Foreign Direct Investment in context of Nepal

Foreign Direct Investment in context of Nepal

Insight on Foreign Direct Investment in context of Nepal

Foreign Direct Investment is the investment made by the foreign investor in the company located in foreign land. Actually it is a net transferred funds to purchase and acquire physical capital, such as factories and machines, therefore if people invested in the business interest located in another country rather than his/her native land and owns more than 10% of its share then that investment is known to be foreign direct investment. But if the investor owns less than 10% than the International Monetary Fund defines it as a part of his/her stock portfolio.

As defined by World Bank, “Foreign Direct Investment are the net flows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of investor. It is sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments.” Normally FDI are made in open economies that have the potential of above-average growth prospects for the investor and offers skilled human resources. Foreign Direct Investment is not only about the capital investment but it also involves the provision of management as well as technologies. The foreign direct investment involves a long term relationship, reflecting a lasting interest and control among investor and parent enterprise.

FDI represents the breach of sovereignty, as with the percent of share invested the power of control over the firm will be in the hand of foreign investor. Therefore, its main feature is that, it either establishes effective control and decision making of foreign business or have foreign influence of business. That’s why for this reason government tracks and keeps records of those who invest in their country’s business. When the business proposal is submitted, stating the % of FDI and local investment, it need to be approved by the concerned country’s law and government, and then only FDI is allowed. Therefore, there are certain rules and regulations that a business firm needs to keep in mind before starting a venture with Foreign Direct Investment.

Reasons behind firms to engage in FDI

The reasons behind most of the firms and multinational corporations to undertake foreign direct investment are as follows:

  • To take advantage of lower labor costs in other countries. E.g. in India labor cost are much lower than in OECD (Organization for Economic Co-operation and Development), thus, it is one of biggest recipients of FDI.
  • To take advantage of proximity to raw materials rather than transport them around the world.
  • Avoid tariff barriers and other non-tariff barriers while trading.
  • To expand market channels, as producing locally through foreign direct investment definitely assists firms to know about the local market trends.

Importance of FDI

Foreign Direct Investment plays a vital role in developing the emerging market trends. There is a strong relationship between economic growth and foreign investment as it enables poor capital country to build up physical capital, create employment opportunities, develop productive capacity, enhance local labor skills through provision of technologies and management and also help the domestic market to diversify in global world.

  • Improvement in existing technical process of the country
  • Improve quality of product and services and also increase the attempt of better human resources
  • Reduce unemployment by creating jobs and thus, reduce social problems
  • Give competitive advantage to the well run business regardless of the race, color and creed
  • Increase in rise of living of the recipient country. As with the increase in investment, the companies will be paying higher taxes to the government.
  • Helps in diversification of the local markets.

Factors influencing FDI

Investor only spends when he/she is assured that there is huge potential of business market along with good returns. Therefore following factors impacts a lot to promote foreign direct investment in a country.

  • Governmental policies: Rigid policies of preventing FDI will definitely hamper the growth of industries, therefore flexible policies should be adopted by country permitting FDI in every sectors.
  • Stable Government: Investors will always look for the investment supportive government and will not take any steps if government seems anti-investment.
  • Cost and ease of doing business: Lower the cost higher will be the investment.
  • Tax policies: Moderate tax policies should be adopted to make investors feel comfortable. A heavy excise and custom duty prevents foreign direct investment, so government should adopt uniform tax policies.
  • Size of economy/Potential for growth: The market should be expandable and diversifiable that attracts more investors.
  • Exchange rates: The exchange rate of the country should be stable. It means value of domestic currency should not drop abnormally. Therefore, exchange rate should be more or less the same as prevailing at the time of investment.

In context of Nepal

Nepal is still in the verse of unstable government. The hurdles of political instability is yet to solve, therefore creating a business environment to attract foreign investors has still been an issue of discussion.

In Nepal, The Foreign Investment and Technology Transfer Act, (FITTA), 2049, promotes foreign investment and technology transfer for making economy viable, dynamic and competitive. Likewise, Industrial Enterprise Act (IEA), 2048 is also responsible for regulating and administrating FDI in Nepal. The Department of Industries (DOI) is the sole agency for administration and implementation of Foreign Investment and Technology Transfer Act in Nepal. As per FITTA, foreign investment means the following investment made by foreign investor in industry in any of the following forms:

  • Investment in Share (Equity)
  • Investment made in the form of loan or loan facilities
  • Reinvestment of the earnings derived from the investment in Share

Most of the Industries are open for foreign investment. But few industries like Cottage Industries, Security related and Automatic Energy related industries are not open for FDI.

A complete list of industries which are not open for FDI are listed in Annexure – 1.

However, permission may be granted for the transfer of technology in such industries even where FDI is not permitted.

Foreign Direct Investment in Nepal has been increased by NPR 13503.90 Million in 2017. FDI in Nepal averaged NPR 3374.48 Million from 2001 until 2017, reaching high of 13503.90 Million in 2017 and a low record of -469.70 Million in 2006. Though this record shows the increment in FDI, it cannot be said that it’s enough. Thus, Nepal still has a long way to go to become an economy of competitive and comparative advantage for foreign investors. As per World Investment Report 2014, it has identified that, 2.2194 billion dollars is invested by India and 247 million dollar is invested by China in Nepal. But it’s unfortunate that Nepal still has not been able to take full advantage of the geographical proximity having these two economic superpowers.

Nepal has not been able to exploit its own potential because of lack of protection as well as promotion to its investors. That’s why Nepal is known as risky country for investors. Therefore, the quid pro quo approach of trade is also not implemented because of lack of proper resource utilization and availability of raw materials. As per the discussion titled “The Symposium on FDI in Nepal: Sharing Experience” organized by the Embassy of India in Nepal, held on March 27, the issues being faced by joint venture companies operating in Nepal has been highlighted.

The legal loopholes of Nepal are also identified as the additional causes for the lower amount of FDI in Nepal. Therefore according to the discussion major issues that are generating difficulties in foreign investment and joint ventures companies operating in Nepal are:

  1. Repatriation: Although FITTA allows repatriation of foreign currency, the investors have to face a lot of problems in repatriating the dollars. According to the Foreign Investment and Technology Transfer Act, foreign investor can repatriate only 75% of the total income. Even after completing all the paper work, the authorities demand proof of financial investment which is inconveniencing.
  2. Legal issues: The investors need to go through many legal formalities just to invest, hence, this is also classified as the issues needed to be addressed.
  3. Labor issues: The disruptive activities of labor unions are also the major issues generating difficulties for foreign investors. This issue have degraded the business environment for investors. The companies over last 10 years has been forced to be closed on different occasions because of labor unions. Similarly, strikes are also common in the country’s hospitality sectors.
  4. Unstable government: This is also the major problems facing by foreign investors in Nepal. It have been discouraging investors to invest in Nepal.

In Nepal, the sectors that has attracted the interest of foreign investors are:

  • Fertile lands
  • Tourism
  • Hydropower
  • Medical tourism
  • Hospitality sector

As per the Industrial Statistics for the Fiscal Year 2072-73 (published by Department of Industries), Sector wise FDI is depicted in the below bar graph:

Sector-Wise-FDI-in-Nepal

With the view of attracting foreign as well as domestic investment to boost the economy, the Government of Nepal has constituted a high level Board of Investment (BOI), chaired by the Prime Minister of Nepal. FDI in Nepal can take a huge leap at this point of time if BOI along with other governmental agencies prioritize the predictable and transparent policies. Though the mix of political instability, policy issues and inefficient bureaucracy has long haunted Nepal, slowly and gradually country is moving in somehow satisfactory manner at least in the South Asia region in term of economic competitiveness. For further development Nepal needs to improve its system and should prioritize the sector of improvement. The major thing to be remembered is, “There is still a long way to go”.

List of Industries which are not granted permission for making FDI

Annexure – 1

FDI-Industries-List-in-Nepal