like import restrictions or import tariff since the former bring less distortion to the market. Production subsidies or subsidiary credits are justifiable if they are provided under a definite strategy to elevate the target industries.

However, in Vietnam, subsidies or credits are given to unprofitable state enterprises without such a strategy: they are handed out just to help their financial condition.

The Vietnamese government should have a strategy concerning future industrial structure. Labor intensive industries should become targeted, considering the dynamic comparative advantage of the Vietnamese economy. $ ^{24} $ In particular, export-oriented labor-intensive industries should be greatly promoted since they produce spillover effects to the rest of the economy such as technology transfers, access to foreign markets, derivative demand to subcontractors, etc. Subsidies and other promotion measures should be taken in the context of such a strategy.

## 4 -2-3 Incentive Mechanism

As explained previously, “innovation competition” has a different character from the neoclassical perfect competition. To make the best use of the merits of such innovation competition, a certain role is expected of the government from the following points.

(i) Since innovation competition, by nature, has the character of oligopolistic competition, there is no guarantee that the equilibrium acquired through the competition will be optimal.

(ii) Innovation is a kind of public goods.

(iii) Innovation competition is accompanied by various risks, e.g. uncertainty concerning future technology or future demand, the risk about whether innovation can be achieved faster than rivals, etc.

Accordingly, a government is required to play the following roles.

(a) To provide information about the perspective of future demand and technology, and the direction of its economic development policies. This will help to remove uncertainty and/or risks accompanying innovation competition. It will also contribute to increasing the rationality of competition since it provides a common basis of economic decision to each enterprise. Designation of the target industries and indicative economic plans will be two main policy measures in this field.

(b) To facilitate innovation. Since innovation will be public goods once it is achieved, the government has the mandate to promote innovation through government-led R&D, technology imports, preferential treatment, etc.

(c) To control innovation competition to an appropriate level. Since innovation competition is dynamic and oligopolistic, we cannot expect that it will converge to the optimal level. The economy might suffer from over-competition or under-competition. As for control measures, price measures (subsidies or taxes) are preferable to quantitative controls since the latter will spoil the incentives of the economic actors.

In the catch-up process, there are several conditions which strengthen the effectiveness of these government roles: the government can get a somewhat clear and correct perspective of the future economic development from the experience of the developed economies; thus the government can identify the target industries relatively easily; import of technology from developed countries is available, etc. The so-called “industrial policy” adopted in Japan and