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Foreign Direct Investment and Technological Change issues in Nepal

Raj Rai, Middlesex University/London

The global FDI statistics reported by UNCTAD shows that global FDI across globe was
US $54.07 billions in 1980 which raised to US $ 207.27 billions in 1990 and US $
1,833.32 billions ( 34 times of 1970) in 2007. Nepal’s neighboring countries China and
India has become able to attract a significant portion of FDI in their countries. China’s
net FDI inflow was US $ 57 millions in 1980 which raised to US $ 3,393 in 1990 and
reached to US $ 83,521 million in 2007.Similarly, India’s net FDI inflow in 1980 was US
$ 49 millions which raised to US $ 237 million and increased to US $ 22,950 millions
2007. The FDI inflow is seen pessimistic for Nepal. FDI inflow statistics is not available
for 1980; however, it was US $ 6 million in 1990 which figure remained same in 2007 as
well (UNCTAD report).

Foreign Direct Investment (FDI) is one of the factors for growing trade, investment and
economic growth for the countries. The integration of global economies is enhanced by
flow of FDI across the globe. Multinational companies (MNCs) are the vehicle of FDI
through which they transfer capital and technologies from one geography to another
geography. Primarily, MNCs go cross boarder operations with the view of market
seeking, raw materials explorations and low operations costs. MNCs are important for
developing economies because they invest in the green fields which help to improve the
infrastructure of the economy.

The main importance of FDI on economic growth is that FDI are embedded with the new
technologies which become the pivotal driver for economic transformation of developing
and under developed economies. The local firms learn new technologies from the MNCs
in one hand; they try to improve the managerial and technological aspects of the
operations on the other hand. In the recent years, every country has the policy to attract
more FDI in their economic policies.

Nepal’s neighboring countries both China and India have achieved higher economic
growth rate along with the massive inflow of FDI (table below). Not only India and
China, other neighboring countries recorded higher level of economic grow in the recent
years.

GDP, FDI and economic growth in South Asian countries in 2007

Bhuta Sri
Year 2007 Bangladesh n India Maldives Nepal Pakistan Lanka China
GDP Billions 1,102.3
US 73.689 1.197 5 1.054 11.28 144.032 32.349 3,382.45
FDI in million 83,52
US 666.4 78 22,950 15 15 5,333 529 1
GDP
1growth
rate 6.6 15.2 8.4 4 3.5 6.5 7.5 13.01
Source: Unctad, world investment report, 2008 and IMF, World economic outlook database, 2008.

According to Central Bureau of Statistics of Nepal, there are 1,423 firms are operated
with FDI in 2006/07 with the NRs.121, 484 billions. These firms employ 121,484 people
which are significant number of people where unemployment is a big problem.
Manufacturing sector dominates the FDI inflow in Nepal. Tourism and service industries
are next largest FDI involved industry. Energy and mineral sectors have least numbers of
FDI. On the basis of scale of firms majority of the FDI are small and medium scale firms.
India has the highest number of FDI in Nepal, US investment is second largest amount of
FDI, China third, South Korea fourth, Norway fifth, Japan sixth and British Virgin
Islands, seventh in Nepal (US department of state, as of October, 2007).

Nepal attracts small amount of FDI and its impact on the economy negligible (UNCTAD,
2003).However, foreign direct investment in readymade garment heavily contributed
foreign exchange earning from export. Second tourism sector attracted FDI which
enabled the standard of Hotels in Nepal. Tourism industry contributes one of major
source of foreign exchange earning. Nepal benefited from the activities of Transnational
Corporations (TNCs) (UNCTAD, 2008). Developing countries are in need of heavy
capital investment on infrastructure but governments can’t finance that much. Therefore,
foreign direct investment is an alternative source of financing for faster economic growth
of Nepal.

Foreign Direct Investment and One Window Policy of 1992, Foreign Investment and
Technology Transfer Acts of 1992, Privatization Act of 1994 and Industrial enterprises
Act of 1992 are the major trade and FDI related acts in Nepal. The Foreign Investment
and one window policy of 1992, foreign investments are allowed up to 100 percent in the
list of acceptable forms; establishes the currency repatriation guidelines. Nepal became
the member of WTO in 2004. So, Nepal has to comply with international trade rules by
opening its markets to the world and reducing the custom duty rates. Nepal has launched
the policies to encourage FDI, however, due to various problems like bureaucratic delays,
political instability, and lack of access to sea ports, difficult land transport, scarce raw
materials, inadequate power supply, non-transparent tax administration and unclear labor
relations.

Technological changes are the main stimulus for economic growth in the country. The
technological is cheaper to bring through FDI than any other means. Nepal is not able to
attract such technologies in almost all sectors. In particular case, Nepalese Banking sector
stands comparatively competitive in the domestic market. Nabil Bank where first FDI
was allowed in1984. Similarly, Nepal Investment Bank, Nepal Grindlays Bank had
established with FDI. Banking sector has been seen one of the innovative and successful
industry in Nepal. Government owned banks (Rastriya Banijya Bank and Nepal Bank)
have also compelled to upgrade the facilities due to the competitive situation. This is an
example shows how FDI upgrades the managerial and technical qualities of local firms.
Technological changes are the main source of development. In this respect, attraction of
FDI with new technologies is the urgent need for Nepal to revolutionize economic
growth. Nepal can’t remain closed with the world economy to presence its existence in
the world. Without the foreign technologies (from MNCs) going in to world market is
impossible.

According to Nepal Industrial Statistics 2007/08(CBS, Nepal) there are 1,423 firms are
operating with foreign investment from 139 countries. India has the largest number of
investment in Nepal (393), China 179, Japan 132, South Korea 94, UK 94, Germany 61
and Switzerland 27. Manufacturing sector has the largest number of FDI involved sector
(565) and hotel and resort sector (370) second. Textile and garment 210 and energy,
water and gas sector has 32 companies. One of the major problems of industrial
development is low scale supply of power and energy in the country. Nepal’s water
resources are one of the frequently addressed issues by each new government. However,
the resources is neither optimally used by country itself nor attracted foreign capital in
this sector. The political instability is the major hurdle for foreign investors to make long-
term investment in Nepal. If the country could attract major investors in the energy
(hydro) sector that could simultaneously encourage other sectors to attract more FDI in
other sectors as well.

Government of Nepal has realized the importance of FDI. Hence, Foreign Direct
Investment and Technology Transfer Act, 1992 (FITTA) was brought in implementation
in the policy level. Policy framework itself is not sufficient for attracting FDI,
facilitations and support for MNCs is necessary to retain them to contribute in the
economy. Political instability and labor dispute issue are some other major hurdles for
MNCs and they are reluctant to investment in Nepal. Hence, government should address
these issues to retain FDI and attract more FDI in the country.