Viet Nam is rapidly becoming a hotspot for startup activity in Southeast Asia. In recent years, there has been a surge in venture capital investments, with an influx of investors from across the region. In 2021, venture capital investments reached a record value of $1.5 billion in 165 deals, before declining in 2022 due to the global capital crunch. International investors and funds have been attracted to Viet Nam by the country’s abundance of talent, low costs, and a large internal market. To date, there have been four unicorns (startups valued at least $1 billion) in Viet Nam, two in gaming (VNG and Sky Mavis) and two in e-payments (VNLIFE and MoMo).
There is ample room for growth in Viet Nam’s entrepreneurial environment. Despite the growth in activity, venture capital investments as a share of GDP lag behind those in more established startup hubs in Southeast Asia, such as Singapore and Indonesia (Figure 1). The Vietnamese private sector produces a relatively high share of new businesses, but they remain concentrated in low productivity and low value-added sectors such as wholesale and retail trade. Knowledge-intensive or technology-driven startups, coveted for their growth and disruptive capabilities, are still rare.
Figure 1: VC investments per $1,000 GDP, 2022
Source: Authors’ compilation based on data from Do Ventures, NIC, and Cento Ventures Research,2023, and the World Bank
So why should Viet Nam nurture innovative startups?
The answer lies in Viet Nam’s ambition of becoming a high-income country by 2045. Viet Nam has achieved stellar economic progress over the last 30 years with one of the fastest GDP growth rates in the world (6.8 percent annually from 1993 to 2022), while nearly eliminating extreme poverty (from 45 percent of the population in extreme poverty to less than one per cent over the same period). However, labor productivity is still lower than in regional peers (Figure 2). To close the gap in productivity and achieve high-income status by 2045, Viet Nam needs a dual strategy: upgrading the capabilities of its existing firms through the adoption of new management practices and technologies, and ushering in a new era of innovative and productive startups.
Figure 2: Per-Hour Labor Productivity (in US$), 2020
Source: Authors’ calculations based on data from the Asian Productivity Organization (2022).
With an improved environment for startups, Viet Nam can build a pipeline of innovative firms that can transform industries and boost productivity. Global experience (e.g., in Chile and South Korea) has shown that dynamic entrepreneurial ecosystems can be catalyzed and grown.
However, Viet Nam’s entrepreneurial ecosystem is still nascent. Our recent analysis identified a number of challenges to the entry and growth of innovative startups:
· Funding gaps: While there has been a surge in risk capital investments, early-stage ventures, engineering-based, and deep-technology startups remain few and struggle to secure funding.
· Regulatory hurdles: Restrictions on establishing and operating investment funds locally limit the capital flow into this sector.
· Limited spin-offs: Resource constraints and a cumbersome intellectual property and technology transfer framework hinders spin offs from Vietnamese universities and public research institutes.
Despite these challenges, Vietnamese entrepreneurs are making great strides. For example, MiSmart—a startup founded in 2019—has developed and marketed drones for agricultural monitoring systems, despite the absence of domestic early-stage funding for hardware-based startups.
What will it take for more innovative Vietnamese startups to be successful?
Our report suggests several key reforms and initiatives that could further develop the ecosystem:
1. Entrepreneurship support: Refocusing the public entrepreneurship support system to develop a pipeline of investment-ready, innovative startups. Viet Nam’s flagship entrepreneurship support (Project 844) could leverage investments made by accredited private investor partners into early-stage ventures. International experience and lessons from other programs could help inform the design of effective public private initiatives. A recent review of Korea’s Tech Incubator Program for Startups (TIPS) shows how such programs could be set up for effective delivery.
2. Regulatory reforms: Viet Nam needs to address regulatory barriers to establishing and operating domestic investment funds (Decree 38), simplify procedures for making inward and outward investments, particularly for investments in innovative startups, and maintain robust implementation of the business regulation reform program (Resolution 68) to simplify regulations and cut compliance costs.
3. Universities linkages: Empowering universities and public research institutions to contribute more to the startups ecosystem, through revitalized incubators, accelerators, entrepreneurship training centers (through public private partnership models), and promoting technology transfer would increase the flow of investable startups. Recent experience from Serbia and Argentina could provide models for improving collaboration between universities and the private sector and for increasing the contribution of the research agenda to economic growth.
Viet Nam’s journey towards becoming a high-income economy may hinge on the development of a robust ecosystem for innovative startups. By addressing existing ecosystem challenges and implementing targeted reforms, Viet Nam can unlock the full potential of its entrepreneurial talent and sustain its economic success.
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