• Introduction The Provincial Competitiveness Index (PCI) is an effort to explain why some parts of the country perform better than others in terms of private sector dynamism, job creation and economic growth. Using new survey data from businesses that describe their perceptions of their local business environments, as well as credible and comparable data from official and other sources regarding local conditions, the PCI rates provinces on a 100-point scale. In 2005, the overall index is comprised of nine sub-indices that explain much of the variation in performance across provinces in Vietnam. In 2006, two new sub-indices were developed to capture other aspects of Provincial Government efforts to enhance the business environment. In addition, a number of the existing indices were strengthened by modifying certain indicators. Sub-indices and indicators are described in detail under the caption “PCI Sub-Indices” below. • Design and Construction The research has a number of important design elements that make the results easily translated into governance reforms: First, by separating out the growth that is generated by initial conditions (i.e. the fundamental underlying factors that contribute to growth but that are very difficult or impossible to address in the short-term), the research was able to determine that good governance practices are possible at the provincial level and that these practices explain why some areas outperform others or why some areas have similar economic outcomes despite having very different initial conditions. The focus on governance practices should lead to improvements in economic performance, even without significant changes in the physical and human infrastructure in a region. Second, by normalizing the scores around the best practices already found in Vietnam, the index directs provincial governments to improve their performance, not against some ideal standard of good governance but rather against the best performance already practiced by their peers within the same national political framework. Therefore, any province in theory could attain a perfect score by adopting the best practices already found in Vietnam. The implication is that there are no easy explanations for poor performance – every provincial government can do better to generate a more favorable economic environment within their borders. Third, by comparing governance practices against actual economic performance, the PCI provides initial estimates of how important governance practices are to attracting investment and generating growth. The research provides a compelling demonstration of the association between business-friendly governance practices, business responses and, importantly, welfare improvements. This last connection is critical as it makes clear that business-friendly policies and practices benefit not just entrepreneurs but also the broader society that relies upon private sector dynamism to provide the jobs that raise household living standards. • PCI Rankings and Analysis The Provincial Competitiveness Index was finalized after weighting sub-indices to reflect their relative importance and standardizing to a 100-point scale. More important than the actual individual rankings are tiers of provinces. These tiers are clearly delineated by break points of one-half of a point or more in the data. These tiers are relatively robust to different sub-index weightings and provide a more useful way of interpreting the data than would an approach that wrongly attributes too much confidence to decimal points in the data. There are five tiers in 2005: • “High” performing group
• “Mid-high” group
• “Average” group
• “Mid-low” group
• “Low” performing group In 2006, a new tier was developed to capture provinces which are clearly head and shoulders above the rest of the field. This is the top performing group and is named “Excellent” Group. For detailed discussion of member provinces in each of those groups, please refer to respective attachments below.
PCI 2005 tiers PCI 2006 tiers | 
