Promoting MSME innovation has been one of the priority work pro-grams of APEC. MSME innovation policy in the APEC and member economies such as Vietnam, has focused on promoting venture capital and startup firms in the ICT industry. This study critically examines such a policy approach, and argues that deepening industrial production capability of MSMEs through the accumulation of technological capability is paramount. To do so, the study undertakes an empirical analysis of determinants of technological change among MSMEs in Vietnam based on the technological capability approach. The study finds that: sales revenue is the most powerful explanatory factor in a firm's decision to innovate, investment in machines and equipment has a more significant impact on innovative activities than formal R&D, and size of the firm may matter for both quantity and quality of innovation. Further, different types of technological capability maybe more important for different types of innovative activity. Therefore, it is important to 1) upscale private enterprises to bolster their technological capability; 2) to direct resources to medium enterprises that play an important role in coordinating smaller firms and diffusing technology transferred from larger firms or FDI firms; and 3) to provide tailor made technological consulting for MSMEs depending on their technological trajectory and S&T strategy, rather than focusing simply on subsidizing formal R&D.

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