Foreign Direct Investment in Nepal

Foreign Direct Investment (FDI)

With a total area of 1,47,181 sq. km., Nepal is a landlocked developing nation sandwiched between the two enormous nations of China and India. The agro-based economy of Nepal is somewhat smaller than other economies. Even if the nation has some natural resources and a competitive advantage in some markets, a number of disadvantages, including a lack of infrastructure, a landlocked status, inconsistent policies, a lack of skill and technology, and others, have an impact on the country's ability to thrive economically. On the one hand, the pace of GDP growth is quite low, if not intolerable, while on the other, rising imports have been consistently driving up the trade imbalance.

Foreign direct investment (FDI) refers to the net inflows (total arrivals) of capital used to acquire a long-term managerial interest in a company operating in a country other than the investor's own. The balance of payments' entire reinvestment of earnings, equity capital, other long-term capital, and short-term capital constitutes this amount. Total net foreign direct investment is displayed in this series. Financial account balances in BPM6 are determined by subtracting the change in assets from the change in liabilities. In this case, net FDI inflows and outflows are assets and liabilities, respectively. Usually, data is expressed in current U.S. dollars. FDI is viewed as a tool for locating resources, boosting competitiveness, encouraging domestic company industrial growth, and also stimulating export, particularly in the least developed countries. A reasonably open economy, stable macroeconomic conditions, and few restrictions on currency exchange operations are all maintained through FDI. It continually encourages innovation, competitiveness, and production. Additionally, it creates job and income prospects that are leading in terms of competitive price, greater wages, the transfer of skills and technology, as well as more revenue and earnings in foreign currencies. Similar to how it boosts entrepreneurial potential when foreign enterprises bring with them firm-specific knowledge in the form of managerial expertise, marketing know-how, and technological prowess. Additionally, it enables new local competitors to gain market knowledge, while exports train people and encourage rivalry among regional businesses. For a developing nation like Nepal, where efforts to develop have been hampered by a variety of circumstances, FDI is essential.

Today's more globally connected and competitive globe makes it impossible for any nation to be completely independent. The majority of economists, development theorists, and specialists concur that using domestic resources and external capital together are crucial for fostering growth and industrialization. Nowadays, regardless of their political structures or sizes, growing nations all attempt to entice foreign investment. By fostering an investment-friendly climate, a huge number of developing nations have been attempting to entice multinational corporations to make direct investments abroad. By providing incentives or deregulating their policies, countries are also concentrating on liberalizing their foreign direct investment laws. Some nations' creation of Economic Zones (EZ) demonstrates their efforts to draw FDI. In the modern world, one of the key elements for the growth of an economy is foreign direct investment (FDI). FDI is now viewed as a crucial component of economic growth in many nations and the fundamental mechanism of capital movements in the globalized economy. Both the foreign investor and the host nation place a high value on foreign investments. Foreign direct investment benefits the host nation through boosting exports, business activity and employment growth, managerial skills, know-how, and technology transfer, as well as starting or accelerating the nation's development and economic progress. According to some estimates, firms' specialized assets, such as technology, capital, technical, human resources, and managerial abilities, are rare and missing in the majority of least developed nations. Therefore, FDI is an advantageous source of new technical, technological, and managerial know-how as well as an useful source of capital, and in this way, it represents the source of improving human capital.

Nepal Foreign Direct Investment2001-2016 | Data

In Nepal, FDI grew in 2015 by 4382.60 NPR million. Foreign Direct Investment (FDI) in Nepal reached an all-time high of 9195.40 NPR Million in 2012, and a record low of -469.70 NPR Million in 2006. Between 2001 and 2015, FDI in Nepal averaged 2529.43 NPR Million. The Nepal Rastra Bank provides information on foreign direct investment in Nepal.

Key Determinants of FDI

Theoretically, FDI can benefit the host nation and the home nation in a variety of ways. However, a variety of factors influence MNCs' choices over where to make investments. They will be motivated once the business climate in the host nation is favorable and their investment is safe. From the standpoint of the home country, the primary objective of the multinational corporations is to travel abroad and make money. The decision of a transnational firm to address or refocus a portion of its operations in a chosen host country gave rise to FDI. This choice is supported by the desire to take use of its unique advantages, such as its managerial prowess, technological advancements, and marketing experience. Finding out the TNCs' plans to operate in the host nations is crucial, assuming a good investment climate exists. Therefore, the MNCs' decision to invest in the host nation depends on these factors as well as both firm- and country-level advantages. The MNCs consider the potential advantages and dangers of their investment before deciding to enter a certain country. If they discover an unfavorable investment climate, they choose to enter the host country as a type of FDI. However, the MNCs must decide on their entry strategy.

The following three elements should comprise Nepal's FDI strategy:

• The investment framework should be improved at a high level and right away.
• To attract early losers Developing packages for industry promotion.
• Creation inside the government of a standard investment agency. Application of the fundamental strategies outlined in them in this scenario.

Existing Business Condition and Problems of FDI promotion in Nepal

Despite having some potential, Nepal has experienced difficulties attracting foreign direct investment (FDI) due to its difficult land transportation, lack of trained personnel, lack of direct access to seaports, inadequate power, scarcity of raw materials, inadequate water supply, opaque commercial legislation, non-transparent capricious tax administration, and unclear labor relations laws. FDI had a positive impact on exports, particularly those of clothing, and Nepal had grown in niche industries including tourism, mineral deposits like limestone, light manufacturing apparel, and herbal items. Additionally, FDI has allowed the nation to export non-traditional manufactured goods like micro transformers and personal consumer goods (UNCTAD, 2003). The majority of investment goes toward labor-intensive, low-tech industries. Additionally, FDI had a limited impact, especially on employment creation. A UNCTAD study found that outdated foreign investment laws, political unpredictability, inadequate physical infrastructure, and strict labor laws all had an impact on FDI intake. This situation is still present because of political unpredictability and change. Without a doubt, Nepal has made significant progress toward opening up its investment policies. However, there have been very few changes to factor markets, particularly in the labor market. For instance, it is very expensive and challenging to fire a worker under the Labour Act of 1992. The Nepal Electricity Authority, a state-owned organization that has ineffective administration, continues to oversee the distribution of electricity. Due to the usual late 1990s electricity shortfall, only about half of the manufacturing sector's production capability was utilized. Although there has been significant progress in building the transportation networks over the years, many regions of the nation are still not connected to major cities. Additionally, there aren't many flight connections between Kathmandu, the nation's capital, and the tourist hotspots. As the security situation deteriorated and the political unrest lasted quickly, several foreign companies stopped operating or indefinitely delayed the completion of recently approved projects. Due to periodically upsetting political events and the absence of effective transportation networks, Nepal has not seen a significant amount of participation from foreign businesses in the tourism industry, although having a tremendous potential in this area. However, this does not imply that Nepal is entirely unfavorable for foreign investors; there are also potentials and chances. The Diamond provides a summary of Nepal's investment competitiveness's advantages and disadvantages.

References

Agrawal, Pradeep, Economic Impact of Foreign Direct Investment in South Asia, Bombay: Indira Gandhi Institute of Development, 2000.

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