In early March 2019, Vietnam’s Ministry of Planning and Investment announced the establishment of a national innovation centre (NIC), a $83m project to be located in the Hoa Lac Hi-Tech Park, close to capital city Hanoi. The NIC is expected to become operational in 2020 and has been mandated to serve as a hub for business innovation in the country.

It aims to attract foreign and domestic large-scale technology firms, start-up ventures and venture capital funds that can collaboratively push Vietnam’s IT efforts in both hardware and software development. Hanoi’s desire is that the centre will become the focus of a new and more sustainable industrial development strategy, ‘Industry 4.0’.


International hopes

In the past decade, Vietnam has gained a reputation as an attractive, low-cost platform for export-orientated manufacturing and assembly. FDI inflows touched $19.1bn in 2018 alone, according to government figures, helping keep the economy running at a fast pace. However, the links between local firms and foreign investors have not been as robust as Hanoi had hoped, and local firms still struggle to project themselves into the lucrative world of international production networks.  

The hope had been that FDI projects would provide a bridgehead for domestic firms, by gradually increasing the proportion of inputs they source from local suppliers inside the host country, as per the ‘Asian Tiger’ model. But this has not transpired, largely because the larger investors from countries such as Japan and South Korea seem content to import their inputs, or have brought with them a ‘baggage train’ of inputs suppliers from their home country.  

Thus, Vietnam’s policymakers have been searching for an alternative industrial strategy that will allow the country to maintain its economic growth trajectory, but also make it more sustainable from a social, business and environmental perspective.  

The next generation

Hanoi’s policymakers think part of the answer lies in developing Industry 4.0, as the next-generation industrial strategy has been dubbed. The strategy envisages advances in science and technology as being the new drivers of Vietnam’s economic growth, helping to unlock the sort of international competitiveness that has often evaded Vietnamese firms in the past.  

Industry 4.0 is expected to yield an additional $30bn to $63bn in Vietnam’s GDP by 2030, according to Nguyen Dinh Cung, president of the Ministry of Planning and Investment’s Central Institute of Economic Management, thereby helping to double per-capita GDP by the same date.  

And Vietnam offers some intriguing prospects in this area, including mixing hi-tech with traditional crafts. For example, US-based biotechnology firm Kraig Biocraft Labs announced in January 2019 that it had delivered its first shipment of genetically engineered ‘spider’ silkworms to a new factory in Quang Nam province, where they will be used to scale up production of a new kind of silk fibre. 

It is hoped that the speciality fibres, which offer both strength and flexibility, will have applications in areas such as protective clothing and composites for aircraft manufacture. The company chose Vietnam based on the country’s established sericulture infrastructure, and is collaborating closely with the country’s Institute of Biotechnology, under the Vietnam Academy of Science and Technology, and the Vietnam Sericulture Research Centre.

R&D activities

Additionally, a growing number of R&D activities are springing up around the existing stock of FDI in Vietnam as companies are bringing their R&D operations closer to production. Samsung, the largest single foreign investor in the country, has spent almost $900m in two R&D centres in the country, and other international groups including Panasonic, Yamaha, Bosch, GE, HP and Piaggio have local R&D operations, suggesting the country is not only a manufacturing hub but also a possible centre for innovation.

But as Ousmane Dione, the World Bank’s country director for Vietnam, points out, a key factor in determining the success of Industry 4.0 will be the extent to which government agencies themselves are able to roll out government-to-government, government-to-business and government-to-citizen interventions in a country where the state remains the dominant economic player. “Government will not be a partner to ‘Industry 4.0’ if it is stuck in Bureaucracy 1.0,” says Mr Dione.

While such a strategy sounds enticing, implementation will depend on Vietnam addressing several thorny constraints. From a political perspective, Vietnam’s leadership places the highest premium on maintaining complete control, even when that has adverse ramifications for the country’s economic prospects. While the communist party has entered into a social compact with its citizens to deliver improved incomes, principally through the enactment of economic reforms, there remain ‘red lines’ that it will not cross.  

A prime example is Vietnam’s highly controversial Cyber Security Law, which came into effect in January 2019. Some observers have cautioned that the new law – billed by Hanoi as necessary to combat cybercrime and cyber-terrorism, but widely seen as a blunt instrument for the government to crack down on its critics – will deter tech firms that rely on data usage and the internet.  

The new law presages the imposition of stringent controls on a wide range of technology companies with operations inside the country’s borders. Jeff Paine, managing director of the Asia Internet Coalition, asserts that the law “will have serious consequences for economic growth, investor confidence and opportunities for local businesses”. The law’s blanket approach to data localisation requirements in particular is at odds with the need for data privacy in Vietnam’s Industry 4.0 ambitions, says Mr Paine, and enforcing the law will only hamper the promotion of innovation and connectivity. Less than one week after the new law came into effect, the Ministry of Information and Communication declared that Facebook was in clear violation of it.

Education levels

There are also long-running concerns around human capital in Vietnam, and whether the country’s education system is generating the skills required by the new economy. The development of smart factories and smart cities requires input from smart people – but just 8% of Vietnam’s labour force has a university degree (and undergraduate degrees, in whatever subject, still devote the first year of studies to Marxist-Leninist ideology).

Until now, Hanoi’s policymakers have been able to walk a line that reconciles maintaining socio-political stability while promoting economic change. But an economic reform agenda such as Industry 4.0, which embraces market disruption and collaborating with companies that subscribe to the ‘move fast and break things’ mantra, is another matter altogether.

The key issue will be whether there is a viable version of Industry 4.0 that can exist within the political conditions and regulatory constraints demanded by Vietnam’s leadership. And will foreign technology firms be comfortable committing resources in a country that has draconian laws on access to and storage of data, and where the enforcement of regulations on issues such as privacy and intellectual property is questionable? Vietnam is poised to find out.