Research “A Trend analysis on Foreign Direct investment in Nepal”

Submitted By

Mr. Narayan Pandey

31 March 2010

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1.1 Motivation and objective of research

Foreign Direct Investment (FDI) is getting more and more important in today’s globalized world.
Most firms and organization now not only limit their operation in home country, they have started
investing in other countries for access of customers and to become more competitiveness and
improve their performance in integrated world economy. There is a specific benefit of foreign direct
investments such as research and development (R&D), marketing and other country specific
advantages such as raw materials access or human resource advantage.

This research try to find the flow of foreign direct investment (FDI) in Nepal and comparing the flow
of FDI’s in comparison to other developing countries. Since Nepal is not able to attract foreign direct
investment in comparison to other developing countries, so it would also try to figure out the
difficulties in part of Government of Nepal for attraction of FDI’s.

1.2 Methodology

After selection of research question it is important to find on the methodologies to be used. In this
research I have considered the following methodologies.

Primary Data: For the collection of primary data I would do forward an questionnaire, do an open
interview and conduct some formal interview in regarding the issue of foreign direct investment in
Nepal.

Secondary Data: The secondary data will be collected from Department of industry (Nepal
government), World Bank reports covering the topics. I have mainly considered secondary data for
purpose of research.

Sampling:

Since it is not feasible to conduct the studying all data, so i have done sampling of data. I have
covered data from year 2001 to 2008 to study the trend of FDI’s in Nepal.

Data Gathering procedure:

I have collected data from ministry of industry (Nepal Government) and visited World Bank site for
secondary data. However i have conducted an open interview and review of literature for primary
data.

Data Analysis

Yin (1994) state that the goal of analyzing the data is to handle the evidence fairly to produce
convincing logical conclusion and to rule out alternative interpretation Data analysis involve turning
a series of recorded observation into descriptive statements.

For analysis of data I have used excel to interpret in form of table, graph and chart to process
unprocessed data into an understandable form. For convenience I cover patterns of inflow of FDI in
Nepal which is analyzed into year wise and sector wise from 2001 to 2008. I have also presented the
available facts and review related to south Asia and analyzed in context of Nepal.

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1.3 Schedule (Grant Chart)

1/3/10 6/3/10 11/3/10 16/3/10 21/3/10 26/3/10 31/3/10

Research Proposal design

Questionnaire design

Open Interview

Data collection

Data analysis

Report Writing

Proof reading

Fig.1: Grant chart for research writing

The above grant chart gives my detail scheduling for research. For example I would start the
proposal design from second week of the march and complete it on last week of March.

Literature review

As of July 2003 the FDI statistics shows that there were 835 foreign investment project registered in
Nepal. The inflow of FDI started in early 1980’s with gradual recovery of economy but the inflow was
quite minimum with annual average of US$ 500,000. According to (UNCTAD 2006)the distinct
acceleration of FDI started during 1990’s after the restoration of democracy maintaining average
inflow of US$ 23 million in 1997. Although FDI is made by approximately 50 countries, india account
for more than 40% of total inflow.

World Bank (2003) states that in comparison FDI inflow is lower than other land lock countries.
UNCTAD (2003) states that FDI’s in Nepal are doing poor performance. The reason beside it is due to
Nepal is land lock resulting in higher cost of transportation and low productivity of labour. Dunning
(1981) suggest that transnational corporations (TNCs) will invest in a foreign countries if host country
offer certain advantage like resources, facilities which it can get in foreign land like supply factors
(labour force, tax policy) and demand factors like (market size, geographic location).

2.1 Research Review

Nepal is a landlocked country situated between two emerging countries India and China. Nepal is
successful in attracting FDI’s in niche sectors like tourism, herbal product, mineral deposit and hydro
power. According to UNCTAD (2003) FDI has enable the country to export non-traditional
manufactured product like micro transformers and personal consumer product. However according
to some previous study there is some constrained because of political instability, unclear foreign
investment law, poor labour regulation and weak infrastructure.

According to Ministry of industry, Nepal by the end of march 2006, 1067 foreign investment project
were registered with total project cost of nepali rupees 92.83 billion. In 1992, the government

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introduced a new policy which encourages to attract FDI in productive sectors like agriculture,
banking, hydropower, manufacturing and in tourism industry.

2.2 Data Analysis

During the period from 1988-2001 a total of 721 projects were approved making a investment of
US$ 1.15 billion where the portion of foreign direct investment was 26.3%.It can be seen from the
that these investment generate a total of 86425 jobs. (Table 1)

Table 1: Status of total Approved Investment Projects, 1988-2001

Investment
total Total fixed Employment
No. Of amount(millio Share Investmen (No. Of
Status Projects n of dollars) of FDI t workers
Operational 270 536.1 18.7 479.2 41310
un der-
construction 49 82 30.3 73.1 6210
Licensed 135 214.1 31.9 172.7 15399
Agreement
signed 183 182.6 39.9 126 13214
Closed 19 17.4 24.1 14.4 1798
Cancelled 65 121.4 27.1 106.1 8494
Total approved 721 1153.6 26.3 971.6 86425
Source: Investment Promotion Board, Department of Industry, commerce and suppliers

The number of foreign investment shows a steady rise during a period from 1988-1996, with
exception in 1994 when there was temporary dip because of political uncertainty (communism in
government for short period) and since 1997 the investment is erratic except in year 2000 when
there was decline compared to mid 1990’s.

The major countries that invest in Nepal are India, United states, China, Norway, Japan, Canada, the
republic of Korea and Hong Kong. However the major country is India which are approximately 40%.
Some of the major foreign investment companies are Unilever, British American Tobacco (BAT),
Coca-Cola, Standard Chartered and Hyatt. Among the developing countries investor india is so far
the largest investor in Nepal, out of total 249 are from India. Table 2 shows the Nepal performance
in attracting the number of foreign direct investment (FDI) from 1989-2002. Please note that the
figure from 1989-94 is the average during those years. In terms of comparison to south Asian Nepal
leads to Bhutan only, it might be because the country geographic location. It is a land lock country
situated between China & India. Although it is difficult to conclude from empirical evidence, political
instability, unclear policies uncertainties are the major reason for lower attraction of FDI in Nepal.

Nepal is now more flexible to allow full foreign ownership with exception in some industries like
cigarettes, bid and alcohol. Despite this flexibility share of foreign capital in total investment during
the period 1988-2001 averaged a mere 26.3% with the share in annual approval from varying in
range of 8%-54%. Moreover table 2 shows the number of FDI inflows in developed countries and

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 developing countries, and in South Asian countries from which can interfere that the number of FDI
inflow in Nepal is low except in Bhutan.

Table 2: FDI inflows, Nepal in international context

  1989-94 1995 1996 1997 1998 1999 2000 2001 2002

38491 48191 68602 17908 139295 82382
World 200145 331068 0 1 8 3 7 5 651188
Developed 21968 26965 47226 82464 112052 59837
Countries 137124 203462 8 4 5 2 8 9 460334
-
Developing 16522 21225 21367 64555 22544
Countries 63021 127606 2 7 3 9 272429 6 190854

South Asia 817 2945 3685 4939 3504 3095 3092 3982 4581
Bangladesh 6 2 14 139 190 180 280 79 45
Bhutan 1 0 1 1 0 0 0 0 0
India 394 2144 2591 3619 2633 2168 2319 3403 3449
Maldives 6 7 9 11 12 12 13 12 12
Nepal 4 8 19 23 12 4 0 21 10
Pakistan 304 719 918 713 507 530 305 385 823
Srilanka 102 65 133 433 150 201 175 82 242
Source: UNCTAD various years

In many countries of south Asia the investors from newly industrializing economy were attracted in
garment exports but they have ignore Nepal despite the opportunity it offer for accessing lucrative
developed markets., circumventing quota restrictions(Athukorala, 1995; Wells, 1994).

If we look at the FDI in context of operation region wise (fig 1) we see that the manufacturing sectors
have focused in Kathmandu city (headquarter) and in Terai region, there is however service sectors
focused only in Kathmandu whereas the hilly and mountain region are ignored. Most of the
manufacturing sector however have concentrated on clothing industry.

Fig, 1 Number of operational FDI, by region

80
70
60
50
40
30
20
10
0
Kathmandu Terai Hilly & mountain region

Manufacturing Service

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Source: Compiled from the data provided by department of industry & commerce, Nepal

3.1 Summary and Finding

Nepal has made a good start in implementing market oriented policies to promote FDI but still there
is long way to go in reaping the benefits of FDI in a global economy through FDI. Under a new policy
the foreign industry have played roles in export of carpet and garment however they are motivated
by generalized system of preferences and quotas rather than country specific comparative
advantage. Similarly the employment generation is also negligible. It seems that FDI are attracted
only for “easy profit”. The quota protected garment industry has failed to make significant
contribution in productivity growth. The foreign firm has largely focused on Kathmandu Valley and in
Tarai region so the investment is rather skewed. Moreover the huge industries-tourism has high
scope but due to lack of transportation the potential is not fully utilized.

Nepal obviously has great disadvantage because of its geographic location but if we see it from an
international context the geographic location does not only matters but the overall investment
climate does.

It can be interfere from the above data that the flow of FDI in Nepal is few in comparison to other
developing countries. Nepal has still to revive it policies to attract more FDI. A efficient stock market,
easy repatriation of income, deregulation are some of the precondition that Nepal need to achieved.

At the same time political instability, labour union, unclear policies have disturbed the existing
industries in Nepal. For instance the Kodak company and colgate-palmolive have shut down their
factories because of unfavourable environment.

3.2 Recommendation

Due to time and resource limitation the research could not explore the depth study of FDI’s trend in
Nepal. However it was seen that the policy makers usually follow the global trend and policies to
attract in Nepal which is not feasible in part of Nepal economic environment. In order to attract
foreign industry it is important to have a host country stable political environment, good governance
and smooth financial system. The several studies made in FDI suggest that it is basically hard to
setup business in Nepal because of unsystematic labour union, unfavourable policies. The attraction
of FDI is seen on tourism sector but due to lack of infrastructure the sector is not fully utilized. The
government of Nepal should be liberal in regulation of FDI, transfer of profit, transfer of technology,
transfer of skilled human resource. The foreign industry who wants to invest in mountain and hilly
region should be given special incentives.

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References

Athukorala, p. & Menon, J (1996)“Foreign direct investments and industrialization in Malaysia;

exports, employment and spillovers” Asian Economic Journal, 10(1), pp. 29-4. Available from
www.gep.org.uk/shared/shared.../01_2008__Ging_Lee.pdf (Accessed at 20 march,2010)

Ministry of industry, commerce and suppliers (2005); www.moics.gov.np. Available from

www.businesspatrol.com/.../ministry-of-industry-commerce-and-supplies,9491.html (Accessed at
16 March 2010)

United nation conference on trade and conference (UNCTD) 2003; www.unctad.org, Available from
http://www.unctad.org/Templates/WebFlyer.asp?intItemID=2657&lang=1 (Accesed at 23 March
2010)

Yin, R (1984), Case study research: Design and methods (1 st ed).Bevery hills, CA: Sage publishing