Foreign Direct Investment and Technological Change issues in Nepal

Raj Rai, Middlesex University/London

The global FDI statistics reported by UNCTAD shows that global FDI across globe was US $54.07 billions in 1980 which raised to US $ 207.27 billions in 1990 and US $ 1,833.32 billions ( 34 times of 1970) in 2007. Nepal’s neighboring countries China and India has become able to attract a significant portion of FDI in their countries. China’s net FDI inflow was US $ 57 millions in 1980 which raised to US $ 3,393 in 1990 and reached to US $ 83,521 million in 2007.Similarly, India’s net FDI inflow in 1980 was US $ 49 millions which raised to US $ 237 million and increased to US $ 22,950 millions 2007. The FDI inflow is seen pessimistic for Nepal. FDI inflow statistics is not available for 1980; however, it was US $ 6 million in 1990 which figure remained same in 2007 as well (UNCTAD report). Foreign Direct Investment (FDI) is one of the factors for growing trade, investment and economic growth for the countries. The integration of global economies is enhanced by flow of FDI across the globe. Multinational companies (MNCs) are the vehicle of FDI through which they transfer capital and technologies from one geography to another geography. Primarily, MNCs go cross boarder operations with the view of market seeking, raw materials explorations and low operations costs. MNCs are important for developing economies because they invest in the green fields which help to improve the infrastructure of the economy. The main importance of FDI on economic growth is that FDI are embedded with the new technologies which become the pivotal driver for economic transformation of developing and under developed economies. The local firms learn new technologies from the MNCs in one hand; they try to improve the managerial and technological aspects of the operations on the other hand. In the recent years, every country has the policy to attract more FDI in their economic policies. Nepal’s neighboring countries both China and India have achieved higher economic growth rate along with the massive inflow of FDI (table below). Not only India and China, other neighboring countries recorded higher level of economic grow in the recent years. GDP, FDI and economic growth in South Asian countries in 2007
Year 2007 GDP Billions US FDI in million US GDP 1growth rate Bangladesh 73.689 666.4 6.6 Bhuta n 1.197 78 15.2 India 1,102.3 5 22,950 8.4 Maldives 1.054 15 4 Nepal 11.28 15 3.5 Pakistan 144.032 5,333 6.5 Sri Lanka 32.349 529 7.5 China 3,382.45 83,52 1 13.01

Source: Unctad, world investment report, 2008 and IMF, World economic outlook database, 2008.

According to Central Bureau of Statistics of Nepal, there are 1,423 firms are operated with FDI in 2006/07 with the NRs.121, 484 billions. These firms employ 121,484 people which are significant number of people where unemployment is a big problem. Manufacturing sector dominates the FDI inflow in Nepal. Tourism and service industries are next largest FDI involved industry. Energy and mineral sectors have least numbers of FDI. On the basis of scale of firms majority of the FDI are small and medium scale firms. India has the highest number of FDI in Nepal, US investment is second largest amount of FDI, China third, South Korea fourth, Norway fifth, Japan sixth and British Virgin Islands, seventh in Nepal (US department of state, as of October, 2007). Nepal attracts small amount of FDI and its impact on the economy negligible (UNCTAD, 2003).However, foreign direct investment in readymade garment heavily contributed foreign exchange earning from export. Second tourism sector attracted FDI which enabled the standard of Hotels in Nepal. Tourism industry contributes one of major source of foreign exchange earning. Nepal benefited from the activities of Transnational Corporations (TNCs) (UNCTAD, 2008). Developing countries are in need of heavy capital investment on infrastructure but governments can’t finance that much. Therefore, foreign direct investment is an alternative source of financing for faster economic growth of Nepal. Foreign Direct Investment and One Window Policy of 1992, Foreign Investment and Technology Transfer Acts of 1992, Privatization Act of 1994 and Industrial enterprises Act of 1992 are the major trade and FDI related acts in Nepal. The Foreign Investment and one window policy of 1992, foreign investments are allowed up to 100 percent in the list of acceptable forms; establishes the currency repatriation guidelines. Nepal became the member of WTO in 2004. So, Nepal has to comply with international trade rules by opening its markets to the world and reducing the custom duty rates. Nepal has launched the policies to encourage FDI, however, due to various problems like bureaucratic delays, political instability, and lack of access to sea ports, difficult land transport, scarce raw materials, inadequate power supply, non-transparent tax administration and unclear labor relations. Technological changes are the main stimulus for economic growth in the country. The technological is cheaper to bring through FDI than any other means. Nepal is not able to attract such technologies in almost all sectors. In particular case, Nepalese Banking sector stands comparatively competitive in the domestic market. Nabil Bank where first FDI was allowed in1984. Similarly, Nepal Investment Bank, Nepal Grindlays Bank had established with FDI. Banking sector has been seen one of the innovative and successful industry in Nepal. Government owned banks (Rastriya Banijya Bank and Nepal Bank) have also compelled to upgrade the facilities due to the competitive situation. This is an example shows how FDI upgrades the managerial and technical qualities of local firms. Technological changes are the main source of development. In this respect, attraction of

FDI with new technologies is the urgent need for Nepal to revolutionize economic growth. Nepal can’t remain closed with the world economy to presence its existence in the world. Without the foreign technologies (from MNCs) going in to world market is impossible. According to Nepal Industrial Statistics 2007/08(CBS, Nepal) there are 1,423 firms are operating with foreign investment from 139 countries. India has the largest number of investment in Nepal (393), China 179, Japan 132, South Korea 94, UK 94, Germany 61 and Switzerland 27. Manufacturing sector has the largest number of FDI involved sector (565) and hotel and resort sector (370) second. Textile and garment 210 and energy, water and gas sector has 32 companies. One of the major problems of industrial development is low scale supply of power and energy in the country. Nepal’s water resources are one of the frequently addressed issues by each new government. However, the resources is neither optimally used by country itself nor attracted foreign capital in this sector. The political instability is the major hurdle for foreign investors to make longterm investment in Nepal. If the country could attract major investors in the energy (hydro) sector that could simultaneously encourage other sectors to attract more FDI in other sectors as well. Government of Nepal has realized the importance of FDI. Hence, Foreign Direct Investment and Technology Transfer Act, 1992 (FITTA) was brought in implementation in the policy level. Policy framework itself is not sufficient for attracting FDI, facilitations and support for MNCs is necessary to retain them to contribute in the economy. Political instability and labor dispute issue are some other major hurdles for MNCs and they are reluctant to investment in Nepal. Hence, government should address these issues to retain FDI and attract more FDI in the country.

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