Foreign Direct Investment Nepal, Its consequences and challenges

1. A Report on
FOREIGN DIRECT INVESTMENT
SUBMITTED BY:
TSERING NGUTUK GURUNG (PAS076MSIEM018)
SUBMITTED TO:
NIRMAL PRASAD BARAL
PASHCHIMANCHAL CAMPUS
INSTITUDE OF ENGINEERING (IOE)
LAMACHOUR,POKHARA
18th
Jan.2021

2. ABSTRACT:
Foreign direct investment (FDI) is a part of the global economy that has grown
quickly over previous decades. It has grown so fast, in fact, that the academic and
policymaking worlds have struggled to keep up with the expanding phenomena.
Much debate has ensued, and Nepal has been one of the many countries caught
up in it. Nepal is a land-locked country with a much less massive GDP, and is
accordingly looking for the best ways to grow. Some have seen FDI as a potential
answer, while some have seen it as a potential problem. This paper gives an
overview of the topic and corresponding debate, particularly as it applies to
Nepal. Lot of developing countries including Nepal have made policies aimed at
reducing FDI barriers.
Foreign capital globalization, particularly FDI inflow is increased significantly in
developing countries, due to the fact that FDI is the most stable and prevalent
component of foreign capital inflows (Adams, 2009). Foreign direct investments
are a very important factor for the development of a country.

3. INTRODUCTION
1. Definition: A 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 in a foreign company. However,
FDIs are distinguished from portfolio investments in which an investor merely
purchases equities of foreign-based companies. Foreign direct investment have
been an engine of economic growth in an increasingly globalized world economy,
and has been one of the most important subjects in the study of international
business.
FDI is a key element in international economic integration because it creates
stable and long-lasting links between economies. FDI is an important channel for
the transfer of technology between countries, promotes international trade
through access to foreign markets, and can be an important vehicle for economic
development. The meaning of FDI is not restricted only to international
movement of capital. Its definition also encompasses the international movement
of elements that are complementary to capital – such as skills, processes,
management, technology etc. Reinvestment of profits from overseas operations, as
well as intra - organisational loans and borrowings to overseas subsidiaries are also
categorised as FDI.
2. Types of FDI: The investment market is an enormous space. Individual investors
and large companies can invest in companies within their countries as well as
overseas. When one company invests in a business in another company in a
foreign land, the investment is deemed as foreign direct investment or FDI. There
are four different types of foreign direct investments.
i. Horizontal FDI: The most common type of FDI is Horizontal FDI, which
primarily revolves around investing funds in a foreign company belonging to
the same industry as that owned or operated by the FDI investor. Here, a
company invests in another company located in a different country, wherein
both the companies are producing similar goods. For example, Toyota
assembles cars in both the United States and China, Burger King opening
restaurants in China.

4. ii. Vertical FDI: Vertical FDI is another type of foreign investment. A vertical FDI
occurs when an investment is made within a typical supply chain in a
company, which may or may not necessarily belong to the same industry. As
such, when vertical FDI happens, a business invests in an overseas firm which
may supply or sell products. Vertical FDIs are further categorised as backward
vertical integrations and forward vertical integrations. For example, If Burger
King buys a farm in China to produce meat, it will be considered as a vertical
investment.
iii. Conglomerate FDI: When investments are made in two completely different
companies of entirely different industries, the transaction is known as
conglomerate FDI. As such, the FDI is not linked directly to the investors
business. For instance, the US retailer Walmart may invest in TATA Motors,
the Indian automobile manufacturer. Tata Group is one of the world’s most
diversified businesses and a great example of a conglomerate.
iv. Platform FDI: The last types of foreign direct investment is platform FDI. In the
case of platform FDI, a business expands into a foreign country, but the
products manufactured are exported to another, third country. Almost all
luxury items marketed by famous fashion brands are manufactured in
countries like Bangladesh, Vietnam and Thailand. They are then sold in other
countries, a clear case of platform FDI at work.
3. Advantages of FDI:
There are many ways in which FDI benefits the recipient nation:
i. Increased Employment and Economic Growth
ii. Human Resource Development
iii. Development of Backward Areas
iv. Provision of Finance & Technology (technology spill overs)
v. Increase in Exports
vi. Exchange Rate Stability
vii. Stimulation of Economic Development
viii. Improved Capital Flow
ix. Creation of a Competitive Market
There are three benefits of FDI to home countries:
i. Repatriated earnings from profits from FDI,

5. ii. Increased exports of components and services to host countries, and
iii. Learning via FDI from operations abroad.
4. Disadvantages of FDI:
There are three primary costs of FDI to host countries:
i. The loss of some (but not all) economic sovereignty associated with FDI:
Because of FDI, decisions to invest, produce, and market products and
services in a host country are being made by foreigners.
ii. Local competition: It is possible that MNEs may drive some domestic firms
out of business.
iii. When MNEs make profits in host countries and repatriate (send back) such
earnings to headquarters in home countries, host countries experience a
net outflow in the capital account in their balance of payments.
There are two costs of FDI to home countries:
i. Since host countries enjoy capital inflow because of FDI, home countries
naturally suffer from some capital outflow.
ii. Job loss: Many MNEs invest abroad while simultaneously curtailing
domestic production—that is, they increase employment overseas but lay
off domestic employees.
5. FDI in Nepal: Landlocked, lacking substantial resources for economic
development, and hampered by an inadequate transportation network, Nepal is
one of the least developed nations in the world. The economy is heavily
dependent on imports of basic materials and on foreign markets for its forest and
agricultural products. Nepal imports essential commodities, such as fuel,
construction materials, fertilizers, metals, and most consumer goods, and exports
such products as rice, jute, timber, and textiles. Despite of acquiring world eight
out of tenth biggest mountains; filled with plenty of medicinal herbs; it has failed
to attract enormous foreign investors. A country equipped with enormous natural
beauties, and all-time favourable climate is desperately lacking a term, Foreign
Direct Investment.
The political and administrative system of Nepal has not made those changes in
trade, investment, and related economic policies that would expedite economic

6. development and attract foreign capital. The government’s development
programs, which are funded by foreign aid, also have failed to respond directly to
the needs of rural people. Nepal’s great river systems provide immense potential
for hydroelectric development. Hydropower is the one of the areas with immense
potential to attract FDI.
FDI is an important source for the developing countries, which has plenty of
resources but is economically weak with a deficiency in finance, technology and
competitive management. FDI introduces new technology, knowledge, skills, new
management practices, etc. To the recipient economy. Generally, practice of FDI
in Nepal is not satisfactory. However, a Nepalese economy is gradually attracting
a growing number of international projects due to recent restructuring of
government. Thus in the near future increased FDI may be expected in Nepal.
The domestic capital is inadequate for infrastructural development 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.
The FDI in Nepal is not expected, as where it needs to be. The flow of inward FDI
was high during mid-1990s but eventually declined due to country’s civil war of
Maoist insurgency. The Comprehensive Peace Accord was signed on 21 November
2006 between the Government of Nepal and the Unified Communist Party of
Nepal. With the settlement of political conflicts, 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.
FDI inflows to Nepal have remained substantially low as compared to other
neighbouring South Asian countries. Nepal has been destination for FDI from 49
different countries. In terms of paid-up capital, China is major investor followed
by India. But in terms of FDI stock, West Indies remains in top spot with Rs. 62.55
billion followed by India, China, Ireland, and Singapore with Rs. 41.74 billion, Rs
26.81 billion, Rs 10.30 billion and Rs. 7.68 billion respectively.

7. CONCLUSION:
The political instability, unclear and unpredictable policy and legal framework is
major setback causing unfavourable environment to the foreign investors in
Nepal. Nepal needs to have a clear vision in terms of an FDI policy. As LDC, Nepal
doesn’t have required the savings that can be directed towards investment. Yet,
Nepal remains one of the poorest and slowest-growing economies in Asia, with its
per capita income rapidly falling behind its regional peers and unable to achieve
its long-standing ambition to graduate from low-income status. This indicates that
Nepal needs foreign capital to take advantages of existing resources and promote
growth in economy. 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.

8. REFERENCES:
Nepal Rastra Bank. (2020). A Survey Report on Foreign Direct Investment in
Nepal.
Ministry of Industry, Commerce and Supplies; Department of Industry. (2018).
Industrial Statistics Fiscal Year 2074/75.
UNCTAD. (2019). Methodological Note World Investment Report 2019.
Organization for Economic Cooperation and Development (OECD). (2008). OECD
Benchmark Definition of Foreign Direct Investment 4th
Edition.