FDI is a cross-border investment in which a resident in one economy (the direct investor) acquires a lasting interest in an enterprise in another economy (the direct investment enterprise). By convention, a direct investment is established when the direct investor has acquired 10 percent or more of the ordinary shares or voting power of an enterprise abroad. FDI may involve the creation of a new establishment or investment, joint ventures, or the acquisition of an existing enterprise abroad (cross-border mergers and acquisitions). A direct investment comprises not only the initial transaction establishing the investment relationship between the direct investor and the direct investment enterprise, but also all subsequent transactions between investors and affiliated enterprises. Once established, increases in FDI can take the form of injections of additional equity capital, the reinvestment of earnings not distributed as dividends and intercompany debt, such as the extension of suppliers’ credits or loans.
Nepal and Foreign Investment
With the expectation to supplement domestic private investment through foreign capital flows, transfer of technology, enhancement in management skills and productivity and to get into the global market, the Government of Nepal (GON) has created a competitive and investment friendly environment. It provides attractive incentives and facilities to the foreign investors. It does not levy income tax on dividends, export earning and interest earned on foreign loan. There is an exemption of tax, duty and fee on the products, machinery, equipment, tools and raw materials used by an export industry. FDI flows to Nepal during 1980s were very low but it showed a distinct acceleration during the 1990s averaging Rs. 1564.39 million per annum during 1990-2000. FDI peaked in 1997 at Rs. 2395.54 million while the fiscal year 1999/2000 actually had the lowest annual total of Rs. 1417.61 million. The unprecedented rise was primarily due to Nepal’s more liberal trade policies, which comprised of tariff rate reductions, the introduction of a duty drawback scheme, the adoption of a current account convertibility system and liberalization of the exchange rate regime. A reversal in the rising trend took place from the beginning of the 2000s. Nepal received an FDI of Rs. 2.88 billion in the fiscal year 2006/07 which increased to Rs. 9.81 billion in 2007/08 as an outcome of housing boom and newly explored hydro potentials. Most of the FDI in Nepal is Greenfield-type investment rather than acquisition. The agricultural sector received eleven foreign investment projects in 2007/08. The tourism sector lured the maximum number of FDI projects, 67 during the year, whereas the manufacturing sector saw 51 FDI projects registered during the year. Likewise, Nepal received FDI commitment from investors across 39 countries in 2007/08. Indian investors topped the list with maximum FDI of Rs. 4.55 billion. An FDI of Rs.2.92 billion was received from South Korean investors while China, with an FDI of Rs. 448 million, was the third largest investment generator for Nepal during the year followed by United Arab Emirates with an FDI of Rs. 403 million.
Prospects of FDI in Nepal
Agriculture, hydropower and tourism are the areas with the most potential for FDI. Besides, a variety of manufacturing activities and information-technology-based services already have some foreign investment in Nepal, with the ready-made-garments industry being the most prominent. The prospects of FDI in various sectors are as follows: * Manufacturing sector: It is one of the largest sectors for FDI. As per the data of 2007/08, there are 51 manufacturing related foreign direct investment projects in Nepal. Manufacturing sector can be categorized into different sectors such as energy, construction, mineral and service.
* Hydropower: Nepal has a potential of producing...