enterprises, the majority of which are SMEs, are not financially capable of investing in R&D (Pham, 2024). Business entities are allowed to set aside up to 10% of their annual profits in a tax-deductible R&D fund, subject to certain conditions. However, such incentives are unlikely to induce small firms and start-ups, which often have no or little profits, to invest in R&D. Instead, more direct support may be more effective. For example, introducing a voucher system to enable small firms to use the Academies of Science to help solve their practical problems could help raise their productivity (Box 4.4). More public funding could help the universities play a more significant role in R&D. Another concern is the weak links between the business sector, universities and the Academies of Science (OECD, 2021). Fostering mobility of R&D staff between the three sectors may improve R&D outcomes.
Given that SMEs could not make sufficient use of the knowledge available in the innovation system, the Netherlands introduced a voucher system in 2004 to allow them to use public research institutions. The vouchers, which range in value from EUR 2 500 to EUR 7 500, enable SMEs to enlist a public research institution to assist with an innovation-related question or problem. The voucher system has successfully allowed SMEs to interact with knowledge providers and incentivised public institutions to work with SMEs. Given the small lump sum available, vouchers are focused primarily on small-scale projects that lead to product and process improvements rather than achieving breakthrough innovations. Up to ten SMEs facing similar problems can pool vouchers to boost the size of the project.
Not surprisingly, the demand for vouchers has exceeded the supply, so vouchers have been allocated randomly through a lottery. An evaluation of the innovation voucher programme found significant benefits for participating SMEs. The benefits became evident within two years of the lottery and persisted in the long run. Compared to firms that were not selected in the lottery, SMEs with vouchers had a higher business survival rate (+4%), were more likely to use the national R&D tax credit programme (+5%), had a higher level of R&D activities (+12% in terms of working hours) and created more jobs (+12%). A voucher system could be effective for Viet Nam given its low cost and the availability of public institutions to perform the research.
Source: OECD (2021), SME and Entrepreneurship Policy in Viet Nam.
Promoting international technology transfer
The transfer of technology by multinational enterprises to entities in host countries is an important source of economic growth worldwide, as reflected in the competition to attract FDI inflows. However, policies that aim to force companies to transfer technology in exchange for permission to gain market access or to operate under the same conditions as local firms create distortions in FDI flows and international trade (Kowalski et al., 2017). For example, some governments, primarily in developing countries, have imposed local content requirements on foreign investors or required them to take local partners. However, this may lead to involuntary technology transfer and the disclosure of proprietary intellectual property that benefits competing firms.
Viet Nam’s FDI promotion policies target investment projects in specific sectors and provide incentives for them based on their R&D spending and the technology characteristics of their investments (Kowalski et al., 2017). Some have argued that foreign-owned firms in Viet Nam should be required to use advanced production technology and transfer it to domestic firms (Vinh et al., 2024). However, the government has avoided such policies, which would likely be less effective for Viet Nam, which does not have the same leverage as a large economy such as China. Moreover, the 2005 Unified Law on Investment explicitly prohibited local content criteria and other forms of foreign investor discrimination. In addition, trade agreements, including the CPTPP and the 2015 Korea-Viet Nam Free Trade Agreement, prohibit performance requirements related to technology transfers. The Japan-Viet Nam Bilateral Investment Treaty forbids requirements such as transferring proprietary technology and achieving a specific value of R&D. On the other hand, Viet Nam’s FDI promotion policies target investment projects in specific sectors and provide special treatment for investment projects based on their technology characteristics. This includes fiscal incentives based on R&D spending by investing firms and technological characteristics of investments (Kowalski et al., 2017).
Rather than imposing technology transfer obligations on foreign-owned firms, Viet Nam should focus on enhancing its absorptive capacity to benefit from foreign technology and maximise the positive spillovers to the domestic economy. The reforms to the education and training systems and measures to boost R&D discussed above can increase such capacity. A study of 93 multinational enterprises in eight high-technology sectors found that research collaboration is the most common form of direct technology transfer (Andrenelli et al., 2019). Viet Nam’s National Strategy for Foreign Investment Cooperation for 2021-2030 (Resolution 52/NQ-CP) emphasizes developing the country’s innovation ecosystems to promote cooperation and technology transfers between FDI and local firms (Viet Nam Briefing, 2022a).
Effective intellectual property rights (IPR) protection is a necessary condition for technology transfers on market-based and voluntary terms because it preserves the technology owner’s interests and prevents an involuntary transfer of technology. Moreover, strengthening IPR promotes technology transfers (Andrenelli et al., 2019). Viet Nam introduced an IPR law in 2005, which has been revised several times to align it with international and regional agreements. The law meets the international standards required by the WTO’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). However, enforcement mechanisms still need improvement (US International Trade Administration, 2024). The government should streamline bureaucratic processes, strengthen enforcement mechanisms and raise public awareness to help protect intellectual property in Viet Nam (Mondaq, 2024). An international ranking of IPR protection placed Viet Nam 40th out of 55 countries, well below the average of major OECD countries, as well as the East Asian economies of Singapore, Chinese Taipei, China, Malaysia and the Philippines (Figure 4.21).
Note: The OECD average consists of 24 large OECD countries.
Source: US Chamber of Commerce (2024), GIPC_IPIndex2024_Full-Report_v4.pdf.
Enhancing the role of services in Viet Nam’s exports
Another way to increase the share of domestic value added in Viet Nam’s exports is to develop the contribution of services. The share of domestic services embedded in its total exports fell from 17% in 2005 to 12% in 2018, compared to 27% to 40% in its ASEAN peers (Figure 4.22). This has been offset by a rise in foreign services’ value-added share in Vietnamese exports to around 19%. Strengthening Viet Nam’s domestic service sector, while remaining open to imported services, is crucial to increasing domestic value added and productivity.
Viet Nam’s domestic services’ contributions as inputs into other sectors’ exports is also relatively small, particularly in manufacturing, where it was 7% in 2018 (Figure 4.22). In a global economy driven by GVCs, it is increasingly difficult to disentangle manufacturing from services, which are the glue that binds GVCs (OECD, 2017). The “servicification” of manufacturing exports implies that the production of goods increasingly incorporates services such as R&D, engineering, transport, logistics, distribution, marketing, sales, after-sale services and IT (World Bank, 2024b). Indeed, the manufacturing sector in particular buys, produces and sells services (Kim, 2019), such as combining a cell phone with a service contract.
Increasing services value added to Viet Nam’s manufacturing sector would help generate demand for higher- skilled jobs and boost overall value added. The low level of value added of services in manufacturing reflects Viet Nam’s small and inefficient domestic service sector (OECD, 2021a). Indeed, it accounted for only 45% of GDP in 2021, well below the 70% OECD average (Figure 4.7). Competitiveness in manufacturing, as well as in the service industry itself, thus depends on the availability of cost-efficient and high-quality services. Consequently, achieving higher domestic value added in Vietnamese exports depends significantly on services.
While Viet Nam is relatively open to trade in goods, its trade in services faces significant restrictions. Indeed, the OECD’s service trade restriction index (STRI) shows that Viet Nam’s service trade barriers were significantly higher in 2023 than the OECD average, although they were in line with its ASEAN peers (Figure 4.23). Services and digital trade face regulatory challenges embedded in domestic laws, which are less transparent and more complex than tariffs on goods. In addition, restrictions on FDI in the service sector (Figure 4.11), such as data localisation and commercial presence requirements, and screening and approval mechanisms for majority acquisitions by foreigners, also limit trade in services. The dominant role of SOEs in some service sectors and the absence of independent regulatory authorities further limit competition (World Bank, 2024b).
In 2018
Source: World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future.
Firm-level studies in Viet Nam report positive productivity effects of service trade liberalisation on service firms and downstream manufacturing firms. For example, the reduction in restrictions on transport, finance and business sectors between 2008 and 2016 was associated with a 2.9% annualised increase in value-added per worker. Moreover, the liberalisation in services was associated with a 3.1% rise in labour productivity of the manufacturing firms that use service inputs, with the largest benefits going to private-sector SMEs (World Bank, 2024b). This is also in line with international evidence (Arnold et al., 2016; Arnold et al., 2011).
Improving supplier development and the matching of domestic and foreign firms
The cost of producing intermediate inputs locally is often higher for foreign-owned firms than importing them due to domestic firms’ weakness in human capital, innovation capacity and lack of technology. In addition to the ideas for addressing those issues, some countries, including Viet Nam, have policies to develop domestic suppliers and match them with foreign investors, thereby leading to productivity spillovers. The concept of “supporting industries” originated in the 2003 Viet Nam-Japan Joint Initiative, which aimed to accelerate Viet Nam’s economic growth by promoting the inflow of Japanese FDI while supporting the development of domestic supplier companies (JCCI, 2023). Under the direction of the Ministry of Industry and Trade (MOIT), the government identified in 2007 key sectors for this initiative – textiles and apparel, leather and footwear, electronics, automobiles, metal products and high-tech industries. In 2015, the government announced a priority list of supporting industry products for each sector eligible for assistance and incentives. This was followed by the Programme on the Development of Supporting Industry for 2016-2025 (Box 4.5), which also aimed to assist domestic firms in entering foreign markets, as well as helping them connect with foreign-owned firms in Viet Nam. Examples of other countries’ approaches to supplier development programmes are discussed in Box 4.6.
Domestic firms that meet international certifications and standards are more likely to supply foreign-owned firms. Conforming to the International Organisation for Standardisation (IOS) criteria, which validate a firm’s success in meeting quality standards, is a minimum standard requirement. Some certification programmes include additional training requirements. However, few domestic firms in Viet Nam have received international standard certifications. Among the members of the Viet Nam Association for Supporting Industries (VASI), an organisation of 300 supplier firms established in 2017, only 14% of the 132 firms specialised in metal processing and 25% of the 16 firms in electronics and electrical components had ISO 14 000 certifications, which are related to environmental issues (World Bank, 2017).
The service trade restriction index (STRI) in 2023
Note: The STRI indices take values between zero and one, one being the most restrictive. The STRI database records measures on a most favoured nation (MFN) basis towards third countries. The indices are based on laws and regulations in force on 31 October 2023.
Source: OECD STRI database (http://oe.cd/stri-db) and TiVA databases.
Supplier development programmes should help local firms meet the standards of foreign-owned firms, which are generally higher than the ISO. The government should help by collecting information about the standards set by foreign companies in their procurement and passing it along to domestic firms. In addition, the government should help cover the cost of compliance and certification associated with these standards. Such support needs to be maintained over the medium term, as it takes time for firms to obtain the necessary skills. Even after meeting basic standards, firms need to continuing improving their technical capacity, digital skills and innovation capabilities so they can maintain their status as suppliers as technology evolves and to be able to move up the product chain (Tong et al., 2019).
Another key to facilitating the participation of domestic firms in GVCs is to strengthen the exchange of information between potential local suppliers and foreign-owned firms. The Programme on the Development of Supporting Industry for 2016-2025 (Box 4.5) includes partial government funding of trade fairs and exhibitions between Vietnamese supporting industry companies and foreign-owned firms, which help potential suppliers gain a better understanding of quality, cost and delivery (QCD) standards. The provincial Investment Promotion Agencies should play a key matchmaking role in connecting local suppliers and foreign-owned firms.
Minimising search costs for foreign firms could be achieved by publishing online databases and directories of local suppliers in English that thoroughly assess these firms’ capabilities (World Bank, 2024b). VASI publishes an annual directory with detailed information on domestic manufacturing enterprises that have successfully become contractors of foreign-owned firms. However, it focuses on only three sectors: mechanical, electronics, and plastic and rubber products. Expanding it to all supporting industries and including prospective suppliers would make it more effective (OECD, 2021a). Moreover, information on potential domestic suppliers should be available to foreign investors before they establish their operations in Viet Nam to increase the potential for links with domestic suppliers (Tong et al., 2019).
The Programme includes total outlays of USD 51 million (0.1% of GDP) over 10 years, with specific targets across several areas.
R&D and technology transfer
Support 1 000 firms in R&D and technology upgrading, with 500 firms receiving technology transfers (USD 27.6 million):
Diffuse technological processes and technical requirements for supplying industry products
Develop national standards and regulations in line with international standards
Support technology transfers through licensing, technology acquisition, and foreign experts
Promote international cooperation in technology training
Training in business administration and production management
Provide 2 000 firms with training, and have 1 500 achieve international/GVC requirements (USD 10.3 million):
Assess enterprise management standards and systems
Prepare training manuals and courses
Promote SME-MNE linkages and attract FDI in supplying industries
Link Vietnamese firms to domestic and foreign manufacturing and assembly firms and support 1 000 Vietnamese firms, and have at least 130 become direct suppliers for manufacturing/assembly of final products (USD 5.1 million):
Develop standards for supplying industry products
Provide technical assistance for enterprises and assessment of enterprise capacity and scale
Select firms with the potential to satisfy international requirements
Organise forums between supplying industrial firms and MNEs
Launch programmes to attract FDI in supplying industries
Organise fairs to supply industrial products and support advertising and brand registration
Training in human resource development and management
Support 500 firms in human resource training and intensify connections between universities, research institutes, training bodies and firms (USD 4.5 million):
Study and assess the human resource needs of enterprises
Create training programmes for managers and technicians of enterprises
Organise training programmes on policy, technology and trade for government officials
Database, website and publications on supplying industries and firms
Compile and disseminate information on supplying industry firms (USD 3.3 million):
Use firm surveys to build a database on supplying firms in different industries
Provide information on supply and demand of supplying industry products
Purchase existing databases
Organise annual workshops and publications
Other measures
Provide consultancy support for enterprises investing in supporting industries
Establish Supporting Industry Enterprises Development Centres (SIDECs) to assist enterprises in R&D and technology transfer, including through testing facilities
Source: Tong et al., 2019.
Improving the financial position of domestic suppliers would also help them to compete with tier-1 and tier-2 suppliers that relocate to Viet Nam. Foreign suppliers located in export processing zones are exempt from value-added tax (VAT), whereas domestic suppliers can only be reimbursed VAT after proving their products are exported, which generates delays, even in a best-case scenario. This tax incentive could be extended to domestic suppliers that sell more than a certain percentage of their production to firms operating in export processing zones. Foreign-owned firms also receive favourable treatment on corporate income tax as noted above. In addition, domestic suppliers have to borrow in local currency, while foreign suppliers can borrow in other currencies at lower interest rates (OECD, 2021a).
Finally, the government could provide incentives for foreign-owned firms to connect with local firms. Such incentives should be tied to firm performance, targeted, with sunset clauses, and designed to minimise market distortions (World Bank, 2024b). Such incentives should include the service sector, which receives less government support than FDI in manufacturing.
Trade liberalisation prompted Chile and Costa Rica to implement supplier development programmes to help their domestic firms meet international quality standards. Both were led by key government institutions – the Economic Development Agency (CORFO) in Chile and the investment promotion agency (PROCOMER) in Costa Rica.
Chile
CORFO’s approach was based on collaboration between the government, the private sector, NGOs and universities to encourage investment, innovation and entrepreneurship. Linkages between domestic suppliers and foreign-owned firms were encouraged by sector-level databases, industry exhibitions, and training programmes based on private-sector inputs. Costs were shared by CORFO and foreign-owned firms, while private-sector experts provided management consulting services. A “Pro-SME” Seal is awarded to large firms that provide timely payments to SME suppliers. An Inter-American Development Bank study found that these programmes were beneficial to both small suppliers and large buyers in terms of higher sales and employment growth (Arraiz, 2011).
Costa Rica
Three programmes aimed at strengthening linkages between domestic suppliers and foreign-owned firms failed during the 1990s, reflecting a lack of coordination and competition between these initiatives. Moreover, these initiatives lacked a comprehensive strategy to develop suppliers’ absorption capabilities through improved workforce skills and increased innovation capacity in domestic firms.
The CR Provee initiative, launched in 2001, has been more successful in matching suppliers and buyers, in part through supply and demand data. The programme provides in-house training and consultancy services and partnerships with universities. Public agencies help monitor the programme and private-sector entities are consulted to improve it. The business climate was improved by modifying export processing zones and simplifying business registration procedures (OECD, 2021a).
Domestic firms that are integrated in GVCs differ from other firms, most notably in size. While 18% of Vietnamese firms participated in GVCs in 2023, the share was much higher for large companies (62%) than for small ones (12%) (Figure 4.24, Panel A). The participation of domestic suppliers in GVCs is closely linked to their growth and size. First, supplying foreign-owned firms allows domestic firms to expand, thereby achieving economies of scale and higher productivity. Second, achieving an efficient scale of production is a pre-condition for participating in GVCs. SMEs’ small scale of production makes it difficult to produce the quantities demanded by foreign-owned firms and limits their productivity. In addition, firms engaged in GVCs are more diversified in terms of products than companies with no connections to foreign firms. Small firms’ lower participation in GVCs also means that they are less likely to be exporters (Panel B). In sum, small firms tend to be excluded from GVCs because of their size but find it more challenging to expand because of their exclusion from GVCs and international trade.
Source: Panel A -- World Bank (2024), Viet Nam 2045: Trading up in a Changing World – Pathways to a High-Income Future; Panel B: World Bank (2022), Malaysia: SME Program Efficiency Review.
4.6.1. Addressing the shortage of SME financing
The SME sector is dominated by family-owned and operated businesses with limited access to finance (OECD, 2020). A 2023 World Bank survey reported that access to finance ranks as the second most significant obstacle for Vietnamese firms at 21%, considerably above the East Asia and Pacific average (Figure 4.25). The problem is concentrated among domestic firms, while only 9% of companies with foreign ownership reported access to finance as a significant obstacle. SMEs accounts for 22% of total bank lending in Viet Nam, in contrast to their 36% share of GDP. More than one-third of SMEs do not have access to loans, mainly because they lack adequate collateral. Indeed, more than 90% of loans to the business sector are collateralised, using property (38.5%) and capital assets (26.5%). Indeed, the probability of obtaining a business loan in Viet Nam is about 25% lower for SMEs (Viet Nam Financial Times, 2019). For SMEs that do obtain loans, the median amount of their most recent loan and the level of outstanding loans was only about one-tenth that of large companies. Around 45% of SMEs applied for loans in 2015. Of those that did not, about two-thirds said they had no need, reflecting strong cash flow or a lack of growth aspirations. A major concern is for the remaining one-third of “discouraged borrowers”.
Viet Nam has a relatively small number of financing programmes that specifically target SMEs. The two key programmes aimed at increasing lending to small companies -- the SME Development Fund (SMEDF), which went into operation in 2016, and the Credit Guarantee Fund (CGF) -- have relatively low take-up. Lending by the SMEDF is delivered primarily through partnering banks. It provides 80% of the loan amount at interest rates capped below market rates, with the borrowing company required to contribute 20% of the project cost. However, the low interest rates tend to discourage the participation of commercial banks by reducing their profit margins on SMEDF-backed loans (OECD, 2021a).
The required contribution by the borrowers may deter small businesses that are cash-constrained from applying. Low awareness of the SMEDF among SMEs and a lengthy approval process have also been cited as reasons for the limited use of this Fund. In addition, the lending bank is allowed to request hard collateral for up to 100% of the loan amount (OECD, 2021a). The 2019 SME Support Law restricted SMEDF loans to “innovative start-ups” and “SMEs participating in business clusters and value chains”, further narrowing the scope of such support. It also allowed the SMEDF to engage in direct lending. In this case, the maximum loan size should not exceed 80% of the total investment capital of the financed project, up to a ceiling of VND 1 billion (USD 39 167), while the interest rate should be no higher than 80% of the lowest interest rate available from commercial banks. As of August 2023, the SMEDF had disbursed less than VND 600 billion (USD 23.5 million) since its inception to fewer than 40 SMEs (AMRO ASIA, 2023).
Source: World Bank (2023), Enterprise Surveys Indicators Data, www.enterprisesurveys.org.
The CGF has also experienced low demand. Viet Nam has offered credit guarantees through local governments since 2001 and the central government since 2008. The total charter capital of guarantee funds was around VND 1.5 trillion (USD 59 million) in 2019. However, the funds are only allowed to lend up to three times their charter capital, compared to leverage ratios of five to seven times in some European countries. The usage of guarantees has been low; only 2 000 SME loans were backed by the CGF between 2001 and 2017. In 2017, the total value of guaranteed loans was equivalent to 0.12% of total outstanding SME loans and 0.03% of GDP, compared to over 1% in Thailand, over 1.5% in Malaysia and 3% to 4% in Japan and Korea (OECD, 2021a).
Several factors limit the use of credit guarantees. First, SMEs must meet strict conditions to receive a guarantee, especially in terms of assets. Second, commercial banks have been reluctant to accept government-backed guarantees, especially at the local level. They are worried that the guarantees will not be honoured by provincial governments, given that most do not have the minimum about of capital required by the government. Third, the quality of the staff managing the local guarantee funds and the efficiency of the guarantee approval process need to be improved (OECD, 2021a). Fourth, the CGF faces a high rate of non-performing loans (NPLs): by the end of 2017, nearly 10% of loans guaranteed by the CGFs were non-performing (Dang and Chuc, 2019).
Viet Nam has a bank-centred financial system, with bank credit to non-financial corporations amounting to around 130% of GDP, compared to around 85% for ASEAN countries. Bank loans are better suited to more established businesses with proven track records. However, they can be less effective for high-risk, high-growth start-ups and early-stage firms, which tend to have limited collateral and uncertain revenues in the short run and fewer relationships with state-owned banks and large commercial banks.
Meeting SMEs’ financing needs could be supported by mobilising alternative funding sources, as “the traditional forms of financing are found increasingly to be inadequate” (OECD, 2024b). However, market-based financing (defined here as the sum of the market capitalisation of non-financial listed companies and the outstanding amount of non-financial corporate bonds) is around 25% of GDP, compared to around 85% for ASEAN countries. Viet Nam’s venture capital market has grown significantly since its launch in 2004. It was ranked 60th out of 125 countries in the 2023 Venture Capital and Private Equity (VC/PE) Country Attractiveness Index and was described as a “highly attractive market with increasing exposure” (IESE, 2023). However, the legal framework for equity finance is still at the early stages of development in Viet Nam. Most venture capital funds with operations in Viet Nam are legally registered abroad, mainly in Singapore, to escape the uncertainty of Viet Nam’s national regulatory framework. To further develop the provision of equity finance for SMEs, the government could introduce tax deductions for investment in seed and early-stage ventures, either directly or through participation in VC funds, as well as favourable taxation on capital gains (OECD, 2021a).
Creating an appropriate regulatory framework for new forms of attracting equity is crucial to ensure its success and protect all parties involved. Unlike conventional capital-raising methods for early-stage companies, which primarily rely on investments from a small group of professional investors, equity crowdfunding targets a broader range of investors. With numerous small shareholders participating, protecting investors by ensuring transparency and preventing fraudulent activities is crucial. To address the concerns of numerous small shareholders, companies seeking crowdfunding should be required to disclose relevant information to investors and regulatory authorities.
Raising productivity depends in part, on an efficient allocation of resources, including labour and capital. Since 1996, the productivity of capital – output per unit of capital services – has declined by 36% (Figure 4.26), suggesting considerable scope for improving the allocation of capital. Viet Nam is not alone in this regard: G7 countries have also experienced a secular decline in capital productivity (Morkunaite, 2019). While the rapid accumulation of capital in Viet Nam has likely played a role, the significant decline in capital productivity in Viet Nam suggests distortions in resource allocation.
A number of factors determine the allocation of resources. First, the banking system plays a major role in allocating capital across firms in Viet Nam’s bank-centred financial system. State-owned banks, which account for 40% of assets, play an important role, raising concern about the extent to which market criteria are applied in the allocation of credit. As noted above, political connections can be essential to receive financing from financial institutions. Other problems, such as credit ceilings, interest rate ceilings and floors, and the problems in the government bond market, can also create distortions (see Chapter 1). Second, corruption, discussed in the following section, can contribute to a misallocation of resources.
Note: Labour productivity is measured as output per person employed.
Source: Asian Productivity Organisation (2024), APO-Productivity-Databook-2024_PUB.pdf.
4.7.1. Reducing the role of state-owned enterprises and improving their governance
The 2020 Enterprise Law defines SOEs as enterprises in which the government holds more than 50% of charter capital or voting shares. These enterprises hold 28.8% of the country’s capital and account for about 20% of GDP. The average capital per SOE is ten times greater than that of foreign-invested firms and 100 times greater than domestic private firms. SOEs accounted for over half of the revenue of Viet Nam’s 500 largest enterprises in 2017 and the total assets of fully-owned SOEs amount to about 80% of GDP. The larger size of SOEs gives them easier access to finance compared to micro and small-sized firms (Dang et al., 2020). SOEs have preferential access to government procurement contracts and enjoy other benefits, including direct subsidies, concessionary financing, state-backed guarantees, and exemptions from antitrust enforcement and bankruptcy rules, giving them considerable competitive advantages. The OECD’s Product Market Regulations (PMR) index measures rules and regulations that affect competition in product markets, such as the existence and quality of competition law and the role of the state in the economy, including SOEs. The PMR index finds that the negative impact of public ownership in Viet Nam on competition is higher than in all OECD countries and non-member countries in the index (Figure 4.27). Moreover, the level of government control of SOEs was more restrictive than the worst-performing OECD country. In addition, the scope of SOEs was the second highest among countries in the PMR index.
In addition to weakening competition, SOEs are often less efficient than foreign-owned firms and private domestic companies, leading to less business dynamism, weak innovation and subdued productivity growth (OECD, 2023b). Indeed, SOEs’ incremental capital-output ratio (ICOR) is higher, meaning that their investment yields lower returns (OECD, 2021a). Other studies suggest that SOEs are less productive than domestic private enterprises, controlling for their higher levels of investment and technology usage (OECD, 2018). Competition should allow productive firms to expand and uncompetitive ones to shrink or disappear. However, SOEs receive preferential treatment, including favourable access to credit and land. They dominate many sectors, such as mining, public utilities, construction and finance, where labour productivity has declined. Preferential treatment and subsidies for SOEs crowd out private investment and make it harder for privately-owned firms to compete. An effective competition regime requires that firms respect the rules and that those rules are applied equally to all firms – private or state-owned, foreign or domestic (OECD, 2018). Ending favourable lending conditions to firms linked to the government should be part of ensuring a level playing field (OECD, 2023b).
Distortions from state involvement on a scale of 0 to 6, from most to least competition-friendly regulations
Note: Information used to calculate the 2018 PMR indicators is based on laws and regulations in place on 1 January 2018 or a later year depending on when the information was provided by the relevant country (1 January 2022 for Viet Nam).
Source: OECD, Product Market Regulation database and OECD-WBG, Product Market Regulation database.
The reform of SOEs has long been a priority in Viet Nam. The number of SOEs fell from 12 000 to around 2 000 in 2020 (OECD, 2023b), mainly through equitisation, mergers, closures and sell-offs. Equitisation – a broadening of ownership through the conversion of SOEs into joint stock companies – was particularly important (OECD, 2018). However, reductions in government holdings of SOE equities have been slower than planned in recent years. Between 2016-2020, only 39 out of 128 targeted SOEs were equitised, and the total divestment value was 11% of the target (OECD, 2023b). Many equitised SOEs have retained significant state ownership and have failed to attract foreign investors, who have been wary of the risks involved. Accelerating privatisation should be a priority, helping to achieve profound changes in SOEs’ managerial and administrative practices (OECD, 2018). The government aims to continue privatisation, while retaining their ownership in “strategic sectors”, which are not clearly defined.
Along with an acceleration of privatisation, it is essential to increase transparency and improve the governance of SOEs, while reducing the involvement of state ministries and provincial governments in their day-to-day operations (OECD, 2023b). The government’s role as both a business owner and regulator of industries creates conflicts of interest that can give SOEs an unfair advantage over private firms. To prevent conflicts of interest and ensure fair treatment of SOEs, it is essential to establish independent regulatory authorities for key service sectors such as telecommunications, postal services, and transportation. In addition, the competition authority should be given more power to level the playing field for all market participants, including SOEs.
The OECD Guidelines on Corporate Governance of State-Owned Enterprises are useful benchmarks for Vietnamese policymakers as they continue to develop and measure progress in improving their corporate governance frameworks. The Guidelines aim to ensure that SOEs operate efficiently, transparently and in an accountable manner (OECD, 2015). SOE boards of directors should play a strong, autonomous, and professional role, while protected from political influence (OECD, 2023b), in line with the Guidelines. Several international agreements, including the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the EU-Viet Nam Free Trade Agreement, prohibit state aid to SOEs.
Raising productivity will also require improvements in institutions and economic governance. While Viet Nam has made progress, strengthening institutions is a gradual process. As incomes rise, citizens and businesses generally become more demanding with respect to the quality of economic governance, and cross-country comparisons typically point to a positive correlation between incomes and the quality of institutions and governance. Viet Nam’s strong improvements in living standards provides an opportunity for further progress in this important domain, which will in turn feed into stronger productivity performance.
Integrity is a cornerstone of a system of sound economic governance. Public sector integrity is essential to establish trust in government, which in turn helps promote citizens’ compliance with laws, including the payment of taxes. Corrupt practices and weak governance can waste public resources, increase the perception of political risk, worsen the investment climate and exacerbate income inequality by allowing relatively prosperous public officials and businesspeople to divert taxpayer resources.
Viet Nam has made progress in the fight against corruption. Still, corruption has been a persistent problem in Viet Nam for many years, with particular challenges arising from a weak rule of law, lack of transparency and accountability, and a powerful politics-business nexus. The government’s influence in allocating land and capital creates many opportunities for corruption (OECD, 2020). In 2016, the government launched a wide-ranging National Anticorruption Strategy, often referred to as the “burning furnace”. Since then, the government has submitted 18 laws to the National Assembly and issued 127 decrees and 171 resolutions, including a national anti-corruption strategy until 2030. Viet Nam has required civil servants, military officers, and other officials to declare their assets to ensure accountability. These declarations are subject to verification. The anti-corruption campaign forced the resignations of several senior government figures in early 2023. During the past decade, nearly 200 000 party members, including 36 Central Committee members and 50 military and police generals, have been disciplined (Giang, 2023).
Some studies suggest that corruption harms economic growth because it favours the public sector at the expense of the private sector (Nguyen and van Dijk, 2012). The anti-corruption campaign has had a number of positive economic effects and the fight against corruption should be maintained. First, it lowered the informal costs of doing business by reducing bribery and gift-giving, thus improving the investment climate for domestic and foreign firms (OECD, 2020). According to the 2021 Provincial Competitiveness Index survey conducted by the Viet Nam Chamber of Commerce and Industry, the share of businesses paying bribes fell from 70.0% in 2006 to 41.9% in 2021. However, the share of firms that reported paying more than 10% of business revenue in bribes rose from 1.2% in 2020 to 1.7% in 2021, while the share paying 5-10% increased from 2.1% to 5.0% (VCCI, 2021). Second, the anti-corruption campaign, in conjunction with administrative reforms, has streamlined administrative processes for firms and individuals. By cutting red tape, the government has improved the ease of doing business, attracting more investors and fostering economic growth. Third, the anti-corruption campaign has weakened the politics-business nexus, especially in the area of real estate, thereby fostering a fairer business environment. At the local level, most corruption cases involve the sale of under-priced state-owned land to businesses with links to the government (Giang, 2023).
The positive impact of the anti-corruption campaign is reflected in the improvement of Viet Nam’s ranking in the Corruption Perception Index from 119th in 2015 to 83rd out of 180 countries in 2023. However, the scope for improvement remains large, as Viet Nam ranks below other Asian countries, including Japan, Korea, Malaysia, Singapore and China, with respect to perceived corruption (Figure 4.28, Panel A). The World Bank’s control of corruption indicator, which measures perceptions of the extent to which public power is exercised for private gain, as well as the "capture" of the state by elites and private interests, gives similar results (Panel B). While Viet Nam has made considerable progress in this indicator since 2017, some of the gains were reversed in 2023 (Panel C). Corruption is considered to be more severe in the public sector compared to the executive and political spheres (Panel D).
The year 2024 was a busy year for the anti-corruption campaign. Nationwide, 825 new cases involving 1 646 individuals were prosecuted for corruption crimes, a 16.4% increase compared to 2023. Authorities recovered VND 1.33 trillion (USD 52.1 million), exceeding the target set by the National Assembly. The campaign led to the prosecution of high-ranking officials, including former ministers and provincial party secretaries (Vietnamnet, 2024c).
The Ministry of Public Security has pledged to intensify its anti-corruption efforts in 2025, emphasising that there will be “no exceptions” and “no safe zones.” While efforts to reduce corruption are crucial to Viet Nam’s long-run development, in the short run, the campaign has slowed administrative procedures at the local government level, as public officials have become more worried about being investigated. Consequently, policy directions set by the national government are not always implemented at the local level. This has contributed to the low disbursement rate of public investment in 2022, which reached only 68% of its planned target. In some cases, it takes two years to obtain a permit for land use as civil servants take longer to carefully check and verify all the information in investment plans to ensure legal compliance. These delays have been particularly problematic in the real estate sector, which accounts for more than half of delayed projects. It also reflects the lack of a clear framework for land pricing.
Balancing anti-corruption efforts with efficient decision-making is crucial. In addition, enhancing openness would help reduce corruption. Greater emphasis on preventing and removing conditions that favour corruption, rather than simply reacting to it, would be beneficial. Low wages and the immobility of civil servants can encourage collusion between locally influential actors and officials. Further increasing civil servants’ wages and mobility, using downsizing in public employment where possible to offset the cost, may help reduce corruption. Another concern is that prosecutions for corruption are sporadic and politically driven in some cases, as the judicial system lacks independence. Finally, increasing the resources of the Government Inspectorate would help in their fight against corruption (OECD, 2020).
In addition to fighting corruption, the authorities are launching a major initiative to reorganise the state administrative apparatus to improve efficiency and innovation. The principle of “party leadership, state management” has created a parallel structure of Communist Party of Viet Nam (CPV) and government institutions. For each state management agency there is a corresponding CPV institution, resulting in overlapping functions and authority that can result in inefficiencies and weaken governance. In December 2024, CPV leadership identified institutions as "the bottleneck of bottlenecks” and called for institutional reform to make the party-state “lean, compact, strong, efficient, effective, and impactful” to achieve breakthrough economic development. As a first step, the number of ministries and ministerial-level agencies will be reduced from 20 to 15 through mergers. At the local level, party and state agencies will also be merged. Streamlining bureaucratic procedures may also decrease opportunities for corruption by reducing interactions between officials and citizens (Nguyen, 2024).
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B & C: World Bank, Worldwide Governance Indicators; Panel D: Varieties of Democracy Project, V-Dem Dataset v12.
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