KATHMANDU UNIVERSITY

SCHOOL OF MANAGEMENT
Balkumari, Lalitpur

Threat Analysis on Foreign Direct Investment(FDI)

Submitted to:

Visc.fac. Mr. Yagya Man Shakya

Submitted by:

Satkriti Bajracharya(23305)

Utsav Dhital(23311)

Manita G.C(23312)

Rachana Giri((23314)

Sabnam Khatun(23320)

Unisha K.C.(23317)

Gaurav Luitel(23321)

Greta Shakya(23333)

Shreeja Shrestha(23335)

MBA Spring 2023, Semester I

9th June, 2023

 Table of content

Table of content...............................................................................................................................
INTRODUCTION...........................................................................................................................
Foreign Direct Investment (FDI).................................................................................................
Factors influencing Foreign Direct Investment...........................................................................
SWOT ANALYSIS OF FDI IN NEPAL.......................................................................................
Strengths......................................................................................................................................
Weaknesses..................................................................................................................................
Opportunities...............................................................................................................................
Threats.........................................................................................................................................
Comparison of SWOT to attract FDI between Nepal and China...............................................
Comparing Strength of Nepal with China..............................................................................
Comparing Weakness of Nepal with China...........................................................................
Comparing Opportunities of Nepal with China......................................................................
Comparing Threats of Nepal with China................................................................................
CONCLUSION AND RECOMMENDATIONS:........................................................................
 INTRODUCTION
Foreign Direct Investment (FDI)
FDI is an investment made by a company or individual with the purpose of gaining a significant
ownership stake in a company in the foreign country. It plays a crucial role in the global
economy and facilitates the flow of capital, technology, and expertise between countries.

FDI can take various forms, including the establishment of new companies or subsidiaries,
mergers and acquisitions, joint ventures, or the purchase of existing assets in the foreign country.
The investment can be made in various sectors such as manufacturing, services, infrastructure,
natural resources, or technology.

FDI flows and trends are monitored by organizations such as the United Nations Conference on
Trade and Development (UNCTAD) and the World Bank. These organizations track the amount
of FDI received and invested by countries and provide analysis on global FDI trends and their
impacts.

FDI is rapidly growing in developing countries. FDI is an important source of capital inflow for
developing countries, which has plenty of resources but is economically weak with a deficiency
in finance, technology and competitive management. It promotes economic growth, creates
employment opportunities, transfers new technology, knowledge, skills, new management
practices, etc. to the recipient economy. Also, Nepal has been actively promoting FDI and has
implemented several policy reforms to attract foreign investors. The Department of Industry
serves as a one-stop solution for foreign investors and provides services related to company
registration, investment approvals, and policy guidance.

Moreover, FDI has not been widely practiced in Nepal but tends to increase soon. The flow of
FDI in Nepal is modest compared to other south asian countries: India, Pakistan, Bangladesh,
etc. have more inward FDI than in Nepal. Despite having enough natural resources and scenic
beauty, Nepal has failed to attract foreign investors. Nepal has not been able to attract inward
FDI to its length in comparison to its neighboring South Asian countries.

In Nepal, the government has established the Department of Industry (DOI) as the main authority
responsible for facilitating and regulating FDI in the country. Whereas the flows and trends are
monitored by organizations such as the United Nations Conference on Trade and Development
(UNCTAD) and the World Bank. These organizations track the amount of FDI received and
invested by countries and provide analysis on global FDI trends and their impacts.
Need of FDI in Nepal
Foreign Direct Investment (FDI) can play a crucial role in the economic development of Nepal
by promoting capital inflows, technology transfer, employment generation, and overall economic
growth. Here are some of the needs and requirements of FDI in Nepal:

1. Economic Development: FDI can provide the necessary capital and resources to support
infrastructure development, industrial expansion, and overall economic growth. Nepal
requires substantial investments in sectors such as energy, transportation, tourism,
manufacturing, and services to enhance its economic development.

2. Job Creation: FDI can contribute to employment generation by establishing new

businesses and expanding existing industries. Nepal has a large young workforce, and
FDI can provide opportunities for skill development and employment, helping to address
the issue of unemployment and underemployment in the country.

3. Technology Transfer: FDI brings advanced technology, technical know-how, and

managerial expertise, which can enhance productivity, efficiency, and competitiveness in
various sectors. Technology transfer through FDI can promote innovation, upgrade local
industries, and enhance the overall industrial base of Nepal.

4. Foreign Exchange Earnings: FDI can contribute to Nepal's foreign exchange reserves
through export-oriented investments. Industries that focus on producing goods and
services for the international market can help generate foreign exchange earnings,
reducing the country's trade deficit and improving its balance of payments position.

5. Infrastructure Development: FDI can support the development of critical infrastructure

projects such as power plants, roads, ports, airports, and telecommunications networks.
Adequate infrastructure is essential to attract investors, facilitate trade, and improve
connectivity within Nepal and with other countries.

6. Policy Reforms: Nepal needs to create a favorable investment climate by implementing

investor-friendly policies and regulatory frameworks. Streamlining bureaucratic
processes, ensuring transparency, protecting intellectual property rights, and offering
attractive incentives are some of the measures that can encourage FDI inflows.

7. Market Access: Nepal's strategic location between India and China provides
opportunities for accessing large consumer markets. Foreign investors can leverage Nepal
as a base for export-oriented production, taking advantage of preferential trade
agreements and regional integration initiatives.
 8. Human Capital Development: Investing in education and skill development is crucial to
enhance the quality of the local workforce. Nepal should focus on improving the
education system, vocational training programs, and creating a skilled labor force that
meets the demands of foreign investors.

9. Sector-specific Opportunities: Identifying and promoting sectors with high growth

potential and comparative advantages can attract targeted FDI. For Nepal, areas such as
hydropower, tourism, agriculture, manufacturing, information technology, and services
offer significant investment opportunities that align with the country's resources and
potential.

It is important for Nepal to have a comprehensive FDI policy framework, effective

institutions, and a proactive investment promotion strategy to attract and retain foreign
investors. By addressing these needs and requirements, Nepal can create a favorable
environment for FDI and leverage it as a catalyst for sustainable economic development.

Status of FDI in global market

FDI is a dynamic and ever-changing aspect of the global economy, influenced by various factors
such as economic conditions, government policies, and geopolitical events.
● In terms of total FDI stock, India ranks top position with $75.8 billion followed by China
($33.0 billion), Ireland ($16.5 billion), Singapore ($15.5 billion) and Saint Kitts and
Nevis ($14.5 billion) as of 2022.

Factors influencing Foreign Direct Investment

Foreign Direct Investment (FDI) is influenced by various factors, both internal and external.
Here are some key factors that can influence FDI:
● Size of Economy and potential for growth
● Wage rates
● Taxes and Tariffs
● Labor Skills
● Political and Legal environment
● Exchange rate
● Transport and Infrastructure
● Social Factors
However, Nepal has many potential factors to flourish foreign investors. With its scenic beauty
and a dense population, Nepal provides several other financial features to foreign investors. The
SWOT analysis of Nepal in relation to investment provides basic information on ensuring
investment.
Objectives of the Study- To help Nepal emerge as a favorable destination for FDI in the
SAARC region and comparative analysis with China.

SWOT ANALYSIS OF FDI IN NEPAL

Strengths
1. Favorable Investment Conditions: Nepal's decision to lower the minimum investment
ceiling from 5 crore to 2 crore creates a favorable investment environment. This
reduction encourages both domestic and foreign investors, opening up opportunities for a
broader range of investments and promoting economic growth. This change is a positive
step towards attracting diverse investment sources and stimulating the country's business
landscape.

2. Rich in Natural Resources: Nepal's significant natural resource endowments,

particularly in the field of hydroelectric power, present lucrative investment prospects.
The country's abundant rivers and mountainous terrain offer tremendous potential for
hydropower generation. With an estimated hydropower potential of 83,000 MW, Nepal
can attract foreign investors interested in tapping into clean and sustainable energy
sources, contributing to the global shift towards renewable energy and addressing the
growing energy demands of the region.

3. Favorable Strategic Location: Positioned between two economic giants, China and
India, Nepal enjoys a strategically advantageous location. This geographical placement
provides a gateway to a vast market of over 1.5 billion people. Investors can leverage
Nepal's unique position to access and serve these neighboring markets efficiently.
Additionally, Nepal's membership in regional trade blocs such as SAARC and BIMSTEC
further enhances its strategic significance.

4. Political Stability: Nepal has made significant progress in achieving political stability in
recent years. The establishment of a federal democratic republic and the successful
conclusion of various peace agreements have created a favorable environment for foreign
direct investment. Stable governance ensures policy continuity, reduces investment risks,
and encourages long-term commitments from investors seeking sustainable growth and
profitability.

5. Low Cost of Operation: Nepal offers a competitive advantage in terms of operational

costs. Factors such as affordable labor, cost-effective real estate, and a favorable business
environment contribute to lower production and operating expenses for businesses. This
 cost advantage enhances the profitability and competitiveness of foreign investors,
attracting them to set up or expand their operations in Nepal.

6. Emerging Market: Nepal's economy is experiencing steady growth, transitioning into an

emerging market. The country's increasing GDP, rising per capita income, and improving
socio-economic indicators make it an attractive destination for foreign investors looking
for early entry into a promising market with substantial growth potential. As Nepal
continues to develop its infrastructure and industries, investment opportunities across
various sectors are poised to expand further.

7. Cultural Diversity: Nepal is known for its rich cultural heritage and diversity. The
country's unique blend of traditions, languages, and ethnicities presents opportunities for
investors in sectors such as hospitality, tourism, entertainment, and handicrafts. By
leveraging Nepal's cultural assets, investors can create immersive experiences for tourists
and capitalize on the growing demand for authentic cultural encounters.

8. Trade Agreements: Nepal actively pursues trade agreements and partnerships with
countries and regional blocs to enhance its competitiveness as an investment destination.
Being a member of SAARC and BIMSTEC, as well as having preferential trade
agreements like SAFTA, Nepal benefits from reduced trade barriers, preferential market
access, and increased market integration within the SAARC region. These trade
agreements provide foreign investors with a conducive business environment and access
to a larger consumer base.

9. Single Stop Service Center: Nepal has established a Single Stop Service Center to
streamline administrative procedures and facilitate ease of doing business for investors.
This centralized platform serves as a one-stop-shop, providing comprehensive support,
guidance, and assistance for investment-related processes. The center ensures efficient
coordination among government agencies, simplifies bureaucratic processes, and reduces
the time and effort required for investors to start and operate their businesses in Nepal.

10. National Treatment: Nepal provides national treatment to foreign investors, ensuring
that they receive the same rights, protections, and benefits as domestic investors. This
policy promotes a level playing field, equal opportunities, and non-discrimination,
creating a fair and transparent investment environment. National treatment encourages
foreign investors to invest with confidence, knowing that they will be treated on par with
domestic investors.

11. Scope of Tourism Development: Nepal has immense potential for tourism development
in various sectors. Health tourism, leveraging the country's traditional medicine practices
and wellness centers, presents opportunities for investment. Education tourism
 development, capitalizing on Nepal's reputation as a hub for Buddhist studies, Sanskrit,
and yoga, can attract students from around the world. Adventure tourism, with activities
like trekking, mountaineering, and wildlife safaris, continues to be a major draw for
adventure enthusiasts, offering ample prospects for investment in infrastructure,
hospitality, and adventure-based services.

12. Member of SAARC and BIMSTEC: Nepal's membership in the South Asian
Association for Regional Cooperation (SAARC) and the Bay of Bengal Initiative for
Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) strengthens its position
as a favorable destination for investment. These regional platforms promote economic
cooperation, trade facilitation, and investment promotion among member countries,
providing foreign investors with expanded market opportunities and regional integration
advantages.

13. Government Commitment in Infrastructure Development: The Nepalese government

has shown strong commitment to infrastructure development, particularly in the areas of
roads, airports, and power transmission lines. Significant investments are being made to
enhance transportation networks, connectivity, and energy infrastructure. Such
commitment creates a solid physical infrastructure backbone, ensuring smoother trade,
improved accessibility, and increased investor confidence in Nepal.

14. Promotion of Public-Private Partnerships (PPP): The government of Nepal actively

promotes public-private partnerships to encourage investment in various sectors. PPPs
serve as catalysts for economic growth by mobilizing private sector resources, expertise,
and technology. By leveraging the strengths of both the public and private sectors, PPP
projects stimulate investment, create employment opportunities, and foster sustainable
development across multiple industries.

15. Favorable Repatriation Environment: Nepal provides a favorable repatriation

environment for foreign investors. Profit, dividends, and capital gains earned by foreign
investors can be repatriated outside the country without restrictions. This policy ensures a
secure and transparent investment climate, instilling confidence in foreign investors and
encouraging capital inflows into Nepal.

16. Dispute Settlement Ease: Nepal has established mechanisms for dispute settlement,
including arbitration and mediation processes. These mechanisms offer an effective and
efficient way to resolve investment-related disputes. By providing a fair and transparent
legal framework, Nepal's dispute settlement mechanisms mitigate investment risks,
protect investors' rights, and enhance investor confidence in the country's business
environment.
 17. Special Economic Zone (SEZ) - Bhairawa: The establishment of the Special Economic
Zone in Bhairawa showcases Nepal's commitment to attracting foreign investment and
promoting export-oriented industries. This SEZ offers various incentives and
infrastructure facilities, including tax benefits, streamlined regulatory processes, and
dedicated industrial clusters. It serves as an investment hotspot, attracting domestic and
international investors seeking a conducive environment for business setup and
expansion.

Weaknesses

1. Unstable and weak political policies:

The inconsistent and ever changing power dynamics between the political parties have
negatively affected the Foreign Direct Investments in Nepal. This instability has discouraged the
foreign investors to seek opportunities in Nepal.

● Policy uncertainty and inconsistency: Political changes lead to shifts in government

policies, including those related to investment and business regulations. When there is
inconsistency or unpredictability in policies, it creates uncertainty for foreign investors.
They may be unsure about the future direction of the government's economic and
investment policies, making it difficult to plan their investments effectively. This
uncertainty discourages FDI inflows as investors prefer stable and consistent policy
environments.
● Political instability and conflicts: Political changes are accompanied by periods of
instability, social unrest, or political polarization. In Nepal, there is a trend of protests
and strikes whenever the government changes. If there are protests, strikes, or conflicts
arising from political transitions, it creates an unfavorable investment environment
leading to decreased foreign investments
● Regulatory hurdles and delays: Constant political changes disrupt the regulatory
environment and bureaucratic processes. In the case of Nepal, new governments
introduce or amend regulations, leading to delays and confusion in obtaining permits,
licenses, and approvals. Bureaucratic inefficiencies can worsen during political
transitions, hindering the ease of doing business and discouraging foreign investors. For
instance, there is an existing cold war among the bureaucrats themselves, depending on
the political party they support. Lengthy and unpredictable processes can deter potential
investors who seek efficiency and a transparent business environment.
● Governance and corruption concerns: Unstable political environment raises concerns
about governance and corruption levels. If there is a perception of increased corruption
or inadequate governance during or after a political transition, it discourages foreign
investors. Investors may be hesitant to invest in an environment where there is a lack of
transparency, accountability, and the rule of law. Such concerns can lead to a decrease in
 investor confidence and discourage FDI inflows.

Failure of TATA automobile assembly plant in Nepal

TATA motors had planned to establish an assembly plant in Nepal but the investors later said
that the country’s investment climate failed to impress them. According to the officials, they
faced problems in land acquisition due to government policy and pressure from the local
community. There were no proper policies to encourage the investment and the government
also had no intention of making the process easy and mediating the disputes and reforming the
policies.

Case of Huaxin Narayani Cement

Another example of how political interest is discouraging foreign investments is the case of
Huaxin Narayani Cement, a Nepal-China joint venture company. Two factions of the ruling
Nepal Communist Party (NCP) quarreled over leasing land to the factory by Benighat Rorang
Rural Municipality, Dhading, for 50 years.The issue reached the Parliamentary Public Accounts
Committee, which directed the government against the land handover and the deal was canceled.
This prompted a strong reaction from a joint venture partner from Nepal who expressed that the
parliamentary committee didn’t provide them with an opportunity to clear things up. Under such
circumstances, there will be no guarantee that foreign investors will stay in Nepal.

2. Complicated Bureaucracy and Red Tape

The approval process for foreign direct investment in Nepal involves multiple authorities,
resulting in increased costs and time consumption. Although the revised Foreign Investment and
Technology Transfer Act (FITTA) introduced the Single Window System to simplify the
process, its full implementation has not been achieved. While the registration of foreign
companies can be completed online via the Office of Company Registrar's website, there is still a
frequent requirement for additional physical copies of documents. This additional step adds to
the complexity and inefficiency of the process, hindering the ease of doing business for foreign
investors. (“FITTA”)

The presence of a complicated bureaucracy and excessive red tape hampers the attraction of
foreign direct investment (FDI) in Nepal, primarily through lengthy and complex procedures and
excessive paperwork and documentation requirements. Lengthy and unclear processes for
establishing a business or investing in Nepal can be time-consuming and costly, discouraging
potential foreign investors who seek efficiency and quick decision-making. Moreover, the
burden of excessive paperwork and documentation further adds to the complexity, making the
investment discouraging. These hurdles create barriers to entry for foreign investors and can
drive them away to countries with more streamlined procedures and reduced paperwork burdens.
Simplifying procedures and reducing paperwork can significantly improve the ease of doing
business and enhance Nepal's appeal for foreign direct investment.
There are numerous cases that vividly illustrate how complicated bureaucracy and red tape
hinder Foreign Direct Investment. Some of the cases are discussed below:

Arghakhanchi Cement Bonus Dividend case

In 2018, Arghakhanchi Cement, with investment from India's UMA Cement International,
applied for approval from the Industry Ministry to issue bonus shares to reinvest in expanding
the factory's capacity. However, despite submitting all the necessary documents, the ministry did
not approve the plan for over a year. Pashupati Murarka, a director of the company, expressed
frustration with the delay and stated that the company had decided to distribute cash dividends
from its profits instead. This situation highlights the challenges faced by companies in Nepal
when seeking timely approvals for their investment plans, which can impede business growth
and expansion. (“FDI”)

Sinohydro Corporation land acquisition case

Sinohydro Corporation Limited, a Chinese company, has processed for acquiring 35 ropanis of
land in Lamjung for the construction of the security structure for the 50-megawatt Upper
Marsyangdi Hydropower Project has been significantly delayed. Despite the project already
being operational and generating electricity since 2016, the Cabinet took three years to make a
decision on the land request. This prolonged delay has hindered the progress of the project and
has caused frustration for the Chinese company. The situation underlines the challenges faced in
obtaining necessary approvals and land acquisition for infrastructure projects in Nepal, which
can hinder the timely completion and success of such ventures. (“FDI”)

3. Issues in Repatriation of Profits

The issue of repatriation of profit in Nepal has discouraged foreign direct investments (FDIs) in
the country. Despite legal provisions guaranteeing the protection of foreign investments and the
repatriation of profits, the practical realities of navigating through complex approval processes,
burdensome procedures, and uncertainties have hindered the smooth repatriation of profits.

Approval Process and Multiple Agencies:

● Repatriation requires approval from multiple agencies, leading to delays and bottlenecks.
● Involvement of agencies like Nepal Rastra Bank, government departments, and sometimes
the Department of Industry further complicates the process. ● Additionally, in the
telecommunications sector, approval from Nepal Telecommunications Authority is
necessary, while investments in joint ventures require approval from the Ministry of Finance
for repatriation.

Consideration of Foreign Exchange Reserves:

 ● Potential foreign investors consider a country's foreign exchange reserves before making
investment decisions to ensure they can repatriate profits.
● Nepal's foreign exchange reserves might not instill confidence in foreign investors,
affecting their willingness to invest due to concerns about potential restrictions on profit
repatriation.
Restrictions and Reinvestment Requirements:

● Foreign investors face limitations on repatriation in certain sectors, with only a small
portion allowed to be taken back while a significant portion must be reinvested. ● Such
restrictions on repatriation reduce the attractiveness of investment opportunities in Nepal,
particularly for investors seeking greater flexibility in profit repatriation.

Ncell Dividend Repatriation Case Example:

● The Ncell case involved a dispute between the tax authority and TeliaSonera, the former
parent company of Ncell, regarding the payment of capital gains tax from the sale of its
stakes to Axiata.
● The government barred dividend repatriation until the issue of capital gains tax related to
the Ncell buyout deal was settled.
● The controversy surrounding the case created uncertainties for Ncell/Axiata in repatriating
dividends and showcased the challenges foreign companies face regarding profit
repatriation in Nepal.

4. Lack of Proper Factors of Production

Poor infrastructural facilities, when compared to other South Asian nations, have become a key
barrier to attracting international investment to Nepal. While the construction of basic
infrastructure facilitates business operations, its absence increases the risk of losing potential
investors. Thus, foreign direct investment is low according to the following factors.

● Lack of Infrastructure
The lack of basic infrastructure is one of the factors contributing to the decline in foreign
direct investment inflows. According to the World Bank, Nepal has the lowest level of
infrastructure in South Asia, ranking 130th out of 190 nations. Even if the availability of
energy has significantly improved, the state of the transportation infrastructure continues
to be poor, as evidenced by World Bank data showing that Nepal ranks 114th out of 167
nations in the world for the Logistics Performance Index.

● Labor Skills and Labor Law Issues

The World Bank indicated in its Doing Business Report that the Labor Law places
additional duties on the employer when it comes to labor relations. Employer-provided
benefits like labor gratuities, health insurance, and accident insurance add to the
 administrative burden already felt by businesses. According to former NPC vice-
chairman Sharma, the larger problem is the poor productivity of the Nepali labor force;
hence, raising productivity is crucial by developing a trained labor force to attract more
FDI.

5. Inadequate Legal Framework

The legal arrangements that govern FDI in Nepal include Foreign Investment and Technology
Transfer Act (FITTA), 1992, Foreign Exchange (Regulation) Act, 1962, Investment Board Act,
2010 and Industrial Enterprises Act, 2016, Company Act, 2017, Investment Board Act, 2011,
Contract Act, 2000, Arbitration Act, 1999, Income Tax Act, 2002, Labor Act, 2017, and
Privatization Act, 1992. Similarly, DOI, Investment Board of Nepal (IBN) and NRB are the
agencies for administration and implementation of rules and regulations related to FDI.
The FITTA defines foreign investment as investment in shares (equity), reinvestment of
earnings, and investment in the form of a loan or lending facilities. The minimum investment
required for approval of foreign investment is Rs. 5 million per investor. This law also outlines
technology transfer, which is possible even in areas where foreign investment is prohibited.
Technology transfer includes the form of using foreign-origin intellectual rights, specialization,
formula, methodology, patent, or technical know-how; using any multinational brand; and
purchasing any foreign technical consultancy, management, or marketing service. Foreign
investment is not permitted in certain areas, such as cottage industries, security printing, and the
arms and ammunition industries, among others.
The inadequate legal framework have made difficult in attracting FDIs due to following
conditions:
● Lack of investor protection: A robust legal framework provides mechanisms to protect
the rights and interests of investors. This includes enforcing contracts, safeguarding
intellectual property rights, and providing avenues for dispute resolution. Without
adequate protections, investors may face challenges such as arbitrary government
actions, expropriation risks, or difficulties in resolving disputes, which can deter foreign
investments. Inadequate legal protections can undermine investor confidence and
discourage FDIs.
● Lack of transparency and corruption: Transparency and accountability are crucial for
attracting foreign investments. Inadequate legal frameworks may contribute to a lack of
transparency, making it difficult for investors to navigate the system and assess potential
risks. It may be associated with higher levels of corruption, where bribery and undue
influence can hinder investment activities and erode investor confidence.
● Limited access to justice: Investors need access to a fair and impartial legal system to
address disputes and protect their investments. Inadequate legal frameworks may result in
a backlog of cases, lack of judicial independence, and delays in resolving disputes which
leads to prolonged legal battles and uncertainty. This can erode investor confidence and
discourage long-term investment commitments. Without adequate access to justice,
investors face heightened risks, reduced confidence, and potential difficulties in resolving
 disputes, undermining the overall investment climate.
● Inconsistent regulation: Inadequate legal frameworks can result in inconsistent and
overlapping regulations. This inconsistency can create confusion and compliance
challenges for foreign investors. When different laws or regulations contradict each other
or overlap, investors may struggle to understand and comply with the requirements,
leading to additional costs and operational difficulties. A harmonized
legal framework that ensures consistent regulations can provide clarity and ease of doing
business for investors.

Gandhi Pandit, a corporate lawyer whose law firm Gandhi and Associates handles the legal
affairs of the Sinohydro Corporation Limited, a Chinese company, said that the Chinese
company failed to get 35 ropanis of land in Lamjung required for setting up the security
structure for the 50-megawatt Upper Marsyangdi Hydropower Project for long.
“The Cabinet didn’t take the decision for three years since the request was made even though the
project started generating electricity since 2016,” said Pandit.

6. Shortsightedness

The policies related to Foreign Direct Investments (FDIs) in Nepal have displayed a short-
sighted approach, often addressing immediate challenges rather than considering long-term
stability. This tendency can be linked to the political instability in the country, as governments
may anticipate limited time in power and therefore prioritize short-term plans and policies.
Instead of implementing sustainable solutions, the government tends to address problems as they
arise without establishing long-lasting frameworks.

For instance, in October, in response to declining FDI inflows, the government substantially
reduced the minimum threshold for foreign direct investment from Rs50 million to Rs20 million,
aiming to attract smaller investors. However, this change was reactive in nature, addressing the
immediate concern rather than considering a comprehensive, long-term approach.

Similarly, in June 2019, the government increased the minimum limit for foreign direct
investment from Rs5 million to Rs50 million, demonstrating the lack of consistency in policy
formulation. These abrupt alterations can create uncertainty and discourage potential investors
who require stability and predictability in the business environment.

Furthermore, in November of the previous year, Nepal tightened business visa rules for foreign
investors to prevent misuse of the permit and align proposed investments with actual
investments. While these measures address specific concerns, they reflect a reactive approach
rather than a proactive, strategic plan to attract and retain foreign investment.

These examples highlight the short-sighted nature of Nepal's policies, which are often
formulated to address immediate challenges without considering the long-term consequences.
Such an approach can undermine investor confidence and deter foreign investors who seek
stability, consistency, and a conducive business environment for their long-term investments. To
attract sustainable FDIs, Nepal needs to adopt a more forward-thinking and comprehensive
approach that prioritizes stability, consistency, and sector-specific strategies.

7. Weak IPR Protection

● Trademark Infringements and hassled process

Unauthorized use of trademarks of multinational and national brands has been increasing by the
day due to weak enforcement of laws, raising concerns among foreign companies wishing to
enter the Nepali market. According to the legislation department of the Department of Industry,
trademark infringements are rising by 20 percent annually. The Patent, Design and Trade Mark
Act 1965 law gives the right to stop the production, seize the products and impose a fine of Rs
100,000 against violators, but the law is too old and fining them just Rs 100,000 is not a big deal
which is one of the main discouragement for the FDIs.

● Policy hurdles
In Nepal, the government has proposed the creation of a hedging fund in the current fiscal year's
budget to mitigate the risks associated with foreign investment. However, the implementation of
this plan is currently uncertain and facing delays or obstacles, leaving its status in a state of
uncertainty. Foreign investors look for the prospect of profit, and political uncertainty and
Nepal’s wildly changing policy confuses potential investors and policy hurdles make investors
think twice before making an investment.

● Legal uncertainties and disputes

Weak IPR protection can lead to legal uncertainties and disputes, making it challenging for
investors to resolve conflicts related to intellectual property. Inadequate legal frameworks,
enforcement mechanisms, and a lack of expertise in dealing with IP-related cases can undermine
investor confidence and thus discourage FDI.

● Infringements of Intellectual Property

Foreign companies seeking IP protection have been facing difficulties due to the general
practice of the ‘first come first serve’ registration process of a trademark in Nepal.

Kansai Nerolac Paints Case Example

For example, Kansai Nerolac Paints, an Indian subsidiary of Kansai Japan, registered Kansai
Nerolac Nepal Pvt Ltd in Nepal. After the registration, the company was barred from using
Kansai Nerolac in Nepal since a Nepali company Rukmini Chemicals had already registered a
trademark under the same name with the Department of Industry (DOI). As a result, Kansai
Nerolac Nepal had to import its products in Nepal under the name of KNP. The legal issue did
get resolved later, after it was taken to the Supreme Court which ruled a verdict in favor of
Kansai Nerolac Nepal allowing it to use its trademark. Such non-recognition of their rightful
ownership could make a lot of investors withdraw their investment as it drags the company into
unnecessary legal and procedural hassles in addition to the entire uneasy process.

8. Limited Market Size

● Small Consumer Base : Nepal has a relatively small population of about 30 million.
Among which 17.4% are under the poverty line. Leading to low purchasing power.

● Lack of Road Networks: The network density is low, at 14 kms per 100 km2 and 0.9
km per 1,000 people. 60% of the road network is concentrated in the lowland (Terai)
areas. A Department of Roads (DoR’s) survey shows that 50% of the population of the
hill areas still must walk two hours to reach an SRN road. Two of the 77 district
headquarters, namely Humla, and Dolpa are yet to be connected to the SRN. (Source:
Sector Assessment [Summary]: Road Transport)
● Awareness of products among the individuals is low, they are yet to be connected with
telecommunication technology. More than 49% of the population is yet to be connected
to the means of communication.

9. Power Play Dominance

Power play dominance refers to a situation where an individual, group, or organization holds a
significant amount of power and influence over others, often to the point of controlling or
manipulating the dynamics of a particular situation or system. It typically involves exerting
authority, leverage, or coercion to achieve desired outcomes or to maintain a position of
advantage. In power play dominance, the dominant party often employs various tactics and
strategies to maintain and expand their power. These may include:

● Control: Dominant party establishes control over key resources, information, decision-
making processes, or institutions to shape outcomes and limit others' influence.
● Manipulation: Engaging in manipulative tactics like deception, coercion, and exploiting
vulnerabilities to gain an upper hand.
● Exploitation: Taking advantage of weaknesses or dependencies, exploiting economic,
social, or political disparities for personal gain.
● Intimidation: Using intimidation and threats to discourage resistance or dissent from
others.
● Networking and Alliances: Building strategic alliances to amplify power and create a
united front against challengers.
● Institutionalization: Creating structures, systems, or norms that perpetuate and reinforce
power dynamics, making it challenging for others to challenge or disrupt the dominance.
One notable example of power play dominance in Nepal can be observed in the case of
Himalayan Reinsurance Company. Initially, the reinsurance sector in Nepal was monopolized by
Nepal Reinsurance Company (NRIC), with a provision by the government that granted them
10% of the total reinsurance business in the country. However, to diversify risk and expand
coverage beyond national boundaries, the government intended to allow foreign reinsurance
companies to operate in Nepal. Unfortunately, due to the influence of certain powerful
individuals and their network, the Investment Board of Nepal granted the
responsibility of covering insurance exposure and risk to Himalayan Reinsurance, a privately-
held company. Additionally, the Investment Board imposed another requirement, granting
Himalayan Reinsurance an additional 10% of the total insurance portfolio for reinsurance. This
example underscores the power play dominance where influential individuals shape and
manipulate policies and regulations even at the governmental level.

Opportunities
1. Energy sector for expansion of the market in neighboring countries: Nepal possesses
significant potential in the hydropower sector, being the second largest source of
hydropower in the world. With the capacity to generate up to 83,000 MW of hydropower,
Nepal has numerous economically lucrative hydropower projects. This presents a
favorable opportunity for investment in the country's hydropower sector, ensuring a
sustained and reliable energy supply for both domestic consumption and export to
neighboring India. Additionally,

Nepal's strategic location between China and India positions it well for cross-border
energy trade, with the development of transmission lines and interconnection projects
enabling the export of electricity to power-hungry regions. Expanding renewable energy
sources, such as solar, wind, and biomass, also contributes to Nepal's potential as a
reliable supplier of clean energy to neighboring countries, supporting their sustainability
goals.

Nepal is actively investing in infrastructure development to support market expansion,

particularly in energy transmission and interconnection facilities. The construction of
transmission lines, substations, and the Nepal-India cross-border transmission line with a
capacity of 400 kilovolts enhances electricity trade and strengthens Nepal's position as an
energy supplier. This infrastructure development ensures efficient energy transfer and
facilitates the growth of Nepal's energy sector, creating mutually beneficial partnerships
and opening up avenues for further investment opportunities.
2. Educational Sector Targeting Domestic and Neighboring Market: Nepali students'
education expenditure abroad (~$3.3 B) equals over 10% of the GDP, straining the
country's finances.
In Australia, Nepali students rank as the third highest contributors in terms of education-
related spending, trailing behind India and China. Nepal contributed $2.002 B to the
Australian economy through education-related expenditures, with 57,182 Nepali students
studying in Australia in 2022.82,000 NOC approvals in 6 months highlight a lack of
quality education in Nepal.

Nepali students' financial commitment and expenditure on education abroad signal a

market potential for FDI in Nepal's education sector, also attracting SAARC international
students.

3. Commercial farming of agricultural products and medicinal herbs: The Nepali

government opened the agricultural sector to foreign investment on January 4, 2021, due
to a lack of interest in agriculture among Nepali citizens and the migration of the rural
population in search of better opportunities. This decision allows foreign investors to
bring in 100% FDI and engage in joint ventures with Nepali investors. Various areas
within the agricultural sector, such as floriculture, horticulture, apiculture, vegetable and
mushroom cultivation, seed development and production, and animal husbandry, have
attracted foreign investors.

Additionally, foreign investors in agricultural products like wheat, rice, and maize are
required to invest a significant amount in immovable capital and export a majority of
their output. Nepal offers several advantages for agricultural investment. The country's
climate ranges from subtropical to alpine, providing a diverse range of micro-
environments suitable for a wide variety of fruits.

Nepal's geographical diversity, including plains, hills, and the Himalayas, presents
opportunities for establishing citrus, apple, walnut, and juice factories. With a low-cost
workforce and inexpensive land available, foreign investors can benefit from low-cost
production.

Furthermore, the agricultural products cultivated in Nepal can tap into the substantial
consumer markets in India and the Middle East, especially for organic vegetables and
spices. Tax breaks, including exemptions and reduced tax rates, are provided to foreign
investors in the agricultural sector. Additionally, imported agriculture machinery is tax-
free, incentivizing the use of advanced technology. The medicinal herbs sector in Nepal
is also promising, with a rich variety of plant species and high-value herbs like
yarsagumba, chiraito, and jatamansi. Foreign investors can enhance the value of
medicinal herbs through processing and value addition, creating opportunities for
 partnerships with local farmers and investments in processing facilities and distribution
networks.
In the healthcare sector, Nepal allows 100% FDI in private healthcare companies. Rising
demand for high-quality and accessible healthcare, along with partnerships between
Nepali and foreign hospitals, drives growth in this sector. Incentives such as VAT
exemptions and low customs duty on medical equipment further support investment in
the healthcare industry.

Overall, Nepal's opening of the agricultural and healthcare sectors to foreign investment,
along with its favorable climate, geographical diversity, low-cost resources, tax breaks,
and market potential, creates an attractive environment for foreign investors seeking
profitable opportunities in agriculture, medicinal herbs, and healthcare in the country.

4. Promoting tourism and hospitality: Foreign Direct Investment (FDI) in Nepal's tourism
sector offers compelling opportunities for foreign investors. With its diverse landscapes,
rich cultural heritage, and adventure tourism offerings, Nepal has immense potential to
attract tourists from around the world. The country's commitment to sustainable tourism
practices further enhances its appeal. Investments in accommodation infrastructure,
adventure tourism companies, ecotourism initiatives, and cultural tourism ventures can
significantly contribute to the growth and development of Nepal's tourism industry.

Here are some of the key areas were FDI can be most beneficial:
a. Remote working hub: Remote working is a working style that allows
professionals to work outside of a traditional office environment. In this age of
digital technology, most of the task is done remotely through the computer. To
capitalize this opportunity, FDI can help to develop smart working hubs in the top
tourism spots of Nepal. For instance, an Apple employee can do software
development from Pokhara by enjoying the pleasant view of Phewa lake, a
Google employee can do coding from Solukhumbu surrounded by the peaky
mountains. This could be one of the transformational concepts for Nepal which
will showcase Nepal as a remote working hub for the world.

b. Adventure Tourism: Nepal's natural landscapes, including the Himalayas and

national parks, offer immense potential for adventure tourism. Mountain bike trail
is one of the potential fields. World class mountain racing trails can be built in
this landscape with the investment of foreign experts. Ice skating is another
unexplored sector of tourism. FDI can also support adventure tourism like
trekking, mountaineering, paragliding, rafting and other adventure activities.

c. Wellness and Spiritual Tourism: Nepal has an image of spiritual land in the
world. Nepal’s association with yoga, meditation, and spiritual practices makes it
 an attractive destination for wellness tourism. Foreign investors can invest in
wellness resorts, meditation centers, yoga retreats, and holistic healing practices
to tap into this growing market segment.

d. Technology in Tourism: Nepal has many unexplored beauty which is hidden

from the world. Certain tourists don't prefer Nepal as their visiting destination due
to the tough land structure and poor infrastructure. With FDI, we can use modern
technology to spread the beauty of Nepal. Augmented and virtual reality (AR/VR)
technologies can enhance the tourism experience by allowing visitors to explore
destinations which are difficult to reach in a more immersive and interactive way.
For example, AR/VR can be used to create virtual tours of Everest Base camp,
Rara lake, Badimalika and many more . This can provide people with a more
engaging and pleasing experience from anywhere they want.

5. Giving importance to Labor intensive industries: Labor-intensive industries hold

significant importance in any economy as they rely on the physical and intellectual
efforts of individuals to drive production and operations. The relationship between
foreign direct investment (FDI) and poverty reduction has been widely acknowledged,
particularly in developing nations like India and China. China's success in reducing
poverty can be attributed to timely economic reforms and substantial inflows of FDI,
especially in labor-intensive manufacturing goods.

Similarly, Nepal, with its abundant labor force and traditional craftsmanship, has great
market potential for FDI in sectors like textiles, apparel manufacturing, agro-processing,
and handicrafts. The country's lower labor costs, strong domestic market, preferential
market access through trade agreements, and international recognition in industries like
handmade carpets further contribute to its attractiveness for foreign investors.

By prioritizing the development of labor-intensive industries, Nepal can generate

employment, foster economic growth, reduce dependence on remittances, and achieve
long-term prosperity. The positive correlation between FDI and agriculture growth rate
indicates that increased FDI inflows can enhance agricultural productivity and overall
growth.

Overall, focusing on labor-intensive industries and creating a favorable investment

climate will attract investors and workers, ultimately leading to economic development
and poverty reduction in Nepal.

6. Focus on local resource-based export-oriented industries: In the present scenario,

foreign trade plays a significant role in Nepal's economy, contributing more than 50% to
 its GDP. Companies that export over 90% of their goods enjoy exemptions from customs
duties, excise duties, and sales taxes.

Nepal's major trading partners include India, China, Bangladesh, and the USA. The
country's key exports comprise clothing, carpets, handicrafts, tea, leather and jute
products, vegetables, and cereals. Nepal's trade policy underwent liberalization in 1992,
with the introduction of a new Trade Policy in 2014. Since joining the WTO in 2004,
Nepal's foreign trade has diversified to include a wide range of countries, maintaining
trade relations with over 100 nations.

Nepal's National Trade Integration Strategy (NTIS) in 2010 identified 19 priority export
items, including Pashmina, medicinal and aromatic plants, large cardamom, honey, and
footwear. Exportable goods usually incur no custom duty, with the duty calculated based
on the FOB price during export. Except for banned or restricted items, no licenses are
required for exporting any product. Nepal benefits from the Generalised System of
Preferences (GSP) as a Least Developed Country, offering tariff reductions on various
products. Nepal possesses sustainable and high-quality raw materials, attracting imports
of items such as crude oil, medicinal plants, jute, and garments from numerous countries.

Threats
1. Setting up business
2. Infrastructure and Technological Advancement
3. Education Advancement
4. Favorable political system and economic policy
5. Employment Opportunities Abroad
6. Increasing trend of Brain Drain
7. Large population and availability of cheap labor in neighboring countries
8. Neighboring big economies and their market size
9. Facilitative FDI policies of neighboring countries

1. Setting up business:The business environment of Nepal in comparison to China is

evolving and undergoing but China is a well-established economy which offers extensive
support services, a well-developed supply chain, and a wide range of industries. This can
be a threat to Nepal in attracting FDI as Nepal is still facing challenges bureaucratic
procedures, limited infrastructure, and occasional political instability.

2. Infrastructure and Technological Advancement: Another sector, where Nepal fails to

attract FDI. Many villages of Nepal are still untouchable to infrastructure facilities such
as roads, electricity, health. For example, due to lack of road transportation in a remote
 village Jumla, Hundreds of quintals of Apple exploit every year. It is still developing,
particularly in rural and remote areas. China has invested heavily in infrastructure
development which offers efficient logistics and connectivity advantages which foreign
investors seek.

India generally has a more advanced technology sector where several major IT
companies and multinational corporations have established their presence while Nepal is
making progress in its sector as it has smaller scale of operations and a comparatively
smaller potential candidates in the IT industry. This factor can attract foreign investors
more to India than in Nepal.

3. Education Advancement: Though Nepal has a literacy rate around 70 percent, it lacks
technical education. The education system in Nepal is very formal and is course oriented.
However, the education system in China and India is more informal and skill oriented.
The children are taught basic technical skills from their childhood. The education system
is updated with technology, but Nepal has an old education system which is 60-70 years
old which is one of the major threats for flow of FDI in Nepal.

4. Favorable political system and economic Policy: The political system should be stable
for proper flow of FDI in any country. But the Nepal political system is frequently
changing over time. The policies brought by one are replaced by another within 6-7
months. A country like India, China has a very stable political system with favorable ease
of doing business. So, they are big threats for us to bring FDI in Nepal. India has opened
FDI in booming sectors like Defense, Real Estate but Nepal has not opened for these
sectors, so India poses a direct threat to attract FDI.

5. Employment Opportunities Abroad: Nepal has witnessed a significant rise in the

phenomenon of foreign employment. This trend has emerged primarily due to the limited
availability of suitable job opportunities within the country, making it challenging for
individuals to sustain themselves. Additionally, the pay scale offered to individuals often
fails to align with their qualifications and skills, further driving the inclination towards
seeking employment abroad.

As per recent data in the first seven months of FY 2022/23, nearly 500,000 youths have
gone abroad for foreign employment.

Type of Approval 2020/21 2021/22 Change %

New /Institutional 93,329 354,660 280.50% (Increase)
Renewal 94,792 282,453 198.50% (Increase)
Source: Ministry of Finance
6. Increasing trend of Brain Drain: Skilled professionals and individuals with specialized
expertise have increasingly chosen to showcase their skills and abilities in foreign
countries, driven by the prospect of better remuneration and a higher standard of living.
This trend has particularly affected professions such as bankers, nurses, doctors, students,
chartered accountants, and others, as they have witnessed a significant surge in the
number of individuals seeking better opportunities abroad.

However, this increasing outflow of skilled manpower has had a detrimental impact on
the flow of Foreign Direct Investment (FDI) in Nepal. The departure of highly qualified
professionals has created a shortage of skilled workforce within the country, leading to a
lack of expertise and reduced productivity in various sectors. Consequently, potential
investors may be discouraged from investing in Nepal due to concerns regarding the
availability of skilled human resources.

Also, the potential drivers of economic wheels, ‘’The Students” have left the country for
higher education and greater opportunities in developed nations like Japan, Australia,
USA, UK and European Countries. UNESCO figures show that the number of students
from Nepal traveling abroad to study has more than doubled from 2017/18 to 2021/22.

Profession FY 2017/18 FY 2021/22 % Change

Students 44,225 95,268 115.42
Source: gsl.news/2023/03/03/inbound-insight-nepal/

7. Large population and availability of cheap labor in neighboring countries:

Neighboring countries such as India and China, with their significantly larger
populations, present unique challenges to Nepal in terms of attracting Foreign Direct
Investment (FDI). China is renowned for its abundance of cheap labor and advancements
in automation, which can be perceived as potential threats to Nepal's FDI inflow. The
vast population in these countries provides a large pool of labor, often at lower wage
rates, making them attractive for labor-intensive industries seeking cost efficiency.

8. Neighboring big economies and their market size: Nepal, as a smaller economy, faces
competition from neighboring big economies like India and China, which have
significantly larger markets and attract substantial foreign direct investment (FDI). India
has a population of over 1.3 billion people, while China has a population of over 1.4
billion people. In contrast, Nepal's population is around 30 million people hence Nepal's
smaller market size may deter some investors who seek larger customer bases, superior
infrastructure networks, including transportation, logistics, and communication systems.
 9. Facilitative FDI policies of neighboring countries: Neighboring countries like India
and China have implemented facilitative policies to attract foreign direct investment
(FDI), which can be seen as a challenge for Nepal in terms of attracting FDI. India had
previously established the Foreign Investment Promotion Board (FIPB), a single-window
clearance mechanism, to facilitate FDI approvals across various sectors. China pioneered
the concept of Special Economic Zones (SEZs), such as Shenzhen and Shanghai Pudong,
which offer preferential policies and incentives to attract foreign investments. These
zones provide infrastructure, tax incentives, streamlined regulations, and access to skilled
labor to encourage FDI which can be seen as a challenge for Nepal in terms of attracting
FDI.

SWOT Analysis to attract FDI in China

STRENGTHS WEAKNESS

● Geographic presence in different ● Regulatory Complexity

regions
● World's largest population,
● Strong financial position
● Access to low cost suppliers
● Manufacturing Capabilities
● Competent and committed human
resource
● Cheap Labour
● Restricted patent protection
● Trade disputes, political conflicts and
changing international relations
● Issues with intellectual property
infringement, counterfeiting, and
forced technology transfers.
● State Intervention and Subsidies to
domestic firms

OPPORTUNITIES THREATS

● Exponential population growth and ● Changing regulatory framework and

potential customer segments
● Development of new technologies
● Reduction in interest rates for easier
fundraising and financing
● Emergence of e-commerce and social
media marketing trends
● Global interconnectedness for
international market expansion
● Government subsidies and friendly
business environment
stricter regulations
● Increasing number of competitors
● Deteriorating economic conditions
affecting customer spending patterns
and purchasing power
● Rise in inflation impacting production
costs and profitability
● Growing environmental sustainability
trends and negative impact on brand
image
● Challenges of dealing with cultural
diversity in a globalized market.
Comparison of SWOT to attract FDI between Nepal and China

Comparing Strength of Nepal with China

● China has been a major recipient of foreign direct investment (FDI) globally, while Nepal
has a lower inflow of FDI in comparison. However, Nepal is striving to enhance its
investment climate and attract more FDI.

● China's large population, rising middle class, and increasing disposable income make it
an attractive market for investors. The Chinese government has implemented policies and
initiatives, including Special Economic Zones (SEZs) and investment incentives, to
attract FDI.

● Nepal possesses abundant natural resources such as water for hydropower, minerals, and
agricultural land. Its potential for hydropower generation and renewable energy
development is significant due to its numerous rivers and hilly terrain. The country's
cultural heritage and historical sites attract tourists, promoting trade and regional
economic integration.

● China's strength lies in its position as the world's largest manufacturer, with diverse
industries including electronics, automotive, textiles, and machinery. Its well-developed
manufacturing capabilities, efficient supply chains, and economies of scale make it a
favored location for outsourcing and production. In contrast, Nepal's manufacturing
sector is smaller and focuses on labor-intensive industries like textiles and handicrafts.

● China's extensive infrastructure development, including high-speed railways, modern

highways, and port facilities, facilitates efficient connectivity within the country and with
global markets. Nepal's infrastructure is still underdeveloped, with challenges related to
transportation networks, electricity access, and logistics systems.

● China's substantial FDI inflows, amounting to $181 billion in 2021 (increase of 21%
from the previous year), reflect its appeal to foreign investors due to its large market,
favorable investment policies, and established industries. In contrast, Nepal's FDI inflows
are modest, reaching $172.3 million in 2021. Nepal is working towards improving its
investment climate to attract more FDI but currently lags behind China in terms of
inflows.
The top five sources of FDI into China in 2021 were:
1. Hong Kong ($131.8 billion)
2. United States ($2.47 billion)
3. Japan ($1.97 billion)
4. Singapore ($1.72 billion)
 5. South Korea ($1.54 billion)

Comparing Weakness of Nepal with China

● China's investment climate is affected by its political system, characterized by a single-
party rule, bureaucracy, and regulatory uncertainties. Nepal, on the other hand, faces
challenges due to political instability, inconsistent policies, and bureaucratic hurdles.

● China's rapid economic growth (According to the World Bank, China's GDP growth rate
averaged 8.97% from 1989 to 2023) has led to economic inequality and regional
disparities, while Nepal also experiences urban-rural divides and income inequalities.
Environmental concerns exist in both countries, with China facing issues such as
pollution, deforestation, and water scarcity, while Nepal deals with deforestation, soil
erosion, and vulnerability to climate change.

● Infrastructure gaps and connectivity issues are present in both countries, with China
having developed extensive infrastructure but some inland regions still lacking access,
and Nepal facing challenges due to its mountainous terrain.

● Cultural and language differences can also pose hurdles for foreign investors in both
markets.(According to a 2018 survey by the EF English Proficiency Index, about 6% of
the Chinese population (or about 82 million people) can speak English to some degree)
(According to a 2019 survey by the British Council, about 15% of the Nepali population
(or about 4 million people) can speak English to some degree.). However, both China and
Nepal have taken measures to address these challenges and create a more favorable
investment environment.

● While both China and Nepal have weaknesses that impact their investment climates, it is
important to consider these alongside their strengths. Both countries have taken measures
to address these challenges and create a more favorable environment for foreign
investment. Understanding and navigating these weaknesses can help investors make
informed decisions and leverage the opportunities available in each market.

Comparing Opportunities of Nepal with China

● With a population exceeding 1.4 billion people, China's consumer market provides a vast
customer base for businesses

● China offers extensive FDI opportunities driven by its massive consumer market, well-
developed manufacturing sector, technological advancements, and infrastructure projects
like the Belt and Road Initiative (BRI).The top five industries that attracted FDI into
China in 2021 were:
 1. Manufacturing ($59.2 billion)
2. Wholesale and retail ($36.8 billion)
3. Information technology ($32.4 billion)
4. Real estate ($29.6 billion)
5. Finance ($28.4 billion)

● Additionally, China's advancements in technology, such as AI and e-commerce, create

opportunities for innovation-driven companies. Belt and Road Initiative (BRI) further
opens avenues for infrastructure-related investments and collaborations.

● While China's FDI opportunities are driven by its scale and economic power, Nepal's
opportunities are more focused on its specific strengths and niche industries.
● In 2020, China's retail sales reached approximately $6.3 trillion, making it the largest
retail market globally (National Bureau of Statistics of China). Foreign companies can
tap into this market by establishing retail outlets, e-commerce platforms, and distribution
networks.

● Nepal's agricultural sector presents opportunities in organic farming, agro-processing, tea

and coffee production, and other high-value agricultural products. The country's fertile
land and diverse climate create favorable conditions for agricultural activities.

● Furthermore, Nepal's emerging information technology (IT) sector offers opportunities in

software development, IT-enabled services, and business process outsourcing. The sector
contributed around 2.6% to Nepal's GDP in 2020 (Nepal Rastra Bank), highlighting its
growth potential and attractiveness for IT investments.

Comparing Threats of Nepal with China

● China's regulatory environment can be complex and challenging for foreign investors.
The country's legal framework and market access restrictions have been areas of concern.
For example, foreign companies may face restrictions on market entry, equity ownership,
and face challenges related to licensing, permits, and approvals.

● China's geopolitical tensions with other countries (mainly with the United States) can
pose risks to foreign investors. Trade disputes, diplomatic conflicts, and changes in
government policies can impact market stability and create uncertainties for long-term
investments.
 ● Nepal faces challenges in terms of infrastructure development, particularly in areas such
as transportation, power supply, and logistics. Insufficient infrastructure can hinder
business operations, increase costs, and limit the efficiency of supply chains.

● Nepal's market size is relatively small compared to larger economies. Limited market size
can restrict growth opportunities and make it difficult for companies to achieve
economies of scale.

● China's domestic market is highly competitive, with strong local players and state-owned
enterprises. Foreign companies may face challenges in penetrating established markets
and competing with well-established local brands.

CONCLUSION AND RECOMMENDATIONS:

In Nepal, the government has been working towards improving its investment climate by
implementing policies to simplify administrative procedures and provide investment incentives.
Additionally, the creation of special economic zones aims to attract foreign investors by offering
preferential tax rates and streamlined processes. However, political instability has been a
persistent challenge, along with regulatory complexities and bureaucratic hurdles that can hinder
the ease of doing business in the country.

On the other hand, China has been successful in attracting significant foreign direct investment
(FDI) inflows. The Chinese government has implemented various policies and initiatives to
create a favorable environment for foreign investors.China's commitment to economic reforms
and its openness to foreign investment have contributed to its status as one of the largest
recipients of FDI globally.
Recommendations to Nepal:
● Improve political stability by promoting good governance and creating a consistent
regulatory environment to instill confidence in foreign investors. This can be achieved
through transparent and predictable policymaking processes.

● Streamline administrative procedures and reduce bureaucratic hurdles to enhance the ease
of doing business. Implementing online platforms and digital solutions can expedite
processes and reduce red tape.

● Leverage Nepal's rich natural resources, particularly in the energy sector, by providing
attractive incentives and creating a favorable investment climate for renewable energy
projects. This can include tax incentives, simplified licensing procedures, and access to
financing options.

● Focus on developing infrastructure, including transportation networks and energy

transmission systems, to address challenges related to access to electricity and improve
connectivity within the country. This can be achieved through public-private partnerships
and attracting foreign investment in infrastructure projects.

● Implement and enforce stricter environmental regulations to address environmental

challenges such as deforestation, soil erosion, and vulnerability to climate change.
Promote sustainable practices and encourage investments in eco-friendly industries to
support long-term sustainability.