Increasing the minimum capital for investment will preclude small and medium-scale companies from investing in Nepal
Foreign Direct Investment (FDI) is an investment venture based in any country located outside of the investor’s origin. Any investment in Nepal made from companies or investors outside Nepal would be considered an FDI, which is significant for our economy. Recently, the government of Nepal enacted the Foreign Investment and Technology Transfer Bill which increased the threshold for FDI from fifty lakh Nepali rupees to five crore Nepali rupees. This decision can be discouraging for small and medium-scale firms to invest in Nepal.
FDI can be of paramount importance for developing countries like Nepal. FDI can promote and maintain economic growth, in both the investing and the receiving countries. FDI has proved to be a means for financing infrastructure development, increasing employment, access to new technologies, increasing products and services, and maintaining foreign currency reserves among many other things in developing countries like Nepal. Whereas, the investing countries and companies benefit by expanding their market, international influence, profit, and getting a cheaper workforce. The United Nations Conference on Trade and Development has said that Small and Medium FDIs play a major role in the development of leading economies.
Increasing the minimum capital for investment will preclude small and medium-scale companies from investing in Nepal. These companies usually have limited capital to reinvest in foreign countries, putting Nepali markets off-limits for them even when their intended investment can be below the threshold of the Ministry of Industry, which would actually be adequate for their fields of interest. Given the unstable political climate, large investments in Nepal are viewed as a large risk for investors, both big and small. Additionally, in a country that still rates poorly on the corruption index, larger project capital translates to a proportionally larger amount of official as well as unofficial processing fees, which along with poor already poor infrastructure, labor laws, and political climate can easily discourage small investors in Nepal.
The government, while reasoning the decision to protect the interest of local investors, has ignored the role of small foreign companies for us. Local investors and businesses benefit from FDI by getting introduced to new products, technologies, operation strategies, and even new markets and are encouraged to perform better due to competition. Studies have consistently found that small foreign investments indirectly or directly boost the productivity of local businesses in developing countries like ours. Likewise, for the general people, more companies mean more jobs, which means more buying power per capita, which in turn supports the national economy.
Furthermore, the government has clearly adopted a blanket strategy for the decision. The minimum threshold applies to all the regions of Nepal and sectors (except those on the negative list where FDI is not allowed). It need not be stated that, compared to the Bagmati province, the Karnali province and Sudarpaschim province have had minuscule foreign as well as native investments where small FDI could have helped them catch up with more developed provinces. Similarly, the level of investments in all sectors is not uniform either. Different industries are performing at various paces with respect to their potential. In sectors that are yet to be well established, small investments, below the current bar set by the government, could prove pivotal for their development.
The current economic scenario is of a post-COVID Nepal with poor economic growth and dwindling foreign currency reserves. The COVID pandemic has strained many businesses and investors leading to millions of lost jobs, closed businesses, trade deficit, and low foreign currency reserves. In such a circumstance, attracting more FDIs as a financial bridging should be one of the priorities of the government to save the economy of the country by lowering the threshold of minimum capital for FDI. A higher number of companies are likely to offer their investment if their amount is lower and in turn, a higher number of projects are likely to come through. Also, small FDIs move faster and can promptly impact the growth of the economy.
While the introduction of laws related to FDI is welcome, the government should conduct an elaborate study of the requirement of investments in various sectors and regions before applying such restrictions. The government should be more facilitative and supportive rather than restrictive to FDIs. There should be proper regulations to mitigate potential disadvantages of FDI and protect the interests of Nepali people. The government needs to have a long-term vision. Even if the goal is to become a self-sustained country, the government, as well as the private sector, should understand the value of small FDIs in boosting our economy, which can be an excellent financial tool towards overall development.
Especially in view of the decreasing trend of FDIs globally, and in Nepal, in the recent years due to the pandemic and increasingly import-heavy economy of ours, the government should focus on attracting more foreign investments. Nepal is already behind South Asia neighbors like Bangladesh and India in attracting FDIs. And setting a high threshold for FDI will only discourage many potential small companies.