Asia's next economic tiger? Hint: it's not India or China.

On a leafy campus on the outskirts of this frenetic city, an experiment is under way. Opened in 2008, the Vietnamese German University (VGU) occupies a temporary, two-story building. This fall it plans to enroll about 220 Vietnamese students, mostly in master's programs taught by visiting German professors.

This modest start represents an ambitious bet by Vietnam on the power of higher education to transform its low-wage economy. By 2020, Vietnam hopes at least one of the handful of schools like VGU will rank among the world's top 200 universities and set higher standards for other institutions.

By investing in higher education, Vietnam hopes to emulate the scientific know-how of Asian economies like Taiwan and South Korea. Since 1990, Vietnam's per capita gross domestic product has risen 10-fold to more than $1,000 on the back of rising exports and large doses of foreign investment.

But it's unclear that simply spending more on education can produce a suitably skilled workforce. Critics say that hidebound university administrators, outdated pedagogy, low pay, and stifling political orthodoxy need fixing first. "Our higher education system is archaic," says Hoang Tuy, a prominent reformer.

Breaking the mold

VGU aims to break this mold. Under its charter, the first granted to a state university in Vietnam, it hires its faculty and designs its own courses. By focusing on applied sciences and undertaking research, in collaboration with private industry, it resembles the German universities that are its principal backers.

Victoria Kwakwa, the country director for the World Bank, which is funding a new $180 million campus for VGU, says it and other autonomous institutions should be seen not as islands of excellence. "Its success will be important in demonstrating that you can run higher education in a different way," she says.

Vietnam already spends a lot on education, including private schooling and overseas study. Literary rates are high, and families put great stock in education. Between 2001 and 2006, the number of students enrolled in university or college here rose from about 900,000 to more than 1.6 million, according to the World Bank.

Addressing roadblocks

The drawback, say analysts, is that most students enroll at overstretched public universities or at private academies that have mushroomed without proper oversight. Vietnamese universities do little original research, according to a 2010 study funded by the United Nations.

The study warns that such research is expensive and requires sustained public or private funding, since student payments fall well short.

In its start-up phase, VGU gets most of its revenues from federal and state governments in Germany. Students pay $1,500 a year, and around 60 percent receive financial aid. Vietnam's government contributes $500,000 a year to its budget.

Eventually, though, Vietnam must shoulder the burden. By 2030, the university's budget is projected to reach $57 million, says Wolf Rieck, VGU's president.

"If they want to have an excellent research university, then they must be willing to pay those people who do the research on a competitive level. Otherwise it will fail," he says.

Mr. Tuy retired two years ago from a prestigious Hanoi university after a career that garnered international acclaim. He even has a math theorem named for him.

But his final university salary was around $250 a month, plus housing and benefits. He supplemented his income by lecturing overseas. Other staff taught weekend and evening classes, he says, sometimes at the behest of administrators trying to boost revenues.

Educators say that Vietnam should try to lure back overseas-educated PhD students to teach, a strategy that China is also pursuing. Since Vietnam can't currently match the salaries offered in the West, it needs to create an environment in which a promising scientist or engineer can shine, while nurturing future thinkers.

This environment must include academic freedom, says Tuy, whose research center in Hanoi was ordered to close last year.