– This article was originally published by Roopali Bista in The Himalayan Times on November 11, 2018.
The IMF and OECD defines, foreign direct investment (FDI) as “an incorporated or unincorporated enterprise in which a foreign investor owns 10 percent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise”. FDIs are an investment made by a firm or an individual belonging from one country investing to another known as the country
FDI does not just bring in capital but also transfers technology, resources, knowledge and creates employment opportunity and generates income in the host countries. Therefore, it plays a crucial role in boosting any economy, and all countries try to avail from it.
Global Investment Competitiveness report 2017/18 released by the World Bank states that, since 2016 more than 40 percent of the nearly $1.75 trillion of global FDI flow was directed towards developing countries, providing much-needed private capital for these economies. Nepal should be able to take advantage of such FDI flow to developing countries by creating favorable policies and environment.
Since the mid-1980s Nepal has enacted several policies and laws to bring in foreign investments. However, the political turmoil during much of the 1990s and early 2000s meant that very little FDI actually flowed to Nepal. Today, the political situation has improved immensely.
Current status of FDI in Nepal
As per the Nepal Rastra Bank, Nepal received NPR 15.51 billion worth of FDI during the 10 months of 2017/18. Foreign Investment Policy, 2015 has attempted to account for the changing context of portfolio investment, debt instruments, non-resident Nepalese investment, special economic zones and labor relations among many issues, and mobilization of debt instruments in domestic and foreign currencies in Nepal. The policy has categorized investors as – foreign institutional investors, foreign individual investors and Non-Resident Nepalese (NRN). According to the NRB’s FDI report 2018, Nepal shares only 0.01 percent of total FDI in the world while South Asia received 3.1 percent. Foreign investors from 39 countries have made investment in 252 firms in Nepal. India seems to be the highest source of FDI in terms of paid up capital to Nepal but when the total stock of FDI is taken into consideration, West Indies happens to have higher investment in Nepal. The Service sector accounts for the highest share (70.2 percent) of outstanding FDIs in Nepal followed by industry and then agriculture sector.
Factors affecting investment
The FDI inflow in Nepal is very low compared to its neighboring countries although it is growing compared to previous years. Going forward, following are some of the areas where Nepal needs to make serious efforts to attract more foreign investors.
Political Stability and security
The Global Investment Competitiveness (GIC) survey, 2017/18 mentions political stability and security as one of the major factors that affect investors’ decision to invest in an economy. We can see in the case of Nepal that there were no major FDI inflow before the initiation of peace process in 2008. Now that a degree of stability has been achieved, we need to focus on creating a secured investment climate for investors. That would require that we analyze investment laws of our competitors, take lessons, reform our investment laws accordingly and guarantee policy stability No investor will be willing to invest in an unstable country where the returns are not guaranteed.
Along with availability of cheap labour Nepal should also focus on developing skilled labour that can be used in the FDI sectors. Investors have long been sharing that Nepal lacks technical human resource. Currently, there is a big gap between the level of FDIs we are eyeing and the absorption capacity of our existing labour force. This will not only attract more investors as they don’t have to focus on further training the labour. This will also provide employment to the people.
Nepal’s pre-investment administrative processes that an investor has to go through carry a notorious reputation of being cumbersome and lengthy. As a result, we lose out investors to our competitors like Bangladesh, Vietnam, Cambodia and Lao DPR. Simplification of administrative process will have a positive signaling effect on potential foreign investors.
Nepal also needs to provide more incentives such as lower tax rates and lower tariffs on import of raw materials and export of final goods which will reduce the relative cost to foreign investors. Another area would be ensuring an easy repatriation.
Along with these reforms lastly Nepal could increase FDIs by investing on physical infrastructure, easing regulatory regime to further ease doing business and acknowledging alternative investment and financing options. Further, retaining Investors in the long run is as important as attracting them.