In Vietnam, non-agricultural economic activities in both the industrial and service sectors are rapidly permeating the livelihoods of rural households. Some households start their own businesses, and others seek employment in nearby factories and workshops. Nowadays, many rural households have more diversified income sources. Small-scale industrial activities have become a wide-spread phenomenon of the rural economy in Vietnam. In particular, one can consider the clusters of rural industries as a form of ‘craft villages’ (làng nghề), where hundreds to thousands of households are engaged in small-scale manufacturing activities. Craft village products vary from processed local foods to traditional handicrafts and housewares. Many craft villages are described as ‘traditional’, and some have histories that are hundreds of years old, while others are ‘new’ craft villages that emerged after the Dổi Mới reform started. This study illustrates the present situation and analyses the characteristics of rural industrialization in Vietnam, by focusing on the development of craft villages since the early 1990s. This study then argues that, for the national economic development, rural areas can play an important role other than provision of labour force to urban industrial sectors; rural villages in Vietnam themselves are becoming important arenas for industrial agglomeration. The challenge ahead is how to develop rural industrialization in sustainable manner. This study uses statistical data from the General Statistical Office (GSO) as well as quantitative and qualitative information collected by the author during a series of field research in the Northern Vietnam from 2005 to 2010.