WHY FDI (Foreign Direct Investment)?
Foreign Direct Investment as the name suggests is an investment venture based in another country than that of the investor’s origin. Foreign Direct Investment plays a vital role in developing economies to a whole new level, with investment in new and emerging markets and providing a global exposure helps a country expand its presence on an international level. Increase in jobs and wages coherently boosts an economy too. In an era where technological advancement leads to greater heights, emerging markets or developing nations are in dire need of being introduced with such technological advancement.
Foreign Direct Investment lures toward improvement of infrastructure and a raise in living standard in emerging economies. Nepal, a nation sandwiched amidst two giant nations, namely India and China can undoubtedly be a strategically beneficial economy for investment. FDI is a primary part for effective international economic approach for development. In a nation where FDI flow is outrageously high, the country’s policies for investors are forthcoming, however country’s with unattractive policies the FDI stream will be low.
FDI in simpler terms can be seen as the inflows of foreign investment in a country. An inflow of investment will surge the economy of any nation, however the inflow of FDI in Nepal is quite low in comparison to its neighboring countries.
Significance of Foreign Direct Investment
FDI is regarded as one of the finest contributor to boost economy growth. There has been a sweeping change and developments around the globe and many developing nations lack the funding and better understanding of gaining such transition. Investment made in any foreign firm is regarded as a FDI and acquires a lasting interest; a lasting interest is when the investor attains a 10% of voting power in the firm. As discussed, an investor can expand its business in a foreign country and secure exponential growth, for e.g. Daraz (e-commerce website) is a new venture of e-commerce giant Alibaba in Nepal. Reinvesting in existing companies, joint ventures, acquiring stocks or operating a subsidiary can also be enlisted under Foreign Direct Investment.
Benefits of Foreign Direct Investment
4. Lower labor costs
5. GDP growth
6. Increment in employment rate
7. Overall economic growth for the host nation
Foreign Direct Investment comes with loads of perks but the disadvantages tags along and a proper regulated rules and policies in regards to FDI by the host nation can somehow diminish the drawbacks. New entrants such as Alibaba in Nepal has certainly made Daraz one of the top-grossing e-commerce site in Nepal, the input of marketing budget etc. from such larger firms can somehow be substantially difficult for local e-commerce sites to compete with. This can lead to shutdown of the locally grown e-commerce website with the same genre of business.
Profit repatriation in layman term can be defined as export of profit back to the investor’s country, leading to large sum of capital outflow from the host nation. An appropriate guideline and mandatory policies needs to be kept in place for such malpractices to diminish.
Foreign Direct Investment in Nepal
FDI is regarded as one of the core economic source for the development and economic stability in developing nations globally. Nepal is considered as one of the most liberalized nation amidst other South Asian nations, but the inflow of FDI has not recorded a good hike. Nepal is gifted abundantly with natural resources, favorable weather and cheap labors; however the FDI input is not significant enough. In context of Nepal, the Investment Board is the apex body related to accepting proposals for FDI and is chaired by the Prime Minister of Nepal. Polices and plans related to FDI are developed to make the investor foresee the investment friendliness of the country.
Foreign Direct Investment in Nepal is governed by Foreign Investment and Technology Transfer Act (FITTA), 1992, Investment Board Act, 2010, Industrial Enterprises Act, 2016, Foreign Exchange (Regulation) Act, 1962, Company Act, 2017, Contract Act, 2000, Income Tax Act, 2002, Labor Act, 2017, Privatization Act, 1992 and Arbitration Act, 1999. As per FITTA 1992, there are several areas where the investment by FDI is prohibited; enlisted are the prohibitory areas for investment:
1. Real Estate
2. Tourist, Trekking, Porter, Guides
3. Fisheries, Poultry, Primary Agro Products
4. Radioactive Materials
5. Media (Radio, TV, Newspaper)
6. Arms and Ammunition
7. Cottage industries