Welcome to the next chapter of growth in the amazing story that is modern Vietnam. After fifteen years of working in every part of the country, I have never been more excited, yet more concerned, about the road ahead. 

At the 14th Party Congress, the country reaffirmed a bold vision: aiming for double-digit GDP growth and reaching high middle-income status by 2040. Recent trends, however, reveal the challenges, which are well documented by one of the great analysts and observers of Vietnam’s economic progress: David Dapice of Columbia University. In his January 2026 research note Managing a Tricky Transition, he explains how high a bar this double-digit growth will be. Even after a banner ~8% GDP growth in 2025, Vietnam’s average growth from 2020–2025 was only 5.7% – well below the 7%+ of prior years and far off the 8–10% annual target. This slowdown isn’t merely cyclical: it reflects structural shifts. Labor force expansion is decelerating, and the once-powerful boost from rural workers moving to factories has dwindled from over 1 million people per year to just a few hundred thousand. That “demographic dividend” – which used to add an estimated 1–2 percentage points to annual GDP growth – is largely spent. In short, Vietnam can no longer count on abundant young labor or basic capital investments to drive growth. Future gains must come from productivity – doing more with the resources at hand. 

Total Factor Productivity (TFP), the broadest measure of innovation and efficiency, needs to take center stage. Dapice calculates that to sustain even a 7% growth rate in the coming decade, Vietnam’s productivity would need to grow around 3.6–4% per year, a big step up from roughly 2.7% in the 2010s. Yet alarmingly, TFP’s contribution to growth has fallen over time – from contributing more than half of GDP growth in the early 2000s to under 45% more recently. Meanwhile, Vietnam’s economy remains heavily dependent on low value-added assembly. For example, only about one-third of the value of Vietnam’s booming electronics exports is produced domestically – roughly 35–40% local value-add, versus 55–60% in China and over 70% in South Korea. If Vietnam remains just an assembler of other countries’ parts, it cannot escape the middle-income trap. 

The good news is that Vietnam’s leaders recognize this reality. A series of recent reforms – epitomized by four new Politburo resolutions known as the “four pillars” – emphasize boosting the private sector, technological dynamism, legal reforms, and deeper global integration. In mid-2025, the National Assembly also approved a historic administrative overhaul to merge the country’s 63 provinces into 34 larger units, streamlining bureaucracy and “providing a bedrock for sustainable growth”. These moves aim to improve what might be called Vietnam’s institutional and organizational productivity, tackling the soft factors that enable innovation. But to translate reform into reality, Vietnam needs a unifying strategic framework – one that can tie together issues of scale, specialization, and innovation. Part of the solution will be the development of regional economic clusters as the framework to drive Vietnam’s next phase of growth. 

Regional Clusters as Engines of Productivity and Value 

In economic history, regional clusters have proven powerful engines for upgrading productivity and value-add. A cluster is more than just a group of similar firms in one place; it’s an ecosystem. It encompasses interconnected businesses, suppliers, service providers, skilled labor pools – even dedicated training or research institutions in a particular field. When such critical mass develops, a region can achieve deep specialization – becoming world-class in a particular industry – which in turn helps countries retain more value onshore and innovate faster.  

Many of the world’s most competitive economies have been built on the back of regional clusters. For example, the Guangdong province–Hong Kong–Macau “Greater Bay Area” in China has evolved into a high-tech manufacturing and robotics cluster of cutting-edge electronics and electric vehicles. Northern Italy’s industrial districts are famed for specialized machinery, textiles, and footwear, built on dense networks of small and medium enterprises. In Germany, the state of Baden-Württemberg boasts an automotive and precision engineering cluster (around companies like Porsche, Bosch, and Daimler) that drives exports and continual innovation. These regions show how clustering firms and know-how can create virtuous cycles of skill development, supply chain localization, and productivity growth. 

Over a decade ago, in 2010, Professor Michael Porter – the Harvard strategist who popularized cluster theory – visited Vietnam and observed the country’s early signs of cluster formation. He made clear recommendations: double down on cluster development to boost Vietnam’s competitiveness. The theory made sense: with clusters, Vietnam could move from competing on sheer volume to competing on uniqueness and quality. By concentrating efforts, each region could develop a unique economic identity rather than everyone chasing the same low-value assembly jobs. Porter’s advice was well-received in theory. Yet in practice, more than ten years on, Vietnam can only count a few truly competitive clusters. What happened? 

Missed Opportunities and New Momentum 

The short answer: Vietnam’s domestic economic structure had not been conducive to cluster development – until now. The country historically had 63 provinces acting as separate economic planning units, each with its own industrial parks and targets. Most of these provinces were simply too small, in both geographic and economic scale, to incubate a full-fledged industry cluster. Effective clusters often require a large labor pool, diverse input industries, and significant infrastructure – usually far more than a single small province can offer. Moreover, coordination among provinces was weak: Vietnam lacked strong mechanisms for regional planning, so provinces tended to act competitively rather than cooperatively.  

Incentives were also misaligned. Local authorities, eager to attract investment, often offered tax breaks and cheap land to any footloose assembly plant that would set up in the province. This might create jobs quickly, but it did not encourage investors to integrate locally or transfer technology. In essence, the system favored quick wins (assembly factories that could be here today, gone tomorrow) over building ecosystems of suppliers, skills, and innovation. The result was a decade of fragmented efforts – many provinces built industrial zones, a few saw some clustering, but true competitive clusters remained rare and shallow. 

The Weather Forecast and the Lucky Number Eight 

Is the current consolidation to 34 provinces enough to give the country the platform to build competitive clusters, or are Vietnam’s provinces still too small to foster such complex systems? Do we need further consolidation? If we give ourselves the unrealistic luxury of looking at this from a purely economic perspective the answer is probably as follows: 34 is huge progress and makes success more likely; but 16 would be better and eight would be optimal. 

Vietnam’s planners can draw inspiration from a surprising source: the nightly weather forecast. The country spans several distinct climate zones and river basins – the Mekong Delta vs. the Red River Delta, the Central Highlands vs. the Southeast coastal region, and so on. These roughly correspond to eight natural economic regions, each with different endowments. Beneath the archaeology of economic history, it is often natural conditions that define a unique economic region. 

But this isn’t just geography. As Nobel laureate Paul Krugman’s new economic geography theory highlights, factors like transport costs, climate, and resource distribution shape long-run specialization. What thrives in the rice-rich, riverine Mekong Delta will not be the same as what suits the mountainous Northwest or the manufacturing hub of the Southeast.  

So, at the risk of oversimplification, if we want to get to 10% economic growth, we need to get the number of regional units of economic management to less than ten, and ideally eight. Any greater number than this – Vietnam can still succeed – but the country steepens the incline it needs to climb.  

Vietnam’s Cluster Landscape: Gaps and Potential 

With eight economic regions, how many competitive clusters can Vietnam reasonably develop? Global benchmarking suggests a single well-defined economic region (think a metropolitan area or a province the size of a small country) can host anywhere from one to five major clusters, depending on the depth and complexity of its economy. Vietnam’s economy, while vibrant, is not deeply diversified yet, so let’s conservatively imagine each of the eight natural regions could specialize in about two competitive clusters. That gives a ballpark of perhaps 15–16 clusters in the long run – a vision of a country where each region has a couple of world-class industries.  

Today, however, Vietnam is far from that vision. By most estimates, Vietnam currently has only about five truly competitive industrial clusters, and some of those are only borderline cases. These include: 

1. Electronics and Machinery in the Red River Delta (around Hanoi and Hai Phong): Vietnam’s electronics exports have surged to record highs, making the country a key node in global electronics supply chains. Yet much of this cluster is driven by foreign firms assembling phones, computers, and machinery with imported components, resulting in limited domestic value-add (only ~35% local content). The potential is high, but depth is still moderate. 

2. Furniture and Wood Processing in the Southeast and Central Highlands: Vietnam is a top global exporter of wood furniture, with Binh Duong and neighboring provinces hosting many factories. There’s a growing ecosystem of timber plantations, manufacturers, and designers coalescing here. 

3. Agro-Processing and Aquaculture in the Mekong Delta: The fertile Mekong region is a natural cluster for rice, seafood, and fruit processing. Companies here benefit from proximity to farmers and ports but moving up the value chain (e.g. branded foods, advanced food tech) remains a challenge. 

4. Garments and Footwear in the South (e.g. around Ho Chi Minh City): A legacy cluster from earlier investment waves, this labor-intensive sector employs millions. Vietnam is among the world’s leaders in apparel and shoes, yet this cluster is shallow in innovation – most designs, technology, and high-value activities happen abroad, with Vietnam doing cut-and-sew or basic assembly. 

5. Tourism in key hubs (Ha Noi, Ho Chi Minh City, Da Nang, etc.): Vietnam’s tourism has boomed, but as an industry it only just qualifies as a “cluster.” High-end tourism services, training institutions, and local value capture are limited. In many tourist hotspots, foreign tour operators, airlines, and hotels capture the lion’s share of revenue, leaving local economies to collect the crumbs of basic services. 

The gap between five clusters and a potential sixteen is both a warning and an opportunity. It tells us Vietnam has significant untapped potential if it can deepen existing clusters and create new ones in fields like the low altitude economy, digital creative industries, AI-driven business services, and advanced marine manufacturing. But it also reminds us that achieving this under the current conditions is not automatic. Even with 34 larger provinces, some clusters will still span multiple provinces (for instance, the Mekong Delta agro-aqua cluster involves a whole region of six provinces). Success will depend on a shift from zero-sum thinking to collaborative strategy. What global best practice is relevant for Vietnam given this context? 

Five Guidelines for Building Competitive Clusters 

Based on analyses and on-ground work in numerous Vietnamese provinces over the past 15 years, there are at least five key guidelines for Vietnam’s central and local leaders to anchor successful clusters: 

1. Coordinate Across Provinces for Shared Clusters: Since most competitive clusters naturally extend beyond a single province, inter-provincial coordination must be built into the planning process. Adjacent provinces should jointly decide on cluster roles and investments, rather than duplicate each other. Some guidance from the central government can help arbitrate and align incentives, so provinces focus on their comparative advantages instead of fighting over the same projects. For example: Upgrading the Mekong Delta’s agro-processing and aquaculture cluster will require careful multi-province coordination. One province might invest in port infrastructure, another in cold storage or processing zones, and others in specialized research and training centers. Only a well-orchestrated regional plan – with aligned infrastructure, logistics, and educational support across the Delta – can fully unlock the region’s competitive potential. No single province, not even Can Tho City, can do it alone. 

2. Leverage Unique Asset Combinations: Provinces and regions should identify the unique mix of assets and industries they have and integrate these into a distinctive cluster strategy. A cluster’s strength often lies in combining different local strengths into something greater than the sum of its parts. Policymakers need to think creatively about cross-sector synergies. For example, Khanh Hoa province, home to the deep-water Cam Ranh Bay, has a one-of-a-kind configuration: a strategic location on the South China Sea, a large, planned expansion in power generation, a legacy of light ship-building and unique naval infrastructure. No single one of these assets would make Khanh Hoa a manufacturing powerhouse. But together, they suggest an opportunity for a modern maritime manufacturing cluster, perhaps focusing on shipbuilding, repair, and maritime equipment. By linking its port, energy supply, skilled workforce (naval engineers), Khanh Hoa can create a niche that no other region in Vietnam has. The lesson is to combine local advantages (natural, historical, industrial) into a cluster identity that is hard for others to replicate. 

3. Anticipate Technological Shifts (“No Sunset Technologies”): In planning clusters, Vietnamese leaders should be forward-looking about technology. The risk is not just picking a “sunset industry” – it’s backing a segment of an industry that might be left behind by technology. The global economy is in the midst of rapid technological change (from AI to green tech to automation), so cluster strategies must be nimble. For example, Vietnam’s Red River Delta now has the pieces to expand into automotive parts manufacturing – traditionally a lucrative cluster. But the world’s auto industry is shifting from internal combustion engines (ICE) to electric vehicles (EV), and even toward autonomous driving and drone-like flying cars. China’s latest Five-Year Plan explicitly highlights a “low-altitude economy” of drones and eVTOL (electric vertical take-off and landing vehicles) as a growth frontier. Vietnam should plan for the future of automotive, not the past: supporting local firms to make EV components, battery technology, autonomous vehicle software, or even parts for futuristic aircraft, rather than solely aiming to supply parts for yesterday’s gasoline cars. 

4. Assess and Cultivate True Cluster Depth: Local officials need a clear-eyed assessment of what makes a real cluster. A single megaproject is not a cluster, nor is a random assortment of firms in the same sector with no supporting institutions. True clusters have depth – meaning a dense network of suppliers, service providers, skilled labor, research and development, and competition plus collaboration among firms. Only by measuring such depth can Vietnam benchmark its clusters and learn from global best practices. A common mistake in Vietnam has been to extrapolate from acquiring one “trophy asset” to declaring a cluster ambition. For instance, a province upgrades its airport to allow international flights, and starts asking, “How can we become the Dubai of Southeast Asia?” Rather than defaulting to grandiose but inapt comparisons (Dubai’s success is rooted in very specific global connectivity roles), provinces should seek appropriate examples that match their scale and context. For a coastal province with a new international airport, aspiring to be the next Phuket – a regional tourism hub – might be far more realistic and beneficial than dreaming of Dubai. 

5. Prioritize “Soft” Infrastructure and Business Climate: Building roads, ports, and industrial parks (the “hard” infrastructure) is often the first thing officials consider for economic development. These are necessary, but not sufficient for cluster success. Equally important is the business environment – the “soft” infrastructure of clear regulations, efficient governance, skilled workers, innovation incentives, and public–private collaboration. Without these, even well-funded projects can falter. A cautionary tale: Vietnam once pushed an ambitious plan to develop Van Phong Bay (Khanh Hoa) into a major international transshipment port. The focus was almost entirely on the physical facility – a deep seaport in an ideal location – and too little on the “soft” aspects: transparent regulatory frameworks, effective governance, attracting shipping liners with the right incentives and seamless customs procedures. Today there is no transhipment at Van Phong.  

These guidelines, if followed, will not guarantee success, but they will significantly tilt the odds in favor of building competitive, resilient clusters, which will deliver the productivity jump Vietnam now urgently needs. 

Competing in the Shadow of China 

Why the urgency for Vietnam to get its cluster strategy right? Look no further than the neighborhood. China – Vietnam’s giant northern neighbor – is entering a phase of “peak performance” as an at-scale, innovation-driven economy, and this has direct implications for Vietnam. Over the past few decades, China methodically built-up dozens of regional clusters, from Shenzhen’s electronics ecosystem to the automotive corridor in the Yangtze River Delta, from biotech hubs in Shanghai to aerospace in Xi’an. Now, those clusters are maturing.  

The Greater Bay Area of China is not only a manufacturing powerhouse but a nexus of innovation featuring world-class robotics firms, EV manufacturers, specialized technical universities, startup incubators, and even a data exchange for manufacturing data (like a stock market where AI-driven firms can buy and sell datasets to improve industrial AI). In short, China’s leading clusters have reached a depth and sophistication that few developing countries can match – deep talent pools, massive research and development spending, and complete supply chains. 

All this is not to say Vietnam cannot compete – but it must compete differently. Vietnam must smartly identify niches and build depth in those niches. This is precisely what a regional cluster strategy enables: differentiation. With deeper, more specialized clusters, Vietnam could offer something distinct in the global market – an electric fishing fleet that is largely autonomous and has a minimal environmental footprint; luxury tourism experiences that are the world’s most affordable and best suited to digital sharing; wearable consumer electronics that are fully integrated with clothing. Vietnam needs provincial competition to create more differentiated and unique products so that the competition itself becomes a kitchen of creativity. 

The alternative looks like the experience of walking past the merchandise shops of a Vietnamese airport – different locations but all the same items. This is a future that the country must avoid at all costs. 

From Airport Merchandise to Regional Cuisine: A Distinctive Path Forward 

In this pivotal next chapter of development, Vietnam’s strength can come from its diversity – if each of eight regions develops its own competitive identity. The old model of provinces engaging in zero-sum competition for identical projects must give way to a new model of regional differentiation and collaboration, delivered at the provincial level. Think of Vietnam’s economy like its celebrated cuisine: the nation is famous not for one single dish, but for a tapestry of distinct regional cuisines – Hanoi’s phở, Hue’s imperial dishes, Saigon’s street foods, Mekong’s sour soups. Each region leverages its local ingredients and culture to create something unique, and the whole world competes for access to the cuisine. This is the model of double-digit growth. 

Read related opinion pieces in the press here:

Nếu chỉ gia công, Việt Nam sẽ khó thoát khỏi bẫy thu nhập trung bình [Vietnam risks remaining stuck in the middle-income trap if it relies only on manufacturing]

Chuyên gia nói thẳng: Việt Nam đứng trước “cửa sổ vàng” để bứt phá hai chữ số [Experts say Vietnam has a ‘golden window’ to break into double-digit growth]