Why Better Governance Has Not Delivered Stronger Manufacturing Growth in Vietnam, Says ADB

An ADB study covering 63 Vietnamese provinces, 4.78 million enterprise observations, and 2006–2020 finds that while better provincial governance helps attract investment, it has only a limited impact on manufacturing productivity, technological upgrading and industrial competitiveness. The report urges governments and development partners to move beyond investment-friendly reforms by strengthening domestic firms, innovation, skills and technology transfer to achieve sustainable industrial growth.

For nearly two decades, Vietnam has pursued one of Asia's most ambitious business climate reform programmes, encouraging its 63 provinces to compete for investment by improving governance, reducing administrative barriers and strengthening the regulatory environment. The expectation has been that better institutions would not only attract foreign direct investment (FDI) but also improve productivity, technological sophistication and industrial competitiveness. However, a new Asian Development Bank (ADB) Economics Working Paper, prepared by researchers from Copenhagen Business School, Nha Trang University, and the ADB's Economic Research and Development Impact Department, suggests that this strategy has produced mixed results. Analysing more than 4.78 million enterprise observations collected between 2006 and 2020, the study finds that while better governance may help attract investors, it has had only a limited impact on improving the long-term performance of manufacturing firms. The findings offer valuable lessons not only for Vietnam but also for governments and development institutions across emerging economies that rely on investment-led growth.

Better Business Climate Does Not Always Mean Better Industrial Performance

The research evaluates Vietnam's Provincial Competitiveness Index (PCI), a widely used measure of provincial governance that assesses 10 areas, including entry costs, land access, transparency, legal institutions, labour training, government support, and administrative efficiency. While previous studies have shown that provinces with higher PCI scores generally attract more foreign investment, this report asks a different question: do these institutional improvements actually make businesses more productive after they invest?

The findings challenge conventional thinking. Across five major indicators- economic complexity, productivity, revenue, employment and average firm size, the researchers found only weak evidence that improvements in the business climate translated into stronger industrial performance. Better governance showed modest positive effects on revenue and employment in some cases, but it had almost no measurable influence on productivity, technological upgrading or the sophistication of manufacturing activities. Even more surprisingly, several governance indicators yielded results contrary to expectations, with some provinces experiencing stronger manufacturing performance despite slower improvements in areas such as transparency, land administration, and legal institutions.

A Growing Gap Between Foreign and Domestic Industries

One of the study's most important findings is the widening gap between foreign-invested enterprises and domestic manufacturers. During the 2006–2020 period, multinational companies steadily expanded into more advanced manufacturing sectors, while most domestic firms remained concentrated in relatively simple, lower-value production activities.

Foreign-invested enterprises increased their contribution to manufacturing employment and revenues, reflecting Vietnam's continued success in attracting global manufacturers. However, the expected technology spillovers to local businesses have remained limited. Many domestic firms have struggled to integrate into multinational supply chains, preventing the broader industrial upgrading that policymakers had anticipated.

The researchers also found that foreign companies appear relatively unaffected by improvements in provincial governance once they have established operations. Strategic decisions on production, expansion and technology upgrades are largely driven by global market conditions, international supply chains and corporate investment strategies rather than local institutional reforms. This suggests that while better governance remains important for attracting FDI, it is far less effective in determining how multinational firms perform over the long term.

What This Means for Governments and Development Partners

The findings carry significant implications for economic policy. Governments should continue improving governance and maintaining an investor-friendly business environment, but these reforms alone are unlikely to deliver sustained industrial transformation. Instead, policymakers need to focus more directly on strengthening domestic enterprises through innovation support, technology adoption, skills development, research and development, supplier development programmes and stronger links between multinational companies and local businesses.

For international development partners such as the Asian Development Bank, World Bank, International Finance Corporation (IFC) and bilateral development agencies, the study suggests that future assistance should go beyond regulatory reform. Development programmes may generate greater long-term impact by combining governance improvements with investments in industrial upgrading, digital transformation, workforce skills, innovation ecosystems and small and medium enterprise (SME) competitiveness. This would help ensure that foreign investment contributes more effectively to domestic economic development instead of remaining isolated within global production networks.

A New Roadmap for Sustainable Industrial Growth

The study also offers important lessons for private-sector stakeholders. Multinational companies have opportunities to build more resilient supply chains by increasing collaboration with domestic suppliers, investing in local workforce development and encouraging technology transfer. These partnerships could improve operational resilience while supporting broader economic development.

Domestic manufacturers, meanwhile, cannot rely solely on a better business environment to improve competitiveness. They will need to invest in technology, digitalisation, product quality, innovation and export capabilities to compete in increasingly sophisticated global markets.

To ensure the reliability of its findings, the researchers conducted extensive robustness tests across different ownership structures, regions, industries and time periods. The results remained largely consistent, reinforcing the conclusion that institutional reforms alone have only a limited effect on firm performance.

The report ultimately argues that Vietnam has reached a new stage of economic development. Attracting foreign investment remains important, but future growth will depend on how effectively the country transforms that investment into stronger domestic industries, higher productivity and greater technological capability. For policymakers, development partners and investors, the message is clear: the next phase of industrial success will be measured not by the volume of investment entering the country, but by how much value that investment creates for local businesses, workers and the wider economy.