FDI in Nepal: Trends and Prospects

What is FDI?

FDI is a flow of entrepreneurial capital in the form of some mixture of managerial skills and financial lending. It directly increases the capital formation of the recipient country. FDI is the outcome of mutual interests of multi-national firms and host countries. According to the International Monetary Fund (1997). FDI is, "investment that is made to acquire a lasting interest in an enterprise operating in an economy other than that of the investor. The investor's purpose being to have an effective voice in the management of the enterprise". IMF definition of FDI treats both reinvested and other direct capital flows such as debt securities, trade credits and grants as part of FDI. This definition is accepted by most countries and also by UNCTAD for reporting FDI data. Briefly speaking, economic benefits of FDI include contribution to physical capital formation, contribution to human capital development, transfer of technology and know-how, expansion of market and expansion of trade. The technological changes that it brings about increase factor productivity, change product and export composition, encourage research and development practice and efficiency to local production.

The role of FDI has been accepted as very important in the development of developed as well as developing countries. It has always attracted a good deal of attention and given rise to heated controversy.

FDI: Trends and Prospects of Nepal

Nepal has been receiving some foreign direct investment (FDI), but the amount has been insignificant when compared with that received by other developing countries, including South Asian one. But the list of foreign investors includes such renowned companies as British American Tobacco (BAT), Unilever, Coca- Cola, Standard Chartered and Hyatt. India is the major source of FDI in Nepal so far (about 40%), followed by the United States, China, The British Virgin Islands, Norway, Japan, the Republic of Korea, Canada and Hong Kong (China) in terms of the amount of approved FDI.

The major area of FDI has been manufacturing, followed by services and, in particular, tourism more specifically, FDI is concentrated in manufacturing products for export to India (e.g. vegetable fat, soap, tooth paste, Ayurvedic preparations) and overseas (ready made garments). This is followed by hotels. More recently there has been significant FDI in hydropower, taking advantage of the further policy liberalization in this sector. (Source:http://mskathayat.blogspot.com/2011/02/fdi-in-nepal-case-study.html)

Persistent labor problems, power outages, political instability, cumbersome regulations and tax regime (leading to high transaction costs), corruption, and lack of adequate infrastructure (leading to high transportation costs), among others factors, are impacting FDI inflows to Nepal.  According to Enterprise Survey 2009, 62 percent of enterprises think instability is the biggest constraint. There are plenty of opportunities for FDI in agriculture and agro-based industries, flowers and flowering plants, Pashmina, garments, tourism, health, education, IT, nursing homes, construction, hydropower and alternative energy sources, and manufacturing, among other sectors.

Source: http://sapkotac.blogspot.com/2011/.../fdi-inflows-to-nepal-1990-2010.html

FDI inflow trends:

The Foreign direct investment; net (BoP; US dollar) in Nepal was last reported at 87,799,640.00 in 2010, according to a World Bank report released in 2011. The Foreign direct investment; net (BoP; US dollar) in Nepal was 38,176,180.00 in 2009, according to a World Bank report, published in 2010. The Foreign direct investment; net (BoP; US dollar) in Nepal was reported at 9,95,123.90 in 2008, Over the past 14 years, the value for this indicator has fluctuated between 87,799,640.00 in 2010 and ($6,647,984.00) in 2006.

A FDI inflow to Nepal was US$ 5.94 million in 1990. It then decreased to almost nil up until 1995. In 1996, FDI inflow was US$ 19.16 million and fluctuated quite a bit until 2000, when FDI inflow was negative US$ 0.48 million. Till 2006 FDI inflow has turbulent fluctuation and after 2007 it has been increasing and reached to $87,799,640.00 in 2010  (details in Table:1)

Table:1 Net Foreign Direct Investment In Nepal

Year	FDI Inflows	Year	FDI Inflows	Year	FDI Inflows
1972	$30,000.00	1985	$650,000.00	2000	($484,827.00)
1973	($10,000.00)	1986	$1,170,000.00	2001	$20,850,000.00
1974	$250,000.00	1987	$1,390,000.00	2002	($5,952,541.00)
1976	($40,000.00)	1988	$680,000.00	2003	$14,778,090.00
1978	$410,000.00	1989	$420,000.00	2004	($417,346.40)
1979	$300,000.00	1990	$5,940,000.00	2005	$2,451,785.00
1980	$300,000.00	1991	$2,220,000.00	2006	($6,647,984.00)
1981	($230,000.00)	1996	$19,160,170.00	2007	$5,741,706.00
1982	($30,000.00)	1997	$23,056,470.00	2008	$995,123.90
1983	($600,000.00)	1998	$12,024,660.00	2009	$38,176,180.00
1984	$950,000.00	1999	$4,350,000.00	2010	$87,799,640.00

Source: http://databank.worldbank.org/

Source: www.unctad.org

On the basis of the table data a line chart is constructed so to provide a visual impact which makes easier to understanding about the inflows trend in Nepal from the year 2000 to 2010. We can notice that FDI inflows is fluctuated from 2000 to 2008 and after the year 2008 it is raising constantly over the period till 2010 and reached to $87.79 million from the initial stage of ($0.484) million in year 2000.

FDI In Nepal: in relation with South Asian Countries

FDI inflows to Nepal was the second lowest in South Asia in 2010. It received approximately US$87 million in 2010. The highest recipient was India with US $24 billion and the lowest Bhutan with US$ 11.69 million. The total FDI inflows in the world was US$ 124.37 billion, to developing countries US$ 573.57 billion, and to South Asia US$ 31.95 billion (South Asia excluding India received US$ 7.3 billion of which approx 30 percent went to Pakistan).

Nepal received 0.12 percent of total FDI inflows to South Asia in 2010. Similarly, it received 0.15 percent and 0.17 percent of FDI inflows to LDCs and landlocked developing countries in 2010. The corresponding figures in 1990 to these destinations, respectively, were 2.79 percent, 1.04 percent, and 0.98 percent. In 2005, they were 0.02 percent, 0.02 percent and 0.04 percent.  (details in table:2)

Table:2 Total FDI Inflows (Sector wise)

Total FDI inflows
FDI inflows (US$ million)	1990-1995	1996-2000	2001-2005	2006-2010	2009	2010
Nepal	8.16	89.80	31.70	77.89	38.56	38.99
Total FDI inflows
FDI inflows (US$ billion)	1990-1995	1996-2000	2001-2005	2006-2010	2009	2010
South Asia	7.53	72.40	51.56	188.43	42.46	31.95
Least developed countries (LDCs)	8.40	79.49	56.34	132.93	26.54	26.39
Landlocked developing countries	7.81	65.02	42.29	102.30	26.19	23.02

Source: http://sapkotac.blogspot.com/2011/.../fdi-inflows-to-nepal-1990-2010.html

As the news published in Abhihan Daily dated 3^rd March 2012, on the month of Magh 2068 total 15 companies with investment amount of NPR. 76crore 82 lakhs,15 companies were registered on Department of Industry, Nepal. Out of these,10 companies are going to be invested by foreign investors, with the total investment of NPR 18crore 79 lakhs.  Among the registered companies 5 are production oriented and 5 are service oriented with 4 from foreign investment.