Attracting Foreign Direct Investment in Nepal

The countries of Latin America, South-East Asia and Africa were initially reluctant toward foreign investment and consequently pursued a policy of import substitution until the 1970s. However, after the introduction of structural adjustment programs, many countries opened up their economies. The countries of Eastern Europe and the former Soviet Union have also liberalized their economies during the process of transition from state-controlled economies to market economies during the 1980s and 1990s. Many low income countries of the world have formulated policies to adopt Foreign Direct Investment (FDI) in order to increase economic growth and human development. Nepal also took some measures to allow FDI in the country for economic growth, such as formulating the appropriate policy and act in 1992. Nepal is in dire need of both market seeking and non-market seeking FDI because there lies a huge market for both kinds of FDI. However, the data taken from Department of Industry (DOI) shows that the flow of FDI in Nepal is not so impressive because only $95 million was attracted in the period of 21 years.

There are several factors that contribute to attracting such low volume of foreign investment in Nepal. Political and policy level instability is considered one of the main reasons because it is the pre-requisite for bringing any sort of investment. There are various bureaucratic hassles that discourage potential investors to start their business ventures in Nepal. It is even very difficult to register a company and get business visa. In addition to this, getting approval for FDI is also lengthy and cumbersome. That is why most of the Non-Resident Nepalese (NRN) bring money in the form of hundi and make investment in their projects. Although, it is illegal, they are compelled to do so to do business in Nepal. Brining money through these channels does not reflect the true financial position of a country. Besides this, financial institutions loose a large amount of money that can be earned in the form of service and other fees.

The recently introduced minimum threshold for FDI creates a hurdle for bringing such investment as investors want to start a small business in the beginning and if it works, then scale it up. Foreign investors have a hard time getting information as well because they cannot get comprehensive information from a single authority. The different officials of various ministries interpret policies and acts in different ways, either because they are unaware of the exact policies or so that they can find avenues for petty corruption. In addition, the process is very time consuming. Foreign investors have been known to lose patience during the approval process and have diverted their investment elsewhere even after getting approval. During the repatriation of profit, investors face similar administrative hassles and bureaucratic delays.

If the concerned authorities create an automated system wherever possible, the problem of delays and corruption will be resolved to some extent. It could accelerate rate of approval of FDI and also aid in repatriation of profits, consequently attracting further investment in future.

(This article was originally published on 30th May, 2013).