There are major obstacles in the business environment that impede access to financial capital, complicate administrative procedures, and inhibit innovation.

Significant Shortcomings Persist in Vietnam’s Business Climate
Photo: Reuters
The World Bank in Vietnam recently launched a new report titled “Vibrant Vietnam: Forging the Foundation of a High-Income Economy” which provides analyses and policy recommendations on how Vietnam can maintain quality growth in the next decade. 
The report suggests that a productivity-driven development model–combining innovation with balanced development and allocation of private, public, human and natural capital–will be key for Vietnam to achieve its goal of becoming a high-income economy by 2045.
Significant shortcomings persist in Vietnam’s business climate. There are barriers to competition that keep too many unproductive firms in business and hold more productive ones back. 
There are too few linkages that could generate beneficial spillovers between large and small firms and between domestic and international ones. And there are major obstacles in the business environment that impede access to financial capital, complicate administrative procedures, and inhibit innovation.
All of these areas require reforms.
• Embrace markets: Mechanisms for an orderly entry and exit of firms ensure that uncompetitive companies will go out of business and resources can flow to more productive firms. A concrete step is to reform the insolvency framework. It is three times more costly and takes ten times longer to liquidate a nonviable firm in Vietnam compared to the global best performers. 
A continued commitment to an open and rules-based trading framework and regional economic integration will equally foster competition and knowledge flows. The most efficient firms will seek international markets which further encourages them to innovate, take advantage of scale economies, and build domestic supplier networks.
• Modernize institutions: Many firms in Vietnam complain that administrative and legal decisions are often not transparent; they seem not based on merit but on favoritism or outright corruption (at the provincial level, almost 60 percent of firms reported to have paid bribes in 2017). 
A business environment in which the most efficient, not the most connected, firms succeed requires a level playing field with clear and legally enforceable rights, rules and regulations. Simplification and digitization of administrative procedures will enhance public sector transparency and efficiency. 
A specific area for urgent reforms is the financial sector to enable more efficient channeling of savings into the most promising investments. To achieve more banking sector competition, direct state intervention and favoritism in directing credit needs to be reduced and the bank supervision and resolution framework strengthened.
Innovative digital banking (notably through mobile phones) and the development of capital markets are two additional channels to foster inclusive finance. The goal is a more flexible and market-based capital market with a broad investor base.
• Rethink incentives: Where markets fail to provide what is needed, more direct government involvement is justified. Increased market-based competition could make useful cooperation between firms more difficult. But linkages between firms in complementary activities or between foreign and domestic firms can raise productivity and overall competitiveness. 
As experience from such countries as Costa Rica, Malaysia or South Korea show, public programs can support the emergence of such linkages through information programs, public-private partnerships, or well-managed industrial parks and business incubators. Firms may also underinvest in innovation or have difficulties acquiring technology especially when intellectual property rights (IPR) and management capacity are weak. Vietnam could emulate China which has strengthened IPR enforcement through specialized courts, and it could more directly invest in innovation support and management training.