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Until recently, the billboard alongside Highway 1 in Bac Ninh province offered only empty promises. "Applying Unity and Creativity Will Speed Up Industrialization," it stated, portraying happy factory workers staring rapturously at a hammer and sickle. But Bac Ninh, like most of northern Vietnam, had been largely left out of the country's economic growth in the past decade. When Pham Thi Nhan, 19, graduated from high school last year, she saw few work prospects other than helping her family grow rice, an occupation that earns them about $400 a year. Nhan thought of moving south like her uncle, who last year returned from his job at a pepper plantation bearing a gift of a new water pump and tales of the riches to be had in the prosperous south. "I dreamed of also having money and buying things for my family," Nhan said. "But I didn't want to leave the north."

Today, she doesn't have to. Nhan is training for a new job on the assembly line at a sprawling Canon factory recently completed a few kilometers down the road from the propaganda sign. Nhan will be making $50 a month, enough to rent a small apartment. "When I earn lots of money," she says, "I want to send money to my parents and maybe buy a motorbike for myself." Nhan isn't the only one with high hopes. Set to begin production this month, the Bac Ninh factory is Canon's second in northern Vietnam, and a third is planned. Operating at full capacity, the plant can churn out four million laser printers a month. "We plan to make this the largest laser-printer factory in the world," said Yasuo Mitsuhashi, Canon's worldwide chief of printer production, during the factory's recent completion ceremony. "The future of this region is very bright."

That wasn't always so. Conventional wisdom has long held that Vietnam's communist north may have won the war 30 years ago, but the capitalist-friendly south won the peace. If you wanted to sip lattes by a lake or meet government bureaucrats, laid-back Hanoi was the place to be. Those serious about making money went to Ho Chi Minh City, with its bustling boulevards and entrepreneurial business culture. As recently as three years ago, Ho Chi Minh City (still informally called Saigon) took in 30% of the country's foreign direct investment (FDI) and generated 40% of exports—despite the fact that the former capital of South Vietnam is home to less than a tenth of the country's population of 84 million. Indeed, Vietnam's economic growth was so uneven that a 2004 United Nations Development Program report fretted in its title, "Why Don't Northern Provinces Grow Faster?"

But in the past year, Saigon has seen some new competition for foreign dollars. As international corporations seek alternatives to China's rising labor costs, Vietnam's north—where wages are cheaper than both southern Vietnam and coastal China—is starting to reap the benefits of slow but steady free-market reforms. Last year, Hanoi for the first time overtook Ho Chi Minh City in FDI, capturing $1.6 billion of the total $6.2 billion. Saigon's share was $738 million. In the past five years, numerous foreign manufacturers have set up shop in the capital, among them Fujitsu, LG Electronics and Daewoo. "People used to say the south was the best place to do business," says Nguyen Anh Tuan, deputy director of Vietnam's Foreign Investment Agency. "But now, that point of view is no longer correct." Tuan may be biased—his office is in Hanoi—but even Luong Van Ly, deputy director of Ho Chi Minh City's planning and investment department, is forced to grudgingly admit: "Hanoi is catching up very quickly."

The north is riding a second wave of economic development in Vietnam. During the early 1990s, encouraged by the government's heralded doi moi (renewal) economic reforms, investors poured in and growth soared. But an arduous, corrupt licensing process plus bureaucratic meddling soured the outlook. Investment all but dried up after the 1997 Asian financial crisis. Starting in 2000, however, leaders intensified efforts to compete in the global economy. "The crisis was actually good for Vietnam," says Vietnamese-American venture capitalist Don Lam. "It forced the government to think realistically, to be proactive instead of just sitting and waiting for the money to come." Last year, Vietnam passed business-friendly investment and enterprise laws and streamlined its bureaucratic licensing process, further boosting growth. Vietnam's GDP jumped 8.4% last year, the second fastest rate in Asia behind China, and the country took in more FDI per capita than both India and China.

Investors' newfound interest in north Vietnam can't be explained just by simplified commercial procedures. The north has a number of advantages over the south, including lower wages, cheaper real estate and a nearby port that is less clogged than Saigon's. Sumitomo, the Japanese real estate giant, first looked to the south when it was planning to build a Vietnamese industrial park in 1997. But after comparing Saigon's infrastructure and labor costs, the developers chose Hanoi instead, and the gamble paid off. The first two phases of Sumitomo's 300-hectare Thang Long industrial park in Hanoi sold out last year, two years ahead of company projections. "It was a surprise," admits Shigeo Fukuda, senior director of Thang Long industrial park. "We're rushing to build our third phase as quickly as possible."

Plus: there's always location, location, location. Hanoi is situated 170 km from the border with China, which last year displaced the U.S. as Vietnam's largest trading partner (two-way trade: $8.7 billion). The U.S. remains Vietnam's largest single-country export market, but many of the companies locating in the north think that, too, may be changing quickly. Most of the companies that have placed factories in the north harbor big plans of sending their finished products, from bathroom fixtures to digital cameras, to the mainland. On a small scale, that's already happening. Canon's Vietnam general director, Sachio Kageyama, says the company last year started exporting printers produced in the Thang Long industrial park to China. In January, a new highway was completed from Hanoi to the Chinese border, cutting the travel time to the Chinese industrial city of Nanning from two days to seven hours. "Hanoi is one of the best locations if you want to sell to China," says Kenjiro Ishiwata, chief Hanoi representative for the Japan External Trade Organization (JETRO). "The monthly salary in Guangzhou is above $100 now. Around Hanoi, the average is about $50, so it's actually cheaper to produce here and transport north."

Even if the China dreams don't pan out, there are other nearby markets to tap. A free-trade agreement among the 10 members of the Association of Southeast Asian Nations (ASEAN) recently reduced tariffs on electronic goods, previously as high as 30%, to zero. That gave Vietnam's electronics manufacturers greater access to a trading bloc of half a billion people. "We can be the gateway for export to China," boasts Hoang Van Dung, vice president of Vietnam's Chamber of Commerce and Industry in Hanoi, "And we can export to ASEAN and the West at the same time."

With the flurry of investment in the north, should anyone be feeling sorry for the south? Hardly. Last month, Intel, the world's biggest maker of computer microprocessors, announced plans to construct a $300 million chip-assembly and testing facility in Saigon. North or south, there appears to be plenty of business to go around. While the world debates whether China or India will become the economic leader of the developing world, Vietnam is seen as an opportunity for companies to diversify their manufacturing base. The country boasts one of the world's highest literacy rates, a young labor force that adds a million new workers each year and a growing internal market. "Vietnam is trying to position itself as 'If not China, then Vietnam,'" says Intel Vietnam's director Than Trong Phuc. "It's a pretty good strategy."

Still, the bullish investment is offset by common developing-country woes. Infrastructure hasn't kept pace with growth; electricity, telecommunications and port fees are relatively costly. Last summer, a drought in the north reduced hydroelectric generation and the government was forced to implement rolling power outages. Vietnam still hasn't developed support industries to supply parts and services to factories, forcing them to import parts and expertise. Meanwhile, restrictive labor laws make it virtually impossible to fire unproductive workers, and managers in foreign-owned factories complain about pervasive government corruption and interference. In January, Hanoi abruptly decreed that the minimum wage paid at foreign-owned factories would rise by 40%, a move designed to end mass strikes by garment workers in the south. The country's first oil refinery has been delayed for seven years and two foreign investors have pulled out of the $1.5 billion project because government officials insist the refinery be located not in the south, near existing ports and oil fields, but in the center of the country, in the hope of aiding that region's development.

The biggest shadow over Vietnam's rising star, though, is its long-delayed entry into the World Trade Organization. Vietnamese-made garments, the country's second largest export earner (after crude oil), are still hamstrung in the important U.S. market by quotas that don't apply to most WTO members. If Vietnam can gain entry, as is expected, this year or next, garment exports are projected to double to $10 billion by 2010. Vietnam is already the world's largest pepper exporter, and the second largest exporter of rice, cashews and coffee. "Now that it's getting attention, Vietnam's job is not to disappoint investors," Intel's Phuc says.

The government appears committed to further progress. Last week, the Communist Party congress, an eight-day leadership conference held once every five years, opened in Hanoi with the political élite promising to accelerate economic reforms and tackle corruption. But it remains to be seen whether bureaucrats will be able to change. "People used to joke in the late 1990s that Vietnam never misses an opportunity to miss an opportunity," says Fred Burke, managing partner of the U.S. law firm Baker & McKenzie. "I hope it won't be true this time." Workers like Nhan, who is going to work in the new Canon factory, are vowing to do their bit. "People in the north are just as hard-working as [those in] the south," she insists. "Now that foreign investors have come, maybe soon the north will be just as rich." If Nhan's wish comes true, the future will be brighter for the whole country.

• Kay Johnson | Hanoi
• The economy of once sclerotic Hanoi is finally catching up with the country's booming south