MACROECONOMICS’s ASSASSIGNMENT DIGITAL ECONOMY INTERNATIONAL ECONOMIC HIGH QUALITY PROGRAM

II THE REAL STATE OF AFFAIRS OF DIGITAL ECONOMY IN THE WORLD III EFFECTS OF DIGITAL ECONOMY AROUND THE WORLD PART B:DIGITAL ECONOMY IN VIETNAM I THE REALITY OF DIGITAL ECONOMY IN VIETNAM

Hanoi, 05-2021

GROUP MEMBERS INFORMATION: (8 MEMBERS)

The presenters : Phạm Hồng Phúc, Nguyễn Thị Hương Trà, Trần Công Minh

TABLE OF CONTENTS

PART A:DIGITAL ECONOMY AROUND THE WORLD

I WHAT IS DIGITAL ECONOMY?

II THE REAL STATE OF AFFAIRS OF DIGITAL ECONOMY IN THE WORLD

III EFFECTS OF DIGITAL ECONOMY AROUND THE WORLD

PART B:DIGITAL ECONOMY IN VIETNAM

I THE REALITY OF DIGITAL ECONOMY IN VIETNAM

II CAUSES AND EFFECTS OF DIGITAL ECONOMY IN VIETNAM

III VIETNAM’S CURRENT POLICIES TO DEAL WITH DIGITAL ECONOMY

PART C:VIETNAM DIGITAL ECONOMY FUTURE SCENARIOS

PART D:REFERENCES

PART A: DIGITAL ECONOMY AROUND THE WORLD

I WHAT IS DIGITAL ECONOMY?

❖ Digital economy is one collective term for all economic transactions thatoccur on the internet It is also known as the Web Economy or the InternetEconomy With the advent of technology and the process of globalization, thedigital and traditional economies are merging into one

❖ Digital economy is defined as an economy that focuses on digitaltechnologies, i.e it is based on digital and computing technologies It essentiallycovers all business, economic, social, cultural etc activities that are supported bythe web and otherdigital communication technologies

❖ Digital economy refers to activities and transactions driven by the public andprivate sectors as well as the citizens to produce, adopt and innovate digitaltechnologies and services in relation to socio-economic functions for enhancedwealth creation, productivity and quality of life

II THE REAL STATE OF AFFAIRS OF DIGITAL ECONOMY IN

THE WORLD

1 Overview

The world's digital economy is worth about $3 trillion, accounting for about3.8% of the global economy's value In ASEAN countries, this value is about 150billion USD, equivalent to 6% of the gross domestic product (GDP) of the membercountries Despite the challenging economic environment, Southeast Asia's digitalsectors continue to grow strongly, reaching $100 billion in 2020 and on track to

surpass $300 billion by 2025 (Pham Viet Dung, 2020).

The strong development of the digital economy is clearly reflected in the

change in the dominant position of companies globally

10 largest companies in the world in 2018 and 2008 2018

Vietnam's digital economy has reached 3 billion USD in 2015, increased to 9billion USD in 2018 and reached a total value of 14 billion USD in 2020 TheSoutheast Asia (SEA) 2020 Digital Economy Report published by Google,Temasek and Bain & Company on November 10 said that the e-commerceindustry in Vietnam grew by 46% and Vietnam is the country with highestpercentage of new Internet users in Southeast Asia

2 Digital economy’s trend

(McK insey & Company)

How Digital Economy control our life

(McKinsey & Company)

Size of the Digital Economy

3 Factors affect the digital economy

❖ Emerging digital technologies:

Emerging digital technologies such as blockchain, artificial intelligence, big dataanalytics and the Internet of Things can make a big leap in infrastructure upgradesindustrial layer, simplifying logistics and supply chains, and help businesses

operate more efficiently (Cameron A, 2019)

❖ Higher demand for cybersecurity and personal security:

The number of businesses and consumers participating in the digital economyincrease leads to a higher demand for cybersecurity and personal security,especially when critical areas such as financial systems and government areincreasingly digitized

❖ Modern digital infrastructure:

A developed digital economy requires quality digital and energy infrastructure –especially for energy-intensive technologies like the Internet of Things or ArtificialIntelligence Telecommunications network also needs to be set up to ensurebroadband Internet is available can process large amounts of digital data fortransportation launch new applications

❖ Demand for Smart Cities:

A country with rapid urbanization and population aging, smart cities will contribute

to the management and use of resources more efficiently, while solving the problem

of waste, pollution, pollution, and traffic congestion

❖ The rise in digital skills, services, and businesses Digital and the freelance economy:

Demand for the service industry and digital products and services increase, whichmeans investing more in higher education, digital literacy, start-up skills anddevelop a bright innovation ecosystem create Vietnam The decreasing trend of jobswith safe, fixed, repetitive; increasing demand for the basis of labor and products togenerate income and services move more creative industries in the labor market

(Cameron A, 2019)

❖ Changing consumer behavior:

Consumer behavior is changing with the rise of the middle classes Asia, towardsusing products and services with high value from the digital economy At the sametime, consumers also increasingly adapting to the digital economy, which

increases the influence of groups, celebrities/ influencers in the digital economy – on supplier behavior and consumers.

III EFFECTS OF DIGITAL ECONOMY AROUND THE WORLD

1 Advantages of the digital economy

❖ Saves time Before, if you needed office supplies, you would have to make ajourney into town and purchase Now, you can make an order over the internet and

it will arrive the next day

❖ Reduced costs for business Firms can save on renting expensive buildings byrunning most of their business through the internet A digital economy enablesfirms to cut out an aspect of the retail chain and send personalized goods directlyfrom factory or warehouse to people’s goods, rather than through shops This

enables lower costs and lower prices (Tejvan Pettinger, 2020).

❖ Lower barriers to entry In some markets, aspects of the digital economymake it easier for new firms to enter If an entrepreneur has an innovative idea thatcatches on, they can create a new product which challenges traditional firms Thedigital economy has brought many new services which were inconceivable before,such as online home deliveries for grocery to dating apps

❖ Big data usage The mass production of data can help inform governments andcharities about what is happening in the economy For example, in tracking ofCOVID-19 spread, the use of an app on mobile phones may indicate where local

hotspots emerge (Tejvan Pettinger, 2020).

❖ Benefits for developing world The digital economy is opening upopportunities for the developing world For example, computer programmers inIndia can easily underbid western counterparts, leading to new job opportunities

and higher income in India (Tejvan Pettinger, 2020).

❖ Enables people to work from home The digital economy has been a hugeasset during the COVID lockdown Without digital technologies, the decline ineconomic activity would have been even greater The digital economy gives greaterscope for people working from home and having greater flexibility in their hours(which may suit parents with children) Working from home can reduce contact andspread of a virus It can also help reduce traffic congestion and pollution

2 Problems of digital economy

❖ Monopoly power of tech giants Despite the potential for new start-ups, manyaspects of the digital economy have become dominated by firms with monopolypower For example, Amazon has cornered the market for online sales, meaningmany firms have to go through the Amazon market place to reach consumers who

go to Amazon out of habit Similarly, Google and Facebook have all developedvery strong brand loyalty and market share in their respective markets This hasmade a few tech giants very profitable With monopoly power, Google are able tocharge high prices for online advertising and Amazon have the market power to

undercut traditional booksellers (Tejvan Pettinger, 2020).

❖ Less community A traditional bookshop can act as a focal point for localcommunity It may holds events, book signings and individuals may enjoy theexperience of browsing physical books With the digital alternative undercuttingtraditional firms, old fashioned bookshops are forced out of business Althoughbooks may be cheaper, we have lost physical interaction between sellers and buyerswhich was an important aspect of the buying experience

❖ Addictive nature of technology Whilst, in theory, the internet can save time,e.g finding bus times is much easier with internet than paper copies, this timesaved may be outweighed by the time we waste checking Facebook, twitter,internet searches Also, the sheer volume of information can cause us to drown ininformation and lose sight of what we actually need More choices do notnecessarily lead to better outcomes When faced with a bewildering range ofoutcomes, we can take time to decide and it becomes easier to procrastinate

❖ Privacy issues Harvesting and using data has become big business Facebookcollects a large range of data on its users and this has been bought by politicalinterests who can give very targeted political ads to its users

❖ Bypassing of labour laws The digital economy has created a trend towardsusing self-employed freelancers, who are not protected by the same labour laws.For example, delivery drivers for Deliveroo and Uber drivers have often beenemployed on zero-hour contracts This enables firms to cut labour costs, be moreflexible, but it can leave workers without sick pay or employment protections

❖ Social media has led to more graphic content The anonymous and distantnature of social media has exacerbated trends to personal attacks and the posting ofconspiracy theories or posting of violent/sexual images The digital economy hasenabled the proliferation of content that is damaging to human well-being

❖ Disruption patterns The economy has always faced disruption from newtechnology – from the period of the Luddites to the assembly line However, thedigital economy is increasing the pace of change, causing many traditional firms(high street retailers) to go out of business The rise of AI may threaten jobs in awhole new range of service sector industries In theory, new technology will lead tochanging patterns of activity, but no increase in overall unemployment However,the pace of digitalisation can lead to structural unemployment, with some unskilledworkers increasingly losing out to skilled workers Combined with the monopolypower of big tech firms, it is causing an increased inequality in society, which maylead to feelings of alienation and unfairness.

❖ Environmental costs It is a mistake to think that the digital economy implies a

‘green solution.’ Data centres use electricity and cause CO2 emissions In the US,

data centres account for around two per cent of U.S electricity use in 2014 (Mark Kaufman, 2020) A bigger potential cost is how the digital economy encourages a

‘throw-away’ culture E.g the planned obsolescence of mobile phones andcomputers, encouraging consumers to buy new models, leading to greater use ofraw materials

PART B: DIGITAL ECONOMY IN VIETNAM

I THE REALITY OF DIGITAL ECONOMY IN VIETNAM

The year 2020 has marked a significant development of Vietnam’s e-commerce,even when COVID 19 spread terrors all over the world and affected the economynegatively This reversed economic growth might be harmful to other countries;but for Vietnam, it was a great opportunity to enhance the digital economy, whichredounded to the highest ever level of GDP growth that we recorded – evenhigher than China and USA

Digital economy, which is growing at double digits (USD 14 billion as of 2020and predicted for USD 52 billion by 2025), plays a contributory role to this economicsuccess In the span of 4 years between 2016 and 2020, online selling-relatedqueries in Vietnam have increased six-fold The country also sees seventy-threepercent of YTD monthly active user growth for selected mobile banking apps and

46% YoY growth in the e-commerce sector (Ousmane Dione, 2020).

With one of the fastest growing online population in the world, wide-rangingonline supply and remarkably supportive ecosystem, Vietnam’s internet economy

is stronger than ever and should be looked out for

From the start or 2019 up till now the year of 2021, consumers have beenchanging there spending habits, with the peak in 2020 when the instruction ofquarantine appeared to be effective

When analyzing customer behavior, the researchers found that up to 45% of Vietnamese customers access e-commerce marketplaces by typing the website address directly into their browsers, rather than searching for it on Google or clicking on ads This

number is much higher than the global average of only 27.49% (Vietnam Insider, 2020).

To have an overall vision, we shall see the changes in consumers spendinghabits throughout the years:

(Boxme Blog, 2020)

The number of users accessing to the Internet increases every year There also changes in the paying method, from using cash into credit card or bank transfer According to Boxme Blog in 2020, people using direct paying method (cash) only takes 17%, while the act of using credit card and bank transfer are much higher, respectively are 37% and 30%.

Growth of e-commerce expenditure among internet users in Vietnam in 2020

compared to 2019, by category

(Statista Research Department, 2021)

According to the following bar chart, the e-commerce expenditure roseincredibly among all aspects of economy, with the peak of 45,9% in food andpersonal care However, it saw a foreseen drop in the percentage of travel,mobility and accommodation, of -40,5%, due to the negative impacts of COVID

19 Traveling is the most popular merchant segment, accounting for 44 percent ofsales in 2019 Unfortunately, this segment in 2020 and 2021 is affected badly by

the movement restriction to the pandemic (Statista Research Department, 2021)

The Vietnam Government has implemented numerous laws and regulations in recent years with the goal of turning Vietnam into a full-fledged digital economy during the Fourth Industrial Revolution, such as Law on Cyber Security No 86/2015/WH13 or Decision 749/QD-TTG dated 30 June 2020 on National Digital Transformation Program to

2025 The policies focus on the establishment of e-government to enhance transparency and speed up licensing works for enterprises, the legalization of e-commerce activities such as AI development, online ride hailing or non-cash payment etc.

At the same time, stricter measures in information management have beenintroduced, with the notable Decree 15/2020/ND-CP dated 3 February 2020allowing police authorities to investigate and sanction individuals and entitiesdistributing false or defaming information on social networks.

For investors interested in the e-Commerce sector of Vietnam, it is crucial toknow that the government recognizes e-commerce transactions (except thoseconducted via social networks) as having the same degree of legal effectiveness andenforceability as written contracts There are three categories of e-Commerce:

(a)Business to customer (“B2C”) website which is created for commerce activities

of the website’s owner only (Oliver Massmann, 2021)

(b) Business to business (“B2B”) website (like Tiki, Lazada, Shopee) which is created for

commerce activities of other individuals or organizations (Oliver Massmann, 2021)

(c) Digital Application (“Apps”) which is installed on electronic devices and

connected to a network for commerce transactions (Oliver Massmann, 2021)

The Vietnam Government’s continuous and visible effort in attracting foreigninvestment as well as transforming the country into a digital economy, if not to say,

a developed one comparable to Singapore, should serve as a green flag toinvestors interested in developing digital services in Vietnam

II CAUSES AND EFFECTS OF DIGITAL ECONOMY IN VIETNAM

Vietnam’s on-going regulatory focus on digital transformation is expected toresult in a 16 percent growth in the digital economy in 2020 By 2025, Vietnam’s

digital economy could reach US$52 billion (Atharva Deshmukh, 2020)

Sub-sectors of the digital economy such as e-commerce, digital financialservices, online gaming, and Industry 4.0 are likely to benefit from an increasingnumber of firms and consumers opting for digital products and services

Many regulations that govern the digital economy are nascent and investorsshould therefore study the regulations carefully before entering the market

Vietnam’s digital economy is expected to reach US$14 billion in 2020, ayear-on-year increase of 16 percent, and will likely reach US$52 billion in 2025,re-accelerating to nearly 29 percent in compound annual growth rate (CAGR)

(Atharva Deshmukh, 2020)

This rapid growth is underpinned by a broader digital transformation in thecountry Vietnam’s National Program for Digital Transformation is aimed at ensuring

more than 80 percent of households have access to fiber-optic infrastructure by

2025 The program also entails that the digital economy forms 10 percent of every

sector which could result in annual productivity increases of 7 percent (Statista Research Department, 2021)

The COVID-19 pandemic has helped this transformation through apermanent and significant digital adoption spurt, with more than one in threeSoutheast Asian digital service consumers (36 percent of digital consumption inSoutheast Asia) new to the service

Vietnam Briefing discusses this shift and opportunities for investors in

Vietnam’s digital economy

1 Sub-sectors in Vietnam’s

digital economy a E-commerce

A study found that Vietnam’s e-commerce market is likely to reach US$15 billion

by 2025, up from 2.8 billion in 2018 This growth is motivated by increasing internet access, a relatively young population, and an expanding number of local businesses opting for e-commerce as a distribution channel COVID-19 has accelerated the adoption

of e-commerce solutions for businesses and consumers alike.

According to a recent market survey, online shopping frequency increased

by 14 percent in 2020, indicating that a growing number of consumers are shiftingtheir consumption patterns The rise in the proportion of online consumption ishighest in food and beverage, cosmetics, sports goods, fashion, and stationery.Popular e-commerce channels include Shopee, Lazada, and Tiki Regionalforeign-owned platforms dominate the Vietnamese e-commerce market Lazadaand Shopee for instance are owned by Alibaba (China) and SEA Ltd (Singapore).However, local firms such as Tiki have signaled expansion plans during thepandemic The e-commerce market is also of policy relevance in the quest for adigital transformation; the National Digital Transformation Program actively

promotes e-commerce adoption by local enterprises (Atharva Deshmukh, 2020)

b Digital financial services

Cash payments remain the mode of choice in Vietnam In 2019, just 41percent of adults in the country had bank accounts, with a majority of themlocated in cities However, there are indicators that the demand for digital financialservices is likely to rise According to World Bank data, only 45 percent of theVietnamese population had access to the internet This figure rose to 68.7 percent

in 2019 (Atharva Deshmukh, 2020)

The combined effects of rising internet access and a booming e-commercemarket are likely to create opportunities in digital banking, payments, savings, andother financial services.

In August 2020, Timo Plus, Vietnam’s first ‘digital bank’ announced that itwould invest in digital financial services through credit and savings products in abid to attract depositors who wish to shift away from traditional banking services.Demand for payments also increased in response to COVID-19 with a 76 percentincrease in digital payments in the first quarter of 2020

(Atharva Deshmukh, 2020)

These changes in financial services consumption have prompted aninterest in Vietnamese fintech firms Fvndit, Kim An Group, Timo, and NextPay areamong those that have secured new capital injections from domestic and foreign

investors in 2020 Fintech revenues in 2020 are expected to reach US$7.8 billion (Atharva Deshmukh, 2020)

Regulatory trends have also favored FDI in fintech Earlier this year, the Vietnamese central bank to discard the 49 percent ownership limits for fintech in intermediary payment services The regulatory conviction here is that growth in fintech could be accelerated by expanding access to capital, both domestic and foreign.

c Online Gaming

Vietnam’s gaming industry has witnessed a surge in demand in 2020 The sport market for instance has grown at 28 percent in a five-year compound annualgrowth rate (CAGR) since 2015 and online gaming revenues crossed US$10 million.Key drivers of the online gaming industry include Vietnam’s digital transformation anddemographics The country is home to 3.9 million gamers and more than 50 percent

e-of the population has access to a mobile device (Atharva Deshmukh, 2020)

Online gaming, like e-commerce, is dominated by foreign-owned firms with most of them being Chinese These firms have leveraged not only Vietnam’s demand but also the country’s supply of low-cost skilled labor and a network of local publishing firms.

d IT-enabled services and Industry 4.0

Vietnam’s internet economy could witness a 29 percent growth over thenext five years The central pillar underpinning this trend is a digital ecosystem offirms and consumers Thus, firms that provide IT services to businesses will bekey to a successful digital transformation in Vietnam and the digital transformation

in turn will create opportunities in IT-enabled services and Industry 4.0

For instance, the cloud services market in Vietnam is projected to grow toUS$291 million by 2024, a five-year CAGR of above 10 percent Much of thisgrowth is concentrated in the Northern region and foreign firms such as Microsoft,Amazon Web Services, IBM and SAP Asia are key players in the cloud services

business (Atharva Deshmukh, 2020)

Vietnamese policymakers have emphasized a focus on Industry 4.0 The goal

of improving Vietnam’s ranking in the Global Innovation Index through productivitygrowth in production processes has sparked policy reform in recent years A nationalstrategy on Industry 4.0 was released in 2019, which focused on R&D investments,

connectivity infrastructure, and digital governance (Ousmane Dione, 2020)

Growth in the Vietnamese market for technologies such as big data, cloudservices, IoT is therefore contingent on the expansion of a skilled workforce andthe provision of high-quality connectivity infrastructure

In addition, Vietnam’s push for Industry 4.0 has urged foreign firms to locateR&D activities in the country For instance, Samsung, Panasonic, Bosch, GE, andPiaggio have local R&D activities This implies that the country’s FDI appeal couldundergo a structural shift with investors seeking innovation and a skilled workforceincreasingly looking at Vietnam for investment prospects

2 Strong growth but regulatory challenges remain

Vietnam’s regulatory landscape for the digital economy is relatively nascent It islikely that the frequency and content of regulatory interventions could vary by sector.For instance, in October 2020 the government issued a draft decree signalinglikely changes to e-commerce investment regulations Included in these reforms is

a set of conditions for FDI in e-commerce Conditions include approvals forcontrolling stakes, the necessary inclusion of foreign investors in a list of ‘globallyreputed technology companies’ issued by the government, and conditions oninvestment exits by foreign investors

In addition, the Law of Cyber Information Security and the Law onCybersecurity are also of relevance to the digital economy These regulationsgovern data collection, data processing, and data protection These activities arekey tools deployed by digital economy participants particularly in sectors that rely

on consumer data processing such as online media Specifically, data of serviceusers are required to be stored in Vietnam, required foreign companies to comply,and even opening representative offices, which may increase costs

Nevertheless, in 2020, Vietnam released the revised Law on Investment (LOI),which seeks to offer incentives to firms operating in R&D activities The LOI statesthat the government is likely to provide project-specific incentives and investmentsupport for projects where investment capital exceeds VND 3 trillion (US$1.3

billion) (Atharva Deshmukh, 2020)

The growth of Vietnam’s digital economy precedes the COVID-19 pandemic butwas also been aided by it Sectors such as e-commerce, digital financial services,online gaming, and Industry 4.0 are poised for growth and offer lucrative opportunitiesfor foreign investors who seek exposure to Vietnam’s digital ecosystem

III VIETNAM’S CURRENT POLICIES TO DEAL WITH DIGITAL

ECONOMY

1 Reference of examples and government’s actions

Opening up the economy, foreign companies invest in Vietnam andVietnamese companies have favorable conditions to export technology abroad.The government is also very supportive of businesses and start-ups to contribute

to the development of the country's total GDP

=> Example: In 2017, there were 21 start-ups in the field of e-commerce receiving foreign investment with a total investment capital of up to 83 million USD, the highest among all