By Chau Hoang —

Ho Chi Minh City at night. The city’s dynamic culture has made it home to many start-ups in Vietnam, with more expected to emerge in the coming years. Source: Image in the public domain.

To catapult Vietnam up the ranks of the world’s leading economies, Hanoi has resolved to turn the country into a “start-up nation” by 2020. The government plans to implement regulatory and financial measures to coax one million businesses, including 5,000 start-ups, into operation within four years.

These plans are both encouraging and concerning. On the one hand, they herald Hanoi’s determination to boost the private sector – a move that can further fuel Vietnam’s growing economy and bolster its economic standing in the Asia-Pacific region.

On the other hand, they reflect a preoccupation with quantity and timeframe, and a reliance on the command economy mindset from which the communist leadership has yet to break away after decades of economic modernization. This mindset must be discarded if Hanoi wishes success in its pursuit of an American-style start-up economy. More than meeting quotas, Vietnam’s success in fostering a self-sustaining start-up ecosystem depends on the creation of better-informed regulations and political conditions that encourage the growth of private businesses.

Though nationwide in scope, Vietnam’s “start-up nation” initiative centers on Ho Chi Minh City, already home to a lively start-up scene. Official statistics on the city’s start-ups remain scant — estimates vary between 1,000 and 2,000 — but there is strong evidence that start-ups will continue to flourish. The recent influx of young tech entrepreneurs, the increasing demand for co-working spaces (workspaces shared by diverse teams of professionals to allow exchanges of ideas), and the popularity of start-up events among the city’s young population attest to the city’s budding appeal as a start-up hotbed.

Foreign investors are coming around, reflected in President Barack Obama’s conversation with the city’s young entrepreneurs during his May visit to Vietnam and recent investments by prominent venture capital seed funds.

This dream seems far-fetched, however, in light of Vietnam’s current economic regulations. Efforts to reform the public sector in the past three decades have not been matched in the private sector. Small and medium enterprises in Vietnam suffer from an unfavorable legal environment and shortage of capital. Overbearing bureaucracy and pervasive corruption have led to a dearth of foreign investment, turning away foreign angel investors and venture capitalists – the patron saints of any start-up.

To make matters worse, most prolific domestic investors, like Vietcombank or the oil and gas giant PetroVietnam, are state-owned and tend to shy away from start-ups in favor of larger-scale projects and companies with established track records. In addition, Article 292 under the penal code has intimidated app developers by criminalizing the offering of non-licensed services online or via mobile networks. Many start-ups have already been lured to Singapore, which boasts far more conducive regulations, political climate, access to foreign investment, and technical infrastructure.

An economy focused on quotas will not solve these problems. First, it distracts Vietnamese policymakers from the country’s economic realities by fanning unrealistic expectations and creating needless pressures to have quotas met. Second, it reinforces the misconception that start-ups can simply be forced into existence via the infusion of government money. Start-up hubs are not “built,” but grow organically.  By framing the problem in reverse, Hanoi will likely set itself up for disappointment. Third, it reintroduces the role of the state as a market player that directly influences the economy – precisely what Hanoi needs to jettison for the “start-up nation” initiative to see any success.

Hanoi must resist its socialist-oriented market economy urges. What matters at the moment is not the quantity of start-ups, but the quality of the business environment in which private enterprises – start-ups included – can grow. More start-up friendly regulations will entice more entrepreneurs, investors, and venture capitalists. Such regulations include enhancing legal protection for private businesses, a more generous visa policy for investors, and a more favorable bankruptcy law.

But economics is not the only issue at play in Vietnam’s quest to becoming a start-up nation. A more fundamental question remains: how can an industry that demands imagination thrive in Vietnam’s political culture, notorious for its restriction on freedom of thought?

This is an area where the United States, as Vietnam’s new strategic partner, can help engender progress. More than just a trade policy, the Trans-Pacific Partnership (TPP) is Washington’s most powerful leverage over Vietnam’s human rights shortcomings. Vietnam’s progress in freedom of thought and expression will in part depend on the TPP bringing Hanoi up to international standards.

Beyond this, U.S.-funded educational initiatives that promote science, technology, engineering, and mathematics will continue to provide Vietnam with the human capital required to drive a start-up boom. One notable example is the much-anticipated Fulbright University Vietnam, which aims to draw talented researchers from around the world and create a top-tier computer science department. Though it will be difficult to replicate Stanford or Carnegie Mellon, success in this arena will lay the groundwork for success in the start-up industry.

Vietnam’s “start-up nation” initiative requires changes both in the manner its government interacts with new businesses and its business culture. Significant obstacles remain, but given Vietnam’s enormous potential for success in this area – its wealth of technological talent, aggressively entrepreneurial culture, high literacy and internet penetration rates – the aspiration is warranted, and the effort worthwhile.

Ms. Chau Hoang is a researcher with the Southeast Asia Program at CSIS.