Kathmandu, October 18:

Attracting foreign direct investment (FDI) in the country has always been a major agenda of past and present governments, no matter which political party was in saddle. However, the effectiveness of such efforts has remained questionable, due to government’s inability to improve the environment for attracting FDI.

According to a recently released book entitled ‘Foreign Direct Investment in Nepal (FDI-N)’ by Centre for Integrated Development Studies (CIDS), there are examples of failures of the government mechanisms for improving the degree of effectiveness in FDI utilization.

As per the study, India alone has invested 46.2 per cent in manufacturing sector in Nepal followed by China and USA. Manufacturing sector alone received 41.1 per cent FDI which itself shows an unequal FDI distribution.

The low level of FDI in Nepal is attributed to negative image of Nepal in areas such as security, micro enterprises and cottage industries, agriculture and tourism. FDI in Nepal during the last couple of years is gradually declining despite its sound growth in the beginning of 1990s, according to the study. Expert in the book pointed out that policy and political environment are a precondition for increased FDI in Nepal. According to FDI-N, a total of 870 FDI projects have been recorded in the year 2004 on account of operation and, pre and non-operational projects.

Major FDI projects are found in tourism, service industries and manufacturing. However, agriculture, energy, construction and mineral did not get much FDI, according to the study.

Studies have said that Nepal still remains less competitive for FDI for third world economies though it has adopted liberal economic policies.

As per the analysis of product market of FDI industries, FDI industries contributed 74 per cent in import substitution and 26 per cent in export promotion, particularly in India. The FDI industries’ contribution to total tax revenue to the national coffer stands at about Rs 52.8 million per annum that was 0.2 per cent in total tax revenue (Rs 28,284.5 million) but 9.5 per cent in total corporate income tax (Rs 551.1 million).

What is good is that FDI has facilitated the development of ‘backward and forward’ linkages in enterprises that have greatly helped to explore markets. Another study conducted by ministry of finance (MoF) and Asian Development Bank (ADB) jointly has stated that there is no concrete or clearcut FDI strategy and a lack of high-level public consultation system.

The study shows that the current Investment Promotion Board (IPB) is not effective. Among many other constraints, there is no legislation to attract investment from NRNs, no provision to protect consumers as per the requirement of WTO, weak efforts in attracting FDI in hydropower and absence of orientation towards research and development due to scarcity of capital.