Foreign direct investment Role in national development

The history of Nepal’s infrastructure development is very short. However, with the beginning of planned development in 1956, infrastructure development has always been pivotal. Construction of roads, airports, bridges and, more importantly, hydropower has ruled the development agenda. Consequently, a number of notable highways have been successfully constructed through foreign direct investment (FDI), without which it could have been next to impossible.

Nepal has always been subsistence or rather a deficit economy that lacks the ability to invest in projects that require huge financial outlay. The basic industries have been established in Nepal with the investment of foreign governments. A number of key industries were established with the FDI. The primary objective of investment made in these industries by foreign countries was to make the country self-reliant. Therefore, the cooperation over the investments was driven by social motive rather than profit. Thus, Nepal has been responsible for the operation, maintenance and production of respective goods and the sole owner of the return on foreign investment. The trend of the industrial development has not changed much as the industrial activities depend largely on the FDI, aid and loan from foreign countries. However, since the last two decades, under the globalization, FDI has gradually been altered from the government to the private source. Under this arrangement, the operation, maintenance, production and the ownership are either divided or solely owned by the foreign investors. For instance, Surya Nepal, Dabur Nepal, Nepal Lever Limited, and Nepal SBI Bank Limited are the outcome of Indian FDI. Similar other ventures that overly exist in Nepal are either operated through Nepalese collaboration or through sole foreign entrepreneurship.

As hydropower development, among other things, has been a priority, some notable hydropower projects have been constructed since 1956. These projects can be divided into four sets according to the nature of their source of investment. The first set comprises of Pardi, Trisuli, Devighat (Indian aid), Sunkosi, Seti (Chinese aid), Panauti (former USSR aid), and other small hydro electric projects were constructed under bilateral cooperation. Moreover, the countries of the globe were divided into two extreme poles under USA and USSR which of course was a boon for Nepal in receiving FDI from bilateral sources. The projects under the first set were the outcome of the persisted global Cold War. But, the trend of investment in hydropower development in Nepal turned multilateral from bilateral cooperation after the 1970s. Hydropower projects such as Kulekhani, Marsyangdi, Kaligandaki A and Mid-Marsyandi in the second set were constructed under the multilateral aid and loans from international financial institutions. Under the structural adjustment program beginning mid-1980s, particularly after 1990, private sector investment, both internal and external, have played a dominant role in the development of hydropower in Nepal. The third set of hydropower projects are Jhimruk, Chilime and other small projects. They were constructed either through joint ventures or sole investment by Nepalese entrepreneurs. Bhote Kosi, Khimti and other small hydropower projects comprise the last set that were constructed under the private sector’s foreign direct investment.

Existing hydropower projects were constructed under the FDI. This reality cannot be undermined as today FDI is inevitable for a poor country like Nepal where resources are limited to help achieve high and sustained economic growth. The country’s own resources both public and private cannot meet the financial investment needs for hydropower development. In order to meet both the growing internal demand and the significant potential for export of power, the large investment needed can only come from foreign development agencies and private sector entrepreneurs.

Despite the fact that FDI is inevitable, it has always been controversial in Nepal. In the past, the so called ‘nationalistic’ views aired against FDI over the utilization of water resources have put its development to a halt, thereby, hampering progress. The Nepalese today are facing load shedding as its dire consequences. It has slowed the nation’s output as the industrial and service sector have been forced to scale down or close operations.

The hydropower projects under consideration if allowed to complete, will not only meet the domestic demand but also tap the opportunities for exporting and earning foreign currency. Today, developing countries are competing to acquire FDI, and creating congenial environment for those investments because FDI has created synergy in most of the nations adding value to mutual benefits. It is high time that the politicians and other stakeholders understand that FDI is important for progress rather than mere receiving of the aid.

Dr. Dhungel is Associate Professor, Central Department of Economics, TU