Foreign Direct Investment (FDI) has become a significant part of capital formation and technology transfer in developing countries. It has been widely recognized as a growth-enhancing factor due to its ability to bring an inflow of external resources, introducing modern techniques of management, providing access to new technologies and creating employment opportunities. In a country like Nepal, it can also help finance the current account deficits by promoting export and substituting import. Also, more productive and efficient foreign firms help to stimulate industry competition.
There are three common purposes of foreign direct investment i.e. resource-seeking, market seeking, and efficiency-seeking[i]. The availability of natural resources promotes resource-seeking motive of FDI. Market-seeking objective is influenced by the host country’s domestic and regional market size and market growth. Lastly, efficiency-seeking purpose is to take advantages of factors that enable them to compete in international markets such as labour cost, distance to relevant markets and availability of reliable suppliers. Efficiency also takes place when there are open and developed cross-border markets[ii]. Nepal as a host country with abundant natural resources and being situated at an economically strategic location between two giant economies, it has the potential of retaining foreign investors that are beneficial for the country’s growth.
Foreign Direct Investment was found as an engine of economic growth in India. There was evidence that it would facilitate technology transfer and bring development in the required sectors if the government adopts a more active and open policy to attract FDI inflows[iii]. Implementation of investment friendly policies and proper regulations helps to render a smooth functioning of FDI. In Nepal, government has formulated friendly policies to liberalize the inflow of Foreign Investments such as permitted to have hundred percent ownership by foreign investors, decontrol of prices by the government, simplification in import of machinery and raw materials, minimum approval procedures and corporate income tax for manufacturing being one of the lowest in the region[iv].
Realizing the contribution and impact of Foreign investments for the growth of the economy, Nepal has taken various steps to foster and encourage foreign investment in the country at an international level. Some of the key institutional activities that have been accomplished are as follow:
- Nepal is a member of the World Intellectual Property Organization (WIPO) and the Multilateral Investment Guarantee Agency (MIGA).
- Nepal has entered into Bilateral Investment Treaties (BITs) with 6 countries i.e. France, Germany, Mauritius, Finland, United Kingdom and India.
- Nepal has also entered into Double Taxation Treaties (DTTs) with 10 countries, namely, India, Norway, China, Pakistan, Sri Lanka, Austria, Thailand, Mauritius, Republic of South Korea and Qatar.
- To ensure access to the vast potential market, Nepal is a member of WTO, SAFTA, and BIM-STEC.
- Nepal is also a signatory to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and a member of the International Centre for the Settlement of Investment Disputes (ICSID), associated with the World Bank[v].
The inflow of FDI has been low even though Nepal has been developing institutional and legal infrastructure to ease doing business since the 1980s. Foreign Direct Investment in Nepal increased to NPR 17512.80 Million (USD 152.76 Million) in 2018 and averaged NPR 4159.94 Million (USD 36.3 Million) from 2001 until 2018[vi].
Foreign Direct Investment might have proved to be of great importance for the economy; however, in many circumstances, FDI could also have an adverse effect. Increasing dependence on foreign investment could be harmful to the economy. There might form a shortage in supply and domestic firms won’t be able to fulfil the gap in the short run if the foreign capital decides to leave the market. This could also result in structural unemployment and weakens the competitive position of local producers[vii]. Therefore, the government, as well as the private institutions, should be aware of the consequences at all stages while attracting foreign capital.
With a feeble capacity of the private sector and weak financial position of the government, it is very important for countries like Nepal to have FDI for its sustainable growth and development in the country. Nepal can now ensure investors’ confidence in its policies, as the nation has a stable government and has also established the federal states. There are many untouched sectors with huge potential in Nepal. For instance, the lack of infrastructure development is very evident in Nepal. It will be a win-win situation to have FDI in those sectors. Investment Board of Nepal (IBN) has also identified potential investment sectors for FDI i.e. hydropower, transport, agriculture, tourism, information communication technology, mines and minerals, health and education, manufacturing and financial institutions[viii].
Moreover, policymakers should be cautious when drafting and implementing policies that are aimed to attract FDI. Export oriented FDI should be given more priorities compared to domestic demand oriented so that it could help decrease the trade deficit of the country[ix]. Nepal has been taking initiatives to bring more investment friendly policies, however, it should keep updating the policies according to new innovation and the changing culture. Furthermore, achieving a good rank in the World Bank ‘Doing business’ report would also help to portrait a worthy image for foreign and domestic investment. According to The World Bank ‘Doing Business 2019’ report, Nepal has been ranked 110th in the world and 4th in South Asia for ease of doing business[x]. Whereas, Nepal ranked 105th in the world and 2nd in South Asia on 2018 report. This clearly indicates that challenges have increased and there is a need for more investment friendly policies along with regulatory framework.
[i] Alain Verbeke, John H. Dunning, and Sarianna M. Lundan. “Multinational Enterprises and the Global Economy” Journal of International Business Studies, Vol. 39, No. 7, 2008
[ii] Alina Kudina & Malgorzata Jakubiak, “The Motives and Impediments to FDI in the CIS” OECD Global Forum on International Investment, 2008 http://www.oecd.org/investment/globalforum/40401047.pdf
[iii] Yoon Jung Choi and Jungho Baek, “Does FDI Really Matter to Economic Growth in India?” Economies 2017. Doi:10.3390/economies5020020
[iv] “Procedural Manual for Investment in Nepal” Department of Industry – https://www.doind.gov.np/images/fdi/PManual-016.pdf
[v] “Procedural Manual for Investment in Nepal” Department of Industry – https://www.doind.gov.np/images/fdi/PManual-016.pdf
[vi] “Nepal Foreign Direct Investment”, Trading Economics https://tradingeconomics.com/nepal/foreign-direct-investment
[vii] Leonid Melnyk, Oleksandr Kubatko, and Serhiy Pysarenko. “The Impact of Foreign Direct Investment on Economic Growth: Case of post communism transition economies” Journal of Problems and Perspectives in Management, Vol. 12 No. 1, 2014.
[viii] “A Survey Report on Foreign Direct Investment in Nepal” Nepal Rastra Bank –https://www.nrb.org.np/red/publications/study_reports/Study_Reports–A_Survey_Report_on_Foreign_Direct_Investment_in_Nepal).pdf
[ix] Ram Kumar Phuyal and Seema Sunuwar, “A Sectorial Analysis of Foreign Direct Investment on Economic Growth of Nepal” Journal of Business and Social Sciences Research, 2018. Vol. 3, No. 1, ISSN: 2542-2812
[x] “Ranking & Ease of Doing Business Score” World Bank Group – https://www.doingbusiness.org/en/rankings?region=south-asia