Using the four high quality household living standards surveys available to date this paper reveals that Vietnam’s rural labour force has been markedly diversifying toward nonfarm activities in the doi moi (renovation) reform period. The employment share of the rural nonfarm sector has increased from 23 percent to 58 percent between the years 1993 and 2006. At the individual level, the results indicate that participation in the rural nonfarm sector is determined by a set of individual-, household-, and community-level characteristics. Gender, ethnicity, and education are reported as main individual-level drivers of nonfarm diversification. Lands as most important physical assets of rural households are found to be negative to nonfarm employment. It is also evident that both physical and institutional infrastructure exert important influences on individual participation in the nonfarm sector. At the household level, a combination of parametric and semi-parametric analysis is adopted to examine whether nonfarm diversification is a poverty exit path for rural households. This paper demonstrates a positive effect of nonfarm diversification on household welfare and this effect is robust to different estimation techniques, measures of nonfarm diversification, and the usage of equivalent scales. However, the poor is reported to benefit less than the non-poor from nonfarm activities. Though promoting a buoyant nonfarm sector is crucial for rural development and poverty reduction, it needs to be associated with enhancing access to nonfarm opportunities for the poor.