Foreign Direct Investment and Technological Change issues in Nepal

Raj Rai, Middlesex University/London

The global FDI statistics reported by UNCTAD shows that global FDI across globe wasU S
$54.07 billions in 1980 which raised to US $ 207.27 billions in 1990 and
U S $ 1,833.32 billions ( 34 times of 1970) in 2007. Nepal’s neighboring countries
China andIndia has become able to attract a significant portion of FDI in their
countries. China’snet FDI inflow was US $ 57 millions in 1980 which raised to US
$ 3,393 in 1990 andreached to US $ 83,521 million in 2007.Similarly, India’s net FDI inflow
in 1980 was US$ 49 millions which raised to US $ 237 million and increased to US $
22,950 millions2007. The FDI inflow is seen pessimistic for Nepal. FDI inflow statistics is not
availablefor 1980; however, it was US $ 6 million in 1990 which figure remained same in 2007
aswell (UNCTAD report).

Nepal’s neighboring countries both China and India have achieved higher
economicg r o w t h r a t e a l o n g w i t h t h e m a s s i v e i n f l o w o f F D I ( t a b l e b e l o w ) .
N o t o n l y I n d i a a n d China, other neighboring countries recorded higher level of economic
grow in the recentyears.
GDP, FDI and economic growth in South Asian countries in 2007
Y e a r 2 0 0 7 B a n g l a d e s h Bhutan I n d i a M a l d i v e s N e p a l
P a k i s t a n SriL a n k a C h i n a
GDP BillionsUS

Source: Unctad, world investment report, 2008 and IMF, World economic outlook database,
2008.

Source: Unctad, world investment report, 2008 and IMF, World economic outlook database, 2008.

According to Central Bureau of Statistics of Nepal, there are 1,423 firms are operatedwith FDI in
2006/07 with the NRs.121, 484 billions. These firms employ 121,484 peoplewhich are significant number
of people where unemployment is a big problem.Manufacturing sector dominates the FDI inflow in
Nepal. Tourism and service industriesare next largest FDI involved industry. Energy and mineral sectors
have least numbers of FDI. On the basis of scale of firms majority of the FDI are small and medium scale
firms.India has the highest number of FDI in Nepal, US investment is second largest amount of FDI, China
third, South Korea fourth, Norway fifth, Japan sixth and British VirginIslands, seventh in Nepal (US
department of state, as of October, 2007).

According to Nepal Industrial Statistics 2007/08(CBS, Nepal) there are 1,423 firms
areoperating with foreign investment from 139 countries. India has the largest number
of investment in Nepal (393), China 179, Japan 132, South Korea 94, UK 94, Germany
61and Switzerland 27. Manufacturing sector has the largest number of FDI involved sector (565) and
hotel and resort sector (370) second. Textile and garment 210 and energy, w a t e r a n d
gas sector has 32 companies. One of the major problems of
i n d u s t r i a l development is low scale supply of power and energy in the
c o u n t r y . N e p a l ’ s w a t e r resources are one of the frequently addressed issues by each new
government. However,the resources is neither optimally used by country itself nor attracted
foreign capital inthis sector. The political instability is the major hurdle for foreign investors to make
long-t e r m i n v e s t m e n t i n N e p a l . I f t h e c o u n t r y c o u l d a t t r a c t m a j o r i n v e s t o r s i n
t h e e n e r g y (hydro) sector that could simultaneously encourage other sectors to attract
more FDI inother sectors as well.

Government of Nepal has realized the importance of FDI. Hence, For eign
D i r e c t Investment and Technology Transfer Act, 1992 (FITTA) was brought in implementationi n t h e
policy level. Policy framework itself is not sufficient for attracting
F D I , facilitations and support for MNCs is necessary to retain them to
c o n t r i b u t e i n t h e economy. Political instability and labor dispute issue are some other
major hurdles for MNCs and they are reluctant to investment in Nepal. Hence, government should
addressthese issues to retain FDI and attract more FDI in the country.