AUSTRALIA-WORLD BANK GROUP STRATEGIC PARTNERSHIP IN VIETNAM Vietnam: Enhancing Innovation System Vietnam: Science, Technology and Innovation Report POLICY BRIEF 2020 Vietnam: Science, Technology and Innovation Report POLICY BRIEF 2020 © 2021 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. 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Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Cover photo: © Sasin Tipchai. Used with the permission of Sasin Tipchai. 2 Vietnam: Science, Technology and Innovation Report – Policy Brief Acknowledgements The Vietnam Science, Technology and Innovation (STI) Report is the final product under the Vietnam Enhancing Innovation Analytical and Advisory Services (ASA) program. This work is supported by the Australia - World Bank Group Strategic Partnership in Vietnam - Phase 2 (ABP2). Prepared in response to a request from the Government of Vietnam - through the Ministry of Science and Technology – it provides important analytical support for the upcoming ten-year Science, Technology and Innovation Strategy (STI, 2021-30) and the Socio-economic Development Strategy (SEDS 2021-30) of the Government of Vietnam. The new STI strategy is expected to contribute to a strengthened National Innovation System (NIS) that would promote a more innovation-driven enterprise sector, and in turn lead to sustained high-growth in Vietnam. The STI Report is co-task managed by Asya Akhlaque (Lead Economist) from the Finance, Competitiveness and Innovation (FCI) Global Practice (GP), and Kurt Larsen (Senior Education Specialist) from the Education GP starting from July 2019 and prior to that, Dilip Parajuli (Senior Education Economist). The STI Report consists of the Main Report and an accompanying Policy Brief. The main report is authored by Asya Akhlaque, Jaime Frias (Senior Economist), Xavier Cirera (Senior Economist), with skills inputs from Kurt Larsen, Dilip Parajuli, Koji Miyamoto (Senior Economist) and Syd M. Dinlemez (Consultant), and innovation ecosystem inputs from Lien Anh Pham (Senior Private Sector Development Specialist), Anne Lopez (Economist, consultant), Gaurav Nayyar (Sr. Economist), Brian Mtonya (Sr. Economist) and Shanthi Divakaran (Sr. Financial Specialist). Excellent logistical support is provided by Nga Thi Phuong Bui, Huyen Thi Thanh Le, Hoa Chau Nguyen, Mary Dowling, and Susana Rey. The WBG team would particularly like to thank Dr. Bui The Duy, Vice Minister, Ministry of Science and Technology (MOST) who led the collaboration and provided guidance, and Dr. Hoang Minh, President, Vietnam Institute of Science and Technology and Innovation (VISTI) who coordinated the contribution from Dr. Le Đinh Tien, Dr. Tran Ngoc Ca, Cao Thu Anh, Nguyen Thu Oanh, and Dinh Tuan Minh as core team members from MOST. The World Bank is also grateful for the partnership provided by the Ministry of Industry and Trade (MoIT), Ministry of Planning and Investment (MPI), Ministry of Agriculture and Rural Development (MARD), Ministry of Education, and officials of HCMC and relevant universities for the Policy effective review. During the preparation of the STI report, several consultations were held with government officials and private sector as well as with think- tanks, and development partners. The WBG team is grateful for the overall guidance of Carolyn Turk (Country Director, EACVF), Ousmane Dione (Country Director, AECE3), Hassan Zaman (Regional Director, Equitable Growth, Finance and Institutions Practice, East Asia and the Pacific), Zafer Mustafaoglu (Practice Manager, EEAF1), Irina Astrakhan (Practice Manager, EMNF2) and Toby Linden (Practice Manager, Education). Valuable advice was received from Steffi Stallmeister (Manager, Operations, EACVF), Achim Fock (Operations Manager, EACPF), Keiko Inoue (Human Development Program Leader), Alwaleed Fareed Alatabani (Lead Private Sector Specialist), Sebastian Eckardt (Lead Economist), Jacques Morisset (Program Leader, EFI Vietnam), Quang Hong Doan (Senior Economist), Dung Viet Do (Senior Country Officer) at various phases of the Innovation ASA activities. The team is grateful to Juan Rogers, Professor at Georgia Tech University, Mary C. Hallward-Driemeier (Senior Economic Adviser, GFCDR), Marcin Piatkowski (Senior Economist), Jason Weaver (Senior Education Specialist) for the peer reviewer comments for the final STI Report as well as the earlier draft outputs. At the concept note stage, Ganesh Rasagam was the Practice Manager for FCI, and Kurt Larsen (Senior Education Economist), Chunlin Zhang (Lead Economist) and Prasanna Lal Das (Lead Knowledge Management Officer) were the peer reviewers. 4 Vietnam: Science, Technology and Innovation Report – Policy Brief Rebalancing STI Policies towards Business Innovation Objective & motivation BOX 1. Conceptualizing innovation beyond The Science, Technology and Innovation formal R&D (STI) Report provides analytical support for Vietnam’s upcoming ten-year Science and Innovation is defined as the introduction Technology Innovation (STI) Strategy 2021- and adoption of new products, technologies, 2030 and the Socio-economic Develop­ business processes, business models and ideas in ment Strategy (SEDS) 2021-2030. The STI the market, as well as invention of new ideas. Report and the accompanying Policy Brief have Traditionally, innovation has been viewed been prepared in response to a request from through the narrow lens of science, formal the Ministry of Science and Technology (MOST). research and development (R&D) and inventions. This report conceptualizes innovation more The Policy Brief summarizes the key findings, broadly as enterprises adopting existing recommendations, and lays out a STI roadmap knowledge that has already been generated as to guide priority actions towards supporting well as new knowledge as salient for enhancing business innovation in Vietnam. As the COVID-19 productivity and growth. The potential gains triggered economic shock continues to spread from adoption and diffusion of existing globally and its impact deepens in Vietnam,1 technology are vast, yet paradoxically limited the importance of technology adoption and effort is invested by governments, including in Vietnam, to realize these gains. innovation for business resilience as well as for productive growth has been amplified. Source: Cirera and Maloney (2017). The imperative of an innovation-driven and productivity-led growth model Vietnam has been a trailblazer in its development success over the last 30 years. Sustained rapid growth averaging around 7 percent since 1988 has led to an almost five-fold increase in its per 1 Vietnam has had impressive success in limiting the human costs of the COVID which is attributed to the effective early action on social distancing and mobility restrictions. At the same time, there has been massive reduction in economic activity as the virus has spread throughout the world - including Viet Nam’s trading partners - with countries implementing various forms of lockdown. Vietnam’s economy grew by 2.9 percent in 2020 - the lowest GDP growth since the last three decades. Nonetheless, Vietnam is one of the few countries in the world to register positive growth in 2020 (IMF, 2020). While the medium-term outlook for Vietnam is overall favorable, significant downside risks are present due to the negative stronger and longer impacts of COVID, weak external demand and the unfinished structural reforms (EAP Economic update, World Bank, April 1, 2020). Rebalancing STI Policies towards Business Innovation 5 capita income, propelling the economy to middle-income status in just one generation. Driven by trade and investment openness, the country has attracted efficiency-seeking direct foreign investment (FDI) and generated jobs in export-oriented, labor-intensive segments of manufacturing global value chains (GVCs). Today Vietnam is the second largest smartphone exporter, producing over 40 percent of Samsung’s global phone products – an embodiment of the success of its growth strategy. Vietnam is entering its new phase of economic transformation at a time of unprecedented global and domestic headwinds that lend urgency to the agenda of promoting innovation. Building on achievements, Vietnam’s ambition is to join the club of upper middle-income countries by 2035 with South Korea, Singapore and Japan as its role models.2 The challenges of the global slow- down in growth and trade, combined with rapid changes in technologies related to Industry 4.0,3 have been put into sharp relief by the COVID-19 economic shock.4 Vietnam remains significantly exposed to economic spillovers from this shock due to its deep integration with the global economy, with manufacturing GVCs and tourism particularly at risk. Restrictions on mobility and social distancing requirements have added a domestic dimension to the economic crisis, threatening large numbers of bankruptcies and job losses, particularly among SMEs in manufacturing, retail, in-person services and accommodation and food services.5 Adoption and diffusion of digital and new technologies associated with Industry 4.0 offer opportunities for increased productivity growth and are also critical for building resilience in firms in the face of crisis.6 Accelerated technological change - particularly the new wave of digitalization, automation, and increasingly sophisticated artificial intelligence - is expected to reshape Vietnam’s low-cost labor-intensive manufacturing-led export strategy. Technological disruption in production and distribution processes, nonetheless, will affect different manufacturing sub-sectors at varying speeds, and opportunities are emerging in services as a necessary complement to the success of manufacturing.7 New business models - as evidenced by the entry of digital platform-based start-ups and “super app” firms8 like ZaloPay and Momo – along with the increasing attractiveness 2 The Vietnam 2035 Report (2016) was jointly prepared by the World Bank and the Ministry of Planning and Investment (MPI), Government of Vietnam. See chapter 3, titled “Building National innovation capacity”. 3 These technologies include robotics (particularly artificial intelligence [AI]-enabled); digitalization and Internet-based systems integration (IoT), including sensor-using “smart factories” (that may also be AI-enabled); and 3-D printing. 4 The COVID-19 shock is transmitted to businesses through multiple and mutually reinforcing channels – including falling demand, reduced and disrupted input supply, tightening of credit conditions and liquidity crunch, and rising uncertainty. 5 Refer to i) Covid-19 and the Labor Market in Vietnam (ILO, April 21, 2020); and ii) the recent assessment by Viet Nam’s Chamber of Commerce and Industry (VCCI, 2020), which was undertaken in 46 provinces and cities, that found that more than 76 per cent of the surveyed enterprises had reduced employee working hours through a range of options - from flexible working hours to, ultimately, layoffs. Vietnam’s manufacturing, tourism and transport activities fell abruptly in early 2020. 6 Digital technologies are increasingly ubiquitous and either underpin or form an essential element of most business innovation and technologies. 7 For instance, food, chemicals, wood and paper products still are viable manufacturing sectors for Vietnam, as are ICT services. (Nayyar, G, 2018). 8 The platform-based enterprises usually start by providing one service and then progressively add an ecosystem of services for users – thus called “super app”. For instance, ZaloPay is a mobile payment application launched in 2017 but is built on top of Zalo, the most popular messenger app in Vietnam, launched in 2012. Momo is a Fintech startup that allows customers to make cash transfers, pay bills, and resolve person loans, and has moved into purchasing services i.e. e-commerce. 6 Vietnam: Science, Technology and Innovation Report – Policy Brief of Vietnam as a destination for Venture Capital and Private Equity (VCPE) investors, are promising.9 The COVID outbreak has demonstrated the need to step-up the pace of adoption and diffusion of technologies, new business models and digital solutions to support business flexibility and growth10. Large room for improving business innovation and digitalization There is significant scope to improve innovation in domestic firms, especially SMEs. The vast majority of domestic firms in Vietnam are small and medium enterprises (SMEs) representing 98 percent of the total and half the workforce.11 Twenty percent of SMEs export which is attributed to lack of scale, technology and business sophistication that is needed to boost productivity for market expansion. There is significant room to improve firm performance through technology adoption and diffusion in Vietnam. Focusing on adoption of digital technologies, a recent technology adoption survey (2020) indicates that on average across different business functions only 20 percent12 of firms use fully digitized processes to perform general business functions (GBF) – that include marketing, payment methods and production planning to sales and supply chain management, sales - in Vietnam (figure 1).13 There is a lot of room for improvement in terms of digitalization across different functions and tasks of the firm. For example, while most firms in Vietnam have access to online sales, only 1 percent of those firms that sell directly to consumers use some digital sales method more intensively than other methods, either social platforms or (most often) their own website. This is reflected in a FIGURE I. Digitalization of general business functions in enterprises in Vietnam Business Administration Marketing Payment methods Production Planning Sales Sourcing and Procurement Total Intensive Digital GBF Index (Average) 0 10 20 30 40 50 Intensive margin digital index (%) Source: Cirera, Comin, Cruz and Lee (2020). 9 VC funding tripled from $205mn in 2016 to $889mn with 92 deals in 2018. Refer to S. Divakaran and Akhlaque A. (2019), Vietnam Venture Capital Industry and Angel Investing, World Bank. 10 Since the first COVID-19 case was reported in Vietnam, the leading e-commerce site Tiki has seen an explosion in the number of purchase orders, and big retailers have seen a dramatic increase in online sales. https://zingnews.vn/ 11 Akhlaque, and Lopez A. 2017. 12 A comparable index in the state of Cará in Brazil is 42 percent. 13 The index of digital readiness tries to capture the extent of digitalization of the different business functions of the firm. A firm can be digital in several tasks. For example, a firm can undertake sales online and also manage the supply chain digitally. Capturing the intensive margin, the index ranges between 0 and 1 where a value of 1 for sales corresponds to all sales undertaken on online platforms or own website. (Source: Technology adoption survey for Vietnam, WB, 2020). Rebalancing STI Policies towards Business Innovation 7 digital index of only 0.1 for sales.14 On the other hand, 51 percent of firms use digital technologies for marketing and advertisement. Looking ahead, Vietnam will need to substantially improve its level of readiness to embrace digital technologies and more flexible manufacturing, as the recent challenges associated to the COVID-19 shock are clearly manifesting. The digital gap persists when it comes to automation in manufacturing. Perhaps as expected, given the low costs of labor, a miniscule number of firms in Vietnam use technologies associated with Industry 4.0 – for example, robotics or 3D printing. Fig 2 shows the extensive margin (i.e. what technologies are being used) in panel (a) and the intensive margin (i.e. the main and most intensive- used technologies) in panel (b). Given that only 29 percent of firms use machines controlled by computers – i.e. digital technology of Industry 3.0 - and only 8.7 percent use this technology intensively is a matter of concern. The results show a significant distance to the technological frontier and dampens down the prospects of leapfrogging. Firms in Vietnam need to continue accumulating innovation capabilities, first by upgrading processes to the use of digital technologies and then to more sophisticated Industry 4.0 ones. The dividends of doing so can be very large. FIGURE 2. Intensive and extensive margin in technologies used for fabrication in Vietnam (a) Extensive margin index (b) Intensive margin index Manual Manual 0.75 20.25 process process Machines controlled Machines controlled 0.90 70.57 by operators by operators Computer controlled Computer controlled 0.29 8.70 machines machines Robots 0.04 Robots 0.16 Additive manufacturing/ Additive manufacturing/ 0.06 0.32 3D printers 3D printers Other 0.07 advanced 0 20 40 60 80 0 .2 .4 .6 .8 1 percent Source: Cirera, Comin, Cruz and Lee (2020). Redoubling the resolve towards regional integration and diversification. While the slowdown in global economic activity and trade flows remains a risk for Vietnam, there are opportunities for new growth pathways for Vietnam. Being one of the most open economies in the world and well-integrated into GVCs, Vietnam’s economy is potentially vulnerable 14 Part of the explanation for the low uptake is because most of e-commerce transactions in Vietnam are in cash (90%) as compared to 51% for Indonesia and 48% for Malaysia, The potential of digital payments needs to be tapped by expediting the process of developing regulations to allow for non-bank agents to operate in the Vietnamese payments landscape. 8 Vietnam: Science, Technology and Innovation Report – Policy Brief to rise in protectionism and continued China-trade war. On the upside Vietnam is strongly positioned to benefit from its decision to deepen regional integration through multiple new trade agreements – CPTPP, EVFTA, ASEAN and RCEP – that offer new growth pathways through diversification of trade flows, markets and products. The ongoing US-China trade tension has presented an opportunity for Vietnam to attract foreign firms that want to move their operations from China to countries such as Vietnam to access the US and global market.15 Changes in trade (including increased demand for services) and technology offer Vietnam opportunities beyond manufacturing, particularly ICT and other services. The evolving COVID crisis has exposed the growing reliance of global trade on supply chains that provide inputs from China. Given its integration into GVCs, Vietnam has been affected from supply chain disruptions. Vietnam is an economy that “imports to export”, and firms involved in GVCs generally keep “just- in- time” inventory. In the short term, the current disruption in the supply chain of inputs from China represents a threat to Vietnam’s economy due the reduced availability of inputs in factories. In the medium to longer term, this could be an opportunity for Vietnam to encourage GVCs to reduce and manage the risk of having their supply chains dependent on factories in China by positioning Vietnam as a competing FDI location for such input suppliers. This would require Vietnam to move from the present low skill assembly manufacturing to higher skilled value- added manufacturing. Realizing potential opportunities depends on Vietnam’s determination to embrace the new challenges and expedite the pace of unfinished policy and institutional reforms. Vietnam 2035 Report (2016) laid out the policy direction to strengthen Vietnam’s national innovation system (NIS) and the STI policy framework to help the country transition towards a productivity-led and an innovation-driven growth model (Box 2). In undertaking the analysis, the following three questions are addressed: • What progress has been made towards meeting the broad directions set out in the 2016 Vietnam 2035 report in terms of strategic shifts in the STI policy framework and its implementation? • What are the remaining critical gaps within the NIS – from the demand and supply side - that are hindering Vietnamese firms from improving their capacity to adopt technology and innovate? In light of global shifts that have become more acute with the evolving COVID-19 crisis, are there new policy areas that deserve attention? • What are the priority recommendations, and how can solutions be devised? 15 https://www.forbes.com/sites/warrenshoulberg/2019/10/16/us-finally-succeeds-in-vietnam-as-more-companies-move- sourcing-there/#1a6eecae4a4e Rebalancing STI Policies towards Business Innovation 9 BOX 2. Vietnam 2035 - Key strategic shifts and broad areas of reforms Vietnam 2035 Report (2016) emphasized that to achieve a productivity-led and innovation-driven growth model: • Enterprises should be placed at the center of innovation policies as the primary users of knowledge, rather than the current bias towards R&D. • Given Vietnam’s weak and evolving NIS, moving “towards the technological frontier” - through adoption and diffusion of technology from abroad or MNCs - should be the priority, rather than “pushing out the frontier” (through invention). Incremental innovation has the potential for generating the largest productivity gains for Vietnam. To tackle the demand and supply side weaknesses of the NIS in Vietnam, four broad areas of reforms are laid out: • Addressing constraints in the operating business environment, including unnecessarily restrictive regulations, limits on competition, economic distortions, inadequate innovation and the limited availability of start-up finance. • Improving firm capacity for technological learning, starting with adoption and eventually invention. • Improving the quantity, quality and relevance of workforce. • Raising the quality and relevance of R&D quality and knowledge production. This policy brief summarizes the key findings and recommendations for the highest priority policies and institutional reforms (based on the analysis in the main report), to inform the upcoming STI Strategy 2021-2030 and the (SEDS) 2021-2030. The analysis deploys the expanded National Innovation System (NIS) framework (Cirera and Maloney, 2017), which presents a systematic view of the demand and supply policies and institutions that enable innovation. Supply side knowledge capabilities, in the form of human capital and R&D institutions, need to evolve and be matched by adequate absorptive capabilities on the demand side i.e. the firms. The framework recognizes the critical role of the government in resolving market and coordination failures as well as the strategic oversight of the innovation system. 10 Vietnam: Science, Technology and Innovation Report – Policy Brief Key findings and policy recommendations Drawing on the analysis, four pillars of reform are identified. Figure 3 captures the key areas of reforms that are needed to reset the new STI strategy towards business innovation and technology adoption. Annex 1 summarizes the current gaps in Vietnam’s innovation system that inform the priority actions. FIGURE 3. Vietnam: Reset new STI Strategy towards Business Innovation STI strategy, Policy design Demand side Supply side & Implementation PILLAR 1 PILLAR 2 PILLAR 3 (i) Rebalance focus of (i) Support rm (i) Promote collaboration the strategy forwards capabilities among university- business innovation- GRIs-Industry (ii) Address weaknesses technology adoption, in regulatory environ. (ii) Improve skills gap new business models, (quality & quantity) digitalization (iii) Enhance innovation/ start-up nance (ii) Improve government capabilities for STI (iv) Expand digital policy design and infrastructure and implementation connectivity Institutional arrangements for coordination of innovation policy PILLAR 4 Source: Authors’ elaboration. Vietnam’s STI policy framework The STI policy framework needs to shift to support business innovation and technology adoption The current STI policy and its implementation remain biased toward applied R&D-based innovation with limited focus on non-R&D based business innovation, including adoption and diffusion of existing technologies. The evidence shows that the current STI policy and its implementation is not yet fully aligned to the Vietnam 2035 recommendation of promoting adoption and diffusion of technology among enterprises. This is manifest through multiple channels: • Resource allocation bias. First, the analysis indicates that there is a resource allocation bias towards R&D promotion programs which aims at generating new technologies rather than moving “towards the technology frontier” through adoption and diffusion of existing technology for a wider pool of firms. It is worth noting that some of programs under MOST (national technology innovation programs) contain features that promote technology application and dissemination. However, these activities are not the focus of these programs. Furthermore, the funding of activities that promote R&D-based innovation dwarf that of programs promoting Rebalancing STI Policies towards Business Innovation 11 non-R&D based innovation. There is thus a disconnect between the Vietnam 2035 policy direction and the STI framework. Much more investment is needed in building technological and managerial capabilities to help improve the absorptive capacity of enterprises.16 • The portfolio of innovation policy instruments is narrow, and implementation remains limited. Second, support instruments currently deployed are too narrow to facilitate technology adoption.17 Specifically, grants and tax incentives are the most common supporting mechanisms - accounting for more than 50% of the value of the portfolio in 2017. Promoting spillovers and linkages requires active instruments to develop the technological capabilities of potential local suppliers and the flow of knowledge spillovers from MNEs to domestic firms, policies to build the necessary skills, and high-quality engineering departments with incentives to commercialize and work on contract research or on collaborative R&D programs with some of these MNEs. Entrepreneurship and market access– key priorities for the Government - were also found to be underrepresented in the policy mix.18 • Program beneficiaries are tilted towards large firms. Third, programs appear to focus on a small number of very large MNE firms as beneficiaries. There is a lot of investment in attracting high- tech companies, but not much on maximizing their spillovers to smaller, domestic enterprises. Investing in government capabilities and competencies to formulate and implement innovation policy Good design and implementation are central to policy effectiveness. The design and implementation of STI programs in Vietnam is far from using best practices.19 Even when the right priorities are well identified, the effectiveness of innovation policies largely depends on the quality of design and implementation. If program managers are unable to design instruments that are adequate for the problem they want to address - for example, providing a tax incentive when resolving the innovation problem requires technical assistance, or when implementation is hampered by burdensome application procedures - it is unlikely that these interventions will achieve the desired impact. In Vietnam, key areas of competencies that need to be developed in innovation related ministries/agencies include the ability to follow a logical framework in designing programs, effective M&E systems, and the accumulation of knowledge related to STI instruments for innovation. Assessment of the national innovation system in Vietnam Remaining gaps in the NIS need to be addressed to enable businesses to adopt technology and new business models 16 There are a few programs that seem to be promoting technological upgrading among SMEs e.g. the national technology innovation program and the national industry support program (based on the decree 111/2015/NĐ-CP), the program to promote a science and technology market in Ho Chi Minh City 2016-2020, and the S&T Market Development Program until 2020. However, most of these programs are in their inception phase or have very little funding. 17 According to the policy effectiveness review (PER) analysis, policy instruments that support collaboration, and the building of managerial and technical capacity, remain underrepresented in the current policy portfolio. 18 In 2017, less than 1% of the budget was devoted to support young technology startups (and only 7.4% of the value of the portfolio excluding the tax incentive programs). 19 Frias J. and X. Cirera (2019), Vietnam PER, World Bank. 12 Vietnam: Science, Technology and Innovation Report – Policy Brief Vietnam has made progress in tackling weaknesses in the demand and supply elements of the national innovation system (NIS) but the pace and quality of reform is mixed. Over the years, Vietnam has implemented a series of reforms, from reducing the cost of doing business20 and strengthening the intellectual property (IP) protection legal framework, to piloting demand-driven business advisory services for facilitating FDI-SME linkages.21 As Annex 1 shows more concerted and urgent action is needed to address the remaining weaknesses in the NIS to support firm upgrading and innovation. The unfinished reform agenda includes improvements on the demand side – i.e. building firm capabilities for technology adoption and addressing constraints in the policy environment, as well as strengthening complementary factors related to innovation finance and expansion of digital infrastructure and connection; and on the supply side – i.e. addressing human capital constraints. Lastly, more work is needed to strengthen government capabilities to formulate and implement effective innovation policies, as discussed above. Strengthen institutional arrangements for coordination of innovation policy Given the inherently complex and multi-sectoral nature of the innovation process, effective coordination is needed across a range of institutions. Figure 4 lays out a diverse set of institutional arrangements that are needed for executing innovation policy, underlining the imperative of coordination. When looking at institutional functions along the stages of the policy life cycle (Angelleli et al. 2017), at least four sequential but iterative steps can be distinguished: i) formulation of innovation strategies (long-term policy aspirations), ii) design of innovation policies, iii) innovation policy implementation and supervision, and iv) deployment of innovation instruments and innovation activities. It is also necessary to add the non-sequential functions of coordination and planning, given their importance in the context of innovation policy.22 The institutional structure and governance of STI in Vietnam is fragmented, with multiple players and limited coordination. The Ministry of Science and Technology (MOST) plays the lead role in the formulation of the STI strategy and has been given the responsibility of overall management of S&T activities at the national level (Decree No. 95/2017 / ND-CP). In this role, MOST is mandated with formulation and monitoring implementation of the S&T strategy and coordinating the budgetary process. However, this arrangement does not appear to be effective when the scope of policy extends beyond the realm of S&T to include non-R&D based innovation among firms. Other challenges that hamper coordination include the lack of consistency among different laws that impact innovation,23 and the involvement of multiple institutions in the design and implementation of innovation programs. There are also limited mechanisms for regular consultation with the private sector to help inform policy design and provide feedback on program effectiveness. There is thus substantial scope for strengthening coordination across multiple levels and programs in Vietnam. 20 This is reflected in Vietnam’s improved ranking in the Doing Business index which has jumped to 70th place in 2020 from 104th in 2007 (World Bank, 2020). The Doing Business index provides an important metric for the cost of doing business for enterprises as it measures the regulatory costs and time taken to interface with government. 21 The business advisory services program is a key component of the supplier development program under the Vietnam Private Sector Development Project that is jointly being implemented by the WBG with Ministry of Industry and Trade. The objective is to facilitate linkages between domestic firms and MNCs in electronics and automobiles GVCs. 22 World Bank (2020). 23 For instance, the State Budget law and the financial law are not always aligned. Rebalancing STI Policies towards Business Innovation 13 FIGURE 4. Multi-sectoral nature of innovation makes coordination essential Scope Innovation Research and Enterpre- Enterprise Investment skills & Human Innovation development neurship development and trade Function Capital Coordination & National Planning Agencies / Ministries of Finance Strategic planning Strategy formulation National Councils (Public and Private) Line Education Science and Economic development and production ministries Policy design / Labor technology ministries (Trade / ministries ministries Investment) Innovation (and Science and technology Other complementary Implementation entrepreneurship agencies agencies agencies Deployment of R&D Universities HE instruments and institutes / Intermediaries / firms and entrepreneurs & VTEs activities Universities Focal Comlementary Source: Adapted from Angelleli, et al. (2017) Turning priority reforms into actions Seizing opportunities and tackling challenges require consistent and urgent action As the Government prepares its new SEDS, 2021-2030 – and the STI Strategy 2021-2030 – it is an opportune time to reshape the country’s development trajectory towards an innovation-driven model. Vietnam can learn from other countries who have transitioned to this model. This section discusses how the reforms can be operationalized. Good practice examples from other countries who have tackled similar reforms are provided. Table 1 below provides a summary of priority actions in terms of the road map as well as the timeline, while Annex 1 captures the full gamut of actions that are needed to strengthen Vietnam’s NIS for improving innovation outcomes. TABLE 1. Vietnam National Innovation System - Priority Reform Actions Issue Sequencing actions (Implementing agency) Short-term Medium term Pillar 1: Re-orientation of the STI Policy and Development Framework • Current STI Strategy biased • New STI Strategy to reflect • Invest in government towards R&D business technology adoption capabilities to formulate and • Resource allocation skewed and diffusion as a key priority implement innovation policies and portfolio of program • Rebalance resource allocation • Set up monitoring and instruments narrow that and broaden policy instruments evaluation system for tracking neglects support for non-R&D for supporting SME-MNE program implementation, and business technology adoption linkages; collaborative R&D undertake impact evaluation and diffusion programs with MNEs; entry of of selected policies for technology firms strengthening outcomes 14 Vietnam: Science, Technology and Innovation Report – Policy Brief TABLE 1. Vietnam National Innovation System - Priority Reform Actions (cont) Issue Sequencing actions (Implementing agency) Short-term Medium term Pillar 2: Improving Business Environment and Complementary Factors (demand-side) • Weak firm capabilities • Introduce new policy • Design and roll-out a new esp. managerial skills and instruments that can be used technology transfer program organizational practices deter directly by firms & equipping and strengthen university- technological adoption and them with management industry collaboration diffusion capabilities for using and/or mechanisms generating technologies; for e.g. • Seek public-private sector Business Advisory Service (and collaboration in providing Technology Extension Service relevant skills • Attract skilled Vietnamese from abroad to fill the managerial/ skills gap • Dynamism of domestic • Introduce appropriate • Reform the insolvency law to enterprises hampered by regulations to implement introduce simplified procedures regulatory and doing business Government Resolution 02 that for SME insolvency provisions, environment aims to accelerate regulatory introduce a framework for out- reforms particularly, starting of-court workouts, and enhance a business, and exit of non- the role of commercial courts productive firms • Access to innovation and start- • Support investment readiness • Stimulate the supply of early up finance deter entry and programs that improve CEOs/ stage finance using public growth of technology firms founders business management capital in the stage with the and leadership skills, networking largest market failure i.e. pre- and matchmaking seed and seed stage. • Further reform regulations on • Continue to reform the secured lending to encourage insolvency law and the secured Vietnamese banks to move transactions regulations to away from traditional real estate further promote movable secured lending and develop collateral in lending to SMEs and more movables financing startups • Digital Infrastructure and • Incentivize firms to use digital • Deepen the data ecosystem, connectivity need to be infrastructure (computers; on- including regulatory framework, enhanced in businesses to line platforms, cloud services) data security, and privacy to realize the promise of Industry • Provide advisory services to promote use of technology and 4.0 facilitate the upgrading of knowledge flow technologies across firms Rebalancing STI Policies towards Business Innovation 15 TABLE 1. Vietnam National Innovation System - Priority Reform Actions (cont) Issue Sequencing actions (Implementing agency) Short-term Medium term Pillar 3: Enhancing Skills and Knowledge (supply side) • Human Capital: Skills Gaps • Develop a national skills • Strengthen the national (poor quality of skills) and skills development strategy in the qualification framework to shortages (inadequate quantity education and training systems make Vietnam’s education of workforce with required for (a) re-skilling of current and training system more skills) are major constraints for workforce (stock) and (b) transparent so that students, engaging in/investing in firms’ investing in skills of new cohorts workers and employers better innovation practices (flow) understand the required • Incentivize enterprises, TVET qualifications for the type of institutions, and universities occupations and tasks envisaged to partner on investing in • Integrate socio-emotional continuous learning and skills into curriculum and training through design and extra-curriculum programs in implementation of more primary, secondary, and tertiary relevant and innovative education curriculum and pedagogy, work- based training (internships) • University/GRI-Industry • Strengthen University/GRI- • Rebalance public funding at research linkages are weak: Industry partnerships by scaling universities and GRIs based enterprises rarely find public up existing and introducing new on national priorities and sector R&D a useful source of innovation funding schemes performance-based funding. knowledge for their innovative targeted for joint/collaborative • Establish a better incentive activities research and innovation projects system to encourage innovative between universities/GRIs and research at universities/GRIs and enterprises allow them to keep the revenues • Establish organizations dealing from commercialization of the with market and technology research results brokerage, technology agents, and centers for leasing and contracting manpower for science and technology activities Pillar 4: Strengthen Institutional Coordination and Partnership across Public-Private Stakeholders • Governance of STI is fragmented • Improve inter-agency • Evaluate the pros and cons of with multiple players and limited coordination mechanisms setting up an innovation agency coordination • Seek private sector inputs on vs. a high-level coordination • Systemize private sector a systematic basis to develop mechanism consultation for policy design, demand-driven policies • Establish a community of and feedback loop practice with key stakeholders to create “feedback loops” to strengthen design and implementation of policies 16 Vietnam: Science, Technology and Innovation Report – Policy Brief PILLAR 1: STI strategy, policy design and implementation Rebalancing the focus of the new STI strategy and policy mix towards firm capabilities and upgrading Looking ahead, the Government needs to formulate and implement a STI strategy with a clear pillar on technology adoption. First, there should be increased focus on promoting adoption of existing technology and non-R&D based innovation, rather than the current bias towards R&D. This would mean recalibrating the financing and not to halt the funding of instruments that foster applied research. A recalibrated STI strategy towards technology adoption would introduce more policies and instruments that support absorptive capacity and upgrading, aligning to the different maturing stages of firm life. The key program focus should include management extension; technology extension; linkages to high-tech MNEs; collaborative R&D programs with high-tech MNEs; and early stage technology-based companies. Beneficiaries should be expanded to a wider number of domestic firms with potential for scale up, digitalization, adoption of new business models and developing linkages with FDI. However, before designing any program, policymakers need to understand the market failure and demand for policy support, and accordingly define the segment of potential beneficiaries that demand support and present some propensity to absorb the technology and yield additionality. It is not about picking winners but about improving targeting and avoiding capture by some public institutions and firms. Investing in government capabilities to formulate and implement innovation policy Adopting good practices in the design and implementation of policies is critical for effectiveness and achieving impact. In this regard, building the competencies of technical staff in relevant innovation agencies in the design and implementation of innovation programs is critical. Having up-to-date knowledge about appropriate instruments also is important. In the short term, capacity building initiatives can be undertaken to train program managers to develop logical frameworks when designing a program and to set up monitoring and evaluation systems. In the medium term, undertaking rigorous impact evaluation of selected policy instruments would be valuable to draw lessons (See Annex 1 for details). PILLAR 2: Demand side - the firm Building firm capabilities should be a priority for promoting access to new technologies Firm capabilities matter for improving innovation and technology adoption in Vietnam. Successful adoption of a new technology is not just about purchasing machinery but requires integrating that machinery into the full production and business processes of the firm. This is particularly important for SMEs, which must be able to adjust rapidly to evolving markets and changing circumstances but are often limited by knowledge, expertise and financial constraints. Support to SMEs thus needs to start with improvement of more basic managerial and organizational practices, which will enable them to use and adapt new processes, and to proceed to more sophisticated technological knowledge associated with Industry 4.0 further along. Bridging the capabilities gap is just as important for the absorption of new technologies in manufacturing processes as it is for the development digital services. Rebalancing STI Policies towards Business Innovation 17 How can firm capabilities be supported? Countries have successfully deployed an array of instruments – along with complementary policies - for building firm capabilities and non-R&D activities that in turn facilitate adoption and absorption of technology. At one end of the spectrum, governments want to promote technology upgrading among SMEs by building firms’ absorptive capacity (Cohen and Levinthal, 1990) and providing information and know-how on how to adopt new technologies. At the other end is the objective of transferring and commercializing new technologies from universities and Public-Research Institutions (PRIs). As figure 5 indicates, there are multiple instruments that can be used directly in equipping firms with the capabilities of using and/or generating technologies. These include business advisory services (BAS), technology extension services (TES), technology centers, and tech transfer offices. Specifically, BAS focuses on building absorptive capacity for technology adoption, while TES focuses on helping SMEs to adopt technologies. FIGURE 5. International Experience – Instruments to support firm capabilities and technology Source: World Bank (2020). A Practitioner’s Guide to Innovation Policy. There is considerable heterogeneity in the models for BAS and TES. For example, Malaysia’s Cradle Investment Program 300 (CIP300) is a conditional grant under the portfolio of the Cradle Fund. It provides financial assistance of up to RM300,000, with a range of value-added assistance, including coaching and mentoring, matchmaking with investors and Cradle’s partners, business advisory services, and media and public relation support. Tables 2-4 provide good practice examples of how countries have deployed a range of policy instruments that have successfully built SMEs capabilities to facilitate technology adoption and diffusion. These can help inform the design of similar programs in Vietnam. 18 Vietnam: Science, Technology and Innovation Report – Policy Brief TABLE 2. Supporting technology adoption in SMEs using vouchers - example of Korea Program definition Case: Vouchers for exporters in Korea Instrument: Vouchers are small non-repayable grants The program supports SMEs by providing export allocated to non-innovative SMEs to purchase services vouchers that list programs in various categories (since from external knowledge providers. The main objective 2017 with the budget of 14 mill. U$). All services listed is to induce non-innovator SMEs to start collaborating on the service menu are available for all participants with knowledge organizations and knowledge regardless of the program engaged. providers. Vouchers are often entitlement-based rather than competition-based, and they typically require light All services are co-financed by SMEs as well to avoid management with effective auditing moral hazard, promote accountability and leverage Justification financial resources. • Voucher schemes aim to address capability failures faced by smaller firms by inducing behavioral Intervention changes towards more proactive learning and Depending on the level of export experience, the sustainable collaboration with knowledge providers voucher program is structured along the following • There is often severe information asymmetry stages: between knowledge providers (particularly public- • Preparation stage: translation of webpages and data sector research organizations) as suppliers of in foreign languages; optimizing design; education innovation knowledge and SMEs as potential users on trade and marketing • Beginning stage: marketing through media/ Evidence SNS; support for global market research and • The bulk of the existing evidence draws upon matchmaking; participation in exhibitions evaluations and surveys of voucher programs in • Contract stage: checking buyer’s credit, writing a Europe contract paper; managing export distribution • The review of the evidence detects project • Global expansion stage: support to build local additionality and some positive impact on sales branches; consulting on M&A and value added in the short-run (Cirera et al, 2020). Behavioral additionality is detected in follow Design recommendations (Do’s) up projects, evidence of a change of attitude • Take stock of supply/demand for knowledge towards collaboration, and spillover effects (an services and have ‘accredited’ providers improved firm public profile after collaboration • Design simple application and selection procedures with universities). For knowledge providers, • Define the range of services covered benefits included introduction to new research • Design (small) voucher amounts areas, commercial opportunities, and new teaching • Adopt proactive advertising to reach SMEs that are opportunities not typically targets for support • Set up brokerage services • Have strong audit function to reduce fraud Source: Cirera et al. (2020); Yong-Seok Choi, Professor, Kyung Hee University (2019). Rebalancing STI Policies towards Business Innovation 19 TABLE 3. Managerial extension/business advisory - example of Colombia Program definition Case: Group Management Extension in Colombia Typically includes direct specialized advice in • The program congregates groups of firms to management strategy, business functions (marketing, enhance the efficiency of the intervention. financial management, sales) and legal aspects of • In Colombia (Iacovone et al, 2018), groups were a business. This type of instrument addresses key assembled comprising 3 to 8 firms located in the absorptive capacity issues, since adopting a new same region, such that members are not direct technology is not only about purchasing machinery but competitors to one another, but are instead also about integrating it into the full production and producing complementary products with similar business processes of the firm. management problems. Justification • SMEs owners have trouble identifying what their Intervention constraints are and how to overcome them. • Leaders from the firms in a group signed an • SMEs do not have the same access as large firms agreement to work together and help each other to information networks, universities, national improve. laboratories, field experts, technical information and • The group treatment model was compared to know-how, so they face higher search costs. an individual consulting model on a cost-benefit • Firms are unlikely to have the in-house expertise basis and appears to offer a promising approach to to solve problems and work through the change scaling management. process. • Like the individual treatment, the group treatment • SMEs tend to operate in isolation and with little began with training classes that covered theoretical access to networks. aspects of management. • Information and advisory markets are not well- developed. Results • Both approaches led to improvements in Evidence management practices of a similar magnitude (8-10 • When designed appropriately, developing country percentage points), so that the new group-based interventions have had significant impact on approach dominates on a cost-benefit basis. performance (output additionality), at least in the • The group-based intervention led to increases short term. in firm size over the next 1.5 years, including a • Some programs have experienced a few issues statistically significant increase in employment, with SME take up rates, particularly when the while the impacts on firm outcomes are smaller interventions were delivered by government and statistically insignificant for the individual agencies (lack of awareness problems, delayed consulting. implementation, etc.) Design recommendations (Do’s) • Conduct market and feasibility analyses before launching programs. • Ensure that appropriate resources are available to build program awareness. • Have high-quality delivery staff. • Ensure that managers are versed on technology. Source: Cirera et al. (2020); Yong-Seok Choi, Professor, Kyung Hee University (2019). 20 Vietnam: Science, Technology and Innovation Report – Policy Brief TABLE 4. Supply chain development program – case of Chile Program definition Case: Supplier development program in Chile Supply chain development (SCD) programs support • The program sought to promote mutually firms in upgrading product quality and processes with beneficial, long-term commercial relations between the objective of linking them with existing large buyers, large buying potential exporters and their small and often MNEs. They help link supply and demand within medium-sized enterprise (SME) suppliers, with the global value chains by scoping opportunities and goal of increasing competitiveness. assisting suppliers and potential suppliers to upgrade so that they can meet the demands of large buyers. Intervention Justification • Program was launched in 1998 and motivated • SDPs are commonly used to facilitate linkages by the trade agreements signed by Chile that between domestic SMEs and foreign investors, or created the need for compliance with international other large firms present in the country. production standards by Chilean exporters and • The justification of programs that support supplier potential exporters. The intervention was led by development typically rests on the need to address CORFO (Chilean agency), and included: coordination problems. For example, the channels - Provision of information on linkage for communication between foreign investors and opportunities (information exchanges). domestic SMEs is not smooth, and frequently face - Matchmaking – through active arrangements challenges driven by work standards, organizational between buyers and suppliers. practices and business culture. - Provision of tax exceptions and subsidies to promote training and technology transfer. Evidence • The evidence of supplier development programs Results in developing countries is not ample, and thus we • An evaluation was able to identify the beneficiaries are unable to come up with conclusive statements of the program and to construct a pool of potential about the effectiveness of these programs. control firms. Both groups benefited from the • The impact evaluation of a Chilean program coordination efforts. But suppliers were found to demonstrated results in the form of increased increase their sales, the number of workers they revenues, additional employment, increase in employ and the salaries their employees received, wages, and increased survival of SMEs (Portugal, while also increasing their sustainability or survival 2018). In a study of the PROVEE (supplier capabilities. The program also increased the sales development) program from Costa Rica, effective of large firms and raised their ability of becoming between 2001 and 2014, revealed that during this exporters (Arraiz, et al 2011). period, the intervention led to 126 new product and service linkages per year. Design recommendations (Do’s) • Ensure that there are high-quality program managers to interact effectively with large and small companies. • Customize the instruments to suit the industry/firm- specific needs (such as specific industry standards). • Utilize group activity and incentivize peer learning as much as possible. • Use performance-based model, firms that demonstrate improvement and capacity building deserve ongoing support. Source: World Bank (2020). A Practitioner’s Guide to Innovation Policy. Rebalancing STI Policies towards Business Innovation 21 PILLAR 2: Demand side - business environment and complementary factors More needs to be done to improve the operating environment and complementary factors Vietnam 2035 recommended strengthening regulatory policies, removing distortions and promoting a level playing field through improving the regulatory framework for competition in Vietnam. In recent years, Vietnam has made efforts to improve its regulatory environment as captured by the World Bank’s Doing Business Report (World Bank 2020). However, the pace of reforms may have slowed down compared to its regional peers in the last couple of years as indicated by DB indicators.24 Impediments nonetheless remain, affecting firms’ incentives to innovate as well as firm entry, expansion and exit. With regard to starting a business, Vietnam ranks 115th- behind Singapore (4th), Thailand (47th), and China (27th) - underlining the unfavourable business environment for entrepreneurs who are agents of innovation. In addition, due to the lack of a level playing field, domestic private enterprises are unable to compete effectively against SOEs. The continued heavy presence of SOEs in certain sectors, particularly those that provide important input services to other firms, is a key constraint. SOE reform is identified as a top priority in Government policy resolutions, but implementation remains slower than expected. Intellectual property right (IPR) protection enforcement is instrumental for fostering innovation and technology adoption.25 To encourage MNCs to share their technologies with local firms as well as enable them to undertake R&D in Vietnam, without the risk of property rights infringements, an effective IPR protection system and its sustained implementation is critical. An IPR protection regime that is consistently enforced is also more likely to attract venture capital and private equity firms to Vietnam to help tech start-ups scale up.26 As Vietnam continues to deepen its regional integration through new free trade agreements (FTAs) - like the CPTPP, EVFTA, ASEAN and RCEP – the agenda has gained urgency as these agreements commit the country to higher levels of IPR protection enforcement standards.27 Vietnam has made progress on its IPR protection legal framework, and multiple efforts are underway in combating violations. In April 2018, new Guidelines for Certain Number of Articles of the Intellectual Property Law and Law on Amendments to the Intellectual Property Law 2009 in Terms of Copyright and Related Rights entered into force.28 In October 2018, Vietnam’s Market Surveillance Agency was upgraded to the General Department of Market Surveillance under the 24 According to the World Bank’s Ease of Doing Business (2020), Vietnam’s ranking slightly declined from 68th in 2018 to 70th out of 190 countries, and remained well below Singapore (2nd), Malaysia (12th), Thailand (21st) and China (31st). 25 IPR protection spans multiple categories and includes patents, copyrights and related rights, industrial property rights and rights to plant varieties, enforcement, and membership and ratification of international treaties. 26 Refer to www.uschamber.com/ipindex, Global Innovation Policy Center. 27 For instance, the EU-Vietnam Free Trade Agreement that was signed on 30 June 2019 and is now in the process of ratification includes a substantial IPR chapter in which Vietnam has committed to a high level of protection, going beyond the standards of the TRIPS Agreement. 28 Decree No. 22/2018/ND-CP Decree No. 22/2018/ND-CP of February 23, 2013, on Guidelines for Certain Number of Articles of the Intellectual Property Law and Law on Amendments to the Intellectual Property Law 2009 in Terms of Copyright and Related Rights, available at https://wipolex.wipo.int/en/text/472667 22 Vietnam: Science, Technology and Innovation Report – Policy Brief Ministry of Industry and Trade, inter alia, to improve the fight against IPR infringements.29 In 2019 the Law Amending and Supplementing a Number of Articles of the Law on Insurance Business and the Law on Intellectual Property (Law No. 42/2019 / QH14) was approved.30 The government has recently approved an “Intellectual Property Strategy until 2030” that aims to develop a comprehensive and effective intellectual property system in Vietnam.31 According to latest official data on administrative IPR violations, the number of cases have fallen from 2954 in 2017 to 1811 in 2018.32 More effort is needed towards IPR protection enforcement. Currently Vietnam’s IP protection ranking stands at 105th out of 141 countries, well behind Singapore (2nd), Malaysia (25th), South Korea (50th), Indonesia (51th), China (53rd) and Philippines (55th), according to the latest Global Competitiveness Report (GCR, 2019). Third parties’ reports and assessments of IPR protection in Vietnam, while noting improvements in Vietnam’s IPR legal framework in terms of bringing it in line with international standards, express concern with the lack of IPR enforcement and adequate coverage of on-line enforcement of copyrights.33 Vietnam also remains an important producer and trader of counterfeit goods in many sectors.34 Areas of improvement and action include: • Online enforcement of copyrights: The weak enforcement of the legal framework has led to increased copyright piracy and domain name infringements. To address this issue, implementing regulations must be amended to accommodate enforcement of IPRs in the online environment as well as strengthen capacity to underpin enforcement efforts against infringing websites and their owners. In addition, regulations and guidelines on the responsibilities of intermediary service providers, such as the provision of “notice and take down” measures, must be developed and applied. • Criminal enforcement: The current enforcement heavily relies on administrative proceedings. Vietnamese law allows for IPR criminal lawsuits, but implementation faces numerous obstacles due to a dearth of specific rules and procedures to guide investigations, prosecutions and adjudications of criminal proceedings in IPR infringement cases. This has posed challenges for IPR criminal enforcement, and copyright piracy remains rampant. Also, sanctions against infringers have an insufficient deterrent effect and there is still a lack of trained IP officials, including in the customs authorities. More generally, Vietnam’s IPR enforcement system has 29 Decision No. 34/2018/QD-TTg dated 10 August 2018 of the Prime Minister, providing for the functions, tasks, powers and organizational structure of the General Department of Market Management directly under the Ministry of Industry and Trade. Provincial-level market surveillance departments are expected to be established under this department. 30 This Law was passed on June 14, 2019 by the National Assembly in shortened order and procedures to timely reflect the obligations to be the CPTPP which came into effect in Vietnam from January 14, 2019. 31 Decision No. 1068/2019/QD-TTg dated 22 August 2019 of the Prime Minister. The IP strategy covers all stages of creation, establishment, protection, and enforcement of IP rights, creating an environment to encourage innovation, meeting international integration requirements, making intellectual property become an important tool to enhance national competitiveness; and includes IPR policies on copyright, related rights, industrial property rights. 32 Refer to 2018 Annual Report on IP activities, Intellectual Property Office of Vietnam, MOST. Along with the 39% decrease in IP violation cases, there was a concomitant increase in total amount of fines. Infringements were still found mostly in trademarks, accounting for 97.8% of the cases and 99.1% of the total fines. 33 For example, refer to EU’s: https://trade.ec.europa.eu/doclib/docs/2020/january/tradoc_158561.pdf, and US’s: https://ustr.gov/ sites/default/files/2019_Special_301_Report.pdf. 34 Refer to 2019 OECD-EUIPO report Illicit Trade - Trends in Trade in Counterfeit and Pirated Goods of 2019. Rebalancing STI Policies towards Business Innovation 23 remained highly complex and the capacity weak, which makes it challenging for right holders to take effective and efficient action against IPR infringements. Vietnam should improve IPR enforcement standards and related procedures and make IPR dispute resolution mechanisms simpler and more accessible, to motivate enterprises to utilize them. China, facing similar challenges, has strengthened IPR enforcement through the launch of specialized IP courts. Among other things, this entails adjustments to IP court procedures, such as strengthened specialized enforcement units, and applying more significant fines and sanctions for non- compliance.35 Improving the availability of innovation and start-up finance. Innovative activities are inherently risky and generally entail investments in intangible assets that have limited collateral value, due to difficulties in gauging their proper financial value and the high transaction costs in dealing with them. Equity financing (angel investors and venture capitalists), rather than debt, is thus generally considered better suited for funding activities in industries where investments in intangible assets are relatively large and informational concerns are severe (such as biotechnology, computer software, etc.). In case of “routine” start-ups (such as restaurants, retail outlets, etc.), they are relatively easy to monitor by conventional financial intermediaries. Despite rapid credit growth, access to innovation finance remains a constraint. Firms continue to require different means of financing as they move from one phase to the next in their life cycle. Vietnam has some representation in most phases of the start-up life cycle; however, it remains small. This is attributed to both demand and supply side issues. On the demand side, many firms are unable to produce business plans to seek out funding and lack investible ventures that indicate capacity to grow. Moreover, many incentives remain “on paper” as cumbersome guidelines, so that the administrative burden involved impairs access. Regulatory mechanisms are unable to catch up with innovation start-up development and serve as barriers rather than facilitators on the supply side. The development of capital markets, as a complement to banking, has been on the radar screen of policy makers. Vietnam is a potentially dynamic startup market. Driven by the country’s position as a vibrant growth hub, rising middle class and young demographics, it is an increasingly attractive emerging market destination for Venture Capital and Private Equity (VCPE) investors. The year 2016 was an inflection point of growth for Vietnam’s Venture capital (VC) industry as reflected by the significant VC funding that tripled from year-end 2016 at $205mn to $889mn with 92 deals in 2018. In 2018, in a high-profile venture capital exit, Yeah1 -- an entertainment group and investee of DFJ VinaCapital -- was listed on the Ho Chi Minh City Stock Exchange (HSX). The recent expansion in bond and equity markets notwithstanding, the outstanding market value of these markets remains low compared to peers in the region, suggesting that there is still ample room for growth. Programs that increase the availability of innovation financing should also work with intermediaries to ensure investees possess the technical capacity to utilize the capital effectively. In Korea, credit guarantees for innovation have been used successfully (see Table 5). 35 See Innovate China: New Drivers of Growth (2019), World Bank Group and Development Research Center of the State Council, The People Republic of China. 24 Vietnam: Science, Technology and Innovation Report – Policy Brief Some policy options include: • Supporting the development of the capital markets requires a continued focus on creating the eco-system that includes a sound legal and regulatory framework, relevant financial products, diversified investors and improved governance, disclosure and infrastructure and better coordination among government agencies. • Reform the insolvency regime and the secured transactions regulations to further promote movable collateral to be used by SMEs and startups. • Amend regulations to allow new debt-related financial instruments suitable for innovation. • Review the matching grants process and administration to reduce the burden for potential applicants. • Enhance access to innovation finance through credit guarantees for innovation (Table 5). TABLE 5. Credit guarantees for innovation – case of Korea Program definition Case: Technology Financing in Korea Loans and loan guarantees are instruments for debt Korea Technology Finance Corporation (KOTEC) financing to support business innovation, typically provides technology innovation-oriented SMEs with an targeting SMEs, although large firms can also be evaluation of their technology and its marketability. targeted. Credit guarantees can cover a portion of the losses experienced by lenders extending credit to firms Intervention investing in innovative projects, when firms default on In Korea, including KOTEC,11 public institutions are loans. It applies exclusively to assets that have been designated as Technology Credit Bureaus for evaluating explicitly covered under its provisions, in return for firms’ technology. Based on the technology evaluation, a fee. Credit guarantees become relevant in the late KOTEC’s Technology Credit Guarantee Program has phases of the innovation cycle when risk is lower. been operating to provide financing opportunities for Justification SMEs’ that have insufficient tangible collaterals but have • Imperfections in financial markets promising technologies. • Information asymmetry • Lack of collateral of SMEs Results While the evidence for additionality of credit guarantees Evidence for innovation is limited, results from implementation • Evidence of the profile of participants is mixed, with suggest that this instrument can lead to tangible results, some programs featuring older firms (20-years-old particularly for SMEs with insufficient or intangible on average, CDTI in Spain) while others feature assets as collateral that remain credit constrained36. As younger firms (less than 5 years old on average in indicated earlier, access to finance for innovation in Korea’s KOTEC). Most programs showed higher the EAP region remains an issue, and the use of credit take up from exporters in high-tech sectors and guarantees for purposes other than innovation is who owned intangible assets, such as patents. CEO widespread (Cirera et al, Forthcoming). Other attractive education was also linked with higher amounts of features include the ability to leverage financial capital guarantees. 36 Input additionality evidence suggests 30-82% incremental lending value, and about 25%increase in percentage points in the probability of investing in R&D. Rebalancing STI Policies towards Business Innovation 25 TABLE 5. Credit guarantees for innovation – case of Korea (cont.) Program definition Case: Technology Financing in Korea • Input additionality of lending seems positive and from the market, reduce the burden on the government robust, with the majority of schemes reporting budget (balance sheet) and improve financial records between 35-68% in incremental loan value. for borrower SMEs. Notwithstanding, the dissemination Evidence on additionality of R&D investments of this instrument for specific purposes of innovation is scarcer, but at least one program showed an has not been widespread (Korea and Spain represent incremental 25 percentage points in the probability 2 case studies featured in the forthcoming innovation of investing (CDTI), and in technologically advanced policy instrument guide). firms (KOTEC). Design Recommendations (Do’s) When designing these schemes, policy makers should: • Promote and advertise credit guarantee schemes (CGS). • Provide financial and operational independence to • Provide transparency and disclosure of public funding available, rules, procedures, arrangements. • Build an adequate governance structure for the credit guarantee schemes Enhancing digital infrastructure, connectivity and access is a necessary condition but not sufficient to realizing the promise of the digital dividends. While the diffusion of internet has been increasing rapidly in Vietnam access to fixed broadband is available to only about 12 percent of the population.37 Clearly, the digital infrastructure is a necessary but not sufficient condition for the use of digital technologies. Firm level investment of digital technology infrastructure in Vietnam remains low as indicated by the digital enabling index.38 The index measures the average investment compared to a situation of full use of digital infrastructure – from cloud services to computers – and ranges between 0 and 100 where a value of 100 indicates complete access of each digital enabler. The enabling index for Vietnam suggests that on average firms are operating at 38 of the full digital infrastructure index.39 While on average internet infrastructure is at 75 of having full internet infrastructure, the access/use to digital platforms is only 27 of potential and 4 for cloud services (Figure 6).40 37 Refer to Vietnam ICT White Book 2018, which states that 58.14% of Vietnam’s population had access to internet (page 14). At the same time, Vietnam fixed broadband subscribers only accounts for about 12% of the population (page 29). Also, in 2017, 47.9% of the population had a subscription for mobile broadband Internet access (3G&4G) (Page 29). This may indicate that Vietnamese use broadband access primarily for entertainment (news reading, social networks) rather than work. 38 The digital enabling index is a composite index that measures the extent of firms access to cloud services, computers, internet, online platforms and phone. The index uses for each of these general-purpose digital technologies a composite of indicators that measure the number of firms that have access to these technologies with the share of use per worker. For example, phone coverage index measures the extent to which firms have phones and mobile phones and the use per worker. The infrastructure pertains to general purpose technologies and includes access/use of internet, computers, stock of phones and use of cloud services, and on-line platforms. Source: Technology adoption survey for Vietnam (World Bank, 2020). 39 As a point of comparison, the index value in one of the lagging states in Brazil (i.e. Ceara) is 55. More comparison data points will be available when similar surveys are completed in other countries. 40 For the case of cloud computing this also corresponds to the percentage of firms using cloud services, 4%. 26 Vietnam: Science, Technology and Innovation Report – Policy Brief FIGURE 6. Vietnam – Digital enabling index Strengthening this digital infrastructure will enable the use of new technologies to Cloud Index adapt to new business models. For instance, mobile payment systems are an increasingly Computer Index integral part of ensuring services can be Internet Index embedded in goods. This will be an important complement to the Industry 4.0 agenda. ASEAN Online Index has witnessed significant growth in the use Phone Index of financial technologies (FinTech) to offer Total Enabler Index new ways of delivering financial services. The development of a data ecosystem, including 0 20 40 60 80 regulatory frameworks to support cross-border Digital enabler index data flows, will also become increasingly Source: Cirera, Comin, Cruz and Lee (2020). important. With an increasing emphasis on the use of data processes in production, issues relating to intellectual property rights, data security, and privacy must be addressed, in line with international best practices, for firms to adopt these data-driven technologies. Pillar 3: Supply side - skills & knowledge Skills Employees need a range of cognitive, socio-emotional and technical skills to engage in more innovative and complex production. While job-specific technical skills are identified as very important skill, a range of cognitive skills (including problem-solving, oral and written communications) and socio-emotional skills (ability to work independently, and teamwork) – are also key skills for engaging in innovation practices. With respect to socio-emotional skills, evidence suggest that adolescence and early adulthood period is actually a malleable period, and interventions such as apprenticeships have shown to be highly effective in enhancing communication, collaboration and organization skills, when delivered well. Policies to foster socio-emotional skills should take into account the skills development across the lifecycle and integrate socio-emotional skills into curriculum and extra-curriculum programs in primary, secondary, and tertiary education. Skills gaps (poor quality of skills) and skills shortages (inadequate quantity of workforce with required skills) are major constraints for engaging in/investing in firms’ innovation practices. The World Bank Enterprise Survey on Innovation and Skills shows that a large proportion of firms report difficulties hiring employees with the required levels of managerial and leadership skills (73 percent), socio-emotional skills (53 percent), foreign language skills (58 percent), and technical and vocational skills other than IT skills (68 percent). The survey also reveals that firms with employees with (a) average literacy proficiency level of 3 and above, and (b) higher levels of socio-emotional skills - ‘engaging with others’ and ‘managing emotions’, are much more likely to engage in innovation practices. Rebalancing STI Policies towards Business Innovation 27 Today’s youth have attained a higher level of education, but the workforce at large lacks sufficient education and a balanced set of skills. Only 8 percent of the current labor force in Vietnam has a university education and this share is expected to only marginally increase in the next 30 years, reflecting a low level of current enrollment and slow future expansion. Vietnam should make a major effort to increase adult and continuous learning including the enrollment and the quality of tertiary education. Tertiary education institutions will have to pay attention to 35, 45 and 55-year- olds, not just 20-year-olds. This requires significant changes in the way institutions and the system function. Without a massive increase in the workforce with a higher level of skills in all the three dimensions mentioned above, Vietnam will not be able to get the basics right for an improvement of its national innovation system. The country needs to increase the quality and relevance of its TVET and tertiary education system to (a) re-skill the current workforce (stock) and (b) invest in skills of new cohorts (flow). This can be done by bringing enterprises (employers) to a larger extent into the skills development system. Employers can usefully work with the tertiary education institutions to improve the relevance of curriculum, implement innovations in pedagogical practices, introduce student internships to facilitate students’ school-to-work transitions. Government should revisit its roles as a steward and facilitator for education (quality assurance, autonomy and accountability, LMIS) and Financier (performance-based, co- financing grant, student aid). This entails designing consistent and effective policies, providing appropriate incentives, information, working with many different public and private partners and capacity building to alleviate the many disconnects observed in the tertiary education sector. Today’s skills needs cannot be met solely by the current practice in the education and training sector which includes programs that target a narrow set of population and limited coherence across life stages. Instead, Vietnam should provide a range of skill development opportunities across a broad population for continuous learning, which will involve a larger set of actors and will change the roles of the education and training sectors. Vietnam needs a comprehensive national skills development strategy that: (a) invests in all three broad skills types – cognitive, socio-emotional and job-specific technical skills; (b) builds and implements a national skills standards framework and a national qualification system; (c) develops a well-articulated strategy for expansion of tertiary education within and between the university (overseen by MOET) and the TVET (overseen by MOLISA) sub-sectors as well as through increased private sector provision; and (d) establishes meaningful partnerships between TE institutions and enterprises in renovating and delivering the curriculum towards 21st century skills and innovating learning/pedagogy practices towards more active/blended learning through the use of disruptive technology where appropriate, and through work-based/project- based training such as internships and apprentices. There are several additional initiatives that can be taken in the short-term (1-2 years) and longer term (3-5 years) as part of the national skills strategy: Short-term: • Design and pilot output-based financing for TVET institutes and universities, with enhanced autonomy and accountability (output can be number of graduates with relevant skills) and 28 Vietnam: Science, Technology and Innovation Report – Policy Brief hand-over the institution-based learning to TVET institutes and universities via greater autonomy and accountability in the design and provision of their services; • Provide policy support and incentives for private sector to invest in (internships and ICT skills at work and TEIs) and provide advice (e.g. on curriculum and information) for a more labor market-oriented skills development sector; • Strengthen adult education programs designed to enhance technical skills literacy and socio- emotional skills; • Design and pilot labor market information schemes, job search programs, and data analytics (disruptive technology) for informed decision-making; • Provide incentives for enterprises on employee tuition support and attracting skilled Vietnamese from abroad. Longer term: • Institutionalize the steward and financier roles of the Government (next HE or TVET Law Amendment); • Strengthen the national qualification framework to make Vietnam’s education and training system more transparent so that students, workers and employers better understand the required qualifications for the type of occupations and tasks envisaged; • Build a well-functioning labor-market driven skills development system by designing and implementing a Labor Market Information System (LMIS) for systematic data analysis and managing dissemination platforms for all stakeholders; • Integrate socio-emotional skills into curriculum and extra-curriculum programs in primary, secondary, and tertiary education. Knowledge Companies rarely find public sector R&D activities a useful source of knowledge for their innovative activities. A key challenge lies in inappropriate incentive schemes for the academic system for collaboration with enterprises and the lack of mechanisms to diagnose the innovation needs of firms. It is therefore becoming increasingly important to strengthen University/GRI-Industry R&D linkages as the intensity and quality of these linkages play a rising role in determining returns to R&D investments, firm competitiveness, long term economic growth and job creation. It also plays an important role in ability of countries to attract and retain highly qualified and mobile personnel. There are several initiatives that can be taken in the short-term (1-2 years) and longer term (3-5 years) to strengthen the collaboration of companies and Universities/GRIs: Short-term: • Strengthen University/GRI-Industry partnerships by scaling up existing and introducing new innovation funding schemes targeted for joint/collaborative research and innovation projects between universities/GRIs and enterprises; Rebalancing STI Policies towards Business Innovation 29 • Support master’s and PhD students to pursue targeted research projects in enterprises including spending part of their studies in an enterprise; • Establish mutual board memberships whereby universities/GRIs invite industry members to sit on their boards and vice versa; • Rebalance R&D support. For example, NAFOSTED funds should also be opened to start ups and R&D investments in enterprises to help commercialization potential; • Innovation vouchers for SMEs to purchase services from universities/GRIs on innovation projects; • Establish organizations dealing with market and technology brokerage, technology agents, and centers for leasing and contracting manpower for science and technology activities. Longer term: • Rebalance public funding at universities and GRIs based on national priorities and performance- based funding. The GRIs should be restructured into sustainable, larger, fewer, and better performing organizations with clear missions and funding criteria, including performance- based ones set at the appropriate level; • Increase autonomy and accountability in the governance of universities and GRIs. Modern R&D management practices at universities and GRIs such as peer review, advisory committees, and performance-based evaluations should be thoroughly applied; • Establish a better incentive system to encourage innovative research at universities/GRIs and allow them to keep the revenues from commercialization of the research results; • Create and improve a legal system for a technology market (including regulations of science and technology contracts). Pillar 4: Strengthening institutional coordination and delivery of innovation policy To respond to the strategic focus on business innovation, Vietnam needs to step-up efforts toward effective inter-institutional coordination and adopting good practices in innovation policy design and implementation The earlier findings suggest Vietnam should pursue a strategic re-orientation of STI policy: from one focused on producing science and technology, and R&D innovation to one focused on facilitating non-R&D innovation and diffusion of existing technology. This change in strategic direction has important institutional ramifications. First, policy support for STI will require implementing agencies to work increasingly closer with industry representatives, particularly SMEs. Second, the deployment of solutions that prioritize absorption of technology and promote non-R&D innovation is becoming more important. Third, policy makers should enable beneficiaries to access a set of multidisciplinary solutions that underpin the cross-cutting nature of business innovation. Looking forward, policymakers need to strengthen inter-agency policy coordination and institutional capacities to facilitate quality service delivery to firms. Improving coordination calls for rethinking of the existing model that has led to a fragmentation of approaches and resources across institutions. New institutional capabilities are necessary for a greater focus on firm needs and delivery of quality program design and implementation. Addressing these two key policy issues may require different institutional responses. 30 Vietnam: Science, Technology and Innovation Report – Policy Brief Advocates for a bold approach suggest that establishing a new innovation agency can tackle the coordination challenge Establishing a dedicated innovation agency may not be an optimal option in Vietnam’s context as it presents significant costs and requires important building blocks for success (Figure 7). Some countries have established a dedicated innovation agency for centralizing and coordinating innovation policy across institutions. However, the typical motivation behind the creation of such an agency rests not on improving coordination but rather on strengthening design and implementation of innovation policies. Innovation agencies can build technical specialization on innovation policy, attract highly competent professional skills that are necessary to deliver innovation policy. This option entails the flexibility of the government to attract and retain talent and offer prospective staff competitive wages. Furthermore, agencies can operate with political independence, bringing agility to policy implementation – i.e. operating in a less bureaucratic environment than agencies acting directly under line ministries. Examples of creating and upgrading some of these agencies can be found in Eastern Europe, where countries like Poland and Serbia have introduced modernization and professionalization of these agencies with success. While there is no single model for an ideal innovation agency, a recent review of innovation agencies across countries sheds light on common success factors that include recruitment of capable staff, effective governance and management structures, diagnostic-based interventions, M&E system, sustainable funding, and forging strategic partnerships with private sector and key stakeholders (see figure 7).41 FIGURE 7. Seven building blocks of performing innovation agencies Source: Aridi A. and N. Kapil (2019. Innovation agencies, Cases for developing economies (forthcoming). 41 These lessons have been gained through an investigation of 13 innovation agencies located in developing countries, and one comparison case of Singapore. Other countries include Malaysia, Poland, Croatia, Serbia, Georgia, Columbia, Turkey, Lebanon, Armenia among others. Rebalancing STI Policies towards Business Innovation 31 In practice, setting up and nurturing a new agency can carry significant costs and risks. Practitioners should draw on international best practice to find potential solutions to their challenges. However, policy makers seeking to copy institutional forms and arrangements from developed countries into their own institutional landscape often fall into a trap (Cirera et al, 2020). Agencies can take many forms depending on the degree of autonomy and staffing but their effectiveness tends to be highly correlated with the overall level of institutional quality and availability of talent endowment in the country. Singapore’s SPRING is a good example of a well-functioning agenda (Box 3). Setting up an agency like SPRING requires human capital and a long-term financial commitment, both of which are currently absent in Vietnam. Vietnam has seen a fair share of similar ‘special-purpose’ institutions already that did not deliver the expected outcomes. A more gradual approach for building competencies to support business innovation in strategic areas may be an option to consider in Vietnam as it responds to challenging ahead. BOX. 3. SPRING Singapore – Enabling Enterprise • Objective: promote competitiveness of local SMEs and start-ups, SPRING is a Government agency and statutory board under the Ministry of Trade and Industry (MTI) • In 2018, SPRING merged with International Enterprise Singapore to form Enterprise Singapore. The aim of the revamped agency is to enable the growth of Singapore’s companies through an integrated support network, providing opportunities to develop business capabilities and access overseas markets. • Program includes: financing, capability upgrading, management development, market access, and other technology and innovation services. • Direct Financial Support: Co- investment initiatives offered under Startup SG Equity- matches investments in eligible start-ups with investors • Non-financial Support: Program to facilitate collaboration between large corporations and SMEs. Key principles behind successful institutional coordination mechanisms for innovation policy Vietnam’s current STI coordination model needs bolstering but there is not a one size-fits- all solution. Most countries do not have a designated ministry mandated to coordinate and promote innovation as this is typically shared across several agencies and ministries. In other countries, this leading coordinating role is given to cross-cutting institutions, like the Prime Minister’s office or a Presidential advisory council, as is the case in South Korea (Box 4). The latter has become popular, and in some cases the Prime Minister chairs the innovation council cross-sectoral meetings to coordinate the implementation of innovation policy. While the institutional arrangements for coordination of innovation policy that work for one country may not be transferable to another, there are key principles that can be considered and adapted in Vietnam’s political economy context. First, policy makers should aim to understand what the short-comings of the current top-down model are, and identify the key factors inhibiting innovation outcomes. Second, a key lesson from the international experience is that the process of coordination needs to be bottom up, relying on consultations among the relevant agencies and the provincial governments. Third, deep engagement from ministries that are close to industry – i.e. with functions over industry, trade or SME development policy - is critical when the greatest challenge for advancing innovation is beyond public and private R&D (i.e. extending to adoption and diffusion of existing innovations). Finally, sustained consultation with the private sector remains key to ensure that support is demand-driven and that there are learning loops embedded during the implementation phase. 32 Vietnam: Science, Technology and Innovation Report – Policy Brief BOX 4. Korea’s High level Strategic and Coordination Institutional Mechanisms Vietnam considers South Korea as an aspirational economic model for its economic transformation. In Korea, innovation policies are closely coordinated between the Ministry of Science and ICT (MSIT), the Ministry of Economy and Finance (MOEF) and increasingly the Ministry of Trade, Industry and Energy (MOTIE). Over time, policy leaders in Korea have evolved their innovation policies – R&D and non-R&D – in line with changing development priorities and country and global circumstances. Given the multi-faceted nature of innovation, policy and institutional coordination mechanisms have played a defining role in Korea’s success. The institutional mechanisms and coordination may be multi-layered: i) the strategic level that sets the national economic development goals and brings together relevant innovation ministries/agencies stakeholders to realize the objectives; ii) coordination of key ministries; and iii) the technical level coordination for design and implementation of innovation and competitiveness policy. What are the key institutional mechanisms that have evolved in Korea over time to support both R&D and non- R&D innovation? Strategic-level Coordination - Presidential Advisory Council on Science and Technology (PACST) PACST is a national council, chaired by the President, with the purpose to adopt innovations in science and technology. PACST deliberates on matters concerning national R&D projects as well as coordinating major policies and plans for promoting science, technology and innovation in general. Specific functions include: • formulating and coordinating major policies and plans for promoting science and technology; • budget allocation, and adjustment for R&D annually and recommendations for public S&T institutions; • evaluation of national research and development projects and inspection. Membership: A cross-sectoral mechanism, it includes civilian members from academia and the private sector. PACST is composed of several committees based on priority areas and expertise required. The R&D committees are supported by the STI Office of MSIT. Special Committee on Innovation Growth Engine, chaired by the Vice Minister for Science, Technology and Innovation of MSIT, is pertinent for policy coordination for non-R&D innovation activities. Composed of government officials from major innovation-related ministries and agencies, including MSIT, MOTIE, MOEF, the Ministry of SMEs and Startups (MSS), and the Ministry of National Defense (MND), as well as experts from academia and the private sector, this Committee coordinates government policies and programs on next- generation engines for innovative growth. Coordination at the level of policy design and implementation The Enforcement Decree of the Framework Act on Science and Technology mandates MSIT and other line ministries to plan, operate and review R&D activities in close cooperation. For instance, Article 21-2 of the Decree states that MOEF and MSIT “shall operate a consultation committee to discuss matters concerning the allocation, adjustment, etc. of the budget for national research and development projects.” Furthermore, in order to facilitate collaborative planning of national R&D projects, Article 25 of the same Decree states that “MSIT may designate projects requiring collaborative planning between the relevant central administrative agencies in consultation with the heads of the relevant central administrative agencies, from among the national research and development projects involving two or more central administrative agencies.” Lessons learnt: • High level strategic vision backed by legal mechanisms that enable close policy coordination among relevant ministries and agencies. • Strong leadership to set the road map, prioritization and oversight • Consultation with the private sector and academia • Setting up technical working committees for coordination of policies and implementation arrangements • Promoting non-R&D with R&D activities for innovation • Monitoring and evaluation of results for accountability and learning loops. Rebalancing STI Policies towards Business Innovation 33 There is scope to strengthen coordination across thematic areas of innovation policy. In Vietnam, the coordinating role for STI strategy has been designated to the Ministry of Science and Technology as per the existing legal framework. Under such mandate, MOST can facilitate coordinated responses to redress the most pressing problems inhibiting business innovation. An enhanced coordination model should adopt an approach that is evidence-based and driven to problem solving in key thematic areas of innovation. Under this framework, the relevant stakeholders can agree (collectively) to deploy measures and allocate resources for addressing agreed policy priorities, that can range from adopting existing technologies, upgrading of SMEs, innovation startups or complex R&D projects. Unlike the high-level measures specified in a typical 5-year strategic plan, the scope of the activities under this multi-stakeholder framework will be action oriented and highly focused on removing concrete barriers to innovation. In this model, MOST could facilitate the implementation of these measures (even when implementation is delegated to another highly competent agency under a different ministry), serving as a secretariat, organizing strategic planning and prioritization, and tracking progress toward the defined goals. The response program would be organized under technical working committees for deployment of policies and decentralized field activities. This model offers two distinctive advantages. First, the implementation of measures will draw on the skills and expertise from different agencies, providing a truly multidisciplinary approach to advancing innovation policy. Second, the involvement of specialized agencies will reinvigorate the existing coordinating role of MOST, giving substance to technical meetings and a sense of urgency to a collective and action- oriented agenda, which will contribute to attaining the aspirations of the national STI strategies. An example of this approach is the National Competitiveness and Innovation Commission from Colombia. The President of Colombia chairs the annual meeting of the Commission’s public- and private-sector stakeholders, which include the sector ministries and the private sector’s competitiveness council. Annex 1 captures the full gamut of reform actions that are needed to strengthen Vietnam’s NIS for improving innovation outcomes. It provides a roadmap in terms of timeline i.e. short- term versus longer-term actions. In each case, the responsible implementing agency is identified. As the reforms are needed across a spectrum of ministries and agencies, a coordinating and monitoring mechanism to track progress will be important. It is worth highlighting that the government is cognizant of the need for these reforms, and the challenge is more about operationalizing these actions by learning from good practices in other countries, as well as expediting the pace of reforms. 34 Vietnam: Science, Technology and Innovation Report – Policy Brief Annex 1: A new STI strategy for enhancing business innovation in Vietnam Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term PILLAR 1: Re-orientation of the STI Policy and Development Framework Current STI Policy Rebalancing the STI • The new STI Strategy • Introduce new Framework and its policy mix and improving reflects the focus on thematic strategies implementation is its composition technology adoption by working groups not aligned to the key • Strengthen business and diffusion in aligning all agencies. Vietnam 2035 priorities innovation programs businesses (esp. SMEs) • Formal review and including fostering to support innovation underpinned by evaluation of existing innovation in enterprises. capacity of SMEs and resource reallocation tax incentives to high- Specifically, there is: tech start-ups by and broadening of tech firms • Resource allocation is focusing on: policy instruments and • Design a new skewed towards R&D - Maximizing beneficiaries technology transfer and neglects support spillovers from • Scale up of program and to non-R&D based FDI by facilitating management, university-industry innovation linkages between technology extension collaboration • Narrow scope MNEs and and linkages programs • Design a new R&D of policies and domestic SMEs [MOST + MOIT + MPI] strategy instruments for - Improving • Minimize policy [MOST as lead] business innovation managerial gaps by creating • Program beneficiaries practices as working groups in the tiled towards larger core innovation following areas: firms capabilities - Promote SME - More emphasis on upgrading and university-GRI – innovation Industry linkages - Early stage and collaboration innovative ventures and finance • Formal review of instruments to improve management quality and to facilitate technology adoption. [MOST as lead] Annex 1: A new STI strategy for enhancing business innovation in Vietnam 35 Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term Improving program • Review and • Increase funding targeting of beneficiaries simplification of available for program and geographical existing application dissemination outside coverage process for Hanoi and HCM City government support • Increase and make mandatory a minimum share of industry representatives in panel experts reviewing proposals • Government Building agencies’ • Make fully developed • Implement rigorous competencies and competencies to design logical and M&E impact evaluations processes to generate and implement STI frameworks of selected policy effective policies needs policies mandatory with instruments strengthening harmonized indicators • Implement a single • Provide capacity information system building activities on: for applicants – single - Logical and M&E window frameworks • Implement a new - Instruments to common IT system support STI for managing • Establish a clear beneficiaries’ template for the information across diagnostic of agencies the problem to [MOST Lead; with be addressed, other agencies] identification of the market failure and justification of the instrument design • Program for training of civil servants in international level STI studies [MOST Lead; with other agencies] 36 Vietnam: Science, Technology and Innovation Report – Policy Brief Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term Strengthening Selected areas of Vietnam’s National Innovation System PILLAR 2: Improving Business Environment and Complementary Factors (demand side) Weak firm capabilities Managerial skills and • Attract skilled • Strengthen deter technological organizational practices Vietnamese from quality of business adoption and diffusion in firms need to be abroad to fill the gap administration strengthened. • Introduce new programs policy instruments • Seek public-private that can be used sector collaboration directly in equipping • Increase allocation firms with the of resources to capabilities of using instruments to and/or generating improve managerial technologies; for e.g. quality and firm Business Advisory capabilities, and to Service (BAS) and facilitate technology Technology Extension adoption based on Service (TES) extension models • Raise awareness among SMEs of the importance of managerial skills for innovation through business associations networks • Facilitate measures (auto-administered) for SMEs to conduct self-diagnostics and enable understanding of their own capacity limitations. [MOIT + MOST + MPI] Competition policy is Unlock private sector • Strengthen separation • Enforce competitive weak due to large role innovation through between ownership markets (independent of SOEs that deters increased competition and and regulatory competition agency) innovation bold SOE reforms functions of SOEs • Improve corporate • Accelerate and deepen • Remove barriers for governance SOE reforms SOEs in using R& D • Open up services • Implement funds sector competitive neutrality [MOIT + MOF] [MOIT + MOF] • Remove distortions to create a level playing field/entry/exit Annex 1: A new STI strategy for enhancing business innovation in Vietnam 37 Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term Dynamism of enterprises • Improve the business • Introduce appropriate • Reform the insolvency hampered by regulatory environment and regulations law to introduce and doing business competitiveness of to implement simplified procedures environment domestic enterprises Government for SME insolvency by improving entry Resolution 02 that provisions, introduce barrier (starting a aims to accelerate a framework for out- business), and exit of regulatory reforms of-court workouts, and firms (Insolvency law particularly, starting a enhance the role of reform) business, and exit of commercial courts non-productive firms Intellectual property • Intellectual property • Patent protection • Strengthen the overall rights regime is not rights protection enforcement can capacity of the IPR well-enforced. This deters regime in Vietnam be strengthened protection system knowledge transfer requires stronger by establishing to enforce patent as it relies on investor enforcement clear guidelines on protection copyrights, protection. This is efforts along with how benefits from and industrial property particularly important for strengthened capacity commercialization rights. Vietnam as it attracts large to adapt to the of new ideas should amounts of FDI. needs of Vietnam’s be divided among entrepreneurial collaborators from ecosystem and universities and think specifically SMEs. tanks/ industry and research/ foreign and local. Innovation and start-up Start-up finance is • Support investment • Stimulate the supply finance constrained constrained by both readiness programs of early stage finance demand and supply side that improve CEOs/ using public capital factors. On the demand founders business in the stage with the side, the inability of firms management and largest market failure to produce business plans leadership skills, i.e. pre-seed and seed to seek out funding and networking and stage. lack of investible ventures matchmaking. that indicate capacity to grow; many incentives remain “on paper” as cumbersome guidelines and the administrative burden impairs access. Regulatory mechanisms are unable to catch up with innovation start-up development and serve as barriers rather than facilitators. 38 Vietnam: Science, Technology and Innovation Report – Policy Brief Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term Improve financing • Further reform • Continue to reform the for SMEs through regulations on secured insolvency law and the regulatory reforms in lending to encourage secured transactions secured transactions and Vietnamese banks regulations to further insolvency law to move away from promote movable traditional real estate collateral in lending to secured lending SMEs and startups. and develop more • Change regulations to movables financing allow new debt related (i.e. secured by financial instruments. broader types of assets, i.e. tangible and intangible or in other words, receivables, inventory, value paper, Intellectual property, etc.) (MoJ as lead with other agencies) • Review the matching grants administered to make the processes less burdensome for potential applicants Digital Infrastructure and • Incentivize firms to use Deepen the data connectivity – need to be digital infrastructure ecosystem, including enhanced in businesses (computers; on-line regulatory framework, to realizing the promise of platforms, cloud data security, and Industry 4.0. services) privacy to promote • Provide advisory use of technology and services to facilitate knowledge flow. the upgrading of technologies across firms. • Develop the necessary regulatory and data security policy framework Annex 1: A new STI strategy for enhancing business innovation in Vietnam 39 Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term PILLAR 3: Enhancing skills and knowledge (supply side) Human Capital: Skills Develop a national skills • Design and pilot • Institutionalize Gaps (poor quality of development strategy output- based the Steward and skills) and Skills Shortages in the education and financing for TVET Financier roles of (inadequate quantity of training systems for (a) Institutes and the Government workforce with required re-skilling of current universities, with (next HE or TVET Law skills) are major constraints workforce (stock) and (b) enhanced autonomy Amendments) for engaging in/investing investing in skills of new and accountability • Strengthen the in firms’ innovation cohorts (flow) through (output can be national qualification practices. more relevant tertiary and number of graduates framework to make TVET as well as primary with relevant skills) Vietnam’s education Vietnam should make a and secondary education • Provide policy support and training system major effort to increase systems. To a larger and incentives for more transparent so the enrollment in tertiary extent bring enterprises private sector to invest that students, workers education. Tertiary (employers) into the skills in (internships and ICT and employers better education institutions will development system skills at work and TEIs) understand the have to pay attention to • Revisit the roles of and provide advice required qualifications 35, 45 and 55-year-olds, Government as a (e.g. on curriculum for the type of not just 20-year-olds. Steward (quality and information) occupations and tasks This requires significant assurance, autonomy for a more labor envisaged changes in the way and accountability, market-oriented skills • Integrate socio- institutions and the LMIS) and Financier development sector. emotional skills into system function. Without (performance-based, • Provide incentives curriculum and extra- a massive increase in matching grant, for enterprises on curriculum programs the workforce with a student aid) employee tuition in primary, secondary, higher level of skills, • Investing in all three support and attracting and tertiary education Vietnam will not be able broad skills types are skilled Vietnamese • Build a well- to get the basics right critical: cognitive, from abroad functioning labor- for an improvement of socio-emotional and • Hand-over the market driven skills its national innovation job-specific technical institution-based development system system. skills learning to TVET by designing and • Incentivize enterprises, institutes and implementing a Labor TVET institutions, universities via Market Information and universities to greater autonomy and System (LMIS) for partner on investing accountability in the systematic data in continuous design and provision analysis and managing learning and training of their services. dissemination through design and • Strengthen adult platforms for all implementation of education programs stakeholders. more relevant and designed to enhance [MOET +MOLISA+ innovative curriculum technical skills literacy Enterprises + and pedagogy, and socio-emotional Vocational + Tertiary work-based training skills Education Institution (internships) (TEIs)] 40 Vietnam: Science, Technology and Innovation Report – Policy Brief Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term Today’s skills needs • Design and pilot labor cannot be met solely by market information the current practice in the schemes, job search education and training programs, and data sector which includes analytics (disruptive programs that target a technology) for narrow set of population informed decision- and limited coherence making. across life stages. Instead, [MOET +MOLISA+ Vietnam should provide a Enterprises + range of skill development Vocational + Tertiary opportunities across a Education Institution broad population for (TEIs)] continuous learning, which will involve both a larger set of actors and will change the roles of the education and training sectors. University/GRI-Industry Build stronger • Strengthen University/ • Rebalance public research linkages University/GRI-Industry GRI-Industry funding at universities are weak: enterprises research linkages partnerships by and GRIs based on rarely find public sector as the intensity and scaling up existing national priorities and R&D a useful source quality of collaboration and introducing new performance-based of knowledge for their between companies and innovation funding funding. The GRIs innovative activities universities/GRI play an schemes targeted for should be restructured increasing important role joint/collaborative into sustainable, A key challenge lies in in determining returns research and larger, fewer, and inappropriate incentive to R&D investments, firm innovation projects better performing schemes for the academic competitiveness, long between universities/ organizations with system for collaboration term economic growth GRIs and enterprises clear missions with enterprises and the and job creation. It also • Support master’s and funding lack of mechanisms to plays an important role in and PhD students criteria, including diagnose the innovation the ability of countries to to pursue targeted performance-based needs of firms attract and retain highly research projects in ones set at the qualified and mobile enterprises including appropriate level. personnel. spending part of their studies in an enterprise Annex 1: A new STI strategy for enhancing business innovation in Vietnam 41 Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term • Establish mutual board • Increase autonomy memberships whereby and accountability universities/GRIs invite in the governance of industry members to learning, teaching and sit on their boards and research at universities vice versa and GRI. Modern R&D • Rebalance R&D management practices support. For example, at universities and GRIs NAFOSTED funds such as peer review, should also be opened advisory committees, to start ups and and performance- R&D investments in based evaluations enterprises to help should be thoroughly commercialization applied. potential • Establish a better • Innovation vouchers incentive system for SMEs to purchase to encourage services from innovative research at universities/GRIs on universities/GRIs and innovation projects allow them to keep • Establish organizations the revenues from dealing with market commercialization of and technology the research results. brokerage, technology • Create and improve agents, and centers a legal system for a for leasing and technology market contracting manpower (including regulations for science and on science and technology activities. technology contracts). [MOST +MOET+ [MOST + MOF Enterprises + GRIs+ Enterprises + GRIs+ Universities] Universities] 42 Vietnam: Science, Technology and Innovation Report – Policy Brief Issue Policy reform actions Sequencing actions (Implementing agency) Short-term Longer term PILLAR 4: Strengthen Institutional Coordination and Partnership across Public-Private Stakeholders Coordination among Improve coordination • Identify champions • Evaluate the pros innovation agencies across public innovation in the Government to and cons of setting as well as sustained agencies and forging improve coordinating up an innovation partnership/consultation partnership with mechanism across agency vs. a high- with private sector in private sector & other agencies level coordination advancing the STI agenda stakeholders • Seek private sector mechanism appears to be ad hoc and inputs on a systematic • Establish a self- needs strengthening basis to develop sustaining community demand-driven of practice with key policies stakeholders from private and public sector to create “feedback loops” to strengthen design and implementation of innovation policies and outcomes Annex 1: A new STI strategy for enhancing business innovation in Vietnam 43 With support from: 8 Dao Tan Street, Ba Dinh District, Hanoi, Vietnam Telephone: +84 24 37740100 Facsimile: +84 24 37740111 Website: www.dfat.gov.au 8th Floor, 63 Ly Thai To Street, Hoan Kiem District, Hanoi, Vietnam Telephone: +84 24 39346600 Facsimile: +84 24 39346597 Website: www.worldbank.org/en/country/vietnam