Foreign Direct Investment in Nepal

Only available on StudyMode
  • Download(s): 365
  • Published: October 27, 2011
Read full document
Text Preview
Nepal had attracted modest FDI in niche sectors such as tourism, herbal products, mineral deposits (lime stone), and light manufacturing apparel; hydro power and that it had positive impacts on exports, particularly garments. FDI has also enabled the country to export non- traditional manufactured products such as micro-transformers and personal consumer products (UNCTAD, 2003b). Investment was mainly in low-technology, labour-intensive production. The impact of FDI had also been modest, primarily in job creation. According to the study, FDI inflow was constrained by political instability, outdated foreign investment law, rigid labour regulations and poor physical infrastructure. This situation remains current due to political instability and political transition. FDI is considered beneficial in view of its contribution to technological transfers, enhancement of managerial capability and new opportunities for market access. FDI, particularly in the form of equity investment, adds to the capital stock of the country and thus enables the recipient country to achieve faster economic growth through momentum in capital formation. Increases in FDI are also seen as leading to increases in exports by creating international markets through new marketing and organizational skills. The inflow of FDI in Nepal began in the early 1980s through the gradual opening up of the economy. From 1980 to 1989, FDI inflows to Nepal were minimal with an annual average of US$ 500,000. FDI inflow showed a distinct acceleration during the 1990s averaging US$ 11 million per annum during 1990-2000, peaking at US$ 23 million in 1997 (UNCTAD, 2003b and 2006). This was primarily due to Nepal¶s more liberal trade policies, which comprised 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. All in all, FDI inflow is the lowest in Nepal even when compared with other landlocked countries (World Bank, 2003). A comparison of other Asian countries, Nepal indicates a poor performance of FDI (UNCTAD, 2003b). The fact that Nepal is landlocked, coupled with its infrastructure and low level of labour productivity has also constrained FDI inflow into the country. Many foreign investors in Nepal are individuals rather than corporate entities. Most of the FDI projects are of small size 72%, medium-sized 16.5% and large-sized industries 11.5%

Much of the FDI inflow is for joint ventures because of non-commercial risks by offering shares to local partners.
Most of the FDI in Nepal is Greenfield-type investment rather than acquisition. FDI is highly concentrated in the manufacturing sector, which accounted for slightly more than 45 per cent of approved FDI projects. Within the manufacturing sector, the textile and garment industry accounts for 28 per cent of total foreign investment, followed by the chemical and plastic industries at 25.3 percent. Tourism is second, accounting for almost 25 per cent of total FDI projects, followed by the service sector with 20 per cent of FDI projects. Although the electricity, water and gas sector has just a few FDI projects, it ranks fourth highest in terms of the size of FDI inflow. In total, FDI comes from 50 countries. But the scale and number of projects by each country vary considerably. Of that total, in terms of investment, India alone accounted for more than 40 per cent, followed by the United States and China. Those three countries alone account for two-thirds of cumulative FDI in Nepal. In terms of number of FDI projects, India ranks first, followed by China, Japan and the United States. Nepalese and Indian nationals do not need passports or visas when traveling between their countries. Similarly, the Indian currency is freely convertible in Nepal. A special relationship with India regarding preferential trade arrangements also...
tracking img