Some limitations in legal regulations hinder innovation in Vietnam

Innovation is one of the key driving forces in improving national competitiveness and promoting socio-economic development. In recent years, Vietnam has achieved many remarkable results in innovation, as evidenced by the increase in the number of start-ups, investment in research and development, as well as increasing rankings on the global innovation index[1]. However, in addition to the achievements, the current legal framework still has limitations that hinder the development of innovation activities. Therefore, the article focuses on analyzing some limitations in current regulations, thereby proposing some solutions to improve the legal system and create favorable conditions for innovation activities in Vietnam in the near future.

 

 

1. Innovation practices in Vietnam

According to the Organisation for Economic Co-operation and Development (OECD), innovation is defined as the fact that a new (or improved) product or process is significantly different from the previous products or processes of the subject (including organizations or individuals),  and have been provided to customers or actually used by such subjects. Innovation activities at the enterprise can include all operational, financial and commercial activities with the aim of creating an innovation for the business. but not only encapsulated in high-tech development[2]. Businesses can participate in the innovation network by collaborating with research institutes, domestic and foreign investors, or other businesses in the startup ecosystem.

In Vietnam, innovation is gradually being shaped as a focus in the socio-economic development strategy. Therefore, the State has been applying policies, support funds, or promotion programs to expand the potential for innovation development in our country. Many positive signals have emerged, such as the birth of national innovation centers, an increase in investment in research and development (R&D), as well as policies to encourage innovative start-ups. However, besides these achievements, Vietnam still has limitations and inadequacies in innovation practice.

1.1. Positive points in innovation in Vietnam

In the context that the global economy is strongly affected by the Industrial Revolution 4.0, innovation has become a key factor for Vietnam to improve its competitiveness and progress in all fields. Aware of the importance of this, the State has constantly made efforts in building a favorable environment for innovation in enterprises and fields in Vietnam and has achieved many encouraging results.

In particular, it can be mentioned that State agencies have issued many important strategies and policies such as Decision No. 844/QD-TTg dated May 18, 2016 of the Prime Minister on approving the Project "Supporting the national innovation startup ecosystem to 2025"; Decree No. 38/2018/ND-CP dated March 11, 2018 of the Government detailing investment in innovative start-up small and medium-sized enterprises (Decree No. 38/2018/ND-CP); Decree No. 80/2021/ND-CP dated August 26, 2021 of the Government detailing and guiding the implementation of a number of articles of the Law on Support for Small and Medium Enterprises; Decision No. 569/QD-TTg dated May 11, 2022 of the Prime Minister promulgating the Strategy for the development of science, technology and innovation to 2030; Resolution No. 02/NQ-CP dated January 10, 2022 of the Government on the main tasks and solutions to improve the business environment and improve national competitiveness in 2022. These policies have created a favorable legal environment, promoting businesses to promote research, development and innovation of products and technologies.

In addition, the Global Innovation Index (GII) Report 2024 published by the World Intellectual Property Organization (WIPO) has marked Vietnam's incredible progress. According to the report, Vietnam ranks 44th out of 133 countries, up two places compared to 2023, maintaining 02nd place in the group of low-middle-income countries and 06th in the group of high-middle-income countries. In addition, Vietnam continues to improve its innovation input ranking by increasing 04 places to 53rd place compared to 2023 (including 05 pillars: Institutions, human resources and research, infrastructure, market development level, business development level) and increasing to 36th place for innovation output ( including 2 pillars: Knowledge and technology products, creative products).

Notably, in 2024, Vietnam will have 03 indicators leading in the world, namely high-tech imports, high-tech exports and creative goods exports. In the report, Vietnam was recognized by WIPO as one of the 08 middle-income countries with the most improvement in ranking since 2013 and one of the 03 countries holding the record with outstanding achievements compared to the level of development for 14 consecutive years[3]. It can be said that Vietnam's GII index has been continuously improved, proving the country's efforts in the field of innovation.

For R&D activities, in 2023, although Vietnam's R&D spending ranking has not changed compared to previous years, the R&D spending of the top 3 large enterprises has improved significantly when it increased 09 places compared to 2022 to 29th place[4]. Also in this year, the global venture capital trend dropped sharply by 35%, but the slight decline in Vietnam's investment market still shows optimistic signals when compared to the general situation in the world[5].

The innovation startup ecosystem in Vietnam is also increasingly focused with the birth of many support centers such as the National Innovation Center (NIC), the National Innovation Support Center (NSSC), and the Internet of Things Innovation Hub (IoT Innovation Hub). These centers have implemented many practical activities such as business incubation, capital support, strategic advisory, connecting startups with domestic and international investment funds. Particularly, NIC has cooperated with 41 investment funds from many different countries with a commitment to capital inflow of 1.5 billion USD for Vietnamese startups in the period of 2023 - 2025[6].

In general, with strong attention from the State and the efforts of the business community, innovation in Vietnam has made important progress. This is a solid foundation for Vietnam to continue to improve its competitiveness and promote sustainable development in the coming time.

1.2 Inadequacies in innovation in Vietnam

Although there have been important steps in building mechanisms to support innovation, in fact, there are still legal barriers that make it difficult for businesses and organizations to exploit the potential of innovation and creativity in Vietnam in the context of globalization.

According to Mr. Nguyen Hoa Cuong - Deputy Director of the Central Institute of Economic Management, in addition to obstacles from the business side, there are still some inadequacies in policies and legal regulations such as the process of registering innovative start-up enterprises or procedures for accessing support, etc  incentives are still complicated and ineffective. In addition, the current law still lacks criteria for identifying innovative and green innovation enterprises[7].

In the report "Review - Update on Vietnam's Economic Situation" in April 2024, the World Bank (WB) said that, although the business environment has recently improved, startups and investors in Vietnam still face challenges related to sub-licensing procedures due to the complexity and currently unclear about the legal nature of countless fields of production and business, especially for start-ups.

For investors, the legal framework for registering the establishment of investment funds is still limited and has not created motivation, leading to only a few funds registered for establishment in the country. In particular, these funds are limited to a maximum of 30 investors, which is much lower than international practice, hindering the attraction and mobilization of capital for innovation projects in Vietnam.

A typical example is that financial technology (fintech) enterprises must apply for permission from various agencies to operate, such as the Ministry of Industry and Trade to license e-commerce activities, the State Bank of Vietnam to approve interbank payment transactions, and the Ministry of Information and Communications if it is related to digital content. The report also shows that, in the 2021 PCI survey, 22% of businesses encountered difficulties in obtaining sub-licenses, which led to their production and business plans being delayed or had to be canceled altogether[8].

2. Legal barriers limit innovation in Vietnam

2.1 Law on business and investment

The current legal framework on enterprises and investment still has many inadequacies, reducing business efficiency and hindering innovative enterprises. In particular, some of the following regulations can be considered:

Firstly, Clause 2, Article 3 of the Law on Support for Small and Medium Enterprises in 2017 stipulates that innovative start-up small and medium-sized enterprises are small and medium-sized enterprises established to implement ideas on the basis of exploiting intellectual property, technology, new business models and capable of rapid growth. At the same time,  Clause 1, Article 2 of Circular 01/2018/TT-BKHCN stipulates that an innovative start-up enterprise is an enterprise with rapid growth based on the exploitation of intellectual property, technology, new business models and has an operating period of not more than 05 years from the date of issuance of the first Enterprise Registration Certificate. It can be seen that the definition of "innovative start-up small and medium-sized enterprises" or "innovative start-up enterprises" is not really appropriate, because there are no specific criteria to determine the ability to grow quickly and do not mention the outstanding characteristics of innovation.  creativity is like investing heavily in R&D to create new products or services, making the definition not reflect the nature of the innovation business.

Secondly, administrative procedures still lack guidance and are not consistent. Specifically, Article 67 of the Government's Decree No. 31/2021/ND-CP dated March 26, 2021 detailing and guiding the implementation of a number of articles of the Law on Investment (Decree No. 31/2021/ND-CP) stipulates the mechanism for streamlining administrative procedures for foreign investors upon establishment,  capital contribution, purchase of shares, purchase of capital in innovative start-up small and medium-sized enterprises, innovative start-up investment funds, however, there is a lack of specific guiding regulations when implementing, leading to some local management agencies still applying the old investment regulations when foreign investors want to invest in Vietnam. Many investors reflect that, in order to invest in an innovative business, they have to carry out many rounds of inspection and approval, with a long time, moreover, Vietnam's legal regulations on investment are not clear in new fields such as fintech, etc  artificial intelligence (AI) or blockchain technology. This not only increases operating costs, but also loses business opportunities in areas that require rapid deployment speeds. In addition, in case the enterprise has to establish a parent company abroad to receive capital from investors due to complicated administrative procedures in our country.

Thirdly, currently Circular No. 05/2014/TT-NHNN dated March 12, 2014 of the State Bank of Vietnam guiding the opening and use of indirect investment capital accounts to carry out foreign indirect investment activities in Vietnam (Circular No. 05/2014/TT-NHNN) does not clearly stipulate whether foreign investors are allowed to use IICA to contribute capital to innovative start-up funds or not.  leading to foreign investors being unable to contribute capital to the fund for the reason that commercial banks and auditing firms do not recognize the ownership of foreign investors' contributed capital in the innovative startup investment fund as legal and valid. It can be said that this has partly hindered the ability to attract capital from foreign organizations and individuals in innovation in Vietnam.

Fourth,  the legal framework for the establishment and operation of innovative startup investment funds in Vietnam also has inadequacies. Specifically, Decree No. 38/2018/ND-CP stipulates that the maximum number of members of an innovative startup investment fund is 30 investors contributing capital[9], while investment funds in developed countries are often able to attract hundreds of individual and institutional investors. In addition, the regulation only allows investors to contribute capital in Vietnamese currency, not accepting foreign currencies directly[10], which has reduced the attractiveness of international investors. At the same time, the Decree does not allow the use of loans to contribute to innovative start-up investment funds. This is considered inappropriate according to international practice because the investment fund Foreign investors still need to raise money from other investors in various forms to contribute capital.

Therefore, it is necessary to timely amend and supplement the above inadequacies to attract more domestic and foreign investors, as well as develop and operate innovative startup funds more effectively.

2.2 Tax law

The law currently does not clearly stipulate tax incentives for the income of innovative startup investment funds, although this fund plays an important role in promoting the innovative startup ecosystem. The provisions of the Law on Investment 2020 and Decree No. 31/2021/ND-CP have mentioned incentives for businesses at innovation centers, but have not yet applied to innovative startup investment funds. Therefore, this fund is still subject to the ordinary corporate income tax rate of 20%, a figure that does not encourage investment and development.

Innovative start-up investment funds are also facing many difficulties in tax declaration in Vietnam due to the lack of synchronization and specific guidance on accounting specifically for the fund. This leads to confusion in tax declaration and payment, making it difficult for funds to operate transparently, especially in meeting regulatory requirements.

In addition, foreign enterprises operating in Vietnam are subject to corporate income tax at the rate of 20% on income from capital transfer. This regulation is applied uniformly without any specific distinction or incentives for transactions of a strategic nature, such as investments in high-tech or innovation sectors. Meanwhile, many countries in the region, such as Singapore, have applied outstanding preferential policies, including tax exemption or the application of a 0% tax rate on income from capital transfers. This policy not only minimizes the financial burden for foreign businesses but also creates an attractive investment environment, strongly attracting international capital flows.

 

 

2.3 Intellectual property law

In the field of intellectual property (IP), although Vietnam has made significant progress through updating and amending the law through each period, the enforcement efficiency has not yet met the practical requirements, Vietnam is still one of the countries with the highest rate of IP infringement.

One of the institutional inadequacies is that the process of registering IP rights protection in Vietnam is still cumbersome with a long time and high cost. For example, for inventions, according to Clause 1 and Clause 2, Article 119 of the 2005 Law on Intellectual Property, amended and supplemented through 2009, 2019, 2022, the registration of an invention requires to go through a complicated process of appraisal of form and content, lasting up to 19 months. However, in fact, this time may last a lot longer depending on the number of applications processed at the competent authority. This reduces the market reach of new products. For startups, this is a major hurdle when they need to protect their products and innovative ideas quickly to compete.

In addition, the IP information database in Vietnam is still inconsistent, the information provision is still limited, the library information page is not modern, and it is often inaccessible, affecting the search and establishment of IP rights,... This not only increases difficulties for businesses when they want to search and establish IP rights, but also hinders information transparency. Investing in information technology solutions to modernize database systems and improve lookup capabilities is urgent but has not been implemented synchronously and effectively.

Another challenge is that the Intellectual Property Law does not have specific provisions on IP rights for AI-generated products. In the context of the strong development of AI technology, the lack of clear regulations on rights holders, scope of protection, and AI-related dispute resolution mechanisms is causing great difficulties for both businesses and regulators.

In addition, one of the reasons for the high level of copyright infringement in Vietnam can be mentioned that our country's administrative sanctions are still not drastic and not enough deterrent. Discussing this issue, many experts and lawyers in the field of IP shared that the process of handling cases of infringement of IP rights still faces many difficulties, some cases last for many years, causing losses of billions of VND, because local enforcement agencies are not experienced in handling cases related to IP,  many procedures are still cumbersome, and the sanctions are not strict enough. Currently, when conducting legal procedures to handle violations of IP law, many companies only receive a small amount of compensation from the infringing units - a very small amount compared to the cost and effort that many businesses spend to pursue the case[11].

In addition, the current administrative sanction level is low, so it is not enough to deter businesses from violating. For example, a very common case today in Vietnam, pirated movie websites infringe on the copyright and IP rights of many units, but the highest sanction is only 60 million. This is too low a figure compared to the profit of the Association's piracy websites. The Motion Picture Association of America has also recently brought a number of cases to propose criminal handling, but this handling is also difficult[12].

It can be seen that the inadequacies in regulations and procedures related to IP rights also cause barriers to promoting innovation activities and the investment and research of these activities still face difficulties and fears. Therefore, the adjustment of regulations in the field of IP, especially sanctions against infringers, is very necessary to promote innovation activities of subjects in today's society.

2.4 Law on cyber security and information technology

Currently, electronic transactions and information security play an important role in promoting digital transformation and innovation, not only in Vietnam but also around the world. However, the current legal system still has a number of shortcomings, such as the lack of specific guidance or the legalization of the law has not kept up with the changes in the market.

One of the limitations is that the current law lacks a legal framework to regulate new technologies such as blockchain, AI or the Internet of Things (IoT). Although the Law on Electronic Transactions, the Law on Cyber Security or the Law on Information Technology have had new updates compared to the past, these laws still focus on traditional electronic transactions and do not cover decentralized or automated transactions.

Take smart contracts, for example, which are applications that run on a blockchain platform[13]. When a smart contract conducts an asset purchase and sale transaction on the blockchain but a dispute arises, the parties involved cannot rely on the current legal system to protect their rights because the 2023 Electronic Transaction Law has not yet recognized the legal value of blockchain-based transactions. This reduces the confidence and investment intention of businesses in the application of blockchain technology in Vietnam.

In addition to the legal documents that have been promulgated, some proposals in some draft laws expected to be promulgated in the near future also have inappropriate points, hindering innovation and creativity activities in our country. In particular, it can be mentioned that the Draft Law on Personal Data Protection is expected to be passed and take effect from January 1, 2026[14]. Although the Draft has made important updates to keep up with the trend of modern technology development, some of the regulations proposed in the Draft inadvertently create worries and may be barriers for businesses and investors and make them consider investing in the Vietnamese market in general and in the field innovation in particular.

Article 49 of the Draft stipulates that basic personal data such as full name, nationality, citizen identification number or marital status must have protection measures including the appointment of a personal data protection organization, a personal data protection expert to protect the data and the need to undergo cyber security checks for with systems and equipment for processing personal data. For sensitive personal data such as political opinions, religion, health status, sexual orientation or location data, in addition to the above requirements, Clause 4, Article 49 of the Draft stipulates that enterprises must undergo a credit assessment on personal data protection.

The above regulation shows the efforts in strictly controlling and enhancing the responsibility of all organizations and individuals involved in the control and processing of personal data. But at the same time, this regulation also poses a cost burden due to the implementation of high security measures, requiring businesses to face large costs to maintain security technology and professional personnel. In addition, the regulations do not clearly delineate the responsibilities of each subject. For example, when a data security breach occurs, the responsibility belongs to the organization or individual hired to protect personal data or the whole business while an ordinary business enterprise cannot understand the technical measures.

In general, the above legal barriers not only reduce the competitiveness of Vietnamese innovative enterprises in the international arena but also negatively affect the development of the domestic innovative startup ecosystem. To remove these limitations, a comprehensive adjustment of the legal framework is needed, focusing on simplifying administrative procedures, improving transparency and creating more favorable conditions for investors, especially in the field of innovation.