FDI in Nepal (Foreign Direct Investments)

GP Sir
Posted by GP Sir 7 months Ago

Concept of FDI

FDI stands for Foreign Direct Investment. It refers to the investment made by a foreign company or individual in another country to establish a lasting interest in that country’s business. FDI can take various forms, such as acquiring shares in a foreign company, establishing a new business, or reinvesting profits from an existing business.

In Nepal, FDI is governed by the Foreign Investment and Technology Transfer Act, 2019. The country has been trying to attract FDI by offering various incentives such as tax holidays, repatriation of profits, and simplified procedures for setting up a business. In recent years, Nepal has seen an increase in FDI, with significant investments in the tourism, energy, and infrastructure sectors.

Types of FDIs

FDI can be classified into four different types based on the investment’s motive, structure, and direction. These types are:

  1. Horizontal FDI: This type of FDI occurs when a company invests in the same industry or product line in a foreign country as it does in its home country. The main motive behind horizontal FDI is to access new markets, increase market share, and achieve economies of scale. For example, a Japanese car manufacturer setting up a plant in Nepal to produce cars for the I market.
  2. Vertical FDI: In vertical FDI, a company invests in a foreign country to acquire inputs or sell its products. It can be further divided into two types: backward integration and forward integration. Backward integration occurs when a company invests in a foreign country to acquire raw materials or other inputs for its production process. For example, a US-based beverage company investing in a sugar plantation in Brazil. Forward integration, on the other hand, occurs when a company invests in a foreign country to sell its products in that country. For example, a South Korean electronics company invests in a retail chain in the United States to sell its electronic products.
  3. Conglomerate FDI: Conglomerate FDI occurs when a company invests in a foreign country in a completely different industry than its home country. The primary motive behind this type of FDI is to diversify the company’s portfolio, reduce risk, and increase profits. For example, a Japanese electronics manufacturer investing in a French cosmetics company.
  4. Platform FDI: Platform FDI occurs when a company invests in a foreign country to use it as a base for its operations in other countries. The main motive behind platform FDI is to take advantage of the country’s favorable business environment, low tax rates, and easy access to nearby markets. For example, a Chinese e-commerce company is investing in Singapore to use it as a base for its operations in Southeast Asia.

FDI in Nepal

Foreign Direct Investment (FDI) is an important driver of economic growth in many countries, including Nepal. FDI inflows into Nepal have been relatively low compared to other developing countries. However, Nepal has made several policy reforms to attract FDI in recent years.

According to the World Investment Report 2021 by the United Nations Conference on Trade and Development (UNCTAD), Nepal received FDI inflows worth $134 million in 2020, a decline of 15% compared to the previous year. The report also highlighted that Nepal’s FDI inflows were concentrated in the services sector, followed by the manufacturing and primary sectors. India is Nepal’s largest FDI source, accounting for over half of total FDI inflows.

fdi-in-nepal

To attract more FDI, Nepal has implemented several policy reforms in recent years. In 2019, the government introduced a new Industrial Enterprises Act to provide a more business-friendly environment for investors. The act provides several incentives, including tax holidays and subsidies for export-oriented industries.

Nepal has also established Special Economic Zones (SEZs) to attract FDI in specific regions. The SEZs offer several incentives, including tax exemptions, simplified customs procedures, and access to infrastructure facilities.

Despite the policy reforms, Nepal faces several challenges in attracting FDI. The country has a weak infrastructure, a difficult business environment, and political instability. Corruption and bureaucratic hurdles also discourage foreign investors. Additionally, Nepal’s small market size and lack of economic diversification limit the potential for FDI.

Current Status of FDI GDP of Nepal

According to the World Bank, the FDI net inflows to Nepal were US$ 202 million in 2019, a slight increase from US$ 198 million in 2018. However, FDI net inflows as a percentage of GDP were only 0.9% in 2019, indicating that FDI is not yet a significant contributor to Nepal’s economy.

According to the NRB, net FDI inflows to Nepal increased by 0.2 percent in 2020/21 to Rs. 19.5 billion. The table below shows the FDI net inflows and the FDI net inflows as a percentage of Nepal’s GDP from 2017/18 to 2020/21 (data from NRB).

Year FDI Inflow (Million USD) GDP (Billion USD)
2017/18 1192.80 24.47
2018/19 1319.60 28.19
2019/20 1667.10 29.27
2020/21 1749.30 30.27

Source: Nepal Rastra Bank, Survey Report on FDI, 2021

Foreign Investment Policy in Nepal

Foreign investment policy in Nepal aims to promote and facilitate foreign investment. The government of Nepal has been working on reforming its foreign investment policies to make the country an attractive destination for foreign investors.

The foreign investment policy of Nepal provides a favorable environment for foreign investors to invest in various sectors of the economy. The government has opened up various sectors, such as hydropower, agriculture, tourism, and information technology, for foreign investment.

The government has also set up the Investment Board Nepal (IBN) to promote and facilitate foreign investment in the country. The IBN is a one-stop shop for foreign investors, providing all the necessary information and assistance for investing in Nepal.

Some of the key features of the foreign investment policy in Nepal include the following:

  1. 100% foreign ownership allowed in most sectors
  2. Easy repatriation of profits and dividends
  3. No restrictions on the transfer of technology
  4. Tax holidays and other incentives for foreign investors
  5. Simplified procedures for obtaining licenses and permits
  6. Protection of intellectual property rights
  7. Prohibition of expropriation without adequate compensation

Why is FDI low in Nepal?

FDI inflows in Nepal have been relatively low compared to other countries in the region. This is due to various factors, including political instability, inadequate infrastructure, a complex regulatory environment, corruption, and a lack of skilled labor. These factors have made it difficult for foreign investors to do business in Nepal, which has led to a lack of investment in the country.

Additionally, Nepal has a small economy and a limited market, which may not be attractive enough for foreign investors looking for larger markets. The country also faces challenges related to its geographical location, which limits access to international markets and increases transportation costs.

Advantages/ Benefits and Disadvantages of FDI (Foreign Direct Investment)

Advantages of FDI Disadvantages of FDI
1. Increased capital inflows and investment 1. Competition with domestic firms
2. Creation of employment opportunities 2. Risk of exploitation of local labor
3. Transfer of technology and knowledge 3. Dependence on foreign investment and control
4. Access to larger markets and new customers 4. Adverse effects on the balance of payments
5. Increased productivity and efficiency 5. Political and regulatory risks
6. Upgrading of infrastructure and technology 6. Cultural clashes and communication issues
7. Improved quality and standards 7. Environmental degradation and social disruption
8. Increased tax revenues and economic growth 8. Economic instability and volatility
9. Encouragement of exports 9. Threat to national sovereignty and security
10. Promotion of international cooperation and relations 10. Repatriation of profits and loss of profits to the host country

Challenges of FDI in Nepal

There are several challenges that Nepal faces in attracting and retaining foreign direct investment (FDI), some of which include the following:

  1. Political instability: Nepal has faced political instability for several years, creating a negative perception among foreign investors and making them hesitant to invest.
  2. Weak infrastructure: Nepal’s infrastructure, such as transportation and energy, is relatively weak compared to other countries in the region. This makes it difficult for investors to operate efficiently and cost-effectively.
  3. Corruption: Corruption is a significant issue in Nepal and can deter foreign investors from investing in the country due to concerns over fair competition, transparency, and accountability.
  4. Complex regulatory framework: The regulatory framework in Nepal can be complex and time-consuming to navigate, discouraging potential investors from considering the country as a viable investment destination.
  5. Limited access to finance: Access to finance is a significant challenge in Nepal, particularly for small and medium-sized enterprises (SMEs), which comprise the bulk of the economy. This limits their ability to invest in new technologies and expand their operations.
  6. Lack of skilled labor: There is a shortage of skilled labor in Nepal, particularly in specialized industries, which can limit the ability of foreign investors to find the necessary talent to operate effectively.
  7. Geopolitical challenges: Nepal faces geopolitical challenges, including its location between India and China, which can impact the country’s relations with these major trading partners and make it difficult to attract FDI.

Measures to attract FDI in Nepal

There are several measures that Nepal can take to attract more foreign direct investment (FDI). Some of them are:
  1. Liberalizing the investment climate: Nepal needs to adopt an investor-friendly approach by reducing bureaucratic procedures, eliminating red tape, and simplifying investment policies to attract more foreign investors.
  2. Providing incentives: The government of Nepal can offer tax holidays, investment subsidies, and other incentives to foreign investors willing to invest in the country.
  3. Developing infrastructure: Nepal needs to improve its infrastructure to make it more attractive to foreign investors. This includes upgrading transportation networks, improving electricity and water supply, and building better communication systems.
  4. Enhancing transparency and accountability: Nepal needs to increase transparency and accountability in its investment policies and practices to create a conducive environment for foreign investors.
  5. Encouraging public-private partnerships: The government of Nepal can encourage public-private partnerships (PPP) in infrastructure development projects to attract more FDI.
  6. Promoting exports: Nepal needs to diversify its export base and promote its exports to international markets to create more opportunities for foreign investors.
  7. Investing in education and training: Nepal needs to invest in education and training to create a skilled workforce capable of meeting foreign investors’ demands.
  8. Strengthening legal and regulatory framework: Nepal needs to strengthen its legal and regulatory framework to protect foreign investors and their investments.
  9. Establishing economic zones: Nepal can establish economic zones with world-class infrastructure and facilities to attract foreign investors.
  10. Fostering regional integration: Nepal can foster regional integration by enhancing connectivity with neighboring countries and participating in regional trade agreements to create a larger market for foreign investors.

List of FDI companies in Nepal:

  1. Standard Chartered Bank Nepal
  2. Nabil Bank Limited
  3. Himalayan Bank Limited
  4. Unilever Nepal Limited
  5. Coca-Cola Bottlers Nepal Limited
  6. Dabur Nepal Limited
  7. Nepal Lever Limited
  8. Tata International Limited
  9. Chaudhary Group
  10. Surya Nepal Private Limited
  11. Sanima Bank Limited
  12. Laxmi Bank Limited
  13. Mega Bank Nepal Limited
  14. NIC Asia Bank Limited
  15. Citizens Bank International Limited
  16. Everest Bank Limited
  17. Global IME Bank Limited
  18. Mahindra & Mahindra Limited
  19. Berger Paints Nepal Private Limited
  20. Surya Nepal Pvt. Ltd. (British American Tobacco)

Suggested Readings: