Foreign Direct Investment

Foreign Direct Investment (FDI) is capital invested by foreign firms in production facilities or other physical assets. It refers to an investment involving a long-term relationship and demonstrates a lasting control by a foreign entity in a country other than its origin.

There can be three different forms of FDI, equity capital, reinvested earnings or intra company loans. The shortage of capital for investment, financing production and trade can be filled to restore growth and development. Because of these attributes, FDI is welcomed in almost all the economies around the globe

A report by UNCTAD reveals that 90,00,000 foreign affiliates are in operation worldwide representing an FDI stock of over $ 7 trillion.

FDI inflows to developed countries dropped to $ 321 billion in 2004 as compared with $ 380 billion in 2003.However FDI inflows to the United Kingdom and the United States, two of the largest traditional host countries recovered from a dip in flows in 2003 even as developing economies led the recovery in global FDI flows in 2004 with inflows of $255 billion, 48% higher than the previous year.

FDI flows to Asia and the Pacific crossed $ 166 billion. This is an increase of 55% from 2003. The countries like China , India and Republic of Korea , Hong Kong and Singapore managed to attract the major chunk of the capital inflows.

The FDI inflows to Nepal stood at $1.7 billion as of December 15, 2004 . At present, there are 927 foreign investment projects in Nepal . This provides jobs to 97,851 people. The table below illustrates the break of FDI in different industries in Nepal .

(Source : Department of Industry-DoI, Nepal ).

As of December 2004, India was the largest foreign investor in Nepal . It holds 32 percent of the total projects involving it in five of the ten largest foreign enterprises. Other big investors in Nepal are United States , China , British Virgin Islands , Norway , Japan and South Korea

In Nepal FDI can be traced back to 1951-52 when Commercial Corporation was established as joint venture with 67 percent equity of Indian investors. In 1961 provision was introduced for foreign investment in medium and large-scale investments. However only in the year 1974, 100 percent foreign investment was permitted in industries such as cement, fertilizer, steel or basic consumer goods such as dairy, pharmaceutical, paper, textile, but there prevailed preferences for Nepalese investors to foreign investors in medium scale industries with investment of Rs. 1 million to Rs 5 million.

For the first time sixth development plan (1980/81-1984/85) recognized the importance of foreign investment. At present Nepal is governed by Foreign Investment and Technology Transfer Act, 1992, which was formulated to achieve the objectives of industrial development and employment creation.

The government encourages FDI in the country by providing attractive incentives with a liberal policy. Upto 100 per cent equity participation by foreigners is allowed into almost all the sectors except those in cottage industry, arms & ammunition, energy & real estate business, printing currency, travel and trekking agencies and consultative services.

The Act allows full repatriation of equity, profits or dividends and interest on loans. Government has given the assurance against nationalization of the investment. Furthermore incentive of a minimum five-year tax holiday is granted tagged with attractive tax allowance .

However the statistics prove that Nepal has not achieved its FDI goals. Nepal attracted only 23.5 % of total FDI inflow in South Asian-Least Developed Countries between 1989-1984.This further decreased to 9.4% of its share in 1995-2000.

Currently inflows of FDI in comparison to our neighbors India and China , Nepal attracts only 2.8% that of India and 2.7 5 % that of China . Nepal only attracts 1.02 % of the total FDI that flows into Asia and pacific region.

Attracting FDI has become a competitive task. A country cannot solely rely on the advantage of cheap labor to attract FDI anymore. It is necessary to be supplemented with strong legal framework, infrastructure, skilled labors, stable political scenario, good labour practices, visible promotional programs etc. Unfortunately Nepal lags far behind in these spheres in comparison to its neighbors.

Policy makers boast about “Foreign investment and Technology Transfer Act, 1992” and the amendment of the Act in 1996 to prove the governments efforts to attract foreign investments. However foreign investors in Nepal have a different story to tell. According to the investors, basic problems faced by them is the turtle-paced decision –making and non-committal attitude on the part of the government, political instability, biased labor law, complicated tax system, frequent changes in policy/rules, less attractive incentives on exports, failure of large scale industries, corruption, lack of banking facilities in rural areas etc creates obstacles.

It is high time Nepal took measures such as a system of automatic approval and registration of foreign investment projects up to various limits in different sectors. This would significantly sort out the delays in clearance and permissions that are still required. It is also necessary to develop a mechanism to monitor flow of FDI

Hardly any promotional measures are taken to publicize Nepal as potential for FDI .It is beneficial to conduct studies on new areas for foreign investment and promote the prospects of joint ventures. Information about newly enacted policy/reforms should be widely disseminated.

It is also noticed that one window system has not been able to provide stated facility. In addition Nepal being a new WTO member, the FDI policies should be compatible with those of the WTO.

Policy makers and the government should focus in area of critical importance to channel FDI into Nepal . This will create jobs, finance social spending, transfer foreign technology and management skills. Furthermore contribution to foreign exchange reserves will fund imports and meet international debt. Nepal will definitely benefit in many social and economic spheres, which will contribute to reduction in poverty.

(The author is Relationship Manager at the Bank of Kathmandu )