Vietnam’s top three cities spark innovation race to bolster growth

[HO CHI MINH CITY] Having earned a reputation as Vietnam’s tech and talent hubs, the country’s three biggest cities – Ho Chi Minh City, Hanoi and Da Nang – are turning into linchpins for the South-east Asian nation’s goal to enhance innovation to spur growth.

The nationwide innovation index released last month ranked Hanoi and Ho Chi Minh City in pole positions, while Da Nang, the country’s third-largest city, won the fourth spot, edging out about 60 other cities and provinces in Vietnam.

This marked the inaugural launch of the Provincial Innovation Index, which aims to track and gather insights on the state of play in the science, technology and innovation space across the country’s cities and provinces.

The index reflects the strengths, weaknesses and potential of each locality, and the conditions needed to raise the bar in these areas.

As it stands, competition to outpace one another is heating up, especially among the country’s three metropolises. They are offering tailored incentives specifically for select technology sectors, including semiconductors, artificial intelligence (AI) and blockchain.

Ho Chi Minh City is putting into force last year’s resolution of the Parliament on some special mechanisms and policies aimed at advancing the city’s development. 

Hanoi is also finalising details of its amended draft law on the capital for tentative approval in May, while Da Nang is adjusting 26 special policies to bolster its growth until 2030.

Among the policies under consideration is the implementation of regulatory sandboxes, which would allow for the small-scale trial of innovations under regulatory oversight.

Hanoi and Ho Chi Minh City have yet to determine the specific technologies, products, or services that qualify for these pilot initiatives.

Da Nang, meanwhile, has gone a step further by proposing to create a sandbox for the applications of blockchain technology to facilitate the management and transaction of digital assets. These assets include tokenised goods and artworks, on the city’s home-grown blockchain platform, as per the latest draft resolution made public in February.

All three cities are also pushing ahead to engage big investors for projects in selected fields such as semiconductors, printed electronics and clean energy.

The central city of Da Nang specifically prioritises chip and AI technologies with preferential mechanisms proposed for employment, salaries, income tax exemptions and financial aid.

While there are slight differences among the three cities regarding the criteria and incentives for “strategic investors” in these fields, their collective strategies align with Vietnam’s National Master Plan for this decade.

The plan emphasises doubling down on three key pillars of economic growth – digital, high-tech and green industries.

A report by Boston Consulting Group said Vietnam has been moving away from simply attracting foreign direct investment (FDI) to actively pursuing “higher-quality” FDI in recent years. 

This entails seeking out investments that are less reliant on labour, and prioritising technology, sustainability and environmental friendliness.

In the last 10 years, Vietnam has jumped 30 spots, making it to the top 50 countries in the World Intellectual Property Organization’s (Wipo) Global Innovation Index.

According to Wipo’s evaluation, the country’s innovation performance exceeded its economic development level, yet lagged behind its regional peers Singapore, Malaysia and Thailand.

Attractive startup incentives

A World Bank study said promoting innovation and technology absorption is largely considered the key driver for future economic growth in middle-income countries such as Vietnam. Among the main measures is the improvement in conditions for the entry of more innovative startups in the local market. 

This has led to a notable emphasis on fostering entrepreneurship through specific policies in the country’s three metropolises.

All of them seek to offer zero capital gain tax incentives for investments in local startups. For a period of five years, startups in those cities are also exempt from corporate income tax from the time that payable tax is due. 

Certain individuals employed at these companies could also enjoy personal income tax exemption for their salaries.

Earlier this year, southern metropolis Ho Chi Minh City took the lead in providing some guidance for such benefits, setting an example and laying the groundwork for others. Despite this, industry insiders acknowledge that there is still a significant amount of effort needed to put these schemes into action.

Nguyen Trung Kien, a tax practitioner from a foreign law firm, said: “Without (detailed criteria), innovative startups cannot ascertain their eligibility for these incentives.” 

He added that this might cause administrative burdens for ineligible startups and challenges for investors in tax planning, and expected the local authorities to offer clarity in the coming period.

Eddie Thai, general partner at venture capital (VC) firm Ascend Vietnam Ventures, reckoned that such an incentive is a positive step towards enhancing the country’s appeal to entrepreneurs and investors. However, tax incentives alone are not enough to create a thriving startup ecosystem.

“Vietnam’s startup ecosystem could truly soar if the country bolsters initiatives aimed at talent development and streamlining its business environment,” he said.

In the latest draft law on Hanoi seen by The Business Times, the Vietnamese capital is also looking to pilot the establishment of a VC fund using the state budget, to invest in local high-tech enterprises and innovative startups. 

This move could mirror Hong Kong’s Innovation and Technology Venture Fund, which allows the government to co-invest with private VCs and foster a more vibrant startup ecosystem in the city.

Foreign investors, however, still prefer to invest in Vietnamese startups via entities located in more developed financial markets, as they tend to have predictable regulatory environments for investors to secure their money.

This practice has pushed most Vietnamese startups to incorporate abroad in order to streamline their fundraising efforts.

Ethan Mayers, a US-based venture adviser and startup mentor, suggests that Vietnam’s strategy should pivot from retaining investments domestically to improving the business environment for startups to easily and speedily spend money for local operations. This could be achieved via measures such as providing subsidiaries and tax benefits.

He added: “I’m not going to invest in any legal system that is not predictable, but I’m happy for the money to be completely spent here, which is the outcome people actually want.”