Vietnam’s economic success story has for decades been fueled by familiar growth engines: cheap labor, capital-intensive investment, and abundant natural resources. But those traditional drivers are now approaching their limits.

The 2020-2025 period has laid bare the fragility of Vietnam’s economy. Successive shocks, from the Covid-19 pandemic to geopolitical conflicts such as the war in Ukraine and the tariff battles between major powers, have taken a heavy toll on stability and growth momentum. When global supply chains fractured and key export markets weakened, the pressure on Vietnam’s economy was immediate.

Adding to the strain is the looming risk for Vietnam of falling into the middle-income trap, which is now more present than ever. Without structural transformation, Vietnam risks becoming “stuck” on the threshold of prosperity, making it difficult to achieve its goal of becoming a high-income country by 2045.

The global context offers both challenges and opportunities. The rise of the digital economy and the green economy is also reshaping the rules of the game. Environmental, social, and governance (ESG) standards are becoming mandatory for entry into major markets.

“That is why rethinking and choosing a new growth model is no longer optional, it is imperative to secure higher, more sustainable growth,” Dr. Le Xuan Sang, Deputy Director of the Vietnam Institute of Economics, emphasized. “Vietnam needs a breakthrough, a comprehensive transformation of its growth model, not only to survive but to rise stronger in an increasingly volatile world.”

Twin drivers of change

To spark a new wave of growth, Vietnam is betting on a dual-engine strategy: reforming institutions to unleash resources while focusing on cutting-edge technologies to leapfrog into the future.

If the economy was to be thought of as a machine, institutions are its operating system. An outdated, overly complex system will slow even the most powerful engine. Recognizing this, Vietnam is pushing ahead with sweeping institutional reform.

At the heart of this effort is a fundamental shift in the government’s management mindset, reflected in landmark laws such as the Law on Science, Technology and Innovation and the Law on the Digital Technology Industry. According to Professor Tran Tho Dat, Chairman of Science and Training Council, National Economics University (NEU), the biggest breakthrough is moving from “process control” to “output management”.

The old management system, built around meticulous paperwork, stifled creativity and made scientists afraid to take risks. The new approach accepts risk in scientific research and evaluates results based on outcomes. Research institutions and scientists are now granted far greater autonomy in budget use, personnel management, and, most importantly, commercialization of research results. By law, at least 30 per cent of profits from commercialization must be allocated as rewards to inventors, turning intellectual capital into tangible assets.

Another breakthrough is the legal adoption of the “regulatory sandbox” mechanism - a safe space where new technologies, products, and services can be tested within a limited scope and timeframe without being constrained by laws designed for traditional business models. This paves the way for breakthroughs in emerging fields such as AI, digital assets, and fintech, allowing innovation to flourish rather than be stifled by the absence of a legal framework.

These changes, together with determined administrative reforms and the building of a transparent, stable legal system, are creating a new “operating system” for the economy - a business environment that encourages creativity and unleashes social resources.

Alongside institutional reform, Vietnam is making bold investments in technological “hardware”. Acknowledging that technology is key to boosting productivity and escaping the middle-income trap, the government has identified a list of strategic priority technologies, with four seen as capable of transforming the economy.

The first is AI and big data. With a vast trove of Vietnamese-language data and a young, tech-savvy population, Vietnam aims to become a regional AI hub. Plans include training 50,000 AI specialists and developing three Vietnamese large language models (LLM) meeting international standards by 2030.

The second is agricultural and food technology. Agriculture is no longer seen as a low-value industry. Through high-tech applications, robotics, the Internet of Things (IoT), and biotechnology, Vietnam seeks to increase value across the agricultural chain, targeting $50 billion in deep-processed agricultural exports.

The third is renewable energy and green materials. Leveraging abundant solar and wind potential, Vietnam is advancing clean energy technologies and battery storage, aiming for 40 per cent of total electricity from renewables by 2030, supporting its net-zero commitment and building a competitive edge in the green economy.

The fourth is biomedicine and pharmaceuticals. Covid-19 underscored the importance of healthcare self-sufficiency, and Vietnam now aims to produce its own vaccines, develop international-standard biological drugs, meet the growing domestic demand, and compete globally.

To turn these ambitions into reality, a series of breakthrough mechanisms are being rolled out. The creation of the National Council for Science, Technology, and Innovation, chaired by the Prime Minister, signals the highest level of political will. Plans to establish four National Technology Institutes with total investment of $1 billion, along with the creation of a $3 billion National Technology Innovation Fund operating under professional venture capital principles, will provide substantial financial resources for research and development (R&D).

Building the ecosystem

Though strategies and goals are clearly defined, Associate Professor Huynh Quyet Thang from the Hanoi University of Science and Technology warned that success will depend on building a comprehensive innovation ecosystem.

Vietnam, he continued, is shaping this ecosystem around a “golden pentagon” model, bringing together five key players: the government (policy-making), enterprises (technology demand and application), institutes and universities (research and training), investment funds (capital), and international partners (technology transfer and expertise).

At the core of this system is talent. To attract and retain leading experts, including world-class specialists, Vietnam is introducing unprecedented incentives: a “Golden Visa” offering five-year residency for foreign experts and their families; a minimum salary of $5,000 per month for leading scientists; and a $500 million Vietnam Talent Scholarship Fund.

Financially, the country aims to lift R&D spending to 1.5 per cent of GDP by 2030, while offering powerful tax breaks, allowing companies to deduct up to 300 per cent of R&D expenses and enjoy a 10 per cent corporate tax rate for 15 years. These measures are designed to spur bold private-sector investment in technology and innovation.

For the vision to take shape, Dr. Sang highlighted three urgent priorities. First, pushing through administrative reforms to remove “invisible” barriers that discourage businesses and investors. Second, enabling domestic enterprises, especially in the private sector, to integrate more deeply into global value chains through real support for technology upgrades, improved management capacity, and stronger links with foreign-invested firms. And third, conducting in-depth studies to reallocate national resources more effectively, from public investment and land to capital use, to avoid waste and fragmentation.

Lessons from East Asia

On the journey to finding its own development path, learning from the experience of countries and territories that have done so previously is invaluable. East Asian economies such as South Korea, Taiwan, Singapore, and mainland China all offer profound lessons on how to achieve growth miracles. Yet perhaps the most important takeaway from these countries is that there is no single formula for success.

Mr. Nguyen Ba Hung, Principal Country Economist at the Asian Development Bank (ADB) in Vietnam, noted that South Korea’s model - driven by giant private conglomerates (chaebol) strongly backed by the government - was highly effective during the country’s economic “take-off”. This approach enabled South Korea to quickly concentrate resources, absorb and master global technologies, and create world-class brands such as Samsung and Hyundai. However, its downside has been the formation of monopolistic structures, which stifle competition and limit the spread of innovation across the economy.

In contrast, Taiwan took a different route. It began with agricultural industrialization and focused on building a highly dynamic ecosystem of small and medium-sized enterprises (SMEs). The government’s role was to create a level playing field, promote healthy competition, and avoid granting special privileges to any corporate “giants”.

Meanwhile, China maximized its export-oriented model and leveraged its vast population to become the “factory of the world”. But this approach has also revealed significant dependence on external markets and brought political and social challenges.

From these diverse experiences, Mr. Hung stressed that the State’s guiding role is critical. While the government should not replace the market, it must set the “rules of the game”, ensure fair competition, and provide support based on actual performance.

Equally important is consistent, substantial investment in science, technology, and innovation. Taiwan and South Korea have invested heavily in R&D - 3.5 per cent and 4.5 per cent of GDP, respectively - levels that Vietnam is still far behind.