FDI A laconic note

DR. GIRISH P. PANT

Broadly speaking, foreign direct investment (FDI) is a transfer of entrepreneurial capital in the form of some conglomeration of managerial skills and the supply of finance to a host country. A case in point of FDI would be a British company gaining a majority venture in an enterprise in China. Another instance would be an Indian incorporation establishing a joint endeavor to promote a mineral deposit in Nepal.

Countries hail FDI for its heterogeneous inherent advantages which encompass employment generation, capital build-up, transposition of technology, advanced equipping of services and escalated competition.

After the Second World War, when many colonized countries attained independence, bureaucracies in the newfangled governments postulated that foreign possession was neocolonialism, a sequel of colonialism. Posing on these concepts, many authorities of newly liberated economies nationalized overseas-owned business. This denoted that the plant, mine or other enterprise was run as a public entity. However, advocates have recommended that foreign investment can fetch capital and technology, foster skills and linkages and increase employment and revenues. It is also salutary for economic development and poverty alleviation.

The United Nations Conference and Trade Development (UNCTAD)’s World Investment Report 2012 which was released recently concludes that global FDI flows in 2011 transcended the pre-catastrophic norm-climbing to US $ 1.5 trillion in spite of dogged misgiving in the international economy. Notwithstanding, flows still prevailed more than 20 per cent beneath their 2007 zenith.

Slower FDI augmentation in 2012 was presaged, with flows leveling off at approximately $ 1.6 trillion. Longer-term forecast divulge a modest but firm upsurge with world-wide FDI

reaching $ 1.8 trillion in 2013 and $ 1.9 trillion in 2014, obviating macro-economic turmoil.

According to the Report, FDI inflows in 2011 swelled across all vital economic regions. Flows to developing countries attained a record $ 684 billion, an increase of 11 per cent. In transition economies, flows soared by 25 per cent to $ 92 billion. Flows to developed countries grew by 21 per cent. However, FDI slump continued in Africa and the least developed countries including land-locked developing countries and small island developing states.

The Report incorporates a detailed scrutiny of international and regional investment, inclinations of domestic policy developments and the significant issues on the latest generation program.

There are strengths, weaknesses, and opportunities in the Nepalese context with reference to FDI. The strengths are (a) venue between two promising huge markets in the world: China and India; (b) moderate macroeconomic stability ; (c) trainable and low-cost labor; (d) ample natural and cultural resources and (e) modest bureaucracy. The weaknesses are (a) land-locked country; (b) meager infrastructure; (c) inflexible and importunate labor regulations and (d) political disequilibrium and enervated enforcement. The opportunities are (a) tourism, inclusive of sports and adventure tourism, health tourism and cultural tourism; (b) an array of agro-business enterprises and (c) hydropower generation and infrastructure improvement.

Nepal has been receiving about 60 per cent of FDI from China and India while the remainder has originated from Organization for Economic Cooperation and Development (OECD) countries. The country has also been pursuing various policies to attract FDI. Entering the World Trade Organization (WTO) in 2004, participating as a representative in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC), and becoming a member of South Asian Free Trade Area (SAFTA) in 2004 are some of the endeavors. More recently, a new Trade Policy (2010), a new Industrial Policy (2010) and Nepal Trade Integration Strategy (2010) have also been released. At high level, the country convened Bilateral Investment Promotion and Protection Agreement (BIPPA) with India in 2011. With the United States, Nepal signed a Trade and Investment Framework Agreement (TIFA) in 2010. She has also signed investment protection covenants with France and Germany. Further, in order to eschew double taxation, agreements have been concluded with India, Norway and Thailand.

In spite of the aforesaid policies and measures, FDI to Nepal has been skimpy. For instance, according to the UNCTAD Report of 2012, quoted earlier, FDI inflows to Nepal in 2011 was $95 million, an uptick from $ 87 million in 2010. This is an opprobrium especially when inflows to Bangladesh recorded $ 1136 million in 2011 and Maldives received $ 282 million. Though the formation of the Investment Board in November 2011 and the declaration of Fiscal Year 2012/13 as Foreign Investment Year have been steps in the right direction, much needs to be done. Nepal, inter alia, should also conduct an in-depth analysis of her economy so that a slew of practical methods could be formulated appropriately at both policy and functional levels to attract more FDI.

Dr. Pant is a

free-lance consultant