Background
Foreign Direct Investment (FDI) is an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (direct investor) in an enterprise that is resident in another economy [1]. FDI can be an important source of financing for economic growth and development, as it can bring benefits such as technology transfer, management expertise, and excess to export markets. The government of Nepal has implemented various incentives and concessions to attract foreign investment and its membership in international organizations, strategic location, and large working-age population make it an attractive destination for FDI. The main goal of government is to mobilize FDI in large infrastructure projects and technological sectors to achieve and maintain a stable graduation from least developed country and realize Sustainable Development Goals (SDGs) and government’s aspiration of ‘Prosperous Nepal, Happy Nepali’ by 2030.
The history of FDI globally evolving through different phases influenced by economic, technological and political changes. From 16th to 19th centuries, European colonial powers made substantial investments in their colonies focusing on trade and resource extraction which laid the groundwork for early forms of foreign investment. In the late 20th century China’s economic reforms also played very important role in attracting FDI. Throughout these periods, FDI played vital role in the development of economics, fostering innovations, job creation, etc.
Nepal has had an open FDI policy framework since 1992. However, according to the World Bank (2021), Nepal hasn’t been able to draw in as much FDI as it could. Nepal started its effort to attract FDI since the first five-year plan (1980–1985) but FDI promotion strategy was only adopted in 1992. After the restoration of multiparty democratic system in the country in 1992, the elected government adopted the new policy measures in several economic spheres including new industrial policy for speeding up the process of industrialization through mobilizing the local capital as well as attracting foreign investment and technology in the country [2]. The trade treaty which was signed with India in 1991 (renewed in 1996) helped, as did the policy liberalization of 1992. In addition, Nepal has several obstacles and barriers to attracting and keeping FDI including political unpredictability, inconsistent policies, red tape, inadequate infrastructure, weak governance, labor challenges, security worries, and lack of coordination among stakeholders [3].
This article attempts to analyze the current status of FDI in Nepal along with the prospects and challenges. The paper has adopted quantitative research method and used descriptive research design based on secondary data collected from the NRB, Ministry of Industry, Department of Industry and World Bank.
FDI Inflows in Nepal and its Share to GDP
According to the world investment report 2021, a global FDI flow in 2019 was $1.5 trillion. The Covid-19 crisis caused a dramatic fall in FDI in 2020. It dropped by 35% that is $1 trillion in 2019. Nepal received NPR. 37805.83 million of FDI in fiscal year 2019/20 which decreased to 32,172.82 million in fiscal year 2020/21 due to Covid-19 pandemic [4].
Nepal’s FDI inflows as a %age of GDP from 2001 - 2022, revealing a relatively modest range between 0% and 0.68% (figure 1). This signifies that unlike many other economies, foreign investment has not yet played a significant role in contributing to Nepal’s economic income. Notably, 2017 marked the highest FDI inflows as a %age of GDP, reaching 0.68%, while 2008 recorded the lowest at 0.10%. Despite occasional spikes in recent years, Nepal has struggled to attract substantial foreign investment throughout the past two decades. Various factors including political uncertainty, inadequate infrastructure, bureaucratic hurdles, security issues and low competitiveness may account for this challenge.
Figure 1. World Bank (2001–2022)
Current Foreign Direct Investment (FDI) Status in Nepal
As per the FDI survey report 2020/21, 694 companies that have taken FDI approvals from Nepal Rastra Bank [5]. Stock of FDI in Nepal has increased by 14.8% to NPR 227.9 billion at the end of 2020/21. Nepal has received FDI from 57 economies as of July, 2021. India is the largest foreign direct investor with NPR 75.80 billion followed by China NPR 33 billion, Ireland (16.5 million), Singapore (15.5 billion) and Saint Kitts and Nevis (15.27 billion).
Industrial Sector accounts for 62.6 % of total FDI stock. Of which, electricity, gas, steam and air conditioning sector constitutes 32.8 % and manufacturing sector 29.5 % of total FDI stock. About 37.3 % of total FDI stock is in service sector. Of which, financial and insurance services sector constitute 25.6 %, accommodation and food services sector 5.3 %, and information and communication sector 4.8 % of the total FDI stock. The electricity, gas, steam and air conditioning sector, particularly hydropower sector, in Nepal has been a preferred sector for FDI in recent years. The latest survey shows that 32.8 % of FDI stock and 41.8 % of total paid-up capital is in this sector. Moreover, hydropower sector has also attracted other sources of external financing such as foreign loans in addition to FDI; the electricity, gas, steam and air conditioning sector accounts for 41.4 % outstanding foreign loan at the end of 2021/22. The profitability of FDI companies remains at 14.7% during the review year.
Findings and Conclusion
The study found that FDI is taken as a source of economic development, economic growth, employment, etc. However, Nepal has several obstacles and barriers to attract and keep FDI which includes political instability, labor challenges, inconsistent policies, lack of coordination among stakeholders, etc. From 2001 to 2022, Nepal’s FDI as a % of GDP varied between 0% and 0.68%, indicating a relatively low contribution compared to other economies. This suggests that foreign direct investment has not been a substantial income source for Nepal’s economy.
The current political climate is also responsible for hindering or promoting FDI. When the political environment is stable and investor friendly, it promotes FDI by instilling confidence among foreign investors. Conversely, political instability, uncertainty or unfavorable policies hinder FDI as investors may perceive higher risks. Infrastructure deficiencies can also affect the FDI. Poor transportation or inadequate infrastructure can increase the cost of doing business, affecting the attractiveness of a location for foreign investor. Weak infrastructure can disrupt supply chains which lead to delay in production and distribution. It can also discourage foreign investors who prioritize efficiency in their operations. Insufficient transportation and communication infrastructure can limit market access which can discourage foreign investor seeking broader market opportunities.
In conclusion, despite legal and policy modifications in Nepal over the past two decades, the country has struggled to consistently attract substantial FDI amounts. In recent years, Nepal has adopted different acts and policies such as the Foreign Investment and Technology Transfer Act 2075 (FITTA), Public-Private Partnerships (PPPs) and Special Economic Zone (SEZ) with an aim to boost FDIs but the country has not yet unlocked its potential for economic growth and development through FDIs.
References
- World Investment Report (2007). Transnational corporations, extractive industries and development.https://unctad.org/system/files/official-document/wir2007_en.pdf
- Bhattarai, B (2008). Foreign Direct Investment in Nepal: Past, present and future.https://archives.kdischool.ac.kr/bitstream/11125/30154/1/Foreign%20direct%20investment%20in%20Nepal.pdf
- Ministry of Finance (2021). Development cooperation report 2021/22.
- Department of Industry (2021). Industrial statistics 2021/2022.
- Nepal Rastra Bank (2022). Survey report on foreign direct investment in Nepal 2021–22.
The Authors: Pranisha Budhathoki and Rubina Rai are BBA Third Semester students at KIST.
