Shyam Prasad Mainali

Foreign direct investment (FDI) is a category of cross-border investment. It has the potential to stimulate and complement domestic resource mobilisation, especially in developing countries. Additionally, it may introduce new technologies, management techniques, finance and market access for the production and movement of goods and services. It serves as a catalyst for development in an open and integrated economic system, which has been an integral part of modernisation, economic growth, and industrial development. FDI is looked upon favourably as it can create employment opportunities, raise domestic wages, increase economic growth, and improve the distribution of income.

FDI has been a major economic policy issue for a great majority of nations around the world. The increasing mobility of international firms and the gradual elimination of barriers to global capital flows have stimulated competition among governments to attract FDI. Evidences have shown that it as a category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy, in an enterprise resident in another.

A large number of developmental specialists and economists have maintained that FDI, often seen as an important contribution of economic growth and countries pursuing outward-oriented development strategies, is more likely to achieve higher rates of economic growth than those that are internally focused. Investment is regarded as imperative factor of aggregate demands which eventually affect the level of aggregate supply in the economy.

Steady increase
Despite the potential benefits outlined above, an increase in FDI has been relatively steady. Political instability, conflict situations and the current COVID-18 pandemic are symptoms which have an inimical effect on attracting foreign institutions for investments. For example, the pandemic has affected output and trade and caused global FDI flows to fall by more than 40 per cent.
As a nation sandwiched between the world’s two economic powerhouses - China and India, Nepal is well-placed in order to attract FDI from its neighbours. Proximity to these nations facilitates access to market with zero tariffs, Nepal is able to enjoy better cost competitiveness in the external market. The low cost and the abundance of labour in Nepal can be unlocked in order to provide goods and services throughout the world. Nepal also possesses other strengths which could further entice FDI.

The Nepal Trade Integration Strategy mentions that the nation is far advanced in 19 areas when compared with other similar countries. Nepal has also liberalised its economy though agreements with the WTO, BIMSTEC, SAFTA as well as policies such as the appropriate trade policy and new industrial policy. Additionally, on institutional front the creation of the Investment Board Nepal for the purpose of attracting potential investors in productive sectors is vital in paving the way for FDI. There is great potential for profitability for prospective investors and with the correct approach it can lead to a great strengthening of the Nepali economy.

As aforementioned, political instability has a detrimental effect on FDI flows. Investors are less likely to take risks in a nation where the nature of political events is increasingly turbulent. Unfortunately, this has been a consistent characteristic of Nepali politics as constant political transitions have severely affected economic development and public service delivery. These conditions are further worsened by the rampant corruption which plagues the country. Despite tremendous potential, Nepal also lacks the infrastructure which could lead to sufficient power generation throughout the nation. Currently, Nepal is dependent on imported fuel and power from other nations which has hindered its economic capabilities.

Furthermore, a lack of good governance, rule of law, technology, expertise and more has deterred possible foreign investors from engaging with the Nepali market. Investment risks are considerably high in a nation like Nepal and the issues outlined above must be addressed in order to invite FDI. Nepal-India power trade agreement of 2014 has opened Indian markets for Nepali goods and services, which is a positive indication of investment security. However, politicisation of FDI and aid projects has created unnecessary hurdle for FDI flow in the country. Political parties are guilty of targeted agitation towards fruitful projects in order to meet their own political interest and closures of programmes are frequent. For example, one can look at Dangote Group of Nigeria that left Nepal without completing their project.

Positive attributes
Despite the circumstances as mentioned above, Nepal is still well positioned among low-income countries to move empathetically in formulating development policy. There is an urgent need for appropriately prioritising economic development and FDI can play a major role in achieving this goal. The nation is bountiful with numerous positive attributes which, if utilised well, can lead to an increase in inflow of FDI. Concerned trade policies and strategies need to be implemented in order to benefit from the nation’s comparative advantages. Policies have created stable and modern macro-economic frameworks with plenty of potential to create dynamic, competitive and investment friendly environment which can develop the economy in the decades ahead.

In a nutshell, the power crisis, widespread political instability, labour unrest and rampant corruption need to be addressed with urgency. Additionally, political and bureaucratic agenda could be moved in a complimentary and synchronised manner. Political and bureaucratic leaders, including top level managers of the government sectors, should coordinate and devise a common agenda for the betterment the nation and its inhabitants. Progress and prosperity of the country highly depends on the effective mobilisation of FDI in productive sectors. In such a situation, rapid reforms in the economic sector of Nepal could be possible.

(Mainali is a former secretary of Nepal government.)