How can Vietnam improve business regulations and spur productivity growth?

Imagine a bustling street in Hanoi, where local businesses are thriving, and foreign investors are busy looking for investment opportunities. This vibrant scene is a glimpse into Viet Nam's ambitious goal of becoming a high-income country by 2045. But to get there, Viet Nam needs to accelerate its productivity. A key way to do that is by improving regulations.

Over the past four decades, Viet Nam has seen incredible economic success. The country has attracted foreign investments and shifted labor from agriculture to more productive sectors. However, there is an obstacle to long-term growth; the productivity of domestic private businesses is lagging. The value added by each worker in domestic private enterprises is only about one-fifth of that of foreign-invested enterprises. One reason is that many local entrepreneurs face regulatory barriers that slow down their growth and limit new investments and job creation.

A recent World Bank report highlights which reforms to Viet Nam's business regulations could best unlock growth. The report used a new World Bank toolkit, the Investment Climate Assessment (ICA) 2.0, to analyze and assess productivity in firms. It revealed an interesting finding. In Viet Nam, more productive firms are growing at a slower rate than their less productive counterparts, and this situation is deteriorating over time (as shown by the downward trend of the orange line in Figure 1). Moreover, unlike other economies, firms entry made also small contributions to overall productivity growth (as indicated by the grey line in Figure 1). This was especially visible in the manufacturing sector (Figure 1). Burdensome regulations explain the difference.

Think about Mr. Trung Le, who owns a small tech startup in Ho Chi Minh City. He has innovative ideas and a talented team, but regulations, such as licensing procedures for drone applications, discourage him from becoming more productive by pursuing R&D activities or introducing new products in the market. Smarter regulations could help entrepreneurs like Mr. Trung start their business activities more easily, use their resources more effectively to grow, and create more and better jobs. More productive firms could thrive while less productive ones would exit the market.

Provinces with better regulations—such as lower costs, transparent procedures, fewer informal charges, and reduced bureaucracy—have higher rates of new firms entering markets. This was evident in Binh Duong province (Figure 2a). Meanwhile, restrictive foreign direct investment (FDI) regulations pose barriers to foreign investment in key service sectors (Figure 2b) across Viet Nam. The report also found that longer times to obtain an operational license are associated with lower levels of innovation and investment in R&D by firms. Viet Nam’s regulatory system shows high variability in the time it takes to comply with regulations. This discretion increases uncertainty for businesses, undermining efficiency and fairness.

Recognizing these challenges, the Viet Nam government introduced a five-year regulatory reform program to simplify or reduce business regulations and cut compliance costs by 20 percent. By December 2023, the program had already simplified or reduced 2,789 regulations. While the Covid-19 pandemic made it difficult to set a proper baseline, the report estimates that the goal of reducing the number of business regulations will be reached by the end of 2025.

A strength of the reform program was an emphasis on coordination between ministries and the Prime Minister’s office with an active central coordinator, the Administrative Procedure Control Agency. The program also emphasizes dialogue and feedback from stakeholders, including 25 business representatives in the Advisory Council for Administrative Procedure Reform. There's still room for improvement. For instance, focusing on the quantity of regulations streamlined does not guarantee that the most impactful regulations are being targeted.

Digital solutions play a crucial role in improving the way regulations are applied in practice. The National Public Services Portal (NPSP), launched in 2019, has digitalized over 70% of public administrative services. However, too many procedures still require paper documentation and in-person visits, limiting the potential benefits of digital transformation. The government could also more swiftly adopt reform measures already approved, focusing on high-impact sectors, and systematically measuring and communicating results. In the medium term, a comprehensive approach that emphasizes digital transformation and risk-based regulations, including licenses and inspections, will be crucial for creating a dynamic business environment. 

Viet Nam's commitment to regulatory reform has yielded positive results. Moving forward, an approach anchored on digital transformation and risk-based approaches to regulation is necessary to unlock the full potential of these efforts. An evolving approach to regulatory reform would enable Viet Nam to create a business environment that fosters investment, innovation, better jobs and long-term productivity growth, paving the way for a more prosperous future.