Should there be a minimum threshold on FDI?

By – Anmol Purbey

The government increased the minimum threshold (the lowest amount of money that an investor has to put if they decide to invest in Nepal) for FDI to NPR 50 million from 5 million in 2019. Delivering his budget speech for the fiscal year 2022/23, Finance Minister Janardan Sharma talked about a new lower threshold of NPR 20 million to attract more FDI, which the cabinet approved on 14th October, 2022. However, is this enough? Should the minimum threshold even exist?

Foreign Direct Investment (FDI) is an investment from a party in one country into a business or corporation in another country intending to establish a lasting interest. Foreign Direct Investment plays a vital role in developing countries fostering national economic growth. FDI creates employment opportunities, raises the level of domestic wages, speeds up economic growth, and improves the distribution of income. However, FDI has not been able to become a significant part of the Nepalese economy. The political instability and legal uncertainty anyway do not seem to offer a hospitable investment climate to foreign investors in Nepal. Besides these, there are other pertinent issues with the procedure of FDI in Nepal, such as the lengthy approval process, limits on foreign borrowings, lack of risk management products, sub-par copyright laws, and more. Why increase the list of issues with the inclusion minimum threshold?

Had there been no minimum threshold, more small investors would be willing to enter the Nepali market. Let’s take an example of a small digital service business started in Nepal which is growing and is in need of a capital injection, and some foreign investor is interested in that enterprise and want to make the investment. However, chances are, 20 million is too much for both of them. Neither the investor might want to spend that much, nor might the business require that much. For this reason, small FDIs should be encouraged as well. FDIs do not just bring money with them. They bring technology, networks, knowledge, job opportunities, infrastructure, and much more. FDI is significant for developing economies and emerging markets where MSMEs need funding and expertise to expand. Hence, Nepal being a developing economy, steps must be taken to bring in FDI, as much as possible rather than putting a cap on the amount of investment.

Some problems that existed with the 50 million floor would still remain with the 20 million floor. 20 million is surely be a significant reduction from 50, but it is still a large amount to ask for in a single go. Investors start with a small amount and increase their investment slowly as (and if) they see potential in the venture. The greater the amount, the higher the risk for the investors. This floor also stops investment into new industries and hinders innovation. Investors have to put a large amount of money; they are more likely to put the money in some tried and tested sector that has been doing well in the past and guarantees to bring back the return on investment In our case, the hydropower industry is on the top currently, hence having the chance of investment much higher than other industries. If the cap is to be removed, chances are that (probably small) investment in new sectors will be higher than before as the risk will be relatively lower than before.