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CHAPTER I

INTRODUCTION

1.1 Background of the Study

A foreign direct investment (FDI) is an investment in the form of a controlling


ownership in a business in one country by an entity based in another country
(Lexicon, 2016). It is thus distinguished from a foreign portfolio investment by a
notion of direct control. The origin of the investment does not impact the definition,
as an FDI: the investment may be made either "inorganically" by buying a company
in the target country or "organically" by expanding the operations of an existing
business in that country.

Foreign direct investment includes "mergers and acquisitions, building new facilities,
reinvesting profits earned from overseas operations, and intra company loans". In a
narrow sense, foreign direct investment refers just to building new facility, and a
lasting management interest (10 percent or more of voting stock) in an enterprise
operating in an economy other than that of the investor (World Bank, 2012). FDI is
the sum of equity capital, long-term capital, and short-term capital as shown in the
balance of payments. FDI usually involves participation in management, joint-
venture, transfer of technology and expertise. Stock of FDI is the net (i.e., outward
FDI minus inward FDI) cumulative FDI for any given period. Direct investment
excludes investment through purchase of shares (CIA Factsheet, 2012).

FDI, a subset of international factor movements, is characterized by controlling


ownership of a business enterprise in one country by an entity based in another
country. Foreign direct investment is distinguished from foreign portfolio investment,
a passive investment in the securities of another country such as public stocks and
bonds, by the element of "control". According to the Financial Times, "Standard
definitions of control use the internationally agreed 10 percent threshold of voting
shares, but this is a grey area as often a smaller block of shares will give control in
widely held companies. Moreover, control of technology, management, even crucial
inputs can confer de facto control (Lexicon, 2016)."

According to Grazia Ietto-Gillies (2012), prior to Stephen Hymer’s theory regarding


direct investment in the 1960s, the reasons behind Foreign Direct Investment and
Multinational Corporations were explained by neoclassical economics based on

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macroeconomic principles. These theories were based on the classical theory of trade
in which the motive behind trade was a result of the difference in the costs of
production of goods between two countries, focusing on the low cost of production as
a motive for a firm’s foreign activity. For example, Joe S. Bain only explained the
internationalization challenge through three main principles: absolute cost advantages,
product differentiation advantages and economies of scale. Furthermore, the
neoclassical theories were created under the assumption of the existence of perfect
competition. Intrigued by the motivations behind large foreign investments made by
corporations from the United States of America, Hymer developed a framework that
went beyond the existing theories, explaining why this phenomenon occurred, since
he considered that the previously mentioned theories could not explain foreign
investment and its motivations (Grazia, 2012).

Facing the challenges of his predecessors, Hymer focused his theory on filling the
gaps regarding international investment. The theory proposed by the author
approaches international investment from a different and more firm-specific point of
view. As opposed to traditional macroeconomics-based theories of investment, Hymer
states that there is a difference between mere capital investment, otherwise known as
portfolio investment, and direct investment. The difference between the two, which
will become the cornerstone of his whole theoretical framework, is the issue of
control, meaning that with direct investment firms are able to obtain a greater level of
control than with portfolio investment. Furthermore, Hymer proceeds to criticize the
neoclassical theories, stating that the theory of capital movements cannot explain
international production. Moreover, he clarifies that FDI is not necessarily a
movement of funds from a home country to a host country, and that it is concentrated
on particular industries within many countries. In contrast, if interest rates were the
main motive for international investment, FDI would include many industries within
fewer countries (Grazia, 2012).

Another observation made by Hymer went against what was maintained by the
neoclassical theories: foreign direct investment is not limited to investment of excess
profits abroad. In fact, foreign direct investment can be financed through loans
obtained in the host country, payments in exchange for equity (patents, technology,
machinery etc.), and other methods. The main determinants of FDI is side as well as
growth prospectus of the economy of the country when FDI is made. Hymer proposed

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some more determinants of FDI due to criticisms, along with assuming market and
imperfections. These are as follows (Graham and Barry, 2011):

Firm-specific advantages: Once domestic investment was exhausted, a firm could


exploit its advantages linked to market imperfections, which could provide the firm
with market power and competitive advantage. Further studies attempted to explain
how firms could monetize these advantages in the form of licenses.

Removal of conflicts: conflict arises if a firm is already operating in foreign market


or looking to expand its operations within the same market. He proposes that the
solution for this hurdle arose in the form of collusion, sharing the market with rivals
or attempting to acquire a direct control of production. However, it must be taken into
account that a reduction in conflict through acquisition of control of operations will
increase the market imperfections.

Propensity to formulate an internationalization strategy to mitigate risk:


According to his position, firms are characterized with 3 levels of decision making:
the day to day supervision, management decision coordination and long term strategy
planning and decision making. The extent to which a company can mitigate risk
depends on how well a firm can formulate an internationalization strategy taking these
levels of decision into account.

Foreign Direct Investment (FDI) serves as a catalyst for development in an open


integrated economic system. Since 1980s, cross border linkages through FDI have
been an important feature of financial globalization and liberalization process.
Foreign Direct Investment (FDI) plays a catalytic role in economic growth. It is a
source of capital formation. Likewise, it helps technology to spillover, supports
human capital formation, enhances international trade integration, creates competitive
environment and strengthens enterprise development. There are three common
motives of foreign direct investment: resource-seeking, market seeking and
efficiency-seeking (Dunning, 1993). Moreover, FDI also seeks strategic assets in a
local economy – brands, new technology or distribution channel. Developing
countries, emerging countries and countries in transition have come to consider FDI
as a source of economic development and modernization, income growth and
employment (OECD, 2002).

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Nation industrial infra, its growth and development is a backbone of its economy. It
reflects nations self sufficiency’s which is herculean task and requires judicious
approach to justify factors involve. It imparts the required dynamism to the economy
which transforms the socio-psychological environment of its historical, traditional
economic and social structure. The nation’s economy and its social growth depend
upon efforts, capital and knowledge. Among these three factors, capital has been
recognized as a most required and important. Its formation involves multiple activities
which are saving, finance and investment. To form capital for economic activities
there is a need of stable financial sector and within financial sector banking sector
play crucial role. Due to liberalization, globalization, deregulation, competitive
disintermediation and economic intensification competition has grown and every
country want to become self reliant and self sufficient and thus demand for financial
resources grown to many fold. To cater the economic demand, socio-political
competition, economic complexities, increasing population, unpredictable challenges
and to capitalize the macroeconomic environmental opportunities at optimal level
Government of Nepal (GON) adopted cataclysmic structural and continuous reforms
in Indian macroeconomic system. It started playing a parental role by stoking the
engine of economic growth through garnering the internal and external resource in
money supply and introduced policy of tectonic economic liberalization,
globalization, digitalization and deregulation with metamorphic liberalized policy in
financial sector which in result brought drastic change and ultimate revolution in
Indian financial sector and transformed conservative financial sector into global at par
and led to the emergence for new financial windows, non debt financial capital FDI,
new banks, new instruments, new financial institutions and motivated foreign
investors to invest in diversified industrial and manufacturing sector (NRB, 2016).

The financial management in Nepal has changed drastically in scope and complexities
due to restructured financial policies. In the Nepalese context, FDI means the
investment by non-resident person or entity of Nepal, in the capital of Nepalese entity
or company, either by buying a company or by expanding operation of an existing
business in target country. It is not a charity but in fact it is core profit making
investment from other nations and multinational companies’ savings. It is contrast to
portfolio investment which is a passive investment in the securities of another country
such as stock and bonds. Entire FDI are investment made by multi-national

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companies (MNCs) and other nation’s savers with a time period consideration. The
modern approach to fund the corporate economic activities is much wider than the
traditional approach. In present competitive global economic environment and
economic overlapping to dominate raising funds have became crucial and
complicated. Financing is an art and service of managing money requires freedom to
acquire funds with safety and transparency. In the past, financing economic activities
through Foreign Direct Investment (FDI) was very complicated. It was very much
controlled by the government and was tough for corporate to arrange and manage FDI
in free economic environment (NRB, 2016).
Nepal has also introduced many provisions to attract FDI including a set of legal,
regulatory and institutional framework. Though FDI inflow in Nepal is low compared
to its neighboring countries, it has been on an increasing trend over the recent past.
Foreign investors from 39 countries have made investment in 252 firms in Nepal. The
FDI stock reached Rs. 137.7 billion (6.1 percent of GDP) in 2015/16, which was
mainly driven by the rise in reserves of FDI-based industries. Reserve constitutes two-
third of FDI stock. The services sector accounts for the highest share (70.2 percent) of
outstanding FDI in Nepal. In terms of paid up capital, the highest FDI in Nepal is
from India. When total stock of FDI is taken into consideration by including reserves
and loans, West Indies happens to be the major source region with FDI of Rs. 62.8
billion as of mid-July 2016.
The impact of FDI on an economy can be considered in terms of a number of
indicators such as its potential contribution to: technology and skills; establishment of
new industries and export promotion; formation of new clusters as anchor investors;
and creation of linkages with, and associated upgrading of local enterprises
(UNCTAD, 2004).

With increasing globalization and liberalization especially after 1980s, the world FDI
flows have grown rapidly and remained significant in the recent years. The World
Investment Report 2017 shows a strong rise in FDI inflows in 2015 and contraction in
2016.

The FDI flows globally decreased by 2 percent to $1.75 trillion in 2016. Developed
economies accounted for 59 percent in total inflows, a growing share in 2016. Flows
to developing economies were especially hard hit, with a decline of 14 percent to
$646 billion in 2016. FDI flows to LDCs and structurally weak economies remain

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even volatile and low. The South Asia received only 3.1 percent of total FDI inflows
in 2016. India is a leading host of FDI in South Asia followed by Bangladesh,
Pakistan and Sri Lanka. The FDI position of Nepal is substantially low in comparison
with other peers, which is just above Bhutan. Nepal’s share in the world total FDI is
only 0.01 percent.

Nepal has been developing institutional and legal infrastructure to ease doing business
since the 1980s with an objective of attracting FDI. FDI inflow is however, very low
despite its great importance to Nepalese economy. Although small in size, Nepal
could be an emerging destination for FDI in South Asia. Nepal has several advantages
such as demographic structure, gradually improving business indicators, strategic
geographic location and its improving legal infrastructure. Firstly, the economically
active population in Nepal is about 56 percent which is rising every year. Availability
of cheap labor force could be an attraction for investors. Secondly, the increasing
disposable income with remittances, expansion of economic activities and changing
consumption pattern have been creating new markets for products. Thirdly, Nepal
ranks at 105, second in South Asia after Bhutan, on the World Bank’s Doing Business
Report 2018. The gradual reforms and realization for the requirement of foreign
capital in mega projects would improve the business environment for foreign
investors. Fourthly, Nepal lies in a strategic geographic location surrounded by two
populous countries, China and India, which has more than 35 percent of total world
population. Lastly, Investment Board of Nepal (IBN) has identified potential
investment sectors for FDI -hydropower, transport, agriculture, tourism, information
communication technology, mines and minerals, health and education, manufacturing
and financial institutions (NRB, 2016).

1.2 Statement of the Problem

Every nation wants growth, development and prosperity. To attain all these there is
need of self sufficient economic environment which is reflected and represented by
the nation’s balance industrialization. Achieving favourable economic condition is a
herculean task and requires judicious approach to justify the factors involve. It could
be possible only by adopting balance economic structure with research oriented
growth and development. It is a core reality that nation’s continuous growth
consolidates its universal economic participation and requires continuous assessment
which is carried out by the academicians, researchers and independent professionals.

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Researchers predict the future by revealing the obscure truth which become possible
by comparing past and present. Every generation of researchers have tried to bring
something new and contributed distinctly in their respective fields by presenting the
past studies in a new way as required by the prevailing time period. A Large numbers
of academicians and research scholars across the globe have worked on financial
economics including FDI and their efforts, facts and finding have contributed to a
great extend in social economics, trade and commerce. Their outcome explored
multiple dimensions of FDI and they pave the way for future course of studies
depending upon time period challenges and requirement.

Foreign Direct Investment is an investment made by a company or entity based in one


country, into a company or entity based in another country. Foreign direct investments
differ substantially from indirect investments such as portfolio flows, wherein
overseas institutions invest in equities listed on a nation‘s stock exchange. Entities
making direct investments typically have a significant degree of influence and control
over the company into which the investment is made. Open economies with skilled
workforces and good growth prospects tend to attract larger amounts of foreign direct
investment than closed, highly regulated economies. Foreign Direct Investment (FDI)
is generally considered, by many international institutions, politicians and economists,
as a factor which enhances host country economic growth, as well as the solutions to
the economic problems of developing countries. Countries with weaker economies
consider FDI as the only source of growth and economic modernization. For this
reason, many governments, particularly in developing countries, give special
treatment to foreign capital.

Foreign direct investment or FDI controls ownership of a foreign company in a


country other than the one it is based in. It affects the home country inevitably. But
economists do not have a general agreement as to which of its effects are more:
positive or negative. Some term it favorable for economic growth while others
disagree and stand in its opposition. The advocates believe it creates employment
opportunities, impart technical skills to the residents, and, above all, increases the
economic growth, of the host country. On the other hand, it is said that through this
FDI, these investors manipulate scarce productive resources of the host country
though it has some positive effects, yet they are minimal as compared with the
negative ones. Nonetheless, its effects desirability vary from country to country.

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Most of the studies of early period were against the FDI, especially its investment in
developing and developed nations. Some studies were supporting and encouraging the
industrialist to invest in those nations where excess of raw material and skilled work
force with ready market is available. To find out the reality of FDI, this study is been
taken by the researchers to examine and evaluate the impact of amendments and
policy initiatives on nation’s economy. The researchers will also critically analyse
previous studies on the growth of FDI in different sectors and its general impact on
developing and developed nation’s economy, and the outcome of the study will set
parameters for future studies in the respective field.

In case of Nepal, it is needed because it can play a significant role in economic


growth. This study has tried to find the foreign direct investment in Nepal and its
impact on the economic growth.

1.3 Research Questions

This study has tried to find the answers of the following research questions:

i. What is the extent of FDI inflow in manufacturing and agricultural sector?


ii. What are the impacts of FID?
1.4 Objectives
The objectives of this study are as follows:
1.4.1 General objective
The objective of the study is to explore the Foreign Direct Investment in Nepal.
1.4.2 Specific objectives
The study is guided by the following specific objectives.
i. To ascertain the extent of FDI inflow in manufacturing and agricultural sector.
ii. To assess the impacts of FDI inflow.
1.5 Significance of the Study

Nepal has is built of various economies like agriculture, hydropower, tourism and
FDI. Among them, FDI is one of the economies which can effortlessly be established,
promoted and developed and can be made an important foundation of national
income. So, it is one of the chief sectors for economic development. FDI is an activity
that generates economic and social benefits. FDI has effects on the different sectors of
the economy. The importance of FDI in Nepal is not confined to the economic aspects

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only, but also to environmental and cultural aspects. Nepalese people realize the
importance of FDI and have pride over it.

The study intended to provide information as to what extent FDI (by sectors)
influences the economic growth of our country. Also the study is useful to Nepali
investment authority because it provides information on which sector performs well in
FDI inflows and which one requires improvement. This will help them in reviewing
their policies and regulations so as to create conducive environment for attracting
more FDIs into the country. Increase of awareness to the users on impact that FDIs
have on the Nepalese economy. The study will enable the researcher to meet the
requirements to be awarded a degree of masters of arts in development economics.
Since there is no consensus on the degree of the effects of FDI on economic growth,
the study will focus of contributing to the platform of comparing the findings with
other studies as the basis of establishing conventional measures of the effects of FDI
on growth. The study will also serve as a reference material for those who wish to
conduct studies on such related topics.

1.6 Limitations of the Study

The target of survey was to cover all FDI enterprises operating in national and the
regional level. The two categorical sizes of firms, i.e. manufacturing and agricultural
were covered in the survey. However, the information from small and medium sized
enterprises was based on sample. The sampling method was followed to ensure
comprehensive coverage of enterprises with FDI and borrowing. The estimation was
made for the FDI of non-sampled firms based on the ratio of approved to actual
capital of sampled firms. Based on the information available, all enterprises with
known foreign assets and liabilities from previous surveys and newly licensed who
have got approval to bring FDI by NRB were covered in the survey.
1.7 Organization of the Study

This study has been divided into five chapters which are as follows:

Chapter One: Introduction of the Study

This chapter consists of background of the study, statement of the problem, research
questions, objectives of the study, conceptual framework of the study, significances of
the study, limitations of the study and organization of the study.

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Chapter Two: Literature Review

This chapter consists of the literature review.

Chapter Three: Research Methodology

This chapter consists of research design, research area, universe, sample size,
sampling procedure, method of data collection, data processing and analysis and
ethical consideration.

Chapter Four: Results and Discussion

This chapter consists of analysis and interpretation of data.

Chapter Five: Summary, Conclusion and Recommendations

This chapter consists of summary of the study, conclusion of the study and the
recommendations given by the study.

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CHAPTER II

LITERATURE REVIEW

2.1 Theoretical Review

Foreign direct investment (FDI) is an investment made by a firm or individual in one


country into business interests located in another country. Generally, FDI
takes place when an investor establishes foreign business operations or acquires
foreign business assets, including establishing ownership or controlling interest in a
foreign company. Foreign direct investments are distinguished from portfolio
investments in which an investor merely purchases equities of foreign-based
companies. Foreign Direct Investment (FDI) is an effective instrument for promoting
sustainable development. Both the 2002 Monterrey Consensus on Financing for
Development and its successor, the 2015 Addis Ababa Action Agenda on Financing
for Development, recognized FDI as a mechanism that can facilitate sustainable
development and the implementation of the Sustainable Development Goals (SDGs).
Foreign direct investments can be made in a variety of ways, including the opening of
a subsidiary or associate company in a foreign country, acquiring a controlling interest
in an existing foreign company, or by means of a merger or joint venture with a
foreign company. The threshold for a foreign direct investment that establishes a
controlling interest, per guidelines established by the Organization of Economic Co-
operation and Development (OECD), is a minimum 10% ownership stake in a
foreign-based company. However, that definition is flexible, as there are instances
where effective controlling interest in a firm can be established with less than 10% of
the company's voting shares.
Foreign direct investment is critical for developing and emerging market countries.
Their companies need the multinationals' funding and expertise to expand their
international sales. Their countries need private investment in infrastructure, energy,
and water to increase jobs and wages. The U.N. report warned that climate
change would hit them the hardest. In 2017, developing countries received $694
billion, or 58% of total global FDI. They received 43 of worldwide
investment. Investments rose 8% in developing Asia, which received $502 billion.
The developed economies, such as the European Union and the United States, also
need FDI. Their companies do it for different reasons. Most of these countries'

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investments are via mergers and acquisitions between mature companies. These
global corporations' investments were for either restructuring or refocusing on core
businesses (Amadeo, 2019).
Foreign direct investment benefits the global economy, as well as investors and
recipients. Capital goes to the businesses with the best growth prospects, anywhere in
the world. Investors seek the best return with the least risk. This profit motive is color-
blind and doesn't care about religion or politics. That gives well-run businesses,
regardless of race, color, or creed, a competitive advantage. It reduces the effects of
politics, cronyism, and bribery. As a result, the smartest money rewards the best
businesses all over the world. Their goods and services go to market faster than
without unrestricted FDI. Individual investors receive the extra benefits of lowered
risk. FDI diversifies their holdings outside of a specific country, industry, or political
system. Diversification always increases return without increasing risk. Recipient
businesses receive "best practices" management, accounting, or legal guidance from
their investors. They can incorporate the latest technology, operational practices, and
financing tools. By adopting these practices, they enhance their employees' lifestyles.
That raises the standard of living for more people in the recipient country. FDI
rewards the best companies in any country. It reduces the influence of local
governments over them. Recipient countries see their standard of living rise. As the
recipient company benefits from the investment, it can pay higher taxes.
Unfortunately, some nations offset this benefit by offering tax incentives to attract
FDI. Another advantage of FDI is that it offsets the volatility created by "hot money."
That's when short-term lenders and currency traders create an asset bubble. They
invest lots of money all at once, then sell their investments just as fast. That can create
a boom-bust cycle that ruins economies and ends political regimes. Foreign direct
investment takes longer to set up and has a more permanent footprint in a country.
Countries should not allow foreign ownership of companies in strategically important
industries. That could lower the comparative advantage of the nation, according to an
IMF report. Second, foreign investors might strip the business of its value without
adding any. They could sell unprofitable portions of the company to local, less
sophisticated investors. They can use the company's collateral to get low-cost, local
loans. Instead of reinvesting it, they lend the funds back to the parent company
(Amadeo, 2019).

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2.1.1 Types of Foreign Direct Investment
Foreign direct investments are commonly categorized as being horizontal, vertical or
conglomerate. A horizontal direct investment refers to the investor establishing the
same type of business operation in a foreign country as it operates in its home country,
for example, a cell phone provider based in the United States opening stores in China.
A vertical investment is one in which different but related business activities from the
investor's main business are established or acquired in a foreign country, such as when
a manufacturing company acquires an interest in a foreign company that supplies
parts or raw materials required for the manufacturing company to make its products. A
conglomerate type of foreign direct investment is one where a company or individual
makes a foreign investment in a business that is unrelated to its existing business in its
home country. Since this type of investment involves entering an industry in which
the investor has no previous experience, it often takes the form of a joint venture with
a foreign company already operating in the industry.
FDI can serve as a principal complement to domestic investment and capacity
building for the growth and development of the LDCs. The unique aspect of FDI is
that it brings in a package of resources — capital, technology, skills, management
know-how and marketing capabilities — together with production activities, to a host
economy. While these resources and capabilities are utilized in the host-country
affiliates and help optimize profits for the investing transnational corporations
(TNCs), they also have an array of direct and indirect impacts that can, under suitable
conditions, be very beneficial to the host economy. They can produce not only
products for domestic consumption or for export, income and employment but also
linkages and spillovers that bolster the capabilities of domestic firms and human
resources, contributing to capacity-building and accelerated growth in the host
economy.
Foreign commercial investment is very important for fuelling developing countries’
economic growth. It is divided into two parts - foreign direct investment (FDI) and
foreign portfolio investment (FPI). This article focuses on the necessity and benefits
of such investment in Nepal. A foreign private investment used for establishing goods
and service industries is called FDI, whereas an investment to already established
industries’ stock is called FPI. FPI is less important than FDI because it does not
directly contribute to a country’s revenue and employment growth. Rather, it

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contributes to promote capital market. No legal provision has so far been made for
attracting FPI in Nepal. However, the process is underway to this end.
2.1.2 Investment Opportunities in Nepal

Nepal has been pursuing a liberal foreign investment policy and been striving to
create an investment- friendly environment to attract FDIs into the country. Our tax
slabs one of the lowest and our position is fairly good in ease of doing business.
Profitable areas of investment include hydropower, industrial manufacturing, services,
tourism, construction, agriculture, minerals and energy.
Nepal encourages foreign investment both as joint venture operations with Nepalese
investors or as 100 per cent foreign-owned enterprises. The few sectors that are not
open to foreign investment are either reserved for national entrepreneurs in order to
promote small local enterprises and protect indigenous skills and expertise or are
restricted for national security reasons. Approval of the GoN is required for foreign
investment in all sectors. No foreign investment is allowed in cottage industries.
However, no restriction is placed on transfer of technology in cottage industries.
1) Land, Land and More Fertile Land
Although land prices in the Terai and rural areas in Nepal are starting to go up, they
are still cheap. Land can provide dividends in terms of crops while waiting for the
value to go up in a couple of decades.
2) Tourism Investments
Nepal is the country in the world which is sandwiched between two fastest growing
large economies. India and China will have a huge growth in middle class population
eager to travel. Nepal can tap the growing tourism market by anticipating where
Chinese and Indian tourists may want to spend.
3) Hydropower:
Potential of hydropower in Nepal is huge. While investing in large-scale hydropower
plants may need huge sum, it is possible to buy shares in related companies when they
go public.
4) Outsourcing from US, Europe and Australia:
Most foreign companies are looking to outsource programming, research or labor-
intensive work to developing countries. These companies will save a substantial
amount of money by doing so. Such outsourcing opportunities exist especially in web

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programming because of a large number of students interested in computer
engineering in Nepal.
5) Medical Tourism:
Nepal has produced some of the best doctors around the world. Surgeons from Nepali
hospitals also do surgeries in Singapore, UK and USA. It is true that Nepali hospitals
lack the infrastructure and equipment found in developed countries, but the quality of
doctors is high.
So a good opportunity to invest is in medical tourism in Nepal. Healthcare services
in the developed world are expensive. A simple bypass surgery costs around a
hundred thousand dollars there, while the same surgery can be done in Nepal at a
fraction of the price.
2.2 Empirical Review

In Nepal’s case, though FDI commitments surged to Rs 49.87 billion in the first 10
months of 2017-18, the realization appears to be nominal. As per data of Nepal Rastra
Bank, Nepal received FDI worth Rs 15.51 billion during the first 10 months of 2017-
18.
Our current figure shows Nepal as a risk free country. FDI reached Rs. 186.00 billion
as of mid-July 2018, which is 6.20 per cent of the Gross Domestic Product (GDP).
For the economic transformation of the country, that ratio should be 25 per cent.
Likewise, other investments reached Rs. 633.85 billion as of mid-July. Of which
deposit was Rs. 43.5 billion, loan was Rs. 525.2 billion, and trade credit and advance
was Rs. 54.5 billion. Nepal has Rs. 10.5 billion special drawing rights (SDR) in
International Monetary Fund (IMF). FDI inflow of Rs. 17.51 billion was recorded in
the last fiscal year 2017/18. The significant portion of inflows was observed in the
energy, cement and hotel industries, which is good news. The FDI inflow was
Rs.13.50 billion in the previous year.
As per the NRB Study 'Current Macroeconomic and Finance Situation of Nepal based
on eleven months of data) the Balance of Payments (BOP) has increased to Rs 90.83
billion in the review period compared to a deficit of Rs.4.34 billion in the same period
of the previous year. Similarly, the current account registered a deficit of Rs 248.72
billion in the review period. Such deficit was Rs 210.24 billion in the same period of
the previous year. Likewise, the capital transfer and foreign direct investment (FDI) in
Nepal amounted to Rs 13.88 billion and Rs 11.81 billion respectively in the review

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period. In the same period of the previous year, capital transfer and FDI amounted to
Rs 15.02 billion and Rs 15.88 billion respectively. In the review period, the gross
foreign exchange reserves also decreased to Rs 1030.88 billion as at mid-June 2019
from Rs 1102.59 billion as at mid-July 2018. Of the total foreign exchange reserves,
reserves held by NRB decreased to Rs 885.83 billion as at mid-June 2019 from Rs
989.40 billion as at mid-July 2018. However, reserves held by banks and financial
institutions (except NRB) increased to Rs 145.05 billion as at mid- June 2019 from Rs
113.19 billion as at mid-July 2018. The share of Indian currency in total reserves
stood at 24.2 percent as at mid-June 2019 (NRB, 2019).
Maram Srikanth and Braj Kishore (2011) in their study tried to explain the impact of
FDI equity inflows on Indian economy by using monthly data for the period April to
March 2011, before and after the eruption of Global financial crises. They used
“Granger Causality Test” to establish the linkages between FDI equity inflows and
macro – economic variables. They found that there is a unidirectional reserve to FDI.
Consequently Indian policy makers are encouraged to attract more FDI inflows into
the country in order to give pace to industrial production.

Mustafa and Santhirasegaram (2013) in their study examined the overall impact of
FDI in pushing the growth and pace of Sri Lanka economy. For the purpose they used
time series annual data for the period of 1978-2012. In addition they also
implemented multiple regression models to estimate the impact of FDI on economic
growth. By using all these tools and technique they found that actual impact of FDI
can be seen after time lag of two plus years.

Kuliaviene and Solnyskiniene (2014) in their study tried to determine exclusive


impact of FDI on Lithuanian GDP by using lag analysis. During the study they found
that average lag was of two years.

Bhavya Malhotra (2014) in his study tried to study the trends and pattern of FDI along
with assessing the determinant of FDI Inflows. In his study he found that Indian
economy has a tremendous potential and FDI has a positive impact. Further he found
that FDI inflow supplements domestic capital along with technological development
and efficiency.

Zafar, S.M.Tariq and Waleed Hemdat (2016) in their study found that FDI flow in
India has increased to many fold in comparison to past. They also found that FDI

16
inflow has influenced the GDP of the nation and both were moving with matching
pace and was having positive impact on economy. They also found that FDI has
generated balance growth and development and engaged manpower across the nation.

Curtishi-Castrati (2013) studied the impact of FDI on economic growth with an


overview of the main theories of FDI and empirical research. The researcher
explained the main trends in FDI and employed 4I-Framework in this study. The
researcher explored many other factors that incite foreign companies to invest in a
particular country. The researcher found that there is no generally accepted theory of
the determinants of FDI and its effects on economic growth and international trade.

Silajdzic and Mehic (2015) found that FDI is assumed to directly affect economic
growth by contributing to the gross fixed capital formation and indirectly by
contributing to knowledge stock. More precisely, in the traditional framework, FDI is
expected to directly affect economic growth since FDI is assumed to complement
domestic investments, and considered to be an important supplement for capital and
investment shortages. Further analysis showed that foreign direct investment has the
positive impact on economic growth through knowledge spillovers in transition
countries; technological and innovative efforts are suggested to be essential factor
underpinning growth performance (Silajdzic and Mehic, 2015). Similarly, the study
by Nistor (2014) found the positive impact of FDI on host economies, manifesting
differently depending on the area and the region of the foreign investment; its impact
depends largely on the quality and quantity of the inflow. The results show that the
FDI inflows together with the human capital development contribute strongly to the
host country’s economic growth (Fadhil and Almsafir, 2015).

In all countries, especially developing, FDI plays a very important role, they are even
considered as the engine of economic growth and development. Engaging in good
conditions, foreign capital can help reduce the gap between the requirements of
capital and national saving, raise skill levels in the host economy, and improve market
access as well as contribute to technology transfer and good governance (Abbes,
Mostéfa, Seghir, and Zakarya, 2015). Hong (2014) found that FDI exerts a positive
impact on the economic development; furthermore, economies of scale, human
capital, infrastructure, and wage levels, and regional differences interact actively with
FDI and promote economic growth in China, while the openness of trade does not
significantly induce FDI. Chee and Nair (2010) showed empirical analysis that the

17
development of financial sector enhances the contribution of FDI on economic growth
in the region and the complementary role of FDI; meanwhile, it is most important for
least developed economies in the region.

A study conducted by Sakyi, Commodore, and Opoku (2015) suggested that an


increase in FDI inflows triggers positive GDP growth in the long-run, an empirical
investigation from Ghana during the period 1997-2011. Similar findings by Javaid
(2016), the FDI has a significant positive impact on the GDP growth of Pakistan both
in long-term and in short-term. Also, other factors such as the inflation and the
population also show significant effects on the GDP in the long run (Javaid, 2016).
Supporting this result, the study conducted by Younus et al. (2014) for the period
2000-2010 confirmed that there exists a positive relationship between economic
growth, proxies by gross domestic product (GDP) and FDI in Pakistan.

In present global competitive economic circumstances no country in the world is self


sufficient and self reliance. Most of them largely depend on other nations in some
way. Advance economy with surplus reserves want to integrate other nations who
have minerals reserves and skilled labours. Emerging economy in hope to become self
sufficient requires fund for their economical promotion and consolidation,
undeveloped economies requires funds for their survival. Thus, financial integration
through FDI played paramount role and accelerate the respective economies. With
growing globalization most of the Asian nations have welcomed the FDI and witness
surge in its inflow. India with conservative approach to globalization has been found
latecomer to the FDI. Its overall market potential, cheep skilled workforce with
mineral reserves and safe marine routes along with liberalized policy regime sustained
its attraction as a most preferred destination for foreign investors. Thus, the
government to attract more FDI reamended its policy in 2015 – 16 and took several
policy initiatives. Considering all economical aspects important for nation integrated
growth and overall development this study has been undertaken by the author’s to
examine and evaluate the impact of amendments and policy initiatives on nation’s
economy. For the study over all data and sector wise data on FDI from 2011to 2016
has been taken. The collected data has been simply analysed and interpreted, in last
conclusion and recommendation has been given (Zafar, Hmedat, and Ahmed, 2017).

18
2.3 Theoretical Framework/Conceptual Framework

On the basis of the objectives of the study, a conceptual framework has been
developed which is as follows:

Figure 1: Conceptual Framework

Foreign Direct
Investment

Manufacturing Agriculture

Impacts

19
CHPTER III
RESEARCH METHODOLOGY
Research methodology refers to the various sequential steps to the adopted by a
researcher in studying a problem to meet the objective. This section of the proposal
deals with the methodologies to be applied to carry out this study which includes
design, research area, universe, sample and sampling procedure, method of data
collection and data processing and analysis which are presented below:

3.1 Research Design

This study followed descriptive type of research design and its nature is quantitative
as well as descriptive. Data will be collected by using secondary data.

3.2 Research Area


The survey is conducted in central and regional level to obtain the information of the
geographically scattered manufacturing and the agricultural industries which are
established or operating with foreign capital. The information of manufacturing and
agricultural industries which are operating within the national and the regional level
were collected.
3.3 Universe, Sample Size and Sampling Procedure

The strategy of the survey is to make the FDI statistics highly comprehensive in terms
of coverage of the agricultural industries. Thus, both census and sample method were
followed by categorizing the FDI sectors into two groups.
3.4 Methods of Data Collection

The survey was conducted with the secondary data obtained from different websites
of Nepal Rastra Bank and the agricultural as well as manufacturing industries. The
data will comprise of two sections: (i) first section contains background information,
including the major goods that are imported as inputs and exported as a final product
by FDI enterprises, especially designed to know the products produced by FDI firms
in the real sector; (ii) second section acquired main information on stock of foreign
investment, especially designed to acquire information for balance of payments and
international investment position.

20
3.5 Presentation and Data analysis

In the process of data analysis, the researcher classified and tabulate the necessary
data, which were collected through the various sources. In this study, data were
collected and tabulated manually. For different types of data, different tables were
prepared. Simple statistical tools like percentage, average, frequency and table were
used. To fulfill the objectives of the study, the data were analyzed descriptively.

21
CHAPTER IV

PRESENTATION AND ANALYSIS OF DATA

4.1 Introduction
FDI refers to an investment made by a foreign individual or a company in the
productive capacity of another country. It can be considered as the movement of
capital across national frontiers in a manner that allows the investor to have a control
over the investment. Firms that provide FDI are referred to as MNCs. There is a
strong relationship between foreign investment and economic growth. Larger inflows
of foreign investments are needed for the country to achieve a sustainable high
trajectory of economic growth. There are several irrefutable reasons for this. For the
economy to grow by 7 to 8 per cent a year there is a need to invest around 35 to 40
per cent of GDP. National savings fall far short of this by nearly 10 per cent. Foreign
borrowing and foreign investments have to meet this investment-savings gap. This is
generally recognized and successive governments have attempted to provide various
incentives to foreign investors. However the Sri Lankan record of foreign investment
has been far below expected levels and low in comparison with many other Asian
countries (Sanderatne, 2011).
Nepal has been pursuing a liberal foreign investment policy and been striving to
create an investment- friendly environment to attract FDIs into the country. Our tax
slabs one of the lowest and our position is fairly good in ease of doing business.
Profitable areas of investment include hydropower, industrial manufacturing, services,
tourism, construction, agriculture, minerals and energy. Nepal encourages foreign
investment both as joint venture operations with Nepalese investors or as 100 percent
foreign-owned enterprises. The few sectors that are not open to foreign investment are
either reserved for national entrepreneurs in order to promote small local enterprises
and protect indigenous skills and expertise or are restricted for national security
reasons. Approval of the GoN is required for foreign investment in all sectors. No
foreign investment is allowed in cottage industries. However, no restriction is placed
on transfer of technology in cottage industries.
Most investment gurus believe that agriculture and mining will produce the best
returns around the world in the next 20-30 years. Food prices are expected to go up
because the growing middle class population in emerging markets will demand more
expensive food including meat and more jewelry. Worldwide inflation will be higher

22
than expected; so holding precious metals will be better than holding cash. Nepal is
close to India and China which will have the largest surge in the middle class
population in the history of the world. As families become smaller and wealthier, they
will start eating well. Meat consumption will rise. It will take more agricultural
resources to produce more meat (Sharma, 2018).
Foreign direct investment contributes to many things, to expand the base of
investment in the country, as well as in solving the problem of unemployment through
the creation of new job opportunities, and the introduction of advanced technology,
the state, and learn about the modern methods of management, communication and
marketing, which lead to the National Employment gain higher skill and experience.
Aware of the importance of foreign direct investment, so always seeks to attract
foreign investment to it through the creation of an atmosphere conducive to foreign
investment, and the provision of facilities and incentives to the foreign investor.
Foreign direct investment is defined as "the investment administered by foreigners;
because of the full ownership, or 5-10 share justify them right of management, most
of these investments by multinational companies."
In recent years, Government of Nepal has accorded a top priority to attract foreign
direct investment. Especial emphasis had been given since Ninth Plan to mobilize
foreign investment. For this purposes the government have adopted various policies.
The FDI in Nepal is not at the peak, as it needs to be. The flow of inward FDI was at
peak during mid-1990s and thereafter declined due to country’s civil war of Maoist
insurgency. However, as Maoist ended up the decade’s civil war and joined the
Government, presently Nepal is creating a peaceful environment for the Foreign
Investors. The political disputes are cooling, and several foreign investors are keeping
an eye to Nepal. Nepal’s FDI projects include mostly in manufacturing, hydropower,
mineral exploitation, construction, agro based, chemicals, tourists hotels and
restaurants, specialized services and in food and beverage industries. By the year
2005, Hotel and Resorts undertook 440 projects under manufacturing industries
followed by 227 projects. In context to approved FDI projects, more than 40 percent
of investment comes from India; and the rest comes from USA, Norway, Japan,
Singapore, Bermuda, China, U.K., South Korea, Italy, Netherlands, Thailand,
Philippines, Germany, Switzer-land, France, Taiwan, Bangladesh, Pakistan, Australia,
British Virgin Island, Canada, Malaysia, Finland, etc. Nepal has been widely

23
entertaining most of its FDI in Manufacturing industries. The low labor cost might
have pursued it. More companies operating are British American Tobacco (BAT),
Unilever and Coca-Cola.
4.1.1 Foreign Direct Investment Policy

Along with the process of liberalization in the mid-1980s, Nepal put efforts to attract
FDI to fill the resources gap in private capital formation. Foreign Investment and
Technology Transfer Act, 1982 was enacted to attract and utilize the foreign
investment in Nepal. Subsequently, a new Foreign Investment and Technology
Transfer Act, 1992 was enacted to facilitate the liberalization process of 1990s.
Thereafter, Nepal became member of the World Trade Organization-WTO, Bay of
Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation-BIMSTEC,
South Asia Free Trade Agreement-SAFTA and Multilateral Investment Guarantee
Agency-MIGA. Nepal signed Bilateral Investment Protection and Promotion
Agreement (BIPPA) with six countries and Double Taxation Avoidance Agreement
with ten countries. Nepal has obtained access to neighbouring and global markets.
Investment Board Act, 2010 was enacted based on which Investment Board has been
established.

The GoN introduced new Foreign Investment Policy, 2015 by replacing the policy of
1992 with an objective of making economy more dynamic and competitive by
maintaining trade balance through export promotion and import management, and by
attracting foreign investment, technology, skills and knowledge in the priority sectors.
The new policy incorporates the changing context of portfolio investment, non-
resident Nepalese investment, special economic zones, labor relation issues, and
mobilization of debt instruments in domestic and foreign currencies. The foreign
investment policy aims to achieve the sustainable economic growth and generate
employment, enhance investment in the regional and national development, fill the
gap of increasing investment demand, increase the domestic production and
productivity and establish Nepal as an attractive destination for FDI by creating
investment friendly environment. In contrast to old policy, the new policy has clearly
defined the term “foreign investment” and “technology transfer”. It recognizes
assignment, user’s license, technical know-how sharing and franchising as the
medium for technology transfer.

24
Table 1: Foreign Direct Investment Policy

Foreign Capital Investment Technology Transfer


 Share investment in the form of  Use of intellectual property rights
foreign currencies or capital assets and such as patent, specification,
reinvestment of its earning formula, process and technical

 Loan to the industry in the form of knowledge,

foreign currencies or foreign assets  Foreign owned trade mark or

 Lease financing provided by foreign goodwill, and

investor in the form of equipment  Foreign technical services,


tools, machines etc, assistance, training, management

 Fund raised by the company, services and market services.

established in Nepal, issuing equity,


debt and debenture abroad,

 Investment in the listed securities in


the secondary market by foreign
institutional investors.
Source: Government of Nepal, Foreign Investment Policy, 2015

Figure 2: Category of Foreign Direct Investors

Foreign Institutional Investor

Non-Resident Nepalese

Foreign
Individual
Investor

25
4.1.2 Legal Framework

The legal arrangements that govern FDI in Nepal include Foreign Investment and
Technology Transfer Act (FITTA), 1992, Foreign Exchange (Regulation) Act, 1962,
Investment Board Act, 2010 and Industrial Enterprises Act, 2016, Company Act,
2017, Investment Board Act, 2011, Contract Act, 2000, Arbitration Act, 1999, Income
Tax Act, 2002, Labor Act, 2017, and Privatization Act, 1992. Similarly, DOI,
Investment Board of Nepal (IBN) and NRB are the agencies for administration and
implementation of rules and regulations related to FDI.

The FITTA defines the forms of foreign investment as (a) investment in share
(equity); (b) reinvestment of the earnings derived from the clause (a) above; (c)
investment made in the form of loan or loan facilities. The minimum investment
required for foreign investment approval is Rs. 5 million per investor. The act also
defines the technology transfer which is allowed even in the area where foreign
investment is not permitted. Use of technological rights, specialization, formula,
process, patent or technical know-how of foreign origin; use of any trademark of
foreign ownership and acquiring any foreign technical consultancy, management and
marketing service are the forms of technology transfer. However, there are some
industries like cottage industries, security printing, arms and ammunition industries,
among others, where foreign investments are not allowed. Furthermore, there are
sector specific acts that should also be followed if the investment goes to the given
specific sectors. These acts are the Electricity Act, 1992, Nepal Petroleum Act, 1983,
Private Investment in Infrastructures Act, 2006, Mines and Mineral Resources Act,
1985, Bank and Financial Institutions Act, 2017, among others.

4.1.3 Institutional Structure

The DOI and IBN provide the facilitator and regulatory services to the investors
depending upon the size of the capital investment. The Investment Board oversees the
foreign investment of Rs. 10 billion or more fixed investment in general. NRB
facilitates the foreign exchange transfer related arrangement.

4.1.4 FDI Process in Nepal

The procedure of FDI in Nepal varies depending on investment size and sectors. In
general, the required documents differ according to mode of foreign equity

26
participation in the industries. The categories are: (i) foreign equity investment in a
new industry and (ii) foreign equity investment in an existing Nepalese Industry.

(i) Equity Investment in New Industry

The FDI process in a new industry comprises following four stages:

a) FDI approval application, b) Company incorporation,

c) Industry registration, d) Tax registration, and other processes.

Figure 3: Process for Investment in a New Company

1. FDI Approval Application

2. Company Incorporation

3. Industry Registration

4. Tax Registration

5. Other Processes

(ii) Foreign Investment in Existing Industry

Foreign investors can invest in any existing firms or industry by share transfer, loan
investment, and/or technology transfer. The investment must be brought inside Nepal
only after obtaining the approval of investment from the DOI and NRB. The letter
issued by the concerned commercial bank is considered as the documentary evidence
for the foreign investment brought into the country. It must be clearly stated in the
joint venture agreement if the foreign investor seeks to invest in terms of plant,
machinery and equipment. Approval of the agreement between Nepalese and foreign
parties must be obtained from DOI stating the terms and condition including the
amortization schedule and interest in case foreign investor seeks to invest in the form
of loan. The loan amount must be brought through the proper banking channel.

27
4.1.5 General Regulatory Arrangement for FDI
Taxation
The foreign investors need to register in Inland Revenue Department (IRD) and
comply with tax system. The company, with turnover more than 5 million, needs to
register for Value Added Tax (VAT). The foreign investors must comply with the
income tax, corporate tax, interest tax, profit tax, payroll tax, capital gain tax etc.
Some relaxations in tax for the industries in FDI have been offered in the Industrial
Enterprises Act, 2016.
Foreign Exchange Arrangement
NRB oversees the foreign exchange management in Nepal, and the foreign Exchange
(Regulation) Act, 1962 is the guiding regulation for it. Foreign investors, who fulfill
the criteria given by rules, can bring in or take out (withdraw) investment. Nepal has
also adopted Article VIII (Exchange Arrangement and Exchange Restrictions) of IMF.
NRB provides the repatriation approval to the FDI on the basis of recommendation
from the concerned regulatory authority (Table 2). Foreign investors can repatriate
the amount received from the sale of the share of foreign investment as a whole or any
part thereof, amounts received as profit or dividend from foreign investment, amount
received from the fees or royalties or supply in case of technology transfer, maximum
75 percent of the earning of foreign nationals working in foreign investment company.
Table 2: Repatriation Requirements
Repatriation Requirements
Withdrawal of Foreign Investment Dividends
For the repatriation of the principal investment, For the repatriation of dividend,
foreign investor foreign investor must apply to
must apply to central bank with: central bank with:
 A copy of approval letter provided by  A copy of approval letter
regulatory agency for provided for the business from
 the business operation;  regulatory agency;
 A copy of approval letter provided by  A copy of approval letter
central bank to bring provided to bring in the
 in the foreign exchange for investment; foreign
 The bank statement showing the deposit in  exchange for investment;
domestic banks  The bank statement showing
 from foreign banks as investment; the deposit to domestic banks
 The sale and purchase agreement, between  from foreign banks as
equity sellers and investment;

28
 buyers, attested by regulatory agency;  The Permanent Account
 The report prepared based on assets and Number, Business Registry
liabilities of equity  Certificate, Bylaws etc.
 sellers;  Audited Annual Report and
 The Permanent Account Number, Business Financial Report as approved
Registry by
 Certificate, bylaws etc;  the general assembly.
 Updated tax clearance certificate;  A copy of clearance certificate
of tax on profit;
 The updated description of shareholders
attested by Office of  Updated Tax Clearance
Certificate.
 the Company Registrar;
 The document showing the buyer is not
blacklisted if the
 buyer of equity is Nepalese;

4.1.6 Priority Sectors


Based on the national priority, the major sectors for the FDI are a) Hydroelectricity
(Production and Transmission), b) Infrastructure related to Transportation (Fast Track,
Railway, Tunnel, Cable Car, Metro Rail, Flyover and International Airport), c)
Agricultural, Food Procession and Herbs Procession Industries, d) Tourism Industries
and e) Mineral and Productive Sector Industries.
4.1.7 Key Sectors
(a) Energy
Energy sector is most prominent sector to drive economic growth and the vehicle to
transform the Nepalese economy. The country has potential of approximately 83,000
MW and economically viable of approximately 42,000 MW. But, the installed
capacity is only approximately 961.2 MW as of mid-July 2017 (Economic Survey,
2016/17).
NEA issues survey license for 5 years, generation license for 35 years for domestic
supply and 30 years for export oriented projects, additional maximum five years for
hydrological risks is provided.

(b) Tourism

29
Tourism is a high potential sector in Nepal owing to the natural beauty and cultural
heritage. The government has given high priority to the development of tourism
sector. Government’s Vision 2020 in tourism seeks to have 2 million tourist visitors
per year along with creation of 1 million jobs by 2020. Ministry of Culture, Tourism
and Aviation is the principal agency for development of tourism sector. Nepal Tourism
Board and Department of Tourism have also been working as regulatory and
implementing agencies. The IBN administers the implementation of the tourism
projects with the cost of fixed capital equal or more than Rs. 10 billion.
(c) Transportation
Transportation is another largest potential sector in Nepal. Being a hilly country, there
are potential of tunnel, cable car, airport, railways and roadways. The Government has
taken some initiative to connect East-West such as Mid-Hill Highway (Puspalal
Highway), Hulaki Marga (Postal Highway), East-West Railways and North-South
such as Koshi Corridor, Kali-Gandaki Corridor, Karnali Corridor, Kathmandu-Tarai
Fast Track etc. Also, the international airports such as Gautam Buddha Regional
International Airport (Bhairahawa), Pokhara Regional International Airport are under
construction, and International Airport at Nijgadh, Bara is in the process of beginning
construction. The concept of Kerung-Kathmandu-Pokhara-Lumbini railway network
has also been coined. Furthermore, rapidly growing cities in Nepal also require
Railways (MRT and Monorail), Bus Rapid Transit (BRT), Flyovers, Tunnel-ways,
Cable cars, and many others.
4.2 Foreign Direct Investment
The first official record of FDI flow to Nepal was in 1951/52 when the Nepal
Commercial Corporation was set up as a joint venture with 67 percent equity
participation from Indian investors (Aryal, 2009).
There were a few cases of foreign investment and technology transfer prior to 1980.
Solidarity Ministerial meeting was held in 1982 and an Investment Promotion
meeting was held in 1984 for promoting foreign investment and creating awareness of
the investment opportunities in the country. Subsequently, Nepal Investment Forum
was organized in 1992 in Kathmandu, which was a very successful in attracting the
foreign investors (Department of Industry, 2005). Thereafter, political and economic
scenarios have been changed significantly. The GoN organized Nepal Investment
Summit on 2-3 March, 2017. This summit observed the USD 13.74 billion investment

30
commitment to ten sectors from 26 companies of eight countries. DOI gives the
permission to establish FDI industries. But, there is a time lag between approved and
actual investment. The actual investment may not take place at all. NRB has statistics
on actual or net FDI. The FDI presented in BoP is net change in FDI liability in a year
The statistics on approved FDI shows small amount of FDI prior to 2007/08.
Thereafter, significant improvement has been observed in FDI approval. For example
Rs. 67 billion FDI was approved in 2015/16. Similarly, the pace of actual FDI inflow
was slow till 2007/08. However, it accelerated after the end of decade long conflict
and the onset of peace process in 2008. The net FDI inflow registered was of Rs. 9.2
billion in 2011/12.The FDI recorded during the 2000/01, 2001/02 and 2005/06 reflects
the net outflows.
Figure 4: Status of FDI in Nepal (Rs in billion)

The statistics of FDI presented in IIP is the outstanding amount at the end of the fiscal
year. It is the sum of paid up capital, reserves, reinvested earning and foreign loans.
The FDI stock was Rs. 52.1 billion at the end of 2012/13. Such stock gradually
increased to Rs. 151.2 billion in 2016/17.
4.2.1 Situational Analysis of FDI in Nepal
The three sectors – service, industry and agriculture sectors are the areas receiving
highest foreign direct investment. The service sector received the major share of FDI
followed by the industry and the agricultural sector. About 70.2 percent (Rs. 96.7
billion) of total stock of FDI is in the service sector, 29.5 percent (Rs. 40.6 billion) in
the industry and the remaining 0.3 percent (Rs. 395 million) in the agriculture sector.
Figure 5: Situational Analysis of FDI in Nepal

31
Source: NRB, 2018
Under the service sector, transport, storage and communication received the dominant
share of 47.0 percent. Manufacturing industries, and electricity, gas and water are
main sub-sectors receiving FDI in the industry sector i.e. 15.1 percent and 13.9
percent respectively. The dividend repatriation by FDI firms, based on approval from
NRB, amounted to Rs. 17.24 billion in 2016/17 compared to Rs. 6.25 billion in
2015/16 and Rs. 7.21 billion in 2014/15. In the latest reports of Nepal, Current
Account recorded a deficit of 464.4 USD million in Apr 2019. The country's Nominal
GDP was reported at 29.0 USD billion in Jul 2018.

4.2.3 International Investment Position of Nepal


The IIP shows the economy’s external financial assets and liabilities position at a
particular point of time. The IIP shows the position of the country whether it is net
debtor or lender. The positive net IIP reflects foreign assets (claims) are more than
foreign liabilities (obligations) and negative reflects the foreign assets (claims) are
less than foreign liabilities (obligations). NRB has been publishing IIP since 2014/15.
Table 3: International Investment Position of Nepal
Description 2012/13 2013/14 2014/15 2015/16 2016/17
Assets 559141.9 681315 837788.9 1054012.06 1107787.55
Direct investment 0 0 0 0 0
Portfolio investment 0 0 0 0 0
Other investments 85350.8 87562.1 111105 136381.2 152129.8
Other equity 2495.8 2502.8 5476.1 6883.7 10765.8
Currency and Deposits 22025.6 29912.6 44169.5 41796.9 43556.8
Loans 52.6 1228.9 64.1 57.6 3304.6
Trade credit and 5147.4 1620 2234.3 338.9 9005.3
advance
Other accounts 55629.4 52297.8 59161 87304.1 85497.3
receivables
Official reserve assets 473791.1 593752.9 726683.9 917630.9 955657.7

32
Liabilities 480095.9 495392.1 542623.2 610485.3 666408.8
Direct investment 52113.3 75373 106171.8 137678.2 151182.1
Portfolio investment 0 0 0 0 0
Other investment 427982.6 420019.1 436451.4 472807 515226.7
Other equity 0 0 0 0 0
Currency and deposits 56115.3 29370.5 39870.3 40664.7 41402.3
Loans 347624.7 356787. 363962. 405199.2 439607
1 5
Trade credit and 14434.6 23686.1 22912.3 16397.4 24381.3
advance
Other accounts 20.2 41.7 38.2 362.5 66.4
receivables
Special drawing rights 9787.8 10133.8 9668.1 10183.3 9769.6
Net IIP 79046 185922.9 295165.7 443526.8 441378.8
Source: NRB, 2018
The IIP shows that foreign assets and liabilities of Nepal were Rs. 559.14 billion and
Rs. 480.10 billion respectively in mid-July 2013. Accordingly, the net IIP remained in
surplus by Rs. 79.05 billon as at mid-July 2013. Such surplus gradually increased to
Rs. 441.37 billion in mid-July 2017. The statistics of FDI presented in IIP is the
outstanding amount at the end of the fiscal year. It is the sum of paid up capital,
reserves, reinvested earning and foreign loans. The FDI stock was Rs. 52.1 billion at
the end of 2012/13. Such stock gradually increased to Rs. 151.2 billion in 2016/17.
Figure 6: Outstanding Direct Investment (Rs. In billions)

4.2.4 Dividend Repatriation


The Foreign Investment and Technology Transfer Act, 1992 allows foreign investors
to repatriate profit or dividend. The dividend repatriation by FDI enterprises, based on

33
approval from NRB, amounted to Rs. 17.24 billion in 2016/17. Similarly, the dividend
repatriation recorded Rs. 6.25 billion in 2015/16 compared to Rs. 7.21 billion in
2014/15.
Table 4: Dividend Repatriation (Rs. Million)
Sector 2014/15 2015/16 2016/17
Financial Sector 1794.43 13.67 13.67
Communication Sector 4.00 1692.80 8692.6
Hydropower Sector 2874.48 3154.30 3264.9
Industrial Sector 2299.19 1387.85 5161.0
Service Sector 238.61 4.11 108.4
Total 7210.71 6252.72 17240.61
Source: Nepal Rastra Bank
During the first eight months of the FY 2017/18, the inflow of FDI is equivalent to
Rs. 14.24 billion as against the Rs. 8.35 billion in the same period of FY 2016/17.
Based on the status of assets and liabilities of the country, FDI liabilities stood at Rs.
151.2 billion in the mid-July 2017. The reserve of such liability in the mid July 2016
was Rs. 137.7 billion. Dividend payments of investment have also been increased
along with the rise in FDI. During the first eight months of FY 2017/18, Rs. 34 billion
has been paid as dividend of foreign investment. Rs. 15 billion was paid as dividend
in previous fiscal year.
Table 5: Dividend Payment

Payment 2013/14 2014/15 2015/16 2016/17 2017/18


Dividend payment (Rs. in 2.3 4.4 4.4 14.8 33.8
billion)
Share in current account 0.3 0.5 0.5 1.3 3.7
payment
Source: Nepal Rastra Bank
4.2.5 Outstanding FDI in Nepal
Foreign Direct Investment in Nepal increased by 17512.80 NPR Million in 2018.
Foreign Direct Investment in Nepal averaged 4159.94 NPR Million from 2001 until
2018, reaching an all time high of 17512.80 NPR Million in 2018 and a record low of
-469.70 NPR Million in 2006.
Figure 7: Outstanding FDI in Nepal

34
Nepal's Foreign Direct Investment (FDI) increased by 24.3 USD million in April
2019, compared with an increase of 24.7 USD million in the previous quarter. Nepal's
Foreign Direct Investment: USD million net flows data is updated quarterly, available
from October 2002 to April 2019. The data reached an all-time high of 80.1 USD
million in Jan 2018 and a record low of -6.0 USD million in April 2006. CEIC
converts quarterly Foreign Direct Investment into USD. Nepal Rastra Bank provides
Foreign Direct Investment in local currency. Nepal Rastra Bank average market
exchange rate is used for currency conversions. Foreign Direct Investment is in
quarterly frequency ending in April, July, October, January of each year. The fiscal
year is from July 16th to July 15th.

The above data have also been presented in table as follows:


Table 6: Nepal Foreign Direct Investment

Nepal Trade Last Previous Highest Lowest Unit


Balance of Trade -103928.8 -107692.8 -3913.3 -132194.7 Million [+]
NPR
Current Account -204431.6 -152155.6 86636 -204431.6 Million [+]
NPR
Current Account -8.2 -0.4 6.2 -8.2 Percent [+]
to GDP
Exports 8598.1 8145.6 9045.9 2831.6 Million [+]
NPR
Imports 112526.8 115868.3 141240.6 8000.3 Million [+]
NPR
Gold Reserves 6.43 6.4 6.5 0 Tonnes [+]
Terms of Trade 143.3 142.8 163.9 129.1 Index [+]
points

35
Terrorism Index 5.3 4.36 6.86 4.39 [+]
FDI 17512.8 13503.9 17512.8 -469.7 Million [+]
NPR
Source: Nepal Rastra Bank, 2018
4.2.6 Countries by Foreign Direct Investment
The list of the countries by foreign direct investment are presented in the following
table:
Table 7: Countries by Foreign Direct Investment (2018/19)
Country Last Previous Range
Argentina 179.91 July/19 161 435:18.22 USD Millions
Australia 80891 Dec/18 55183 80891:-37051 AUD Millions
Brazil 7657.89 Jul/19 2190 16275:-101 USD Millions
Canada 21668 Jun/19 12022 50326:-8640 CAD Million
China 892.6 Aug/19 788 1350:18.32 USD HML
France 1487 Jul/19 2348 21742:-7723 EUR Million
Germany 1077.25 Jun/19 15706 141352:-32190 EUR Million
India 7001 Jun/19 3034 8569:-1336 USD Millions
Indonesia 104.9 Jun/19 87.2 112:35.4 IDR Trillion
Italy -2621 Jun/19 1808 14203:-10787 EUR Million
Japan 12360.55 Jul/19 14726 70855:-3825 JPY Hund.
Million
Mexico 5703.4 Jun/19 12399 21009:-63.9 USD Millions
Netherlands -19677 Mar/19 -186670 189388:- EUR Million
186670
Russia 10206 Mar/19 1506 40140:-3922 USD Millions
Saudi Arabia 1249 Mar/19 829 11747:264 USD Millions
Singapore 39895.4 Jun/19 37893 39895:-4442 SGD Million
South Africa 11733 Mar/19 -8219 52712:-13910 ZAR Million
South Korea 6704915 Jun/19 3172507 10820073:0 USD THousand
Spain -1628 Jun/19 -2227 23250:-9566 EUR Million
Switzerland 1088433 Dec/17 1061331 1088433:20959 CHF Million
Turkey 13200 Dec/18 10900 22046:1800 USD Millions
United -15010 Mar/19 15947 82539:-44536 GBP Million
Kingdom
United 52432 Jun/19 53720 55831:-9988 USD Millions
States
Source: Nepal Rastra Bank, 2018
4.2.7 FDI in Manufacturing Sector
The report of NRB obtained further information to identify position and the nature of
enterprises, annual turnover, major exports and imports, the share of domestic input

36
contents, and employment status of such enterprises which were operating in the
manufacturing sector. Out of total sampled firms, 37 firms were from manufacturing
sector. The sample information provided by respondent firms is aggregated to find the
nature and characteristics of the manufacturing industry.
Gross domestic product (GDP) growth edged down to an estimated 6.3% in fiscal
year 2018 (FY2018, ended 16 July 2018) from 7.9% in fiscal year 2017 that
accelerated from a low base (Figure 1). Floods of August 2017 crimped paddy
production by 1.5% compared to the previous year. Manufacturing grew by 8.0%,
though down from 9.7% a year earlier, on increased availability of electricity.
Construction grew at a sustained pace with the sub-sector taking off at sub-national
levels and the renewed acceleration of post-earthquake reconstruction. Several small
sized hydropower projects commenced operation, raising the installed electricity
capacity by 10.5% in FY2018. Tourists’ arrival (Figure 3) increased favoring the
expansion of hotels and restaurants and travel and communication services as the
economy recovered from the 2015 earthquakes and the September 2015 – February
2016 trade and supply disruptions, further bolstered by the prospects of a more stable
socio-political environment.
Figure 8: Gross Domestic Product of Nepal

Source: Nepal Rastra Bank, 2019

Nepal's Foreign Direct Investment (FDI) increased by 53.7 USD mn in Jul 2019,
compared with an increase of 24.3 USD mn in the previous quarter. Nepal's Foreign
Direct Investment: USD mn net flows data is updated quarterly, available from Oct
2002 to Jul 2019. The data reached an all-time high of 80.1 USD mn in Jan 2018 and
a record low of -6.0 USD mn in April 2006. CEIC converts quarterly Foreign Direct
Investment into USD. Nepal Rastra Bank provides Foreign Direct Investment in local

37
currency. Nepal Rastra Bank average market exchange rate is used for currency
conversions. Foreign Direct Investment is in quarterly frequency ending in April, July,
October, January of each year. The fiscal year is from July 16th to July 15th.

In the latest reports of Nepal, Current Account recorded a deficit of 548.3 USD mn in
Jul 2019. The country's Nominal GDP was reported at 30.7 USD bn in Jul 2019.

Table 8: Nepal's FDI in 2019

Last Previous Min Max Unit Frequency Range


53.7 24.3 -6.0 80.1 USD Mn. Quarterly Oct 2002-
July2019
July 2019 April April Jan 2018 As of July
2109 2006 2019
Source: Nepal Rastra Bank, 2019
Figure 9: Foreign Direct Investment (2016 to 2019)

Nepal has received as much as Rs 61 billion foreign investment in the recently


concluded fiscal year 2017/2018. This amount is three times the amount of foreign
investment Nepal had received in the previous year, fiscal year 2016/17. It has been
observed that the country’s investment climate continues to remain low since the past
few months. According to Nepal Department of Industry (DoI) statistics, foreign
investments in Nepal decreased significantly by 63 percent in the first eight months
(review period) of FY 2018-19 compared to the same period, last year. The country
recorded NPR 34.9 billion in investments between mid-July and mid-February of FY
2017-18, while this year the investments dropped to NPR 11.25 billion. However, FDI
commitment in terms of numbers of projects increased drastically during the current
review period compared to last year. The nation received investments for 194 projects in

38
the first eight months of 2017-18, whereas it registered investments for 224 projects during
the same period, this year.

Variable Mean Std. Dev Variance


Gross Domestic Product 5.25 3.19 7.6625
Foreign Direct Investment 43.28 20.394 311.94
The findings in above table indicate the descriptive statistics of studied variables
throughout 2016-2019. The mean of GDP and standard deviation are USD 5.25
Billion and USD 3.19 Billion, respectively. On the other hand, the mean of FDI is
USD 43.28 Billion, the standard deviation is USD 20.394 Billion. The data in the
above table shows that FDI is positively related to GDP.
4.2.8 Reasons for Decline in Foreign Investment for Nepal
 Energy Sector 2018: As per the DoI, Nepal did not receive any investments
in the energy sector this year, whereas it had received an investment of NPR
22 billion during the same period last year.
 Agriculture and forestry sector: Nepal received foreign investments worth
NPR 1.8 billion between mid-July and mid-February last year, while it
recorded only NPR 88 million during the same period this year.
 The country also experienced a drop in investments for its information and
technology and mineral sectors this year.
4.2.9 Type of Firms
The respondents firms under manufacturing sector have been broadly categorized
under two sub-sectors namely fast moving consumer goods (FMCGs) and industrial
goods (IGs). The firms which produce food and beverages, tobacco and soap are
included under FMCGs whereas the firms which produce metal products, cement,
plastic etc are categorized as industrial subsectors. Of 37 sampled firms, there are 35
percent FMCGs firms and remaining 65 percent firms are industrial goods producing
firms.
Figure 10: Type of Firms

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4.2.10 Turnover of the Firms
Out of 37 firms, 3 firms are not in operation. Out of remaining 34 firms, 16 firms have
annual turnover of more than Rs. 1 billion, 11 firms have turnover less than Rs. 100
million whereas 7 firms lie between these two categories.
Exports and Imports: Only 11 firms of manufacturing sector export goods. Of
which, 8 firms are IGs category and 3 are FMCG category. The firms under FMCG
category exports goods like juice, tooth powder and paste, feeds, crude mustard and
soybean oil, among others, whereas the industrial goods producing firms with FDI
export goods like galvanize sheets, GI pipe, black pipe, fittings, loop mats, gabion
boxes, plastic closures, among others.
Table 9: Major Exports of Firms with FDI (2018)
S.N. Categories Number of Firms
1. Domestic supply 23 -
2. Exports 11 -
3. FMCG 3 Justice, tooth powder and
paste, feeds, crude mustard
and soyabean oil
4. IGs 8 Galvanize sheets, GI pipe,
black pipe, fittings, loop mats,
gabion boxes and plastic
closures
5. Not in operation 3
Total 37
Depending upon the nature of firms, the FDI related firms import various goods. The
major goods imported by such firms have been summarized. The imported goods by
manufacturing firms are under the category that ranges from the raw materials to
machinery for production of goods. As an example, the firms which produce foods

40
and beverages imports flavors, concentrate, sugar among others. Manufacturing firms
fulfill on average 66.5 percent of their input needs from imports. Four firms use cent
percent imported inputs. The firms producing plastics and related items use all
imported inputs to manufacture their final product. 18 firms use more than 50 percent
of imported inputs along with domestic inputs. In contrast, one firm, related to water,
uses hundred percent domestic inputs.
Table 10: Major Imports
Types of Firms Major Imports
Food and beverages Flavour, concentrate, sugar, gas, pretpeform
Tobacco Leaf tobacco, packaging materials
Soap Chemicals
Metal Hot rolled sheets, cold rolled sheets, zinc, tin, lead
metal, MS billet, zinc ingot
Cement Gypsum, bauxite, iron ore, coal
Plastic and rubber Granules, resins
Source: Nepal Rastra Bank, 2019
For a least developed-country (LDC) like Nepal with huge saving-investment gap;
limited, albeit growing, revenue to gross domestic product (GDP) ratio; and limited
amount of foreign aid flow, foreign direct investment (FDI) is considered an
indispensible mode of development financing. Although FDI is traditionally viewed
as foreign investments made in manufacturing and services sectors, which
undoubtedly contribute to employment opportunities as well as economic growth,
they are increasingly attracted by host countries for meeting financing requirements
for large infrastructure projects. This is an area in which foreign investors used to shy
away from investing in the past due to various risks associated with such projects
resulting from long gestation and pay back periods. In the context of Nepal, although
FDI is generally welcome in all sectors, due to acute dearth of resources for
infrastructure financing, it has become an imperative in the latter sector. It must be
noted that the utility of foreign investment for a country like Nepal does not end there.
It is an instrument for the transfer of technology from the technology-rich countries to
technology-deficient countries. Similarly, leadership and managerial skills transferred
by foreign investors and eventual expansion of local knowledge and skill base,
whether at the enterprise level or at the sectoral level, are considered yet another
spillover impact of foreign investment.

41
4.2.11 Agriculture

Nepal’s geography, topography, water resources and ample supply of labour give
Nepal a comparative advantage in agricultural production. Nepal’s natural gifts are
agricultural diversity and verified topographical and temporal conditions making the
land suitable for the production of various kinds of agro-based products, medicinal
herbs and essential oils among others. Nepal’s altitude ranges from just 59 meters at
Kechana Kalan in Jhapa district to 8848 meters at Mount Everest, the world’s highest
point. The country’s economy is largely dependent on the agricultural sector, which
accounted for 29.4% of GDP in 2016/17 and absorbs about two thirds of the labour
market. Around 25% of the total land area is cultivable land; another 33% is
comprised of forest land and the rest is mountains.
The agricultural sector in Nepal is gradually transitioning its growth from subsistence
to commercial scale. The country also shares an open border with five adjoining
Indian states comprising approximately 350 million people, a huge, duty-free market
for agricultural products. The Government of Nepal (GON) has taken an integrated
value chain approach in its development efforts and has encouraged all stakeholders
to support this approach through the Agriculture Development Strategy (ADS) and
Nepal Trade Integration Strategy (NTIS).

 There are good opportunities in input markets (such as for seeds, fertilizers,
agricultural infrastructure and technology).

 Due to favorable climatic conditions, the focus on high value organic crops is
increasing.

 Opportunities exist in processing, packaging and branding of non-timber forest


products (medicinal and aromatic plants) cardamom, ginger, aquaculture,
vegetables, floriculture, tea, coffee, honey and other agro products.
Even countries with very successful agricultural export sectors attract a small
proportion of FDI into their agricultural sectors. FDI can play a critical role in raising
farmers’ income by bringing new technology, market knowledge, infrastructure and/or
investing in agriculture-related manufacturing. FDI can have a pioneering impact,
developing or rejuvenating entire industries.
Nepal has been pursuing a liberal foreign investment policy and been striving to
create an investment-friendly environment to attract FDI into the country. Our tax

42
slabs one of the lowest and our position is fairly good in ease of doing business.
Profitable areas of investment include hydropower, industrial manufacturing, services,
tourism, construction, agriculture, minerals, and energy (MoFA, 2018).
Nepal government policy is also to introduce foreign direct investment (FDI) in the
agricultural sector, although according to the World Bank Nepal Overview Report,
FDI still only accounts for 0.6 percent of GDP. Agriculture sector still could not
attract private investment despite the governmental prompt policy. Poor farm-market
linkage, lack of policy, and political unwillingness may be the reasons behind it.
Furthermore, the remittance is not being used properly and largely in the agriculture
sector due to the lack of policy and political willingness. Remittance, which has been
found in other countries to be contributing to increasing agriculture yield— are not
contributing to boosting agriculture yield in Nepal. (Asian Development Bank, 2014).
Government is supportive of Foreign Direct Investments in agriculture, with 100%
foreign shareholding allowed in most agribusinesses. Foreign Direct Investment (FDI)
is allowed in most agricultural sub-sectors except those categorized as cottage
industries. As a result of a liberal FDI policy, most reported commercial funding of
agribusinesses is through Foreign Direct Investments route. Over US$ 13 million of
FDI has been channeled into agriculture by foreign entities from over 20 countries
since 2008 (DOI, 2013). The highest capital inflows are reported from India, China,
Denmark, and USA into agribusinesses in tea, dairy, MAPs, and fruit processing.
Nepal’s geography, water resources and ample supply of labour gives Nepal a
comparative advantage in agricultural production. The temperature and rainfall differ
from place to place, but the wet season is roughly the same in all areas of Nepal. The
sector has seen NPR 3.37 billion (USD 338 million) in foreign investment in about
180 agriculture projects, which employ over 7,500 people. Significant investment
needs (private and public) in agro-infrastructure, natural resource development,
research and food safety nets. Agriculture sector attracted a meager amount of FDI.
The FDI in agriculture includes coffee plantation and herbs processing firms. As of
mid-July 2016, the share of FDI in agriculture sector was just 0.3 percent.
4.3 Impacts of FDI in Nepal
The foreign direct investment (FDI) inflows are often seen as an important catalyst for
economic growth in developing countries. The benefits of foreign direct investment to
both host and investor economies are generally recognized, and there is a wide

43
demand for reducing or eliminating barriers to global FDI integration. In the past few
decades, continuous effort in multilateral trade negotiations, regional trade
agreements, bilateral and multilateral investment accords have, to some extent,
reduced obstacles to FDI. The World Trade Organization (WTO) has made trade
negotiations aims at continuing this trend. Thus, it is not surprising to see that FDI
flows have increased dramatically in recent decades.
Foreign direct investment plays vital role in developing countries for foster national
economic growth. FDI creates employment opportunities, raise the level of domestic
wages, faster economic growth and improve the distribution of income. FDI has not
been widely practiced in Nepal. With the settlement of political conflicts, a growing
number of international projects are willing to assure in Nepalese economy. FDI tends
to increase in the near future in Nepal. Nepal needs FDI to have very good
infrastructural development like road network, waterways, and airways. The domestic
capital is inadequate since this sector needs very huge investments. FDI is needed for
Nepal to boost the industrialization process from running stage to take off stage.
Government of Nepal is incapable to attract the foreign investors to invest in Nepal.
There are various factors create a substantial problem in the inflow of FDI in Nepal
that directly affect the economy preventing a growth of production, employment and
income. Even though, the country is bountiful of numerous positive attributes. Trade
policy and trade strategy has succinctly identified sectors having comparative
advantages. Prudent monetary, fiscal and trade policies have created a modern and
stable macroeconomic framework with the potential to create a dynamic, competitive,
and investment attracting economy in the decade ahead. Above all, conclusion of
political settlement, labor unrest and power crisis are the critical factors. However,
political agenda and economic agenda have to move in a best synchronized way.
Provided the conditions, a potential influx of FDI is at the country’s door step but due
to knock its door
FDI in structurally weak economies remained fragile as illustrated by the fact that
flows to the least developed countries (LDCs) fell by 17 per cent to $26 billion in
2017. This negative trend remains a matter of concern for policymakers in Least
Developed Countries (LDCs) where international investment is indispensable for
sustainable industrial development. FDI can serve as a principal complement to
domestic investment and capacity building for the growth and development of the

44
LDCs. The unique aspect of FDI is that it brings in a package of resources — capital,
technology, skills, management know-how and marketing capabilities — together
with production activities, to a host economy. While these resources and capabilities
are utilised in the host-country affiliates and help optimise profits for the investing
transnational corporations (TNCs), they also have an array of direct and indirect
impacts that can, under suitable conditions, be very beneficial to the host economy.
They can produce not only products for domestic consumption or for export, income
and employment but also linkages and spillovers that bolster the capabilities of
domestic firms and human resources, contributing to capacity-building and
accelerated growth in the host economy. When the firm-specific assets that constitute
the basis for international production through FDI are effectively leveraged and
integrated with country-specific advantages of host economies, FDI has the potential
to augment consumer welfare, create employment opportunities, increase labour and
environmental standards, and contribute to improved living standards and poverty
alleviation.

CHAPTER V

SUMMARY, CONCLUSION AND RECOMMENDATIONS

5.1 Summary

Foreign Direct Investment (FDI) is an important source of capital for economic


growth in developing countries. It provides a package which constitutes new
technologies, management techniques, finance and market access for the production
and movement of goods and services. However, attracting FDI is a major challenge
for host countries as it faces the challenge of identifying the major factors that
motivate and affect the FDI location decision. The main FDI location factors are cost,
market infrastructure, and technological, political, legal and socio-cultural factors.
Despite several conflicting circumstances, Nepal is attempting to sort out overarching
issues of FDI concerning with economic development. That’s why Nepal is at a point
where from it can excel for economic goals via FDI. The set trends illustrate that
various indicators pertaining to FDI in the country has been improving since peace
process was begun in 2006. This analysis comes to conclusions that the country owns
unique advantages and, thereby, opportunities of FDI useful for the country’s

45
prosperity. Yet FDI in the country is not free of challenges, thus, that need to be timely
addressed with prudent measures.

FDI in structurally weak economies remained fragile as illustrated by the fact that
flows to the least developed countries (LDCs) fell by 17 percent to $26 billion in
2017. This negative trend remains a matter of concern for policymakers in Least
Developed Countries (LDCs) where international investment is indispensable for
sustainable industrial development. Though FDI inflow in Nepal is low compared to
its neighboring countries, it has been on an increasing trend over the recent past.
Foreign investors from 39 countries have made investment in 252 firms in Nepal. The
FDI stock reached Rs. 137.7 billion (6.1 percent of GDP) in 2015/16, which was
mainly driven by the rise in reserves of FDI-based industries. Reserve constitutes two-
third of FDI stock. The services sector accounts for the highest share (70.2 percent) of
outstanding FDI in Nepal. In terms of paid up capital, the highest FDI in Nepal is
from India. When total stock of FDI is taken into consideration by including reserves
and loans, West Indies happens to be the major source region with FDI of Rs. 62.8
billion as of mid-July 2016.

The political instability, resultant policy and legal uncertainty do not seem to offer a
hospitable investment climate to the foreign investors in Nepal. Militancy of trade
unions, which have become emboldened particularly in the aftermath of the
declaration of Nepal as a republic, has created havoc for the overall business climate
of the country. Despite various inter-locked issues, controversies and transitional
political circumstances, Nepal is well positioned among low-income economies to
move emphatically on development policy and spending priorities during the next
decade. However, there isn’t much investment, neither by the foreign countries, nor
by neighboring country. And rate of FDI is not increasing at a required rate. Towards
end this, political, business, bureaucratic leaders are required to come closer and act in
a business-friendly chorus. The whole gambit of course ends with aggressive
marketing that Nepal is ripe for hosting FDI. The employment rate in various sectors
has to be increased to generate employment situation in Nepal.

5.2 Conclusions

Foreign direct investment is when an individual or business owns 10 percent or more


of a foreign company. If an investor owns less than 10 percent, the International

46
Monetary Fund defines it as part of his or her stock portfolio. A 10 percent ownership
doesn't give the investor a controlling interest. It does allow influence over the
company's management, operations, and policies. For this reason, governments track
who invests in their country's businesses.

A foreign direct investment (FDI) is an investment in the manner of commanding


ownership in the company in one nation by an existence based in the different nation.
It is thus recognized from an international portfolio purchase by a perception of direct
monopoly. The beginning of the investment seems not influence the interpretation, as
an FDI: the investment may be made either "inorganically" by purchasing an
organization in the objective nation or "essentially" by extending the processes of
actual business in that nation. Foreign expertise can be an essential agent in
developing the current technological manners in the nation. Foreign direct Investment
helps in developing the character of outcomes and methods in selective sectors. It also
benefits in generating jobs and decrease unemployment predicaments. The
government of India has extended to expose its market to FDI on a sector-by-sector
foundation. The administration has the authorization to increase FDI frontiers up to
100% without Legislative permission, except in the field of annuities, insurance, and
defense.

The amount albeit small compared to that of neighboring countries, FDI inflow in
Nepal has been increasing in recent years. FDI stock reached 6.1 percent of GDP in
2015/16, which was mainly driven by increase in reserves of FDI-based industries.
Reserve constitutes two-third of FDI stock. Foreign investors from more than 39
countries have made investment in 252 firms showing great interest in the service
sector which has received 70.2 percent of outstanding FDI in Nepal. Industrial sector
is the second preferred sector for FDI. However, the agriculture sector is the least
preferred sector having only 0.3 percent of outstanding FDI as in mid-July 2016.
Loans have a very small share (i.e. 3.7 percent) in total outstanding FDI. In terms of
paid up capital, India brought the highest FDI in Nepal. However, if we consider total
stock of FDI by including reserves and loans, West Indies surpasses India with FDI
Stock of 62.8 billion as in mid-July 2016. All FDI from West Indies has been made in
the services sector. Regarding the manufacturing firms established with FDI, two-
third of them are producing industrial goods, the rest are producing fast moving
consumer goods. These manufacturing firms employ 87 percent domestic workers.

47
Given the volatile outlook for remittance inflows going forward, the focus on
attracting FDI will be necessary, not only to increase investment in the economy, but
also to maintain external stability. Further research on identifying the problems and
prospects of FDI in Nepal would be helpful in unleashing the investment potential in
the days to come.
5.3 Recommendations

Some recommendations have been provided to attract foreign direct investments in


Nepal:

i. The main stakeholders and government have to come up with new policy to
open up foreign investment in other sectors as well which helps to move
informal activities into formal economy.

ii. It is noted that formulation of new plan and policy will be a necessary
condition but nonsufficient step for the development, so the key
recommendations are made for the effective steps and actions to be taken by
the concerned authority to review and implement the introduced plan and
policies, which in turn, will help in flow of FDI to achieve, accelerate, and
sustain the high rate of economic growth in Nepal.

iii. In order to attract investment as well as to compete with various neighbouring


states in India offering favourable incentives to attract investments, Nepal
needs to immediately enact the legislation on special economic zone (SEZ)
and expedite the process of completing SEZs, which are under construction.
The SEZs should, at a bare minimum, provide required infrastructure facilities
and strictly implement flexible labour laws that allow for adherence to strict
disciplines, including linking of wages with productivity, imposing no-work
no-pay system, and imposing ban on strikes.
iv. Power problems should be resolved through reduction in leakage, operating
thermal plants to the fullest extent possible and importing electricity from
India. A market-based mechanism should be fixed for the adjustment of fuel
prices.
v. Board of Investment should be empowered further for providing fast track
approval to big projects. Contradictory provisions in various legislation should
be streamlined and ambiguities corrected so as to provide predictability to

48
investors. A system should be devised such that facilities provided by laws are
automatically granted to investors.
vi. Enforcing of strikes and bandhs through violent means should be banned.
vii. Current level of investment made on education should be maintained and skill
development trainings should be provided by mobilizing government
resources as well as those of the private sector and donors.
viii. Resources and expertise should be provided to DOI for monitoring the
developmental impact of FDI, including preparation of database on the
proposed, approved and realized flow of FDI, employment generated, tax paid
and corporate social responsibility projects implemented by them.
ix. Policy making process should be made inclusive, capacity of government
officials should be enhanced and strict reward and punishment system should
be devised within the bureaucracy.
x. A sustained improvement in business climate should be achieved, among
others, through consistency in the application of policy and law, adequate
provisioning of infrastructure facilities and a proactive agenda for the
development of skill and technology.
xi. Foreign and local investment—both public and private or combinations
thereof—should be mobilized for the construction of hydroelectricity projects
(mainly focusing on reservoir type) and for the construction of roads and trade
corridors.

Nevertheless, what actions the government takes further in creating an investment


climate will decide the future of FDI. And the policymakers ought to have a clear
vision of using FDI for meeting the aspirations of our own national development and
prosperity.

49