Unit Four Global business environment:

Course Contents: Globalizationconcept and characteristics, forms of globalizaiton, advantages and disadvantages of globalization, globalizaiton and Nepal Multi-national companiesconcept, types, benefits and problems of MNC Foreign Direct Investment (FDI)Concept, role of FDI, current scenario of FDI in Nepal, Problem associated with FDI World Trade Organization (WTO)Functions and Service Plans, WTO and Nepal, Impact of WTO on Nepalese Economy.

Globalization:
Concept of Globalization: Globalization is a widely-used term that can be defined in a number of
different ways. When used in an economic context, it refers to the reduction and removal of barriers between national borders in order to facilitate the flow of goods, capital, and service and labor. It refers to the trend toward countries joining together economically, through education, society and politics, and viewing themselves not only through their national identity but also as part of the world as a whole. Globalization is not a new phenomenon. It began towards the end of the nineteenth century, but it slowed down during the period from the start of the First World War until the third quarter of the twentieth century. This slowdown can be attributed to the inward-looking policies pursued by a number of countries in order to protect their respective industries. However, the pace of globalization picked up rapidly during the fourth quarter of the twentieth century. Globalization resulted in increased movement of people, knowledge and ideas, and goods and money across national borders that have led to increased interconnectedness among the world's populations, economically, politically, socially and culturally.

Forms of Globalization:
1. 2. 3. 4. Economic Globalization Cultural Globalization Political Globalization Environmental Globalization

Economic Globalization: Increasingly over the past two centuries, economic activity has become more globally oriented and integrated. International trade has become central to most local and domestic economies around the world. The recent focus on the economic globalization is based on the desirability of a free global market with as few trade barriers as possible, allowing for true competition across borders. International economic institutions, such as the World Trade Organization (WTO) and the International Monetary Fund (IMF), facilitate this increasingly barrier-free flow of goods, services, and money (capital) internationally. Regionally, too, organizations like the North America Free Trade Association (NAFTA), the European Union (EU), and the Association of South East Asian Nations (ASEAN) work towards economic integration within their respective geographical regions. Cultural Globalizaiton: Culture is the set of socially acquired behaviour pattern transmitted symbolically through language and other means to the member of a particular society. It is a way of life. The way we dress, think, eat and spend our leisure time are part of our culture. Different countries have different cultures. The expanding process of globalizaiton has brought these cultural diversities together to form a global culture. The desire to increase ones standard of living and enjoy foreign products and ideas, adopt new technology and practices, and participate in a world culture is the effects of cultural globalization. Advances in communication, television networks, transportation technology have been reducing the barriers of distance and culture. The growth of commercial jet travel has reduced the time it takes to get from one location to another.

Television program have made people aware of other cultures and languages. These have reduced the cultural distance between countries. The process of globalizaiton has increased mutual understanding, peaceful coexistence, and learning from each others experiences. The positive effects of globalization on culture are many! Not all good practices were born in one civilization. The world that we live in today is a result of several cultures coming together. People of one culture, if receptive, tend to see the flaws in their culture and pick up the culture which is more correct or in tune with the times. Societies have become larger as they have welcomed people of other civilizations and backgrounds and created a whole new culture of their own. Cooking styles, languages and customs have spread all due to globalization. The same can be said about movies, musical styles and other art forms. They too have moved from one country to another, leaving an impression on a culture which has adopted them. Political Globalizaiton: Some use "globalization" to mean the creation of a world government which regulates the relationships among governments and guarantees the rights arising from social and economic globalization. Nations today are more inter-dependent. They are joining hands to participate in creating macropolitical framework for development. There are exchanges of views and experiences between nations regarding the establishment of good governance system, legal system, human rights, free media, property rights, decentralized pattern of governance, relatively free access to state information, and so on. The regional grouping of nations has promoted the integration further and created pressure for democracy and human rights. Because of these global influences, the political system worldwide made a shift away from command and mixed economies to the free-market model. Environmental Globalization: The globe toady is facing unprecedented problems of global warming, depletion of the ozone layer, acute loss of biodiversity, and trans-border pollution. In fact, ecological problems like floods, soil erosion, water pollution, air pollution, acid rains, and global warming cross national borders without hindrance. In response to the damage that has been caused to our world over the years, the individual nations have decided to come together to find a way to save our world from ourselves. Organizations monitoring climate change as well as those which look at the welfare of our animals and marine life, are undoubtedly one of the positive effects of globalization on the environment. Today, world attention has been drawn toward conservation of environment, harnessing water resources, and judicious use of non-renewable resources. The world community is, therefore, trying to encourage countries to understand these global environment issues and adopt legal and other measures to protect the environment.

Advantages and Disadvantages/Effects of Globalization:

Positive Effects/Advantages:
Increased Competition: One of the most visible positive effects of globalization is the improved quality of products due to global competition. Customer service and the 'customer is the king' approaches to production have led to improved quality of products and services. As the domestic companies have to fight out foreign competition, they are compelled to raise their standards and customer satisfaction levels in order to survive in the market. Employment: With globalization, companies have entered into the developing countries and hence generated employment for them. It has given an opportunity to invest in the emerging markets and tap up the talent which is available there. In developing countries, there is often a lack of capital which hinders the growth of domestic companies and hence, employment. In such cases, due to global nature of the businesses, people of developing countries too can obtain gainful employment opportunities. Expansion of Markets: Globalizaiton through reduction in tariff barrier as well as non-tariff barrier increases the scope of market for the product. Consumer Benefit: Consumers through globalizaiton get benefit by way of qualitative and modern products at a lower price produced at far distance from them. Investment and Capital Flows: Globalizaiton facilitates flow of international capital mobility and technology at a low cost. Through the promotion of foreign direct investment, it helps to solve the problem of resource gap, trade gap, and revenue expenditure gap and debt burden in developing countries Spread of Technical Know-How: While it is generally assumed that all the innovations happen in the Western world; the know-how also comes into developing countries due to globalization. Without

globalization, the knowledge of new inventions, medicines would remain cooped up in the countries that came up with them and no one else would benefit. But due to improved political ties, there is a flow of information both ways. Spread of Education: One of the most powerful positive effects of globalization on women and men both is the spread of education. Today, one can move in the search of the best educational facilities in the world, without any hindrance. A person living in US can even go to another continent for a new experience and some courses which one may not find in the home country. A good example of that is how the American managers went to Japan to learn the best practices in the field of mass production and incorporated that knowledge in their own production units.

Negative effects/Disadvantages:
Globalization has generated significant international opposition over concerns that it has increased inequality and environmental degradation. Some also view the effect of globalization on culture as a rising concern. Along with globalization of economies and trade, culture is being imported and exported as well. The concern is that the stronger, bigger countries such as the United States may overrun the other, smaller countries' cultures, leading to those customs and values fading away. This process is also sometimes referred to as Americanization or McDonaldization. Interdependence: The world today is so interconnected that the collapse of the subprime mortgage market in the U.S. has led to a global financial crisis and recession on a scale not seen since the Great Depression. Displacement Effect: Traditional art and culture, small-scale industries are displace by modern technology. This makes indigenous people and workers unacquainted with modern tools and technique displaced from their job. Widening of Poverty: Labor-intensive technology in production is replaced by capital intensive technology. So those familiar with modern tool and know-how get employed and mass of unskilled workers are deprived of the job. This further alarms the poverty, enhances income inequality etc. Possible shutting down of domestic industries: Domestic industries have to face stiff competition with foreign products in terms of quality and price. Definitely, MNCs products drive away the products produced by domestic industries form market circulation. Possible Capital Flight: Globalization advocates the boundary-less world economy for products and financial flows. As domestic economy becomes weak, it induces capital flight from the country. These financial flows may pose risk and threat to the economy as those faced by East Asian countries in the name of Asian crisis. Brain drain: Opportunities in rich countries drive talent away from poor countries, leading to brain drains. Brain drain has cost the African continent over $4.1 billion in the employment of 150,000 expatriate professionals annually. Indian students going abroad for their higher studies costs India a foreign exchange outflow of $10 billion annually.

Impact of Globalization and Economic Liberalization in Nepal:

Introduction:
Since the beginning of the mid 1980s, Nepalese economy experienced the internal and external shocks. Budget and current account deficits, BOP crisis were the examples. Budget deficit created requirement for the internal and external loan. Heavy currency devaluation, (14.7% in 1985) due to the fixed exchange rate system for a long period, again increased the foreign debt and added the fuel in the fire. The objective of the devaluation was increasing the export. Import was controlled and the domestic industrial sector was controlled and the domestic industrial sector was protected through the high custom duties. Regulation in the import of capital goods too, limited the industrialization in the country, despite it was protected. Generally, low growth, high inflation, and deficits in BOP, budget and current account etc. became the general phenomenon. To overcome the critical situation, the program of Economic Stabilization, an initiation of IMF, was introduced in 1985. Due to partial success of the first attempt of stabilization program, second trail to improve the given

situation was launched with the help of the IMF was WB as Structural Adjustment Program (SAP) in 1987 to 1990. Even though, the impact of liberalization program (SAP) was not so satisfactory, the next trail as Enhanced Structural Adjustment Program (ESAP) was started with initiation of the IMF since 1992. The program advised the additional development strategies with additional liberalization activities. The program achieved some success such as: current account convertibility, soft custom duties, limit tax rate (VAT is one of them), guarantee of foreign investment return etc. The program (ESAP) was not fully successful and expired in 1995. After termination of ESAP, Nepal stopped the specific economic program for some while, but did not stop the liberalization process. The global impact of SAP and ESAP, in the evaluation of the founder institution too, found not so hopeful. Keeping this is mind, the IMF and WB introduced a comprehensive program of development for the underdeveloped countries as Poverty Reduction and Growth Facility (PRGF) in 1999. In this connection, the PRGF is taken, by some academics, as the outcome of failure of the SAP and ESAP. Nepal accepted the same program from 18th November 2003. PRGF is taken as the more comprehensive program rather than the former two. The program will be focused to liberalize the sectors left by the SAP and ESAP. Satisfactory growth with private sector involvement will be the core measurement of the program. The three-year PRGF, in Nepal, will break Nepal Electricity Authority, Privatize Nepal Telecom and Nepal Oil Corporation. The funding base of PRGF is tenth five year plan. According to the PRGF provision, if the government changes the accepted reform programs and conditions, the assistance might be stopped.

Impact of the Globalization:

Nepalese economy, largely a satellite of Indian economy for more than four decades of planned development, is yet isolated from global economic developments that created many bubble economies in the SAARC and the ASEAN regions. In the Nepalese experience, the impact of the liberalization is both sweet and bitter. Nepal is landlocked and bounded by the two big countries, which are economically more developed. Naturally, the relationship between the two nations is very important for Nepal. Their pace of development, political situation, economic relationship, historical relationship, growth situation, etc bears great importance for Nepal. Every economic move of the two immediate neighbors affects Nepal very quickly. In this connection, these giant economies are moving towards the globalization through the liberalization. One the other side, Nepal is suffered from the political instability. We have very short experience and culture of development. Economic activities are growing very slowly, but the population growth is high, and the development need is higher. Resource insufficiency is the major constraint for us. Due to the chronic poverty, people need the higher economic growth for their poverty reduction on the one side, but able to pay low tax for the government which is not sufficient for development. Therefore, there exists the deficit in the budget because the government is compelled to use deficit financing to fulfill the resource gap through the internal and external debt. As we know, the internal loan again curtails the consumption and its ultimate impact falls into the lowering the growth.

Positive Impacts:
1. Political change in 1990 and the democratic Constitution of Nepal 1990 are the important achievements of democratic policy which guarantee the various rights. 2. Multiparty democracy, constitutional monarchy, the provision of the adult franchise, parliamentary system, rule of law, concept of independent judiciary, etc are the pillars of the democratization. 3. The universalization of society; the harmonization of the decision making process and the popularizations of participatory democracy at the grassroots level are undoubtedly the positive impacts of globalization. 4. Increasing consciousness about human rights, good governance, anticorruption campaigning, gender equality and solidarity (women right), power delegation, decentralization, unionisms, caste equality,

religious freedom, consumers sovereignty, environment protection, sustainable development, growth of civil society, right to ethnic minorities, disarmament and peace etc. which are making the people more informed and powerful in their common interest. 5. Structural shift of our economy, which shows the part of our traditional agriculture in GDP is decreasing and of other services sector is increasing. 6. The numbers of financial institutions such as commercial banks, development banks, finance companies, licensed cooperatives, insurance companies, licensed non-government organizations, postal saving centers, etc. are increasing much more than before which help to create healthy competition and better services. 7. Non-financial social institutions such as village cooperatives, village partnership institutions, clubs, religious groups, ethnic groups, caste organizations, schools, colleges, hospitals, nourishing homes, unions (trade, students, farmers, women, disabled, children, youth), publications, transportations, air services etc. are also increasing both in numbers and coverage. 8. Technological development is the crucial benefit of the globalization. The western economies have paid a lot of money for research and development. Thats why the information technology and other technologies are rapidly developed. No space of the globe is, now out of the human reach. Information of any corner can be spread all over the world within seconds. One machine can perform the job within the shorter time which otherwise consumes a lot of manpower. 9. Trade relationship among and between the countries have increased. Nepal is the member of WTO, SAARC (SAFTA), BIMSTEC and it has more than twelve bilateral trade agreements, which shows that our trade reach is regionally and globally expanded. Before, our trade affiliation was mostly limited within India, but after the trade treaty1990 with India, we are able to expand our trade out of Indi. Trade affiliations between and among the countries help us to solve our trade complications. For example, WTO provides the forum for solving the bilateral and multilateral trade complication. Now, the international trade is our right. 10. We have six joint venture commercial banks and other development projectssuch as hydroelectricity, constructions, social services etc. with the direct and indirect assistance of the foreign countries. 11. Twenty four public enterprises out of 66 either privatized or dissolved or contracted for the improvement. It has decreased the financial liability of the government one side and supported the autonomous functioning of the enterprises on the other. 12. Import of goods and services, due to the current account convertibility, has tremendously increased. 13. Other important benefits from the globalization are the increasing consumerism, which gives the perfect knowledge about quality, prices, durability, and other information about goods and services.

Negative Impacts:
1. We, Nepalese, are suffering from the chronic poverty for a long time. Theoretically we reinstated the democracy in 1990, but practically majority of the people remained out of the net of the democratic benefits. Corruption, bad governance, political instability, centralization of the state services, relegation of the minority groups such as Dalits, Women, lower castes, ultra-poor people etc have hindered the process of development. This increased the economic and social inequality in general, and poverty as well. Two economic plans, 8th and 9th, are implemented with the main objective of poverty reduction, but the result is very far from our hope. Still we have 31 percent of people under the poverty line; form this we easily say that the income inequality still persists. 2. Other serious impact of the globalization is that the westerns intervened into our cultures, social norms and values. Now, in our society, people are going to be hippies, disco lovers, and vulgar. Our social and cultural values are gradually disappearing. Domestic wears foods, music, religious ceremonies, folk dances, festivals, arts, history, TV channel, radio channels are being the second choice. The people almost dislike the nation and exaggerate about the foreign people, places and things; even they do not know about it. Usually the youths are more pessimists about eh nation, which is very harmful.

3. Growing insecurity is taken as another impact of the globalization. It is because growing income inequality and unequal distribution of the national wealth inevitably brings the social terror. Theft, robbery, terrorism, pick pocketing, rapes, cheating, smugglings, insurgencies, conflicts, social unrests, crimes etc. are general phenomenon of the globalized age. 4. Another impact of this is the interference in the economy. Now, the underdeveloped economies are the playing platform for the developed nations. They test their theories in such nations and learn a lot. Not only this, they formulate the development priorities of the developing nations, according their interest, and make the poor their debtors. In Nepal, before the liberalization, total debt per head was only Rs. 412 but now every Nepalese has about Rs. 14000 loans. In other words, every newly born baby is debtor of the nation by Rs. 14000 5. Our development activities are donor driven in the most cases. We are not able to determine our development needs, the donor enforce us to accept their donations according to their priorities. We cannot formulate our policies, which are in our favor, but the donor prepares it. Even the elected governments cannot project their industries by the custom duties, they cannot reduce the income inequalities with the help of progressive tax, they cannot rebate the tax for the national priority investments, they cannot subsidize the backward sectors, industries and agriculture, they cannot levy the excise to the industrial products, they cannot determine their budget polices, in these cases, the hands of the governments are tied, mouths are closed. When the crises prevail, all the forces will be the audiences and the listeners only. In this sense, we are no more sovereign. 6. Major economic variables are against of the social welfare. Budget deficit, BOP deficit, and inflation, NPAs of the commercial banks, overdraft to the government, internal and external debt are increasing incessantly. 7. Urbanization and environment pollution are global phenomenon. Likewise, environment pollution due to the unmanaged industrialization is generating threats of the global environment. Numbers of diseases are increasing. Ozone level is depleting continuously. Unmanaged urbanization, growing industrialization, increasing insurgency, deforestation, unusual exploitation of the natural resources and uncontrolled population growth are the major reasons of the environmental degradation. 8. Back-warding the agriculture sector by the globalization is being serious problem for us. Due to the global trade, we are not able to protect our agriculture thereafter in one side, and we are losing our right to the natural herbals and such raw materials. We are compelled to use low quality but cheaper agricultural products. 9. In the context of the membership of WTO, Nepalese quota of the readymade garment in US market exhausted since 1st January 2005, which covered about 40 percent of our total export. Now, we should compete with China and India to sell the garment, which is beyond our access in the present situation. Likewise the membership is seen very costly for us because our competency in every area is weak and the competitors are very smart. Our labor cost is taken as high and unionism may create problem to the entrepreneurs. 10. Our economy is the resource deficient, for a long time. In this context, we will be unsuccessful to collect revenue for the increasing requirement of the development. In such, there is no alternative to accept the foreign aid. But the assistance are assumed not in our favor and accordingly to our priority. So there is danger of the state being indebted more in near future. 11. Our internal preparation for globalization is more pessimistic. No doubt, we can reap more fruits form this changing scenario if we are internally prepared. 12. Globalization is assumed as the private property of the developed nations and they want to be powerful buy suppressing the poor nations forever with the help of donations, policy advices, loans etc. In this respect, some specialists understand the globalization as the new colonism. The global institutions, such as WTO, IMF, and WB are charged as they taught the underdeveloped countries to have junk foods but they did not teach them to be self-dependent, they gave the solution to take sufficient loans but did not teach them the way of mobilization of internal resources.

13. The financial sector is another matter of headache for the last decade. Increasing NPAs, overstaffing, and other structural problems are the recent phenomenon of the financial sector. A lot of money is spent to restructure the financial sector but the result is not satisfactory. Impurity is increasing in this field. Cartel culture is growing in the banking field in place of the fair competition. 14. The next serious problem form the globalization is the brain drain. Due to open mobility of labor force all around the world, our workable youths are going to overseas for employment. Again, in this connection, we are not ready to increase employment opportunities through our industrialization and agricultural development and increasingly becoming dependent on the remittance. 15. The globalization process has led the Nepalese society towards materialization, economy toward transnationalization, citizens towards capitalization, middle class towards vulgarization (through fashion and so on), upper class towards extreme materialization and denationalization, and lower class towards brutalization and exploitation.

Remedies and Conclusion:

Recently, we have dual economy, in the sense of the development; there is very poor and hilly region where acute poverty is prevalent and there is modern sector where the people are experiencing the changing technology, luxurious consumption habits, fashion etc. Not only this, people in the remote areas are suffering from severe insecurity which is lately added in the poverty issue, whereas the urban people are relatively secured and there is more probability of availability and access to the basic needs. In this connection, our development policy should be equipped with the twin strategy like the economy. On the one hand, private sector should be promoted and facilitated, and on the other, the deprived people should be subsidized. Rural sector is deprived of the state facility for a long time. Their basic problems are nothing more than food, cloths, and homes, which are their rights too. Therefore, our strategy should be focused mainly towards the poverty alleviation though state involving in the rural and promoting private sector in the urban. The operators of the globalization, WTO, WB, IMF should think about its rational impact on the people we cover. Basically, they should rethink about their policy prescriptions towards the develop nations that whether the prescriptions are able to reduce their poverty rate hopefully or not. If not, they found, revision in the programs with the help of the national bodies is necessary.

Multinational Companies:
Meaning: Multinational corporations are business entities that operate in more than one country. The typical multinational corporation or MNC normally functions with a headquarters that is based in one country, while other facilities are based in locations in other countries. In some circles, a multinational corporation is referred to as a multinational enterprise (MBE) or a transnational corporation (TNC). The idea of a multinational corporation has been around for centuries. Some trace the origins of the concept back to the Dutch East India Company of the 17th century, as the corporate structure involved a presence in more than one country. During the 19th and 20th centuries, the idea of a company that functioned in more than one nation became increasingly common. In the 21st century, this business model continues to be highly desirable. There are several ways that an MNC can come into existence. One approach is to intentionally establish a new company with headquarters in one country while producing goods and services in facilities located elsewhere. In other instances, the multinational corporation comes about due to mergers between two or more companies based in different countries. Acquisitions and hostile takeovers also sometimes result in the creation of multinational corporations. In a world that continues to become more interconnected each day, a multinational corporation sometimes has a greater ability to adapt to economic and political shifts that corporation that function in a single nation. Along with decreasing costs associated with producing core products, this business model also opens the door for diversification, which often makes it possible for a company to remain solvent even when one division or subsidiary is posting a temporary loss

Types: 1. Model 1: The exact model for an MNC may vary slightly. One common model is for the multinational corporation is the positioning of the executive headquarters in one nation, while production facilities are located in one or more other countries. This model often allows the company to take advantage of benefits of incorporating in a given locality, while also being able to produce goods and services in areas where the cost of production is lower. 2. Model 2: Another structural model for a multinational organization or MNO is to base the parent company in one nation and operate subsidiaries in other countries around the world. With this model, just about all the functions of the parent are based in the country of origin. The subsidiaries more or less function independently, outside of a few basic ties to the parent. 3. Model 3: A third approach to the setup of an MNC involves the establishment of a headquarters in one country that oversees a diverse conglomeration that stretches too many different countries and industries. With this model, the MNC includes affiliates, subsidiaries and possibly even some facilities that report directly to the headquarters.

Advantages of MNCs:
1. MNC promote transfer of technology, capital and managerial and entrepreneurial skills in favor of the host country. 2. MNCs increase the exports of the host country. Thus, it helps improve the countrys balance of payment. 3. MNCs generate job to reduce unemployment problems and create career opportunities in the host country. 4. MNCs increase availability of improved quality-products for local consumers of the host country. 5. MNCs improve competition in the host country by ending domestic monopolies. 6. The host country also benefits from the knowledge and expertise of MNCs. MNCs improve them continuously through efficient R & D activities. 7. MNCs increase the revenue of the host country, as they are the major source of payments of tariff, taxes and other charges. Nepal Lever is one of the top 10 income tax payers in Nepal.

Disadvantages:
1. Economic power of the MNCs may influence politics and policy making of the host country. In 1970s, US firm International Telephone and Telegraph (IT &T) was instrumental in overthrow of Chilean president Salvador Allende, a Marxist communist 2. MNCs cause the host country to depend overly on MNCs for capital supply, technology transfer, exports, and product availability. 3. MNCs compel small industries of the host country to close down their operations unless they get strong protection from the state. Small industries cant compete with them. 4. MNCs may cause socio-cultural and environmental disruptions. The industrial accidents, like the USs Union Carbide gas leak disaster in Bhopal (India), are undesirable. 5. Because of their enormous size and strength, they may make undue influence in the competitive environment, thereby re-imposing monopolistic behaviors. 6. They cause resource outflows from the host country; thus: i. They repatriate profits, royalties, interests, and licensing and management fees in foreign currency to the how country. This may adversely affect the balance of payment of the host country. ii. They cause fast depletion of the natural resources including the non-renewable ones. iii. They mostly mobilize local capital to finance their equity.

Foreign Direct Investment in Nepal:

Foreign Direct Investments (FDI) is the international movement of capital for specific investment purposes. Such investments are made for the purpose of actively controlling property, assets, or companies located in host counties. Business organizations undertake FDI to expand foreign markets or gain access to supplies of

resources or finished products. FDI occurs when overseas companies set-up or purchase operations in another country. FDI can be categorized into three components: equity capital, reinvested earnings, and intra-company loans. Equity capital comprises of the shares of companies in countries foreign to that of investor. Reinvested earning includes the earning not distributed to shareholders but company and its affiliates. FDI thus may take many forms, including: Purchase of existing assets in a foreign company New investment in property like land and building Participation in a joint venture with a local partner Mergers and acquisition activities. Why do companies engage in FDI? There are a number of reasons: To access new overseas markets or better serve existing markets To take advantage of lower manufacturing and wage costs. To access new technology and skills particularly in R&D. To locate a business function near clusters of similar or related companies.

Low saving, low investment, and low capital formation characterize a developing country. Such a country obviously looks for an external source to fill its resource gap. The following are some benefits of FDI: A developing country, suffers from lack of capital and advanced technology. FDI is an important source of bringing in capital and technology in a country. FDI has a positive impact on the economic growth of host countries. Improvement in productivity, technology transfer, research and development expansion, and promotion of exports are some of the benefits a host county an expect form FDI FDI also infuses competitive corporate culture and technical skills, which are equally important factors for industrial development. A developing country often needs to import raw materials that are not available domestically. The country needs foreign currency to pay for imports. FDI can be of great help in this respect. When a MNC sets up its subsidiary in a developing country, the parent company also transfers its work system, management concepts and skills to its subsidiary. Hence the host country benefits form such transfer of management skills. Thus, the countries, both developed and developing, have been attracting FDI by offering several incentive packages and concessions to foreign investors. The developing countries in particular have been making extra efforts to create an environment, which is conducive for attracting such investment. In order to attract FDI on a large scale, the governments have taken several steps to remove the barriers and irritants, which hinder the inflow of investment. The global FDI flow in 1980 was around US$699 billion. In 2007, it rose to US$1.8 trillion. Thus, almost a three-fold increase has been recorded over a period of two and half decades. The US and Western European countries have continued to dominate as recipients of world FDI. Among emerging markets, China is by far the main recipient of FDI flows. The inflow of FDI in Nepal began in the early 1980s through the gradual opening up of the economy. From 1980 to 1989, FDI inflows to Nepal were minimal with an annual average of US$500,000. FDI inflow showed a distinct acceleration during the 1990s averaging US$11 million per annum during 1990-2000, picking at US$23 million in 1997 (UNCTAD, 2006). This was primarily due to Nepals more liberal trade policies, which

comprised tariff rate reductions, the introduction of a duty drawback scheme, adoption of a current account convertibility system and liberalization of the exchange rate regime. A reversal in the rising trend took place from the beginning of the 2000s. Despite these efforts, the FDI inflow to Nepal started declining. During 1986-1990, it was US$1.9 million, which rose to US$19.3 million in 2001. In 2007, the FDI inflow to Nepal further declined to US$6million. These figures suggest underlying apprehensions and lack of investors confidence with the existing state of affairs. In Nepal, there are about 1646 foreign ventures operating at present. In terms of investment, India alone accounted for more than one-fourth of the projects with an investment of Rs. 21,229 million. The second major investor in Nepal is China (254 projects) worth Rs. 4,857 million. The other investors are USA (146 projects), Japan (138 projects), Korea (105 projects), Germany (67 projects) and UK (87 projects). The investments of SAARC counties like Pakistan, Sri Lanka and Bangladesh are found to be dismal (less than 2 percent). Thus, Indian investors and businessmen are dominating FDI in Nepal. Most of the FDI projects are of small size (72 percent) and are for joint venture because of non-commercial risks. Sanjel (2007) and Gautam (2010) have summarized the causes of this poor state of affairs of FDI in Nepal in the following words: The government has announced FITTA, 1992 to attract foreign investment. The Act is not clear on the definition of foreign investments and technology transfers. It has yet to modify foreign exchange regulations and tax policies. Production base is limited due to non-availability and poor access to mineral, forestry and other natural resources. Recent political disturbances have even threatened bilateral and multilateral development projects. With growing political instability, the government has failed to control it. The disturbances have instead spread throughout the country. This is a serious problem in attracting FDI. Social tension and unrest are likely to grow due to rising unemployment among youths. Markets flourish when there is peace, not in the midst of war and unrest. Nepalese economy has vast potential to grow. It needs foreign capital, which in the presence of political instability and social unrest shy away. The recent approval of the Indian Government to allow its citizens to invest up to IC 600 million in Nepal, without prior approval, has opened new opportunities for foreign investment in medium scale ventures. But the likely investment areas are yet to be explored. There is absence of long-term business plan and strategies backed by proper information and R&D systems. There is lack of proper monitoring and supervision of the registered foreign projects. Most of such projects exist only in name. They have not yet started their project construction and operation. Although the Government is open to FDI, implementation of its policies is often distorted by bureaucratic delays and inefficacy. Many foreign investors in Nepal are individuals rather than corporate entities. As there is no strict rule to register only foreign companies, any individual can apply and get registration of the project in Nepal. Such projects are never started the purpose of the individuals is simply to get their stay extended in Nepal. The above analysis indicates that Nepal has yet to appear in the global FDI map. It has not been able to meet the necessary minimum preconditions for FDI. Nepal has a long way to go to make the environment investor friendly. A developed stock exchange, full convertibility of foreign exchange or free mobility of capital and easy repatriation of profits and deregulation are some of the preconditions for FDI. These preconditions are yet to be fully achieved in Nepal.

At the same time political instability and social and political disturbances have affected the joint venture projects already operating in Nepal. Some of such undertakings have been withdrawing their capital. For instance, the French shareholders have withdrawn their capital form the Nepal Indosuez Bank. Similarly, the Kodak Company and Colgate-Palmolive have closed their factories in Hetauda. Many of the Indian businessmen running garment and carpet factories in Nepal have also closed down their operations. These recent developments appearing in the Nepalese business scenario have been a big set back to the ongoing efforts of the government to attract foreign investment. The Government has now constituted the Board of Investment under the chairmanship of the Prime Minister. The purpose of this body is to create a favorable environment in the country including policy and legal reforms for domestic as well as foreign investment. The safety of investment would also be the prime concern of this body. The Government has also announced that a Monitoring Unit would be created in the Office of the Prime Minister to supervise and monitor the investment climate in the country. We should bear in mind that not all types of foreign investment contribute to income and employment generation. The Government should be selective about FDI. While taking the decision about FDI, the Government should not discriminate against domestic investors. The industries using FDI should also be evaluated in terms of their potential to create employment, promote exports, transfer technology and encourage human development-friendly activates. The industries having market prospects in India and other SAARC counties have to be promoted. The extended South Asian market, after the implementation of SAFTA, need to be kept into consideration in providing public support to new industries.

World Trade Organization (WTO):

The world trade organization came into being in January 1st 1995. It is one of the youngest of the international organizations, and is an extension of General Agreement on Tariffs and Trade (GATT), the global trade regime that dealt with the merchandise trades and ignored services sector. WTO cane into being as an extended version of GATT as the relevance of GATT was minimized under the changed global condition where the world was witnessing increasing interdependence among economies and significant growth of trade in services. WTO is an organization that has put forward the concept of removing non-tariff barriers for free trade of goods and services within the member countries. This means no country which is the member of world trade organization can impose non-tariff restrictions against imports from any other country which is also the member of WTO. Non-tariff barriers include imposing trade embargo, restricting imports under quota and other forms of non-tax restrictions. The establishment of WTO has helped fade the conventional approach of promoting the concept of import substitution and self-dependency. The policy now is open, liberal and outward looking and based on export promotion. Export promotion, however, does not necessarily means advocating protectionism policy and safeguarding domestic industries. It refers to enhancing strengths of industries with least comparative cost. The most important principles built into the foundation of multilateral trading system such as WTO are: Trade without discrimination: To ensure similar treatment with all trading partners and amongst the locals Fair Trade: Gradually reducing the trade barriers to make global trade freer. Predictability: Binding commitments Promoting fair competition and encouraging development and economic reforms The WTO has 150 members, accounting for over 97 percent of world trade. Around 30 others are negotiating members. Decisions are made by the entire memberships. This is typically by consensus. The WTOs

agreements have been ratified in all members parliaments. The WTOs top level decision making body is the Ministerial Conference which meets at least once every two years. Below this is the General Council (normally ambassadors and heads of delegation in Geneva, but sometimes officials sent from members capital) which meets several times a year in the Geneva headquarters. The General Council also meets as the Trade Policy Review Body and the Dispute Settlement Body. At the next level, the Good Council, Service Council and Intellectual Property (TRIPS) council report to the General Council

The WTO agreements:

The WTOs agreements are the result of negotiations between the members. GATT is the WTOs principal rule-book for trade in goods. A new rule has been created to deal with trade in services, relevant aspects of intellectual property, dispute settlement, and trade policy reviews. Through these agreements, WTO members operate a non-discriminatory trading system that spells out their right and their obligations. Each country receives guarantees that its exports will be treated fairly and consistently in other countries markets. Each promises to do the same for imports into its own market. The system also gives developing countries some flexibility in implementing their commitments. Goods: It all began with trade in goods. From 1947 to 1994, GATT was the forum for negotiating lower customs duty rates and other trade barriers; the text of the General Agreement spelt out important rules, particularly non-discrimination. Since 1995, the updated GATT has become the WTOs umbrella agreement for trade in goods. It has annexes dealing with specific sectors such as agriculture and textiles, and with specific issues such as state trading, product standards, subsidies and action taken against dumping. Services: Banks, insurance firm, telecommunication companies, tour operators, hotel chain and transport companies looking to do business abroad can now enjoy the same principles of freer trade that originally only applied to trade in goods. These principles appear in the new General Agreement on Trade in Services (GATS). WTO members have also made individual commitments under GATS stating which of their services sector they are willing to open to foreign competitors, and how open those markets are. Intellectual Property: The WTOs intellectual property agreement is related with the rules for trade and investment in ideas and activity. The rules state how copyright, patents, trademarks, geographical names used to identify products, industrial designs, integrated circuit layout-design and undisclosed information such as trade secrets- intellectual property- should be protected when trade is involved. Dispute Settlement: The WTOs procedure for resolving trade disputes within the member countries under the Dispute Settlement. Countries bring disputes to the WTO if they think their rights under the agreements are being infringed and this body carries out a suitable study and gives its decisions. Judgments made by specially-appointed independent experts are based on interpretations of the agreements and individual countries commitments. The system encourages countries to settle their differences through consultation. Failing that, they can follow a carefully mapped out, stage-by-stage procedure that includes the possibility of a ruling by a panel of experts, and the chances to appeal the ruling on legal grounds. Policy Review: The Trade Policy Review Mechanisms purpose is to improve transparency, to crate a greater understanding of the policies that countries are adopting, and to assess their impact. Many members also see the reviews as constructive feedback on their policies. All WTO members must undergo periodic security, each review containing reports by the country concerned and the WTO Secretariat. Development and Trade: Over three quarters of WTO member are developing or least-developed countries. All WTO agreements contain special provision for them, including longer time periods to implement

agreements and commitments, measure to increase their trading opportunities and support to help them build the infrastructure for WTO work, handle disputes, and implement technical standards. A WTO committee on trade and development, assisted by a sub-committee on least-developed countries, looks at developing countries special needs. Its responsibility includes implementations of the agreements, technical cooperation, and the increased participation of developing countries in the global trading system. Technical assistance and training: The WTO organizes around 100 technical cooperation missions to developing countries annually. It holds on average three trade policy courses each year in Geneva for government officials. Regional seminars are held regularly in all regions of the world with a special emphasis on African countries. Training courses are also organized in Geneva for officials from countries in transition from central planning to market economies.

Nepal and WTO:

Nepal became the 147th member of World Trade Organization on April 23rd, 2004. Nepals membership marked the culmination of a process that had commenced in 1989 with the application in the GATT. Nepal could not receive the membership of GATT, the result of which it had to follow the lengthy negotiation process to receive the membership by virtue of accession. Nepals membership in WTO presents a wide spectrum of challenges along with the opportunities. The current challenges are in the form of having a transparent set of legal framework that is consistent with WTO and the opportunities of having a stable trading environment that can accelerate domestic economic growth and development. After the accession of the WTO, Nepal has to abide the following agreements. Alleviation of discrimination on imports based on country and nature. The tariff, duties and fees on same nature of goods should be equal irrespective of the country or origin. For instance, if the customs duty for good imported from India is 15 percent, same rate must be levied for another country. Removal of non-tariff barriers such as fees and duties within 10 years. Discouraging other form of non-tariff barriers and making the rules of law transparent. The other forms of non-tariff barriers such as quantitative/quota restriction, import ceiling, import licensing, should be non-existence Imposition of customs duty on the basis of transaction price Governments non-intervention on price mechanism except in the case of very essential commodities. Establishment of a separate judicial institution to hear complain against administrative units. Formulation of necessary acts and policy documents including antidumping, countervailing duties, safeguard measures. There are a total of 38 acts to be revised/formulated to make them compatible with the norms set by WTO. This includes laws related to competition, copyrights, trademark, patient rights, and others. Major commitments that Nepal made during its entry into WTO are mentioned below; The initial average binding tariff on agricultural goods has been set at 51 percent. The applicable average binding tariff has come down to 42 percent in 2007 The initial average binding tariff on industrial goods has been set at 39 percent, which after the transition period of three years has come down to 23 percent. Amongst the 160 sub-sectors identified by WTO as the potential services sectors that should be opened for foreign trade, Nepal has expressed its commitments to open 70 sub-sectors. The subsectors that Nepal has opened for foreign trade include financial sector, communication sector, hospital sector, tourism sector, transport sector among others.

Challenges and Opportunities:

With the adoption of liberalized economy policy since mid 80s, Nepal has already opened number of sectors for foreign investment. The establishment of joint venture banks is the outcome of liberalization policy that Nepal has adopted. Along with the opening of services sectors, Nepal has also gradually reduced the customs rates and has adjusted at comparatively lower. Currently, the actual customs rate in Nepal is far less than that committed during the WTO negotiations. In case of agricultural sector, the customs duty is not applicable in most of the products. In some products Nepal charges 13 percent on the customs price in the form of agricultural reform fee and other special fees. As this rate is 10 percent lower than the binding tariff, the commitments expressed by Nepal during the WTO will not affect the imports of agricultural commodities. In the same vein, the actual weighted average customs duty is 13 percent, which is also lower than the committed customs duty by 10 percent. This too suggests that Nepals entry into the WTO will have no effect on merchandise imports. Going towards the export front, the entry into the WTO has opened up the trading area. The only need is to identify the commodities of comparative cost advantage and produce them for export purpose. The current practice of export promotion based on quota and preferential agreements will not benefit for Nepal. The exporters will have to enhance their competitive strength and be able to compete with the foreign producers. The fact that we have to bear in mind is as Nepal is a landlocked country; it has a comparative disadvantage on transportation cost, which experts say is 15 percent higher than India. The position between two giant economies China and India, the entry of foreign firms and establishment of mutational companies would, however, be a boon for Nepalese economy. Some industries run by locals may feel the hit but the nation will benefit. One of the core opportunities open to Nepal is the probability of significant trade diversification both in terms of markets and products. The service sector has partially opened and this has already put threat on Nepali industry. As Nepal will have to open up the services sector completely within some time, the most affected sectors by the entry into WTO would undoubtedly be the service industry. The opening up of the economy can help promote the untapped potential of service sectors such as tourism industry.