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1. Introduction

Investment done by a foreign individual or company in productive capability of

another country is what is meant by foreign investment. It is the movement of capital
from the national border in such a way that it grants the investor the total authority
over the acquired asset. FDI generally transfers both physical capital and intangible
assets such as technology among nations. As per standard growth theories, the major
factors driving economic growth are capital accumulation and technological
innovation. Foreign direct investment plays a major role in the economic development
of the host nation. It acts as a launching pad to the economic, social, infrastructural,
technological developments of many host countries. This is an age of globalized
world economy and foreign direct investment is the major driving force behind the
interdependence of national economies.

FDI has a major role in taking the economy of the host country far ahead. The
economically developing as well as the underdeveloped countries are dependent on
the economically developed countries for financial assistance which would help them
to achieve some financial stability. For the last twenty years any form of foreign
direct investment has gained in a lot of capital knowledge and technological resources
into the economy of a country. Foreign direct investment is an essential and
unavoidable part of national developmental plans. There are many positive aspects for
FDI for which it is welcomed by all nations globally. It has become an integral tool
for triggering economic growth for nations all over. FDI is well versed in utilizing
human resource in the most effective way as a result of which high productivity is
obtained. Foreign direct investment has gained popularity worldwide.

2. FDI process in developing countries

Global foreign direct investment (FDI) flows fell by 23 per cent to $1.43 trillion. This
is in stark contrast to the accelerated growth in GDP and trade. The fall was caused in
part by a 22 per cent decrease in the value of cross-border mergers and acquisitions.
But even discounting the large one-off deals and corporate restructurings that inflated
FDI numbers in 2016, the 2017 decline remained significant. The value of announced
green field investment – an indicator of future trends – also decreased by 14 percent.
FDI flows to developing economies remained stable at $671 billion, seeing no
recovery following the 10 per cent drop in 2016

. • FDI flows to Africa continued to slide, reaching $42 billion, down 21 per cent from
2016. The decline was concentrated in the larger commodity exporters.
• Flows to developing Asia remained stable, at $476 billion. The region regained its
position as the largest FDI recipient in the world.
• FDI to Latin America and the Caribbean rose 8 per cent to reach $151 billion, lifted
by that region’s economic recovery. This was the first rise in six years, but inflows
remain well below the 2011 peak during the commodities boom.
• FDI in structurally weak and vulnerable economies remained fragile. Flows to the
least developed countries fell by 17 per cent, to $26 billion. Those to landlocked
developing countries increased moderately, by 3 per cent, to $23 billion. Small island
developing States saw their inflows increase by 4 per cent, to $4.1 billion.
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3. FDI flow in Nepal

Nepal has also introduced many provisions to attract FDI including a set of legal,
regulatory and institutional framework. Though FDI inflow in Nepal is low compared
to its neighboring countries, it has been on an increasing trend over the recent past.
Foreign investors from 39 countries have made investment in 252 firms in Nepal. The
FDI stock reached Rs. 137.7 billion (6.1 percent of GDP) in 2015/16, which was
mainly driven by the rise in reserves of FDI-based industries. Reserve constitutes two-
third of FDI stock. The services sector accounts for the highest share (70.2 percent) of
outstanding FDI in Nepal. In terms of paid up capital, the highest FDI in Nepal is
from India. When total stock of FDI is taken into consideration by including reserves
and loans, West Indies happens to be the major source region with FDI of Rs. 62.8
billion as of mid-July 2016.

The impact of FDI on an economy can be considered in terms of a number of

indicators such as its potential contribution to: technology and skills; establishment of
new industries and export promotion; formation of new clusters as anchor investors;
and creation of linkages with, and associated upgrading of local enterprises
(UNCTAD, 2004).
The FDI position of Nepal is substantially low in comparison with other peers, which
is just above Bhutan. Nepal’s share in the world total FDI is only 0.01 percent. Nepal
has been developing institutional and legal infrastructure to ease doing business since
the 1980s with an objective of attracting FDI. FDI inflow is however, very low
despite its great importance to Nepalese economy. Although small in size, Nepal
could be an emerging destination for FDI in South Asia. Nepal has several advantages
such as demographic structure, gradually improving business indicators, strategic
geographic location and its improving legal infrastructure. Firstly, the economically
active population in Nepal is about 56 percent which is rising every year. Availability
of cheap labor force could be an attraction for investors. Secondly, the increasing
disposable income with remittances, expansion of economic activities and changing
consumption pattern have been creating new markets for products. Thirdly, Nepal
ranks at 105, second in South Asia after Bhutan, on the World Bank’s Doing Business
Report 2018. The gradual reforms and realization for the requirement of foreign
capital in mega projects would improve the business environment for foreign
investors. Fourthly, Nepal lies in a strategic geographic location surrounded by two
populous countries, China and India, which has more than 35 percent of total world
population. Lastly, Investment Board of Nepal (IBN) has identified potential
investment sectors for FDI -hydropower, transport, agriculture, tourism, information
communication technology, mines and minerals, health and education, manufacturing
and financial institutions (NRB, 2016).
In Nepal’s case, though FDI commitments surged to Rs 49.87 billion in the first 10
months of 2017-18, the realization appears to be nominal. As per data of Nepal Rastra
Bank, Nepal received FDI worth Rs 15.51 billion during the first 10 months of 2017-
18.
Our current figure shows Nepal as a risk-free country. FDI reached Rs. 186.00 billion
as of mid-July 2018, which is 6.20 per cent of the Gross Domestic Product (GDP).
For the economic transformation of the country, that ratio should be 25 per cent.
Likewise, other investments reached Rs. 633.85 billion as of mid-July. Of which
deposit was Rs. 43.5 billion, loan was Rs. 525.2 billion, and trade credit and advance
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were Rs. 54.5 billion. Nepal has Rs. 10.5 billion special drawing rights (SDR) in
International Monetary Fund (IMF). FDI inflow of Rs. 17.51 billion was recorded in
the last fiscal year 2017/18. The significant portion of inflows was observed in the
energy, cement and hotel industries, which is good news. The FDI inflow was
Rs.13.50 billion in the previous year.
As per the NRB Study 'Current Macroeconomic and Finance Situation of Nepal based
on eleven months of data) the Balance of Payments (BOP) has increased to Rs 90.83
billion in the review period compared to a deficit of Rs.4.34 billion in the same period
of the previous year. Similarly, the current account registered a deficit of Rs 248.72
billion in the review period. Such deficit was Rs 210.24 billion in the same period of
the previous year. Likewise, the capital transfer and foreign direct investment (FDI) in
Nepal amounted to Rs 13.88 billion and Rs 11.81 billion respectively in the review
period. In the same period of the previous year, capital transfer and FDI amounted to
Rs 15.02 billion and Rs 15.88 billion respectively. In the review period, the gross
foreign exchange reserves also decreased to Rs 1030.88 billion as at mid-June 2019
from Rs 1102.59 billion as at mid-July 2018. Of the total foreign exchange reserves,
reserves held by NRB decreased to Rs 885.83 billion as at mid-June 2019 from Rs
989.40 billion as at mid-July 2018. However, reserves held by banks and financial
institutions (except NRB) increased to Rs 145.05 billion as at mid- June 2019 from Rs
113.19 billion as at mid-July 2018. The share of Indian currency in total reserves
stood at 24.2 percent as at mid-June 2019 (NRB, 2019).
Along with the process of liberalization in the mid-1980s, Nepal put efforts to attract
FDI to fill the resources gap in private capital formation. Foreign Investment and
Technology Transfer Act, 1982 was enacted to attract and utilize the foreign
investment in Nepal. Subsequently, a new Foreign Investment and Technology
Transfer Act, 1992 was enacted to facilitate the liberalization process of 1990s.
Thereafter, Nepal became member of the World Trade Organization-WTO, Bay of
Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation-BIMSTEC,
South Asia Free Trade Agreement-SAFTA and Multilateral Investment Guarantee
Agency-MIGA. Nepal signed Bilateral Investment Protection and Promotion
Agreement (BIPPA) with six countries and Double Taxation Avoidance Agreement
with ten countries. Nepal has obtained access to neighboring and global markets.
Investment Board Act, 2010 was enacted based on which Investment Board has been
established.
The GoN introduced new Foreign Investment Policy, 2015 by replacing the policy of
1992 with an objective of making economy more dynamic and competitive by
maintaining trade balance through export promotion and import management, and by
attracting foreign investment, technology, skills and knowledge in the priority sectors.
The new policy incorporates the changing context of portfolio investment, non-
resident Nepalese investment, special economic zones, labor relation issues, and
mobilization of debt instruments in domestic and foreign currencies. The foreign
investment policy aims to achieve the sustainable economic growth and generate
employment, enhance investment in the regional and national development, fill the
gap of increasing investment demand, increase the domestic production and
productivity and establish Nepal as an attractive destination for FDI by creating
investment friendly environment. In contrast to old policy, the new policy has clearly
defined the term “foreign investment” and “technology transfer”. It recognizes
assignment, user’s license, technical know-how sharing and franchising as the
medium for technology transfer.
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3.1. Investment Opportunities in Nepal

Nepal has been pursuing a liberal foreign investment policy and been striving to
create an investment- friendly environment to attract FDIs into the country. Our tax
slabs one of the lowest and our position is fairly good in ease of doing business.
Profitable areas of investment include hydropower, industrial manufacturing, services,
tourism, construction, agriculture, minerals and energy.

Nepal encourages foreign investment both as joint venture operations with Nepalese
investors or as 100 per cent foreign-owned enterprises. The few sectors that are not
open to foreign investment are either reserved for national entrepreneurs in order to
promote small local enterprises and protect indigenous skills and expertise or are
restricted for national security reasons. Approval of the government of nepal is
required for foreign investment in all sectors. No foreign investment is allowed in
cottage industries. However, no restriction is placed on transfer of technology in
cottage industries.

3.2. Foreign Direct Investment (2016 to 2019)

70
22 4
60 58.92 4
53.7
50 146.93
40
30
20 3 9
3 7 8
13.59 6
10 5 8 9
5 6 7
0 0 0 0 0 0
2016 2017 2018 2019

Nepal has received as much as Rs 61 billion foreign investment in the recently

concluded fiscal year 2017/2018. This amount is three times the amount of foreign
investment Nepal had received in the previous year, fiscal year 2016/17. It has been
observed that the country’s investment climate continues to remain low since the past
few months. According to Nepal Department of Industry (DoI) statistics, foreign
investments in Nepal decreased significantly by 63 percent in the first eight months
(review period) of FY 2018-19 compared to the same period, last year. The country
recorded NPR 34.9 billion in investments between mid-July and mid-February of FY
2017-18, while this year the investments dropped to NPR 11.25 billion. However, FDI
commitment in terms of numbers of projects increased drastically during the current
review period compared to last year. The nation received investments for 194 projects
in the first eight months of 2017-18, whereas it registered investments for 224 projects
during the same period, this year.

Variable Mean Std. Dev Variance

Gross Domestic Product 5.25 3.19 7.6625
Foreign Direct Investment 43.28 20.394 311.94
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The findings in above table indicate the descriptive statistics of studied variables
throughout 2016-2019. The mean of GDP and standard deviation are USD 5.25
Billion and USD 3.19 Billion, respectively. On the other hand, the mean of FDI is
USD 43.28 Billion, the standard deviation is USD 20.394 Billion. The data in the
above table shows that FDI is positively related to GDP.

4. Utilization of FDI in Nepal

967
1000
Rs. (in millions)

800
600 406 395
400
200 1 1 2 2 3 3 4 4
0
Service Industry Agriculture
FDI

Under the service sector, transport, storage and communication received the dominant
share of 47.0 percent. Manufacturing industries, and electricity, gas and water are
main sub-sectors receiving FDI in the industry sector i.e. 15.1 percent and 13.9
percent respectively. The dividend repatriation by FDI firms, based on approval from
NRB, amounted to Rs. 17.24 billion in 2016/17 compared to Rs. 6.25 billion in
2015/16 and Rs. 7.21 billion in 2014/15. In the latest reports of Nepal, Current
Account recorded a deficit of 464.4 USD million in Apr 2019. The country's Nominal
GDP was reported at 29.0 USD billion in Jul 2018.

5. Conclusions

Foreign direct investment is when an individual or business owns 10 percent or more

of a foreign company. If an investor owns less than 10 percent, the International
Monetary Fund defines it as part of his or her stock portfolio. A 10 percent ownership
doesn't give the investor a controlling interest. It does allow influence over the
company's management, operations, and policies. For this reason, governments track
who invests in their country's businesses. 

A foreign direct investment (FDI) is an investment in the manner of commanding

ownership in the company in one nation by an existence based in the different nation.
It is thus recognized from an international portfolio purchase by a perception of direct
monopoly. The beginning of the investment seems not influence the interpretation, as
an FDI: the investment may be made either "inorganically" by purchasing an
organization in the objective nation or "essentially" by extending the processes of
actual business in that nation. Foreign expertise can be an essential agent in
developing the current technological manners in the nation. Foreign direct Investment
helps in developing the character of outcomes and methods in selective sectors. It also
benefits in generating jobs and decrease unemployment predicaments. The
government of India has extended to expose its market to FDI on a sector-by-sector
foundation. The administration has the authorization to increase FDI frontiers up to
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100% without Legislative permission, except in the field of annuities, insurance, and
defense.

6. Recommendations

Some recommendations have been provided to attract foreign direct investments in

Nepal:

1) The main stakeholders and government have to come up with new policy to
open up foreign investment in other sectors as well which helps to move
informal activities into formal economy.
2) It is noted that formulation of new plan and policy will be a necessary
condition but nonsufficient step for the development, so the key
recommendations are made for the effective steps and actions to be taken by
the concerned authority to review and implement the introduced plan and
policies, which in turn, will help in flow of FDI to achieve, accelerate, and
sustain the high rate of economic growth in Nepal.
3) In order to attract investment as well as to compete with various neighboring
states in India offering favorable incentives to attract investments, Nepal needs
to immediately enact the legislation on special economic zone (SEZ) and
expedite the process of completing SEZs, which are under construction. The
SEZs should, at a bare minimum, provide required infrastructure facilities and
strictly implement flexible labor laws that allow for adherence to strict
disciplines, including linking of wages with productivity, imposing no-work
no-pay system, and imposing ban on strikes.
4) Power problems should be resolved through reduction in leakage, operating
thermal plants to the fullest extent possible and importing electricity from
India. A market-based mechanism should be fixed for the adjustment of fuel
prices.
5) Board of Investment should be empowered further for providing fast track
approval to big projects. Contradictory provisions in various legislation should
be streamlined and ambiguities corrected so as to provide predictability to
investors. A system should be
6) Policy making process should be made inclusive, capacity of government
officials should be enhanced and strict reward and punishment system should
be devised within the bureaucracy.
7) A sustained improvement in business climate should be achieved, among
others, through consistency in the application of policy and law, adequate
provisioning of infrastructure facilities and a proactive agenda for the
development of skill and technology.
8) Foreign and local investment—both public and private or combinations
thereof—should be mobilized for the construction of hydroelectricity projects
(mainly focusing on reservoir type) and for the construction of roads and trade
corridors.
Nevertheless, what actions the government takes further in creating an investment
climate will decide the future of FDI. And the policymakers ought to have a clear
vision of using FDI for meeting the aspirations of our own national development and
prosperity.
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7. Reference

 Unctad, world investment report, 2008 and IMF, World economic outlook
database, 2008.
 https://www.ukessays.com/essays/economics/foreign-direct-investment-fdi.php
 https://www.ukessays.com/essays/economics/foreign-direct-investment-in-
developing-countries-economics-essay.php
 https://www.scribd.com/search?content_type=tops&page=1&query=fdi
%20flow%20flow%20nepal
 https://www.ukessays.com/essays/economics/foreign-direct-investment-and-
economic-development.php
 https://waipa.org/blog/fdi-trends/
 https://unctad.org/en/pages/newsdetails.aspx?OriginalVersionID=2112