By: Kundan Pokhrel Majagaiya
Donghua University China
Nepal can not be far from the benefits of Foreign Direct Investment (FDI). So Nepal has been given priority for the attraction of FDI and its development but still have some of the advantages, opportunities and threads discussed below.
AdvantageFDI is expected to fill the gaps such as technology, capital investment, foreign exchange, management capability etc. FDI is recognized as a vehicle for technology transfer and integration into the world economy. Countries whose policy encourages innovation can capture the positive externalities of FDI. As a whole, attracting foreign direct investment has become an integral part of the economic development strategies for Nepal. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. FDI has been a booming factor that has bolstered the economic life of Nepal, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher.
Economic growth
This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in Nepal has boosted the economic life of country.
Trade
Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in Nepal both in terms of import and export production. Products of superior quality are manufactured by various industries in Nepal due to greater amount of FDI inflows in the country.
Employment and skill levels
FDI have also ensured a number of employment opportunities by aiding the setting up of industrial units in various corners of Nepal.
Technology diffusion and knowledge transfer
FDI apparently helps in the outsourcing of knowledge from Nepal especially in the Information Technology sector. It helps in developing the know-how process in Nepal in terms of enhancing the technological advancement in Nepal
Linkages and spillover to domestic firms
Various foreign firms are now occupying a position in the Nepalese market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Nepalese market.
Opportunity
Nepal is lying between two fast growing economies of the world i.e. India and China. Both are heavily populated countries, so are the largest markets of the world as well. Nepal can take the advantage of this situation and can play the role of transit country for attracting them in both trade and investment.
Compared with most other low-income countries, Nepal has the potential to attract significantly more FDI. General programs of investment promotion, linkages with national firms, and longer-term plans to improve competitiveness, will have a limited impact on Nepal's ability to attract FDI and benefit from it. Nepal has some the world’s niche sectors for the attraction of FDI listed below.
Financial Sector
Financial sector is an important sector for the attraction of FDI. Banking Sector, Finance Sector and Insurance Sector are three different sectors of Financial Sector for the attraction of FDI.
Tourism Sector
Nepal has natural and historical sceneries with different culture so considered as “Garden of the world ". Tourist lodging, motel, hotel, restaurant, resort, travel agency, skiing, gliding, water rafting, cable car complex, pony-trekking, trekking, hot air ballooning, Para sailing, golf course, polo, horse riding, etc. are the main tourism sector for the attraction of FDI.
Communication Sector
Communication sector is also one of the important sectors for the attraction of FDI. In this sector not so foreign investor has been involved even though this sector is huge one.
Manufacturing Sector
Manufacturing Sector is one of the largest sectors for FDI. Manufacturing Sector can be categorized in different sector like
(i) Energy-Based sector (Industries generating energy from water resources, wind, solar, coal, natural oil, gas, bio-gas or any other sources),
(ii) Construction Sector (Construction and operation of Road, bridge, ropeway, railway, trolleybus, tunnel, flying bridge & industrial, commercial & residential complex; Construction, management of sewerage system; Construction, management & operation of water supply pipeline Infrastructure; Construction, management & operation of Irrigation infrastructure; Construction, management & operation of Electricity power station and electricity transmission infrastructure,
(iii) Agro and Forest based Sector (Mainly on agriculture or forest products such as integrated sericulture and silk production, horticulture and fruit processing, animal husbandry, dairy industry, poultry farming, fishery, tea gardening and processing, coffee farming and processing, herbiculture and herb processing, vegetable seed farming, mushroom vegetable farming or vegetable processing, tissue culture, green house, bee-keeping, honey production, rubber farming, floriculture production and forestry related businesses such as lease-hold forests, agro-forestry, etc.,
(iv) Mineral Sector (Mineral that includes Stone and Limestone; Talc; Silica; Dolomite; Iron-ore; Oil and Natural Gas) ,
(v) Service Sector (Workshop, leather and textile, pasmina ,garments, pharmaceutical, printing press, consultancy service, ginning and baling business, cinematography, construction business, public transport business, photography, hospital, nursing home, educational and training institution, laboratory, cold storage and
(vi) Information Technology Sector.
Threats /Constraints
It has already been established through earlier discussion that there are various potentialities of foreign direct investment in Nepal. In spite of this prospect, investment from the countries is not yet satisfactory. Because some hindrances prevailing in Nepal that are acting as bottlenecks to the smooth flow of investment. Some of the constraints for FDI in Nepal are highlighted below
Political Instability
Sandwiched between China and India, Nepal is facing serious political instability with a crisis in the ruling government on one hand and insurgency by Small groups on the other. Investigation into the impact of long-term political instability is prerequisite for developing a sustainable growth model. It necessitates finding out the link between low level of economic and social achievements, and political instability. There has been a great deal of literature on the macro-level analysis of the impact, but little micro-analysis. A recent study of Aisen Ari hints at a high level of political instability in Nepal, measured by the number of cabinet changes in comparison to other SAARC countries. Average growth rate in Nepal has been around 1-1½ percentage points during 1970 through 2000. The findings also show political instability accounting for roughly ½-¾ percentage point of the difference in average growth rates. Nepal’s climate, natural beauty, declining risk profile and huge market potential with two of the world’s largest economies, China and India, are constrained by weak investment promotion programs coupled with corrupt administrative practices and political instability.
Poor Physical and Non-Physical Infrastructure Facilities
One of the important preconditions for attracting FDI in a country is the presence of developed infrastructure. Nepal is small and locked country with limited resources, weak infrastructure and small size. Besides this, Nepal is still facing some problems for the attraction of FDI because of lack of direct access to seaports, difficult land transportation ,lack of trained personnel’s, scarce raw materials ,inadequate power, insufficient water supply etc.
Absence of Effective Banking Network
Presence of develop banking network with other countries is another essential factor in any international business. The banking network is poorly developed; the level of cooperation between the banks is not developed properly.
Trade Barriers
Nepal is affected by the presence of many trade barriers including tariff and non-tariff barriers, such as different standardization and certification processes, subsidies on agricultural products and different custom rules and regulations. The differences in tax laws and regulations, exchange rates, interest rates, duty structure as well as macroeconomic policies in general have proved to be a major factor inhibiting investment flows.
Lack of Cross-Border Facilities
Lack of sufficient cross border facilities like transportation, and communication, etc. is another threat for the attraction of FDI. For smoothening production and marketing of goods and services in the region, inter country roads, rail, waterways, and airways modes of transportation must be available at the required level. But still it is yet to have an integrated transport network for helping the easy movement’s people and products.
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