Attracting FDI: Make it easy for investors

For attracting foreign direct investment and optimising it, greater policy transparency, especially through increasing information flows, is essential for boosting investor confidence

The focus of foreign direct investment (FDI) policies has generally been towards the economic dimension of development. During the 1980s, such policies often encompassed economic and investment liberalisation as well as the deregulation measures. While such liberalisation often improves the economy’s efficiency, a number of crises, including the 1997 South-east Asian financial crisis and the 2008-2009 global financial crisis, validated the need for prudent regulation and supervision for improving the stability of the economy and investment climate. Moreover, according to the Global Investment Competitiveness Report 2017/18, the two major factors influencing multinational corporations’ investment decisions in developing countries include political stability and a business-friendly regulatory environment. These two factors outweigh other country characteristics, including infrastructure, access to land and low tax rates.

The overall benefits of FDI for developing country economies have been extensively documented. FDI prompts technology spillovers, assists human capital formation, contributes to trade integration, helps generate a more competitive business climate and enhances enterprise development. It can also boost productivity, raise investment in research and development and lead to better-paying and more stable jobs in host countries. Among all its benefits, however, it is FDI’s spillover potential — the productivity gain resulting from the diffusion of knowledge and technology from foreign investors to local firms and workers — that is perhaps the most valuable input to long-run growth and development. Moreover, beyond the strictly economic benefits, FDI can also support in the improvement of environment and social condition in the host country by relocating “cleaner” technology and directing to more socially responsible corporate policies.

Though the benefits of FDI are real, they do not come about automatically. For garnering the optimal benefits, the host governments must formulate and implement the right policies and create an investment-friendly climate which encourages domestic as well as foreign investment, provides incentives for innovation and improvements of skills and contributes to a competitive business climate.

Still, when inviting FDI, governments often downplay the value of the business climate and tend to accord more priority to market size, availability of natural resources and costs. Nonetheless, the challenge for policy makers is not about securing substantial amounts of FDI activity per se, but rather in maximising the linkages and positive spillovers that can be derived from foreign investors.

In Nepal’s case, despite the introduction of fairly liberal “Foreign Investment Policy, 2015,” “Industrial Enterprises Act,  2016” and “Special Economic Zones Act, 2016”, foreign investors are still skeptical of the quality of the domestic institutions and the enforceability of the law. Political instability and ensuing policy and legal uncertainty means that foreign investors would think twice before investing in Nepal. Again, poor infrastructure, which escalate the cost of doing business in Nepal, has been a strong disincentive for foreign investors. Moreover, overlapping laws and institutional arrangements, differing priorities of various agencies of the government have also been obstacles to generation of an investment-friendly climate in the country.

Likewise, investor aftercare services in Nepal have often been an overlooked element of investment promotion. These include administrative services that facilitate the operations of foreign firms (such as obtaining business licenses and work permits), operational services that support the effective and efficient operations of foreign firms (such as support for training, identifying local suppliers and cluster development to improve productivity and competitiveness) and strategic services that influence the future direction of the firm and the development of capabilities.

For attracting FDI and optimising it, greater policy transparency, especially through increasing information flows, is essential for boosting investor confidence. Nepal also needs to undertake positive image building activities aggressively in order to induce investors that it has an attractive and competitive environment for business and to dismiss possible negative images of its location.

Similarly, lessening investor risk through upgrading quality and effectiveness of laws, and predictability and efficiency of their implementation, are preconditions for attracting, retaining and expanding FDI. Regulatory simplification, dismantling barriers to investment entry and addressing infrastructure constraints are crucial confidence-building gestures for the investors.

Finally, policies to attract FDI should not be prepared in isolation.  They need to be well-integrated and mainstreamed in national plans and strategies as FDI cuts across nearly all aspects of development. This will require active cooperation and proper coordination of all concerned government agencies, ministries and the private sector. Ultimately, investment promotion, in the end, is just about marketing a specific location to foreign investors. This together with practical policies is bound to bring in technical know-how, enhance work force skills, raise productivity, generate business for local firms and create employment opportunities.

Pant is with Nepal Rastra Bank