VIETNAM NATIONAL UNIVERSITY

INTERNATIONAL SCHOOL

FINAL REPORT

THE IMPACT OF DIGITALIZATION ON INNOVATION: SECTORAL

EVIDENCE AND STRATEGIC IMPERATIVES FOR VIETNAMESE
FIRMS

Team leader : Ngo Manh Thu

Student ID : 22070286

Lecturer : Duong My Hanh, MSc

Subject Code : INS310001

Ha Noi, 23 May 2025

 VIETNAM NATIONAL UNIVERSITY

INTERNATIONAL SCHOOL

THE IMPACT OF DIGITALIZATION ON INNOVATION: SECTORAL

EVIDENCE AND STRATEGIC IMPERATIVES FOR VIETNAMESE
FIRMS

TEAM MEMBERS

Name ID Class Email

Ngo Manh Thu 22070286 FDB2022C [email protected]

Nguyen Duc Son 22070205 FDB2022B [email protected]

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Table of contents
List of tables ..................................................................................................... 5

List of abbreviations ....................................................................................... 6

Abstract ............................................................................................................ 7

1. Introduction ................................................................................................. 9

1.1. Overview ................................................................................................. 9

1.2. Motivation and research gap ............................................................... 12

1.3. Main findings ....................................................................................... 13

1.4. Main contributions .............................................................................. 14

1.5. Structure ............................................................................................... 14

2. Literature review ....................................................................................... 15

2.1. The influential factors of firm innovation .......................................... 15

2.1.1. Internal factors ............................................................................... 16
2.1.2. Eternal factors ................................................................................ 18

2.2. Digital transformation and firm innovation ....................................... 20

3. Legal framework and firm performance in Vietnam ............................ 25

3.1. Legal framework .................................................................................. 25

3.2. Firm performance ................................................................................ 34

4. Data & methodology ................................................................................. 38

4.1. Data ...................................................................................................... 38

4.2 Variables ................................................................................................ 39

4.2.1. Dependent variables ....................................................................... 39

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 4.2.2. Independent variable ...................................................................... 40
4.2.3. Other control variables ................................................................... 40

4.3. Methodology ......................................................................................... 44

4.3.1. Specification equation .................................................................... 44
4.3.2. Instrumental variable strategy ....................................................... 44

5. Results and discussion............................................................................... 46

5.1. Baseline results .................................................................................... 46

5.2. Alternative approachs .......................................................................... 50

5.3. Alternative measurement of innovation .............................................. 52

5.4 Heterogeneous effect ............................................................................ 53

6. Conclusion .................................................................................................. 60

6.1. Problems in Vietnamese enterprises ................................................... 61

6.2. Strategy implication ............................................................................. 62

6.3. Policy recommendations ...................................................................... 64

6.4. Limitations............................................................................................ 69

References ...................................................................................................... 72

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List of tables

Table 1 Current policies on digital transformation and the innovation

process in the Vietnamese government ........................................................... 29

Table 2 Descriptive statistics.......................................................................... 42

Table 3 Correlation matrix and variance inflation factor ............................. 43

Table 4 Baseline results.................................................................................. 49

Table 5 Results with IV logit model and LPM ............................................... 51

Table 6 Results with alternative variable ....................................................... 53

Table 7 Results with classification of domestic ownership and foreign

ownership ........................................................................................................ 55

Table 8 Results with classification of private and government ownership .... 57

Table 9 Result with classification of non exporting and exporting state ....... 59

Table 10 Issues faced by Vietnamese enterprises in digital transformation

and innovation ................................................................................................. 61

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List of abbreviations
Abbreviation Explanation
AI Artificial intelligence
AR Augmented reality
BIM Building information modeling
DV Dummy variable
FE Fixed effect
IoT Internet of things
IV Instrumental variable
LTD Limited
LPM Linear probability model
R&D Research and development
SMEs Small and medium-sized enterprises
SOEs State-owned enterprises
VR Virtual reality
WB World Bank
WBES World Bank Enterprise Surveys

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Abstract

This study investigates the impact of digitalization on product and process

innovation within Vietnamese enterprises, particularly within the context of

early-stage digital adoption prevalent in these firms. It addresses a notable gap

in firm-level evidence from Vietnam. Empirical analysis utilizes the World

Bank Enterprise Surveys (WBES) dataset for Vietnam across 2005, 2009,

2015, and 2023. An instrumental variable probit model, with skilled labor as

the instrument, is employed to address potential endogeneity in the relationship

between technology adoption and innovation. Empirical findings reveal an

asymmetric impact: early-stage digitalization is associated with a significant

negative effect on product innovation while concurrently fostering process

innovation. This divergence, robust to endogeneity controls, suggests that firms

in initial digitalization phases may prioritize operational efficiencies over more

complex product development. Furthermore, while digitalization positively

influences the initiation of R&D activities, this effect does not yet appear to

translate into increased product innovation output. These core impacts on

product and process innovation are broadly consistent across ownership

structures, and export status, although some heterogeneity is observed across

specific firm categories. Skilled labor is identified as playing an indirect

positive role, facilitating innovation through its influence on digitalization. This

7
study contributes novel firm-level micro-evidence from Vietnam, offering

theoretical insights into the nuanced effects of early-stage digitalization and

highlighting crucial policy implications for fostering comprehensive

innovation that extends beyond immediate operational improvements

Keywords: digitalization, product innovation, process innovation,

Vietnam.

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1. Introduction
1.1. Overview

In recent years, the rapid advancement of science and technology drives

the emergence of the digital economy in the context of extremely rapid changes

in the global economy. In that context, an important condition for businesses

that want to maintain competitiveness and drive innovation is to grasp the

process of digital transformation, which helps improve business models and

company operations. From production to marketing and customer service, the

fourth industrial revolution is defined by incorporating digital technology into

all facets of corporate operations (Gong & Ribiere, 2023; Zhao et al., 2015).

The integration of technologies such as artificial intelligence, big data, cloud

computing, and blockchain helps businesses improve their company

capabilities and streamline operations and forces them to reassess their strategic

priorities and innovation capabilities in the context of the global industry (Li et

al., 2023; Wu et al., 2024). This digital transformation is reshaping the global

economy and fundamentally altering the ways in which companies produce and

promote goods and services. This process has the potential to significantly

boost efficiency, drive innovation, and enhance economic prospects. The

impact of digital technology on businesses is significant; digital transformation

not only changes the company's operational processes but also affects how

businesses innovate in terms of products, services, and their interactions with

9
customers. In this context, innovation is the process of developing new

products, services, or workflows to help businesses reduce operational

expenses, maintain competitiveness, and grow in the market. From there, one

can see a close relationship between digital transformation and innovation.

Digital technology allows businesses to innovate not only in their product

offerings but also in their operational processes, marketing strategies, and

customer interaction models. The use of digital tools such as big data and

artificial intelligence enhances innovation capacity within companies, allowing

them to create new solutions and business models. Conversely, the drive for

innovation encourages businesses to adopt and optimize the use of digital

technologies, thereby creating a close relationship between digital

transformation and innovation as these two factors interact with each other.

Notably, some businesses show initial progress in innovation capabilities

and production efficiency thanks to their efforts in implementing digital

transformation. This explains why businesses quickly adopt digital

transformation to drive innovation through digital technology and new business

models (Li et al., 2023). Empirical evidence shows that digitalization strategies

help people understand the changes that digital technology brings to businesses,

thereby recognizing the importance of effective digital transformation in

today's society (Chanias & Hess, 2016). To adapt to the trend of digital

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transformation, businesses must accept changing outdated, inefficient

traditional business models that have not yet optimize costs and processes,

which remain cumbersome (Kotarba, 2018). For many countries, this

transformation is the key to improving the quality of economic growth (Li et

al., 2023). For instance, one of the rapidly developing economies in Southeast

Asia, Vietnam, illustrates the dual potential and challenges of digital

transformation. Vietnam aims to be among the top 50 countries in the world

and ranks third in ASEAN in the digital economy by 2030. To create a

foundation for seizing opportunities from the Fourth Industrial Revolution, the

Vietnamese government makes efforts to achieve this goal by focusing on

building a legal framework for the digital economy. In all areas of the socio-

economic sector, strong policies and processes support digital transformation,

promote innovation, and protect intellectual property rights. An open and

honest investment environment strongly attracts both domestic and

international capital for growth and technological innovation . In the context of

digital transformation in Vietnam receiving more attention than ever, the

Government continues to actively implement policies and programs to support

businesses in their digital transformation efforts. Additionally, the National

Innovation Center (NIC) highlights the economic potential of digitalization in

Vietnam, predicting that "the annual economic impact of digital technology in

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Vietnam could reach approximately 74 billion USD by 2030"1 . This forecast

highlights the importance of proactively pursuing comprehensive digitalization

in all aspects of Vietnamese businesses to drive sustainable growth. The

government implements programs such as the National Digital Transformation

Program by 2025, with a vision towards 2030, signed by prime minister

Nguyen Xuan Phuc in Decision No. 749/QD-TTg on June 3, 2020, and

commitments under the EU-Vietnam Free Trade Agreement (EVFTA), which

lay a solid institutional foundation for the digital transformation and innovation

process (Nguyen & Dao, 2023).

1.2. Motivation and research gap

The role of digital transformation in reshaping the modern economy is

increasingly significant, and the relationship between digital transformation

and innovation in developing economies like Vietnam needs to be studied more

deeply. While digital transformation is globally recognized as the main driver

of economic growth, its impact on innovation at the enterprise level in Vietnam

has yet to be explored. The lack of research on this relationship, especially at

the enterprise level, is the motivation for us to conduct this study. Especially in

the context where the Vietnamese government is actively implementing a series

of policies to encourage businesses to undertake digital transformation. The

1
https://baochinhphu.vn/hoan-thien-co-che-ho-tro-dn-nam-bat-xu-huong-chuyen-doi-so-
10224101815373111.htm

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study aims to address the gap in the literature by examining the relationship

between digitization and innovation in the context of Vietnamese enterprises.

1.3. Main findings

Employing an IV probit model with the World Bank Enterprise Surveys

(WBES) dataset for the years 2005, 2009, 2015, and 2023, our research

uncovers an asymmetric impact of early-stage digitalization on innovation

within Vietnamese firms: increased adoption of digital technologies

significantly boosts process innovation while concurrently reducing product

innovation. This implies that firms utilizing more digital technologies tend to

introduce more improvements in their operations and processes but are less

likely to introduce new products or services. This core finding remains

consistent across alternative approaches, such as the IV logit model and the

linear probability model. However, when using R&D as an alternative measure

of innovation, our study reveals that digitalization has a positive and

statistically significant impact on R&D. This suggests that while early-stage

digitalization may support the initiation of research activities, this has not yet

translated into an increase in product innovation output. Furthermore, our study

also finds that these impacts exhibit heterogeneous effects across different

types of firms.

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1.4. Main contributions

Our contribution not only contributes to the literature review but also

introduces an empirical study. Firstly, we are among the first to study the

relationship between digital transformation and innovation at the enterprise

level in Vietnam. Secondly, the findings from this study not only contribute to

understanding how digital technology impacts business innovation in Vietnam

but also provide valuable insights for researchers to conduct in other

developing economies. Thirdly, in this paper, we use the IV model, which is an

econometric method used to address the issue of endogeneity in regression

models, meaning when the explanatory variable is correlated with the error

term, causing OLS estimation bias. Finally, Finally, our study identifies the

problems faced by Vietnamese enterprises, thereby providing specific, practical

strategies for enterprises and proposing practical policy implications for policy

makers.

1.5. Structure

The rest paper is structured as follows: In section 2, an overview of the

theory and factors influencing innovation is provided, along with an analysis

of the impact of digital transformation and the effectiveness of digitalization in

Vietnamese enterprises. Section 3 describes and explains the research methods

used to complete this study. In section 4, the research results are presented and

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analyzed. Finally, Section 5 is dedicated to discussing the results and proposing

specific policies and strategies. Furthermore, the limitations of this research are

also acknowledged within this section.

2. Literature review
2.1. The influential factors of firm innovation

Corporate innovation is crucial for the development of businesses. An

innovative organization may provide items that satisfy the dynamic

requirements of the market and customer expectations. Consequently, it is

feasible to enhance the competitiveness of firms in the market, particularly in

the present, perpetually intense competitive landscape. Therefore, establishing

robust innovation is a critical undertaking for businesses and policymakers.

Firm innovation is affected by several internal and external elements of the

organization (Doan, 2023). Government grants, R&D funding, and ownership

structure are factors that influence business innovation. For a long time, there

have been debates about the positive impact and "trap" of government

subsidies. Government subsidies not only help promote innovation investment

at the company level and drive the company's technological innovation

activities but also compensate for market failures in the process of innovation

(Lin & Luan, 2020; Liu et al., 2020). However, on one hand, scholars who hold

a negative view of government subsidies believe that selective government

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subsidies have a crowding-out effect on company innovation (Wu et al., 2022).

On the other hand, the conclusions of many other scholars show that the

company's R&D investment has a positive impact on innovation (Alam et al.,

2020; Xu et al., 2021). The ownership structure influences the company's

creativity; the preferences of controlling shareholders guide the company's

strategic innovative decisions. Major shareholders' stability gives them the

drive and authority to oversee corporate managers' activities, gain greater

advantages from technological innovation, boost innovation investment, apply

technology accumulation, and aggressively accept innovation risks (Li et al.,

2023). In the extensively studied academic literature, factors influencing a

company's innovation capability are identified. These factors, which play a

crucial role in driving innovation, are broadly classified into internal and

external determinants.

2.1.1. Internal factors

Internal factors encompass the firm’s intrinsic capabilities and resources,

which provide the foundation for innovation activities. The main internal

factors significantly affect the level of innovation, including company size, the

education level of managers, company age, and job growth (Cokgezen &

Hussen, 2019; Olurinola et al., 2021). For instance, in Ethiopia, owner-manager

traits influence the expansion of small and medium-sized businesses. The

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results reveal that companies owned and managed by people with extensive

prior experience exhibit superior growth (Engidaw, 2021). Failing enterprises

relate to managers lacking drive and dedication about their work, whereas

successful companies link to managers who are passionate about their job

(Worku, 2014). Many factors, including management factors, influence the

performance of businesses, particularly small and medium-sized enterprises

(Fetene, 2017). Managers avoid reducing the performance of individuals and

the company by clearly dividing tasks to prevent creating a stressful

environment due to confusion and conflicts among employees (Engidaw,

2021).

Additionally, the key determining factors for the company's innovation

potential are financial resources and human capital, R&D investment,

technological capabilities, organizational structure and culture, and innovation

strategy. These factors shape the company's ability to explore new ideas,

develop innovative products, and apply advanced technologies. Many studies

mention the essential role of innovation strategy, technological capability, and

investment in R&D in driving innovation at the enterprise level, along with

factors such as business scale, managers' educational background, and

company age (Bogetoft et al., 2024; Tajpour et al., 2024). Simultaneously

implementing both product and production process innovations helps increase

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production efficiency and reduce costs compared to businesses that do not

participate in innovation. Factors such as financial resources and high-quality

skilled labor play an intermediary role in helping businesses effectively

digitalize, thereby enhancing their innovation capabilities. In other words,

businesses find it easier to access and implement innovative solutions if they

have good financial management capabilities and a skilled workforce proficient

in technology. Technological capability is a crucial factor in determining the

creation and maintenance of a competitive advantage based on innovation for

a business. They include the ability to apply modern technology and implement

digital systems. There is a positive impact on innovation demonstrated by R&D

investment. Its important role in driving technological progress and product

development is emphasized in many research papers (Alam et al., 2020; Xu et

al., 2021). Moreover, the ownership structure, which includes the influence of

controlling shareholders, significantly affects a company's investment

decisions and technology adoption, shaping the trajectory of its innovation

efforts (Alam et al., 2020).

2.1.2. Eternal factors

External factors create the context in which companies operate, either

enabling or hindering innovation. Customer demand and market requirements

are among the most important external factors. Access to capital, market

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competition, consumer behavior, and the broader economic and institutional

environment are indeed those external factors. According to Felin & Zenger

(2014), market competition drives companies to innovate to keep a competitive

edge, while consumer preferences guide innovation efforts, which is precisely

what market competition brings. In addition, the development of the local

digital industry plays a crucial supporting role, providing infrastructure and a

technological ecosystem that fosters the company's innovation. Government

policies and subsidies play a dual role in influencing innovation. According to

Lin & Luan (2020), by stimulating investment in R&D and encouraging

companies to adopt new technologies or participate in the innovation ecosystem

through government subsidies, market failures in the innovation process can be

addressed. The innovation capacity of a company can also be significantly

influenced by the legal framework, intellectual property rights, and innovation

policies. The growth of technology is a significant external element influencing

innovation, since it generates new possibilities or compels enterprises to

embrace new technologies to remain competitive.

Government grants and incentives contribute to encouraging businesses

to invest in R&D activities, address issues, and support the commercialization

of new technologies. Besides, some scholars argue that selective government

subsidies can have a "crowding out" effect, where excessive intervention

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reduces innovation efforts led by companies (Wu et al., 2022). For example,

access to financial resources remains a major barrier for small and medium-

sized enterprises in developing countries, where limited infrastructure and

financial resources hinder innovation activities (Olurinola et al., 2021). The

innovation capacity of companies, by facilitating or hindering access to

necessary resources and support, is directly influenced by the institutional

environment, including the legal framework and enforcement mechanisms. In

addition, strong competition in the market encourages companies to

continuously differentiate their products, enhance efficiency, and adopt new

technologies (Felin & Zenger, 2014).

2.2. Digital transformation and firm innovation

In government agencies, companies, and research institutes, digital

transformation is one of the key drivers of innovation that can be considered

important for them (OECD, 2020). Bringing value to customers, alongside

creating opportunities and challenges, is achieved by changing the operational

methods that have existed for a long time within the business (Kraus et al.,

2019). Advanced digital technologies such as social networks, mobile

platforms, big data, the Internet of Things (IoT), and blockchain enable

companies to redefine business models, modify core processes, and restructure

organizational frameworks (Matt et al., 2015). Technologies like artificial

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intelligence (AI), Industry 4.0 machinery, 3D printing, and social media

revolutionize business operations, accelerating innovation across industries

(Vaska et al., 2021). For instance, in the economy of a developing country like

Pakistan, business efficiency in enterprises, especially small and medium-sized

ones, is enhanced by the implementation of digital transformation (Mubarak et

al., 2019). The business efficiency of small and medium-sized enterprises,

specifically big data, the Internet of Things design network, interoperability,

and the Cyber-Physical Systems (CPS) network, are the four influencing

factors that are examined in the study (Nguyen et al., 2023). Enterprises store

data more efficiently by using big data in recent decades. Digital transformation

not only reduces costs and increases productivity but also adds value to

products. Additionally, people say that digital transformation helps businesses

operate efficiently and adapt to changes in the business environment, which is

why they are actively investing heavily in it (Zealand & Sirisukha, 2020). In

an era where technology is booming and developing rapidly, such as nowadays,

if businesses want to survive long-term and operate efficiently, digital

transformation is almost mandatory. Enterprises will no longer have much of

an advantage over their competitors if simply introducing new products is not

enough; the difference lies in how companies mobilize their resources for

innovation activities.

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 Digital transformation helps companies maximize resource usage,

reduce operational costs, enhance workforce productivity, streamline supply

chains, and improve customer loyalty and satisfaction (Kaufmann, 2015;

Loebbecke & Picot, 2015; Rachinger et al., 2018). It also fosters innovation by

facilitating data collection, integration, and application, supporting the platform

economy, and identifying growth opportunities (Vaska et al., 2021). This

ongoing revolution reshapes relationships within and between ecosystems,

introducing both new managerial opportunities and challenges (Bresciani et al.,

2018; Gustafsson et al., 2012). Previous studies emphasize the pivotal role of

digital transformation in driving product innovation. Defined as the

incorporation of digital technology into corporate procedures, digital

transformation enables companies to create newfangled goods and services

(Vaska et al., 2021). Technologies such as big data, machine learning, and 3D

printing redefine operational approaches, fostering novel value propositions

(Bresciani et al., 2021). Disruptive innovators like Uber and Spotify exemplify

how technology adoption leads to groundbreaking products and services.

Empirical evidence confirms a positive correlation between digital

transformation levels and product innovation performance, though the extent

of this impact may vary by industry, firm size, and adaptability (Masoud &

Basahel, 2023; Olurinola et al., 2021; Radicic & Petković, 2023; Zhao et al.,

22
2024). The successful implementation of digital transformation plays a very

important role in promoting economic benefits (Zhang et al., 2021). From those

points, it can be seen that there is a positive relationship between digital

transformation and the innovation performance of businesses (Li et al., 2023).

However, people say that among the reliable factors for innovation, R&D costs

are the most important. They also show that innovation is not significantly

impacted by digital technology (Usai et al., 2021).

In addition, they also show that digital technology has very little impact

on innovation (Usai et al., 2021). Digital transformation's contribution to

innovation is multifaceted, influencing not only product development but also

operational efficiency, customer experience, and IT innovation (Bresciani et

al., 2021). For instance, the transformation of digitalization is more noticeable

in enterprises with strong innovation capabilities but may be limited in smaller

firms due to resource constraints (Gaglio et al., 2022; Radicic & Petković,

2023). The regional digital infrastructure and innovation ecosystem

significantly moderate the relationship between digital transformation and

innovation. Firms located in regions with advanced digital industry innovation

levels may face diminishing marginal innovation returns (Li et al., 2023).

Conversely, a high regional digital innovation environment can create spillover

effects, enhancing the innovation efforts of surrounding firms. Furthermore, the

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interplay between servitization and digitalization highlights the synergy in

driving innovation performance. Servitization enhances firm innovation by

increasing digitalization levels, with digital technologies acting as a mediator

(Shen et al., 2021). Organizational capabilities such as learning, coordination,

and integration further optimize the outcomes of these strategies, demonstrating

the crucial role of digitalization in advancing innovation.

In sum, the aforementioned documents have emphasized that the

combination of internal and external factors, including R&D investment,

government support policies, organizational structure, and market conditions,

has shaped the company's innovation (Alam et al., 2020; Xu et al., 2021;

Engidaw, 2021; Li et al., 2023). Among them, the adoption of technologies

such as the Internet of Things, AI, and big data has helped companies enhance

productivity and develop new services and products, thereby highlighting the

strong driving factor for innovation as digital transformation (Matt et al., 2015;

Vaska et al., 2021). Some empirical studies have demonstrated a positive

relationship between digital transformation and innovation performance;

however, this impact often depends on factors such as infrastructure, business

scale, and financial capacity (Masoud & Basahel, 2023; Zhao et al., 2024;

Radicic & Petković, 2023; Gaglio et al., 2022). Additionally, there are studies

suggesting that the impact of digital technology is limited in environments

24
lacking supportive ecosystems or businesses that still have limited financial

resources and high-quality labor (Usai et al., 2021; Olurinola et al., 2021). The

findings in those studies highlight the contrast in the context of the fourth

industrial revolution and underscore a clear research gap in emerging

economies. There is a significant difference in the level of digital

transformation adoption and innovation capability among businesses in an

emerging economy like Vietnam, and micro-level evidence at the enterprise

level is needed to better understand how digitalization truly shapes innovation

outcomes (Nguyen et al., 2023). This study will fill and address that research

gap.

3. Legal framework and firm performance in Vietnam

3.1. Legal framework

International organizations consider Vietnam to be one of the countries

with the highest growth rates in Asia and the world in recent years. The process

of renewal has helped Vietnam transform from one of the poorest countries in

the world into a middle-income nation with an increasingly high status on the

international stage, as assessed by the World Bank (Nguyen, 2024). However,

the country's economic competitiveness is still inferior to developed nations,

largely due to a lack of science and technology in production, commerce, and

low worker productivity. Therefore, strong digital transformation is essential

25
for leading the region in the Fourth Industrial Revolution and is a fundamental

solution for achieving breakthrough advancements in the new era, narrowing

the gap with developed countries, overcoming the middle-income trap, and

moving towards sustainable development. The digital transformation of

business models, the improvement and digital transformation of management

models for production processes and technology processes, the connection of

digital transformation enterprises, and the innovation of new products and

services are the three stages corresponding to the specific technological

requirements of the digital transformation process. Previous studies

demonstrate the importance of the digital transformation of businesses,

especially for small and medium-sized enterprises in developing countries

(Chen et al., 2021; Wang et al., 2023). To adapt to the changes in the digital

era, businesses need to enhance employee training, facilitate access to and

nurture new technological knowledge, improve innovative thinking, and

cultivate digital skills in the context of rapidly changing technology. By means

of this, it provides the advantages that digital transformation brings to

enterprises, especially small and medium-sized ones, in aspects including

economic, environmental, and social dimensions of sustainable firm growth.

The ministries, sectors, and localities promote reforms and issue policies

to support digital transformation in both public and private enterprises; these

26
are implemented in accordance with the government's directives and

orientations on digital transformation. Digital transformation of the entire

economy is what the Vietnamese government is building and implementing to

ensure the country achieves effective and sustainable growth and development.

Current regulations and decrees related to trade are issued by the ministries

within the legal framework. The operation and adjustment of various aspects of

the digital economy and digital transformation are issued at multiple

administrative levels through legal documents. The main goal of the Party and

the State of Vietnam is currently to promote digital transformation and develop

the digital economy. Rapid and sustainable growth mostly depends on science

and technology, creativity, and digital transformation; the legal system has to

support innovation, digital transformation, and the creation of new goods,

services, and economic models, which are the goals emphasised by the party

and state Vietnam in the documents of the 13th Party Congress. Identifying key

tasks and priority solutions to improve the legal system, facilitating the

country's digital transformation process, is critical. In fact, the enormous

potential of the economic development strategy driven by science, technology,

and innovation, especially the development of the digital economy, is

considered an inevitable trend that drives economic growth for Vietnam, which

the government recognised before 2020. This fact can be demonstrated through

27
numerous decisions, directives, and laws of the government aimed at preparing

the foundation for the development of the domestic digital economy. Table 1

will list the major current policies aimed at promoting the digital transformation

and innovation process of the Vietnamese government.

28
Table 1
Current policies on digital transformation and the innovation process in the Vietnamese government

Law Decrees, directives and decision Master plans and initiatives

• Law on intellectual • The program until 2010 provides public telecommunications • Strategy until 2010
property (2005). services and is approved by the Prime Minister on April 7, and orientation until
• Law on information 2006, under Decision No. 74/2006/QĐ-TTg. 2020 for the
technology (2006). • Decree of Government No. 35/2007/ND-CP of March 08, development of
• Law on high 2007 regulates banking e-transactions.. Vietnam's postal and
technology (2008). • On August 28, 2008, Decree No. 97/2008/ND-CP specifies telecommunications.
• Law on technology the management, provision, and use of Internet services and • Overall plan until
transfer (2008). electronic information on the Internet. 2010, vision until
• Law on radio • The Science and Technology Development Strategy for the 2020 for the
frequency (2009). period 2011-2022 is approved by the government on April Vietnamese

• Law on network 11, 2012, in Decision No. 418/QD-TTg. electronics industry.

information security • On May 16, 2013, Decree No. 52/2013/ND-CP regulates e- • Planning until 2020
(2015). commerce. for the development of

29
• Law on support for • Decision No. 392/QĐ-TTg of the Prime Minister: Approves national information
small and medium- the Target Program for the Development of the Information technology security.
sized enterprises Technology Industry until 2020, with a vision until 2025. • Program until 2020,
(2017). • The 2020 infrastructure development program is approved in vision until 2025,
• Law on 2016 under Decision 149/QD-Tg. goals for information
cybersecurity • Enhancing the capacity to access the Fourth Industrial technology
(2018). Revolution is clearly stated in Directive 16/CT-TTg of the development.
• Law No. government. • The 2020 program for
24/2023/QH15 of • Decision No. 1563/QĐ-TTg of the Prime Minister: developing broadband
the National Approves the overall plan for e-commerce development for telecommunications
Assembly: the period 2016 – 2020. infrastructure.
telecommunications • The establishment of the National Committee on E- • Project until 2025 on
law. Government is signed by the Prime Minister in Decision No. supporting the
• Law No. 1072/QD-Tg. national innovative
20/2023/QH15 • Resolution No. 17/NQ-CP, signed by Prime Minister startup ecosystem.
dated June 22, 2023 Nguyen Xuan Phuc on March 7, 2019, outlines several key • Strategy until 2010,
on electronic tasks and solutions for the period 2019-2020, with a vision oriented towards 2020
transactions. towards 2025 for the development of e-government. for the development

30
• Law No. • On February 1, 2019, Prime Minister Nguyen Xuan Phuc strategy of
60/2024/QH15 of signs Decree No. 13/2019/ND-CP on scientific and information and
the National technological enterprises. communication
Assembly: data law. • Some guidelines and policies are issued by the Politburo in technology.
• The corporate Resolution No. 52-NQ/TW on proactively participating in
• National Digital
income tax law the fourth industrial revolution on September 27, 2019. Transformation
offers tax incentives • Decree No. 85/2021/ND-CP of the Government regulates e- Program by 2025,
for businesses commerce. with a vision towards
investing in R&D
• Decision No. 749/QD-TTg on June 3, 2020 is approved and 2030
and digital
signed by Prime Minister Nguyen Xuan Phuc aimed at
transformation to
placing Vietnam among the top 50 leading countries in the
encourage
world and the top 3 in the ASEAN region in terms of e-
companies to invest
government and digital economy.
in new technologies.
• The project for developing digital infrastructure by 2025,
with a vision towards 2030, is approved by Deputy Prime
Minister Nguyen Hoa Binh.

31
 • General Secretary To Lam signs Resolution No. 57-NQ/TW
of the Politburo concerning advances in the development of
science, technology, innovation, and national digital
transformation on December 22, 2024.

• On January 8, 2025, Prime Minister Pham Minh Chinh signs

Resolution No. 01/NQ-CP, which outlines the main tasks
and solutions for implementing the state budget plan for
2025 and the socio-economic development plan.

Source: Author’s compilation

32
 Vietnam enacts several laws, decrees, and directives to facilitate digital

transformation, including policies that incentivize investment in research and

development (R&D) and digital technology. Public-private partnerships

provide a roadmap and support, helping small and medium-sized enterprises

become more competitive in the new economic environment, playing a crucial

role in the digitalization process of these businesses in government policy.

Previous research on government support also indicates that it can yield several

beneficial outcomes at the company level, such as capacity building,

performance, globalization, innovation, and business orientation (Faria et al.,

2023). For example, while the German government strongly encourages

technological growth by supporting the digitalization process of small and

medium-sized enterprises, the Vietnamese government tends to stifle the

potential participation of small and medium-sized enterprises and favors state-

owned enterprises more (Radicic & Petković, 2023). In fact, the policies of the

Vietnamese government show a preference for foreign enterprises and state-

owned enterprises over domestic small and medium-sized enterprises.

In summary, the Vietnamese government deeply recognizes the

importance of digital transformation during the booming period of the Fourth

Industrial Revolution and establishes a comprehensive legal framework with

33
numerous resolutions, decrees, and national programs to encourage businesses

to actively implement digital transformation and innovation. From there, it

contributes to laying a solid foundation for the development of the digital

economy. With the aforementioned legal foundations, one can see Vietnam's

efforts in promoting the digital transformation process in all aspects to narrow

the gap with developed countries and aims for sustainable development in an

era where digital technology is the cornerstone of society.

3.2. Firm performance

The creation of primary employment sources and contributions to

domestic income and exports, as well as overall value added, are due to small

and medium-sized enterprises, which account for more than 90% of the total

number of companies outside the agricultural sector in developing countries

(Love & Roper, 2015). For instance, small and medium-sized enterprises

account for 98% of all businesses, 40% of the gross domestic product, and 50%

of employment in Vietnam2 . From that, it can be seen that policymakers as

well as company owners and boards of directors are attracted to the

development and improvement of the performance of small and medium-sized

enterprises. During the 2021 – 2030 period, one of the components of the

strategic breakthrough is the rapid growth of digitalization, innovation, science,

2
https://www.vietnam-briefing.com/news/facilitating-sme-growth-vietnam.html/

34
and technology. Regarding the development of the digital economy, the digital

economy accounts for 20% of GDP, the proportion of the digital economy in

each industry and sector reaches at least 10%, annual labor productivity

increases by at least 7%, and bringing Vietnam into the top 50 countries in

information technology (IDI), into the top 50 countries in the Global

Competitiveness Index (GCI), and into the top 35 countries in the Global

Innovation Index (GII) are the goals by 2025 to enhance the competitiveness of

the economy (Tran, 2021).

By 2024, the rapid implementation of the national population database,

ensuring seamless data connectivity between 18 ministries, sectors, and 63

localities, makes remarkable progress. As of September 2024, more than 537

million data synchronization instances and over 1.3 billion queries are

conducted3 . In addition, over 14 million citizens are integrated into the

electronic health record system, 8 million accounts are registered for accessing

the online public service portal, and over 20 million electronic citizen ID cards

with chips are issued. Vietnam climbs to the 71st position out of 193 countries

and territories in September 2024, rising 15 places compared to 2022,

according to data from the United Nations e-Government Survey4.

3
https://vietnamnews.vn/society/1690120/viet-nam-s-digital-transformation-leaps-into-future.html
4
https://english.mic.gov.vn/comprehensive-strategy-is-a-must-for-national-digital-transformation-permanent-
deputy-pm-197241115085531527.htm

35
 In addition, Vietnam's Global Innovation Index also rises two places to

44/133, while the Global Security Index increases by 8 places to 17/19474 4.

Also in 2024, 1.5 million jobs are created for workers by 51,000 technology

companies in the country, generating an estimated total revenue of 118 billion

US dollars for the industry in the first nine months of the year 4. Revenue from

software and digital services is reported to increase by 9.9%, reaching 6.64

billion dollars, while technology product exports are expected to grow by

18.3%, reaching 100.8 billion dollars4. Moreover, in 2023, Vietnam's e-

commerce sector is one of the fastest-growing in the world, with total revenue

increasing by 23% to 20.5 billion dollars4. Not only in the business sector but

also in the digital transformation of social and welfare services, significant

progress is made, especially in education and training, healthcare, social

insurance, and administration. Not only that, as of October, more than 82.4%

of households are using fibre optic internet, an increase of 3.3% compared to

the same period last year, surpassing the target of 80% set for 20253. The

percentage of people using smartphones also accounts for more than 87% of

the population3. In addition, the launch of the largest and most modern data

centre by the telecommunications service provider, Viettel Group, also marks

an important milestone that Vietnam achieves in 2024 3. The advanced

technology equipped at this secure data centre plays an important role in

36
contributing to the protection of national sovereignty and personal data in

Vietnam. Alongside these developments, semiconductors, artificial

intelligence, and 5G chipsets, which are key technologies of the digital age, are

also being heavily invested in by Vietnamese technology companies with the

aim of mastering these critical technologies.

The scale of the global digital transformation market reaches 695.5

billion USD in 2023, and by 2030, this figure is expected to rise to 3,144.9

billion USD with a compound annual growth rate of 24.1% from 2024,

according to data provided by Research and Markets5. From the data provided

on the global digital transformation market, comparing it with Vietnam, we can

see that the level of digital transformation and digital economic growth in

Vietnam is quite strong. The rapid development of Vietnam's digital economy

in recent times is due to the increasingly tech-savvy population, which

contributes to the smooth process of digital transformation. According to data

provided by Vietnam’s General Statistics Office, the digital economy market

in Vietnam is expected to reach 45 billion dollars by 2025, and by 2030, this

figure will reach between 90 billion and 200 billion dollars 6. The close

integration of digital transformation and the application of modern science and

5
https://www.researchandmarkets.com/report/digital-transformation?
6
https://www.trade.gov/country-commercial-guides/vietnam-digital-economy

37
technology is the driving force for Vietnam's future development7. In other

words, to fundamentally improve and transform business operations, it is

necessary to apply advanced technologies such as social media, modern data

analysis tools, and automated connection systems (Luong et al., 2024).

In sum, the examples mentioned above demonstrate Vietnam's

impressive achievements in reaching the e-government goals. The

achievements in digital transformation across the pillars of digital government,

digital economy, and digital society contribute to building a solid foundation

for the nation's digital transformation journey. Specific actions such as the

issuance of policies and decrees reflect Vietnam's determination to implement

digital transformation. These factors motivate us to conduct research that

provides the government with a more comprehensive view of the relationship

between digital transformation and innovation at the enterprise level and

proposes policies to promote the process of digital transformation and

innovation in Vietnam.

4. Data & methodology

4.1. Data

This study utilizes data from the World Bank Enterprise Surveys

(WBES) conducted in Vietnam. The WBES is a recurring data collection

7
https://vovworld.vn/en-US/vietnam-rising-era/digital-transformation-propels-vietnams-development-
1324797.vov

38
program designed to analyze the business environment and firm performance.

The surveys focus on formal enterprises with five or more employees, operating

in the manufacturing and service sectors, excluding wholly state-owned

enterprises, firms in agriculture, real estate, public utilities, and most financial

intermediaries. For Vietnam, we use firm-level microdata from the survey

waves conducted in 2005, 2009, 2015, and 2023. The selection of these years

allows for the analysis of aspects such as digital technology adoption and

innovation activities of firms over nearly two decades, thereby enabling the

tracking of important changes and trends.

4.2 Variables

4.2.1. Dependent variables

Fundamentally, innovation involves the introduction of something novel,

such as an idea, product, or process that possesses the potential to alter existing

conditions or transcend previously established boundaries. Innovation can be

disruptive or incremental, but it must represent a departure from the status quo,

ultimately aiming to enhance efficiency and foster novel capabilities (Singh &

Aggarwal., 2021). According to the literature review and Goedhuys and

Veugelers (2012), innovation is commonly measured by product innovation

and process innovation. Therefore, this research measures innovation through

two variables: Product innovation and Process innovation, both of which are

39
binary variables. Variable Product innovation is equal to 1 if a firm introduce

new or significantly improved products or services, and 0 otherwise. Similarly,

variable Process innovation is equal to 1 if a firm introduce any new or

improved process, and 0 otherwise.

4.2.2. Independent variable

The literature reiview reveals a wide range of definitions for firm-level

digitalization. Generally, digitalization encompasses the use of digital

technologies or the digitization of information to generate value in novel ways.

More specifically, digitalization refers to the adoption and application of digital

technologies, such as cloud computing, blockchain, artificial intelligence, and

web-based applications (Ritter & Pedersen, 2020; Calderon-Monge & Ribeiro-

Soriano, 2024). This research generate digitalization variable (Digitalization)

as the use of internet as a proxy of web based applications. The variable

Digitalization is a binary variable, it is coded as 1 if the firm use websites or

social media pages in its interactions with clients and suppliers, and 0

otherwise.

4.2.3. Other control variables

We account for firm and market characteristics by incorporating the

following control variables. Given that a firm's innovation performance is

related to the number of years of operation of the firm, we include the variable

40
Firm age (Huergo & Jaumandreu, 2004; Messeni Petruzzelli et al., 2018;

Withers et al., 2011). As stated by Crowley and Jordan (2016), increased

competition is often associated with higher innovation levels. Therefore, we

consider Competitor as a dummy variable equal to 1 if the firm face

competitors by the firm's main product in its primary market and 0 otherwise.

Experience is measued as number of years the top manager has worked in this

sector. Okrah & Irene (2023) find that top managers with more years of

experience tend to enhance a firm's innovativeness. Variable Training is a

dummy variable euqal to 1 if a firm have formal training programs for its

permanent, full-time employees. This variable is a proxy for employee training

programs at firm, which enhance innovative performance by promoting

learning practices (Paul et al., 2024; Sung & Choi, 2014).

In summary, Table 2 show the descriptive statistics. Follow the table,

there are 38.4% of surveyed firms introduced product innovations and 16.1%

implemented process innovations. Besides, there are 17.8% of surveyed firms

have R&D investment. For digitalization, 42.1% of firms used websites or

social media for client/supplier interactions, showing considerable

engagement. Additionally, 33.1% of firms provided formal employee training.

Top managers averaged 17.37 years in their sector, average firm age was 12.68

41
years, and 18.5% of firms exported. State-owned enterprises accounted for

7.05%.

Table 2
Descriptive statistics

VARIABLES Mean Std. dev. Min Max

Dependent variable
Product innovation 0.384 0.486 0 1
Process innovation 0.161 0.367 0 1
Alternative variable
R&D 0.178 0.383 0 1
Independent variable
Digitalization 0.421 0.494 0 1
Control variable
Experience 17.37 11.08 0 70
Firm age 12.68 10.74 1 115
Training 0.331 0.471 0 1
Competitor 0.303 0.460 0 1
Subsetting variable
Firm size 1.394 0.488 1 2
Government ownership 0.070 0.256 0 1
Foreign ownership 0.098 0.297 0 1
Exporting 0.185 0.389 0 1
Instrumental variable
Skilled labor 93.68 354.1 0 6,978

Source: Author’s calculation

42
 The correlation matrix is presented in Table 3, showing correlation

coefficients among the variables. The correlations are overall low. Gay et al.

(2011) note that correlation coefficients whose magnitude is above 0.66 (in

absolute terms) indicate variables that can be considered highly correlated. We

find no evidence of multicollinearity because all correlation coefficient bellow

0.66. Furthermore, to assess multicollinearity, this study examines the variance

inflation factor (vif) values presented in Table 3. Referencing Kim (2019),

severe multicollinearity is indicated when a vif value exceeds 5. The results

from Table 3 reinforce the finding that there is no significant multicollinearity,

as all vif values are below 5.

Table 3

Correlation matrix and variance inflation factor

Variable (1) (2) (3) (4) (5) (6) Vif

(1) Digitalization 1.0000 1.92
(2) Experience 0.0776** 1.0000 3.54
(3) Competitor -0.0248* 0.3268* 1.0000 1.9
(4) Training 0.1430* 0.1282* 0.1500* 1.0000 1.62
(5) Firmage 0.1549* 0.2988* 0.0621* 0.1261* 1.0000 2.75
(6) Skilled labor 0.1231* 0.1407* 0.0618* 0.2049* 0.1594* 1.0000 1.2
Notes. * p < 0.01.

Source: Author’s calculation

43
4.3. Methodology

4.3.1. Specification equation

The data utilized in this research consists of panel data, and the

dependent variables are dummy variables. Therefore, to explore the impact of

digital transformation on innovation, probit model is employed. The empirical

specification has the form below:

Pr(Innovationi,t = 1) = Φ(α + βDigitalizationi,t + Z i,t + μi,t) (1)

Where i and t denote firm and year, respectively. Innovation is a vector

of innovation, including Product innovation and Process innovation. Z is a set

of other control variables that consider firm’s characteristics such as firm age

(Firmage), years of experience of the manager (Experience), employee training

programs (Training) and industry competitiveness (Competitor). Meanwhile, μ

is standard errors and α, β is the cofficient.

4.3.2. Instrumental variable strategy

When analyzing binary variables such as innovation (Product innovation

and Process innovation) and digitalization, there is a significant potential for

reverse causality to arise, this means that there is the presence of endogeneity

problems. Besides, The probit model has an important assumption that

independent variables must be exogenous, meaning they cannot be correlated

with the model's error term (Greene, 2017; Rivers & Vuong, 1988). In practice,

44
this assumption is often not satisfied due to endogeneity problems that

frequently occur, resulting in biased and inconsistent estimates. This is

particularly serious in observational studies, where complete control of factors

is impossible (Sarrias, 2021). Therefore, we employ an instrumental variable

approach as a solution to address the endogeneity problem (de Grange et al.,

2024; Sarrias, 2021). The estimation procedure involves two stages: the first

stage is detailed in Equation 2, and the second stage is shown in Equation 1.

Pr(Digitalizationi,t = 1) = Φ(α` + γSkilledlabori,t + Z`i,t + ηi,t) (2)

In this context, digitalization (Digitalization) is the endogenous variable.

The instrumental variable, skilled labor (Skilled labor), is proxied by the total

number of skilled production workers. α` and γ represent the coefficients. Z` is

a set of other control variables, and η denotes the error term.

In this research, Skilled labor was chosen as the instrumental variable

because it satisfies two crucial conditions: relevance and the exogeneity

condition. Regarding the relevance condition, skilled labor is a key determinant

in digital transformation activities. A shortage of skilled labor can impede a

company's access to technology and its capacity for digital transformation, and

conversely, an abundance of skilled labor can enhance these aspects8.

8
https://documents1.worldbank.org/curated/en/929681629871018154/pdf/Vietnam-Science-Technology-
and-Innovation-Report.pdf

45
Furthermore, a positive correlation has been identified between a firm's

absorptive capacity and its skilled labor (Vu, 2018). This implies that when a

firm possesses a larger pool of skilled labor, its potential for digital

transformation is higher and more feasible. Moreover, the results in Table 4

demonstrate that the impact of Skilled labor on Digitalization is statistically

significant at the 1% level. These factors collectively indicate that Skilled labor

is relevant to Digitalization. Turning to the exogeneity condition, it is argued

that skilled production workers (Skilled labor) cannot directly generate or

promote a company's innovation except through the channel of digitalization.

In this study, Skilled labor is posited to merely provide the necessary

foundation for implementing and effectively utilizing digital transformation,

rather than directly engendering innovation. This means that Skilled labor is

assumed to have only an indirect impact on innovation operating via

Digitalization and no direct effect. Therefore, the Skilled labor variable

satisfies the exogeneity condition.

5. Results and discussion

5.1. Baseline results

Table 4 reveals that in the first stage, Skilled labor positively

impacts Digitalization at statistical significance level. This indicates that

Skilled labor is an appropriate instrumental variable in this study. In the second

46
stage, after being predicted with Skilled labor, Digitalization negatively

impacts Product innovation at statistical significance level. This is because

digitalization in Vietnamese firms is often confined to the "early-stage" or

"surface-level", meaning firms are merely “doing digital” rather than truly

“being digital”. At this initial stage, digitalization typically focuses on

digitizing and altering existing processes, and enhancing communication

capabilities or establishing an online presence. It targets operational efficiency

and market reach rather than concentrating on new product development.

Moreover, developing new products requires a more profound digital

transformation than the superficial application of technology currently seen in

Vietnamese firms, which is insufficient to drive product innovation.

Additionally, firms in Vietnam tend to prioritize actions that yield rapid

efficiencies rather than investing significant time in researching and applying

digital technologies to launch new products (Vo & Tran, 2025).

One reason explaining this picture stems from the current competitive

landscape and the strategies chosen by firms. With China, a powerhouse in

manufacturing and innovation, as a direct neighbor, the innovation strategies of

Vietnamese firms are directly impacted (Dang, 2017). They may show less

enthusiasm for product innovation research, as China is exceedingly strong in

this area, making competition exceptionally challenging. Consequently,

47
Vietnamese firms tend to leverage digital transformation for process innovation

to reduce costs and improve operational efficiency, rather than for product

improvements that might entail longer development cycles and greater risks

(Vo et al., 2024; Nguyen et al., 2019). This is also clearly demonstrated in Table

4, where Digitalization has a positive impact on Process innovation at

statistical significance level. Concurrently, Competition negatively

impacts Product innovation and positively impacts Process innovation at

statistical significance level, further substantiating this argument.

Regarding other control variables like Firm age, there is no evidence to

prove that Firm age impacts Product innovation, as the result in Table 2 is not

statistically significant. However, Firm age negatively impacts Process

innovation at statistical significance level. This finding reflects that long-

established firms in Vietnam tend to be change-averse and innovation-shy,

preferring to follow established, safe paths.

48
Table 4

Baseline results

First stage Second stage

Variables Digitalization Product Process

innovation innovation

Digitalization -0.409** 0.407***

(0.171) (0.127)

Skilled labor 0.001***

(0.000)

Experience 0.007*** 0.007** 0.012***

(0.002) (0.003) (0.003)

Competitor -0.078 -0.262*** 0.610***

(0.051) (0.077) (0.082)

Training 0.552*** 0.682*** 0.380***

(0.048) (0.121) (0.101)

Firmage 0.011*** 0.004 -0.006**

(0.002) (0.004) (0.003)

Constant -1.265*** 1.788*** -2.329***

(0.065) (0.239) (0.231)

Observations 4,214 4,214 4,214

Number of Firm_id 3,597 3,597 3,597

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

49
5.2. Alternative approachs

Wooldridge (2003) notes, the logit model can be used as an alternative

to the probit model for binary dependent variables. Therefore, to ensure the

robustness of our findings in this study, we also employ the IV logit model. As

shown in Table 5, the overall results from the IV logit model are largely

consistent with those from the probit model, revealing that Digitalization has a

negative impact on Product innovation while exerting a positive impact on

Process innovation. Furthermore, to further confirm these results, a linear

probability model (LPM) was also used and its findings were also consistent

with the baseline result. Finally, when considering alternative approaches

including logit model and LPM, the results showed no significant differences

from the main model used in the study, emphasizing the stability and robustness

of the results in this study.

50
 Table 5

Results with IV logit model and LPM

IV logit model LPM

First stage Second stage Product Process

innovation innovation
Variables Digitalization Product Process
innovation innovation

Digitalization -0.927** 0.765*** -0.707*** 0.276***

(0.399) (0.221) (0.043) (0.046)

Skilled labor 0.001*** 0.014*** 0.002

(0.000) (0.001) (0.001)

Experience 0.011*** 0.016** 0.021*** -0.200*** -0.035

(0.003) (0.006) (0.006) (0.035) (0.038)

Competitor -0.119 -0.325** 1.111*** 0.630*** -0.034

(0.084) (0.150) (0.150) (0.037) (0.040)

Training 0.898*** 1.394*** 0.717*** 0.009*** -0.004**

(0.079) (0.258) (0.180) (0.002) (0.002)

Firmage 0.017*** 0.010 -0.012** -0.282*** 0.260***

(0.003) (0.008) (0.006) (0.032) (0.034)

Constant -2.103*** 3.313*** -4.232*** 4,214 4,214

(0.112) (0.544) (0.424) 0.471 0.075

Observations 4,214 4,214 4,214 3,597 3,597

R square -0.707*** 0.276***

51
Number of 3,597 3,597 3,597 3,597 3,597
Firm_id

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation
5.3. Alternative measurement of innovation

To further investigate the impact of Digitalization, a model measuring

its effect on the alternative variable R&D was implemented. The results in

Table 6 show that Digitalization positively impacts R&D at a statistical

significance level. This suggests that even when firms are only in the initial

stages of digitalization, “doing digital” plays a crucial role in foundational

R&D. Early-stage digitalization can significantly enhance access to knowledge

and information, which are vital inputs for R&D. More specifically,

digitalization at this stage provides companies with access to global research,

industry trends, patent databases, and competitor analyses, thereby reducing

initial barriers to exploring and implementing new ideas.

Additionally, Digitalization facilitates easier connections for companies with

experts, research institutions, or potential R&D partners, fostering an

environment conducive to knowledge sharing and joint development.

52
Table 6

Results with alternative variable

Variables R&D
Digitalization 0.561***
(0.076)
Experience -0.011***
(0.003)
Competitor -0.246***
(0.068)
Training 0.371***
(0.054)
Firmage 0.008***
(0.002)
Constant -0.632***
(0.078)
Observations 4,214
Number of Firm_id 3,597
Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

5.4. Heterogeneous effect

To gain a deeper understanding of the impact of Digitalization on

different entities, this study considers heterogeneous effects. To begin, firms in

this research are categorized according to their ownership structure.

Specifically, if a firm's domestic ownership accounts for more than 50%, it is

classified as a domestic firm; otherwise, it is considered a foreign-owned firm.

53
Table 7 shows that for domestic firms, the results do not change at certain

significance levels. For firms with foreign ownership, Digitalization also

negatively impacts Product innovation at a significance level, consistent with

the previous findings. However, Digitalization does not impact Process

innovation in these foreign firms, suggesting that their operational and

organizational processes are already well-established, and early-stage digital

transformation does not significantly alter their operational machinery.

54
Table 7

Results with classification of domestic ownership and foreign ownership

Domestic Foreign

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.620*** 0.283* -1.776*** 1.031

(0.185) (0.151) (0.184) (0.673)

Experience 0.010*** 0.011*** 0.011 0.033

(0.004) (0.003) (0.007) (0.024)

Competitor -0.338*** 0.660*** -0.927*** -0.116

(0.080) (0.078) (0.240) (0.678)

Training 0.834*** 0.476*** 1.535*** 0.115

(0.129) (0.111) (0.182) (0.653)

Firmage 0.006 -0.004 -0.004 0.019

(0.004) (0.003) (0.016) (0.049)

Constant 1.531*** -2.419*** -1.390*** -5.090***

(0.249) (0.215) (0.252) (1.529)

Observations 3,800 3,800 414 300

Number of 3,269 3,269 410 296

Firm_id

Notes. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

55
 Next, firms are further distinguished as either private or government-

owned. Those with private ownership accounting for more than 50% are

designated as private firms, while the remaining firms are categorized as

government firms. The results in Table 8 indicate that there is insufficient

statistical evidence to prove Digitalization impacts Product innovation in

private firms, a result similar to that for state-owned enterprises.

However, Digitalization still has a positive impact on Process innovation in

private firms at a statistical significance level, while conversely, there is

insufficient statistical evidence to demonstrate

that Digitalization affects Process innovation in state-owned enterprises. This

suggests that within the long-established and tightly regulated frameworks of

state-owned enterprises, Digitalization does not affect the firm's innovation

capabilities.

56
Table 8

Results with classification of private and government ownership

Private Government

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.361 0.576*** -0.528 0.224

(0.243) (0.172) (0.894) (0.192)

Experience 0.007* 0.013*** -0.017 0.013

(0.004) (0.003) (0.036) (0.011)

Competitor -0.246*** 0.696*** -1.247 0.086

(0.087) (0.094) (2.119) (0.322)

Training 0.690*** 0.349*** 0.452 -0.028

(0.176) (0.124) (0.877) (0.274)

Firmage 0.003 -0.011*** 0.004 0.006

(0.005) (0.004) (0.013) (0.007)

Constant 1.918*** -2.261*** 3.973 -1.923***

(0.377) (0.287) (6.438) (0.493)

Observations 3,917 3,917 297 297

Number of 3,448 3,448 295 295

Firm_id

Note. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

57
 Lastly, firms are further distinguished by their involvement in

international trade. Firms engaged in exporting goods are designated as

exporting firms, whereas those not involved in such activities are classified as

non-exporting firms. Table 9 shows that Digitalization has no statistically

significant impact on Product innovation in either non-exporting or exporting

firms, indicating that the effect of early-stage digital transformation on Product

innovation remains rather faint across firms.

However, Digitalization positively impacts Process innovation in non-

exporting firms at a statistical significance level, with the opposite result for

exporting firms. This may indicate that the quality of the operational machinery

and activities of exporting firms is already high, as they must meet numerous

international requirements and regulations regarding products and processes to

be able to export. Therefore, early-stage digitalization does not bring about

significant changes in exporting firms.

58
Table 9

Result with classification of non exporting and exporting state

Non exporting Exporting

Variables Product Process Product Process

innovation innovation innovation innovation

Digitalization -0.268 0.311* -0.224 0.495

(0.324) (0.173) (0.267) (0.351)

Experience 0.007 0.007* 0.010 0.027**

(0.005) (0.004) (0.007) (0.013)

Competitor -0.371*** 0.827*** 0.495* 0.458

(0.103) (0.088) (0.272) (0.322)

Training 0.652*** 0.452*** 0.673*** 0.368

(0.227) (0.127) (0.241) (0.291)

Firmage 0.001 -0.006 0.005 -0.007

(0.005) (0.004) (0.007) (0.009)

Constant 2.114*** -2.553*** 0.864* -2.342**

(0.496) (0.244) (0.503) (0.977)

Observations 3,433 3,433 781 781

Number of 3,065 3,065 747 747

Firm_id

Note. Standard errors in parentheses. *** p<0.01, ** p<0.05, * p<0.1.

Source: Author’s calculation

In summary, the study finds convincing evidence of heterogeneous

59
effects of Digitalization on Product Innovation and Process Innovation across

the examined firm types, highlighting the importance of distinguishing firm

characteristics in the analysis

6. Conclusion

This study investigated how digitalization impacts the innovation

capabilities of Vietnamese firms over the period between 2005 and 2023 by

employing an instrumental variable probit model. The research findings

indicate that, in the context where digitalization within firms is merely at a

superficial, early stage, digitalization exerts divergent effects on innovation.

Specifically, digitalization at this phase negatively impacts product innovation

but demonstrates the potential to foster process innovation. Furthermore, other

factors such as the years of experience of top managers, employee training

programs, the firm's operational duration (firm age), and industry competition

all have certain impacts on a firm's innovation capabilities. Notably, the results

suggest that innovation is considerably challenging for long-established firms,

and as industry competition intensifies, firms tend to innovate processes to save

costs and improve operations rather than making long-term investments in

product innovation. The research results remain consistent across various

robustness checks. Additionally, with R&D as an alternative variable, despite

digitalization being only in its initial stages, it also shows a definite positive

60
impact on foundational R&D. Moreover, after considering heterogeneous

effects, the impact of digitalization varies across different aspects depending

on the firm type. Particularly for state-owned enterprises and exporting firms,

digitalization appears to have no discernible impact on their innovation

capabilities, owing to the specific characteristics of each firm type.

6.1. Problems in Vietnamese enterprises

Based on the results of this study, Table 10 summarizes the prominent

issues faced by Vietnamese enterprises in the process of digital transformation

and innovation.

Table 10

Issues faced by Vietnamese enterprises in digital transformation and

innovation

Issues Root Causes Impacts

Digitalization remains Lack of long-term Fails to effectively

primarily in an "early strategy; shortage of drive product

stage." high-quality human innovation.

resources.

Lack of product Focus on short-term Loss of long-term

innovation. process optimization. competitive advantage.

61
 State-owned enterprises Rigid processes; low Stifled impetus for

(SOEs) do not derive competitive pressure. improvement;

clear benefits from operational

digitalization. delays/stagnation.

Exporting firms derive Processes already meet Necessitates a shift

limited benefits from established standards; towards new

process innovation. limited scope for product/service creation

further enhancement. and innovation.

SMEs lack resources Insufficient financial Hinders business

for implementing in- support, digital skills, scalability and the

depth digitalization. and general resources. capacity for innovation.

6.2. Strategy implication

Based on the problems that Vietnamese enterprises face, this study

proposes some practical strategies. Each type of enterprise in Vietnam requires

a distinct digitalization strategy tailored to its specific resources, development

objectives, and operational characteristics. For private enterprises, particularly

small and medium-sized enterprises (SMEs), the primary advantages lie in their

flexibility and capacity for rapid adaptation. However, they often face

significant constraints regarding capital, human resources, and technology.

Therefore, in the initial phase, private SMEs should focus on digitalizing

62
internal processes to enhance operational efficiency. This includes

implementing solutions such as point of sale (POS) systems, customer

relationship management (CRM) software, and simplified enterprise resource

planning (ERP) systems for accounting and logistics. Once operational stability

is achieved, these enterprises should transition to a second phase focusing on

product and service innovation via digital platforms. Examples include

integrating AI chatbots for customer service or developing personalized online

sales channels based on consumer behavior data.

Meanwhile, exporting enterprises, especially those with established

international markets, typically possess well-developed production processes

that often meet international standards. However, these enterprises need to

emphasize product innovation geared towards 'market-specific personalization'

and apply technology to enhance added value. The proposed strategy involves

leveraging market data (through analysis of Google Trends, Amazon reviews,

Alibaba insights, etc.) to design region-specific products, tailoring aspects such

as design, packaging, and smart features. Furthermore, digitalizing the entire

supply chain – from manufacturing facilities to logistics – is crucial for

optimizing costs and meeting the transparency demands of international

partners. Garment Company 10 (May 10 Corporation) exemplifies success in

this area, having implemented an integrated manufacturing execution system

63
(MES) that reduced order fulfillment times from 30 to 18 days, thereby

boosting its export competitiveness.

Conversely, state-owned enterprises (SOEs) possess abundant resources

but are often hampered by rigid administrative structures, leading to slow and

frequently superficial digitalization processes. A suitable strategy for SOEs is

to establish 'internal innovation units' or 'innovation labs' that operate with

autonomy. These units would be responsible for piloting new technologies,

service models, and process improvements, unconstrained by existing internal

bureaucratic hurdles. Concurrently, transparent mechanisms for technology

investment, linked to specific innovation KPIs, are necessary. Examples of

such KPIs include the percentage of revenue generated from new products and

services, or the degree of operational automation achieved. The application of

this strategy can be observed in EVN (Vietnam Electricity), which established

a digital transformation center for the electricity sector. This center has piloted

smart metering systems and AI for load analysis, contributing to an 8%

reduction in power losses in 2023. This approach also aligns with issues

addressed and solutions proposed in the politburo's recent resolution 68.

6.3. Policy recommendations

Based on the empirical findings, several practical solutions, proposals, and

strategies can be formulated, aligning with Vietnam's current economic context

64
and policy landscape. This includes Politburo Resolution No. 57-NQ/TW,

issued in December 2024, on continuing to accelerate national industrialization

and modernization by 2030 with a vision to 2045, as well as other national

digital transformation initiatives.

Reorienting Digitalization Strategy: From "Doing Digital" to "Being Digital"

The initial stages of digitalization have shown a significant negative

impact on product innovation. This can be attributed to Vietnamese enterprises

largely being at the stage of "doing digital" rather than truly "being digital."

Currently, businesses tend to focus on digitalizing existing processes and

enhancing their online presence, rather than investing deeply in new product

development. Competitive pressure from manufacturing and innovation

powerhouses such as China and the United States also leads Vietnamese

enterprises to prioritize process innovation to reduce costs and increase

operational efficiency. However, in the long term, this approach may cause

businesses to lose their competitive advantage, lack motivation for

improvement, experience delays, and face difficulties in scaling up and

achieving greater corporate stature.

Therefore, policy interventions must extend beyond merely encouraging

superficial technology adoption. It is crucial to guide and support enterprises in

deeply integrating digital technology into all aspects of their operations,

65
particularly in R&D and new product development. This aligns with the

objectives of Resolution 57 regarding the development of science, technology,

and innovation as the main driving force for growth. Specific measures should

include:

• Developing specialized financial and technical support programs for

digital platform-based product innovation projects.

• Offering tax incentives for investments in advanced digital technologies

(AI, Big Data, IoT) that serve innovation purposes.

• Assisting enterprises with new product testing and market access.

Subsequently, enterprises also need to proactively embrace the spirit of

Politburo Resolution No. 52-NQ/TW (2019) and, most recently, Resolution

No. 57-NQ/TW signed by General Secretary To Lam on December 22, 2024,

as well as the National Digital Transformation Program. These all clearly

define the central role of science-technology, innovation, and digital

transformation in the national development strategy. Resolution 57 particularly

emphasizes transforming Vietnam into an ASEAN regional innovation hub by

2030 and increasing investment in research and development (R&D) to 1.5–

2% of GDP – a level three to four times higher than at present. Concurrently,

policies also encourage enterprises to adopt new technologies such as Artificial

Intelligence (AI), Big Data, Blockchain, and the Internet of Things (IoT).

66
Building internal capacity for advanced digitalization

The role of skilled labor must be underscored. Policies should focus on

developing a human resource pool capable of mastering digital technologies

and cultivating an innovative mindset.

• Foster collaboration with universities and research institutes to establish

advanced training programs in digital skills, data analytics, and

innovation management. Vietnam National University, Hanoi, for

instance, has committed to further implementing its Action Program

aligned with Resolution 57-NQ/TW, centering on innovation and

effectively connecting government, academia, and industry (the 'Triple

Helix') to promote the transfer of knowledge, scientific products, and

technology into practice. This includes developing high-quality young

human resources in Science, Technology, and Innovation, alongside

establishing three additional research institutes.

• Encourage enterprises to invest in training and retraining their

workforce. Recently, Prime Minister Pham Minh Chinh engaged with

Chinese corporations regarding investment and technology transfer for

the North-South high-speed railway project, indicating a focus on

capacity building.

67
 • Attract and retain talent in technology and innovation through special

mechanisms and commensurate remuneration packages to prevent the

"brain drain" phenomenon and the waste of resources, particularly young

and highly skilled labor. This is especially critical in the current context

of global integration, Vietnam's golden population period, and an era of

significant national advancement.

Supportive policies and financing for digitalization

Administratively, Decision No. 130/QD-TTg of 2023 enacted the

Strategy for Science, Technology, and Innovation Development by 2030,

prioritizing key sectors such as the digital industry, high-tech agriculture, and

digital health. This serves as a basis for developing specific support programs

for Small and Medium-sized Enterprises (SMEs) to promote value chain

digitalization, new product research, and innovative business model

development. Furthermore, the Prime Minister issued Resolution No. 01/NQ-

CP on January 8, 2025, reaffirming digital transformation as one of the three

"strategic breakthroughs" and requiring ministries and sectors to coordinate and

vigorously promote the digital economy, digital government, and digital

society.

Additionally, current legal documents such as the Law on Support for

Small and Medium-sized Enterprises (2017) and the amended Law on

68
Corporate Income Tax clearly stipulate financial incentives for enterprises

investing in digital transformation, technology innovation, and R&D. These

include tax exemptions or reductions for 4–9 years depending on the sector, as

well as a 50% subsidy for digital transformation costs under Decision No.

4889/QD-BKHĐT of 2022.

Thus, the current legal and policy framework in Vietnam establishes a

favorable legal corridor and provides comprehensive mechanisms for financial,

infrastructural, and human resource support, enabling enterprises – particularly

SMEs – to accelerate their digitalization and innovation processes. However, a

key challenge remains: many enterprises have not yet accessed or do not know

how to effectively utilize these support programs. This necessitates more

specific guidance and improved connectivity between policymakers and

businesses. Crucially, tailored consultation, ongoing support, and practical

implementation assistance are needed for different groups of enterprises,

considering their scale, industry, and internal capacities.

6.4. Limitations

The limitations of this study could be used as recommendations for

future research. First, this is a panel research that exclusively included a single

country. Future research could investigate the impact of Digitalization on the

innovation performance of firms in other developing economies, as well as in

69
countries that are similar to Vietnam, which is considered to have strong

innovation potential. Regarding the generalization of our findings, these results

should be applied cautiously, and should only be applied to other developing

economies in the region similar to Vietnam, such as Southeast Asian countries.

This is because the results maintain specificity to the Vietnamese context

throughout the survey periods. Second, the survey data was collected in 2005,

2009, 2015, and 2023. Although the inclusion of 2023 data significantly

increases the timeliness, the data points from 2005 and 2009 still reflect a very

early stage of the digitalization process in Vietnam, before core technologies of

modern digital transformation (such as Cloud, Big Data, AI, IoT) became

widespread. Therefore, results from the earlier years may not fully correspond

with the current context. Moreover, the intervals between survey years are

uneven with large gaps, with a four year interval between 2005 and 2009, a six

year interval between 2009 and 2015, and an eight year interval between 2015

and 2023. These long periods, especially the 2015-2023 period when digital

transformation made significant breakthroughs, may have caused the research

to miss important changes in technological turning points, or short-term or

medium-term impacts of Digitalization on innovation occurring between

survey milestones. Third, the research data was collected based on self-

reporting by enterprises through surveys, therefore there remains potential for

70
various types of bias such as: social desirability bias, subjective perception bias

regarding "innovation" and "digitalization", and recall bias. Consequently, the

reliability of the data depends on the understanding and honesty of the

respondents. These limitations suggest ideas for further research.

71
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