FDI bottlenecks

Nepal is a least developed country (LDC) with its economy based on agriculture and remittance. Nepal has a number of potential areas of economic development but lacks the capacity (financial and technological resources) to make large investments in big developmental projects.

In this context, the role of foreign direct investment (FDI) is crucial. Despite the provision of liberal investment policies of the government, Nepal has not been able to attract FDI in an effective manner. Political instability, poor governance system, inefficient bureaucracy plagued by corruption and lack of will are the major impediments. However, Nepal can attract prospective foreign investors to invest in key areas of development by making timely improvements in the legal framework, transaction cost and investment climate.

The Encyclopedia Britannica defines FDI as “an enterprise that is resident in a country other than that of the foreign direct investor.” FDI is deemed as a catalyst for the economic growth in developing countries. It is an important vehicle of technology transfer from developed countries to developing countries. Various studies and researches suggest that FDI stimulates domestic investment and facilitates to improve in human capital and institution in host countries.

In the context of Nepal, this potential has not been translated into action. One major bottleneck Nepal confronts is perennial political instability. A large section of economists hold the opinion that political instability hampers growth and development in general and FDI promotion in particular. This is inevitably true in Nepal’s development endeavour.

Another barrier to FDI in Nepal is poor governance system. Nepal’s bureaucracy is characterised by inefficiency, dilly-dallying, traditional mindsets and incompetent human resources with least or no ICT skills.

On top of all, corruption is rampant everywhere.

Nepal should address two things urgently. First, it should ensure attractive return for the foreign investors by maintaining political stability, ensuring good governance, strengthening bureaucracy and revising and reviewing policy and regulatory framework. Second, Nepal should attract the international investors through seminars, meetings with business communities, encouraging the private sector and consolidating the role and capacity of Nepali diplomatic missions abroad.