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Foreign direct investment: Constraints and challenges



There are other impediments that have forestalled FDI from flowing into the country. They include the disequilibrium of the macroeconomic milieu‚ the structural vulnerability of the institutional and legal framework‚ and the lack of promotional activities to lure FDI

Foreign Direct Investment (FDI) entails the procurement of business or other commercial holdings in a host country by multinational ventures, other foreign enterprises or individual foreign residents with an object to supervise the business or commercial reserves in the host country. FDI flows embody equity investment by multinational enterprises earnings reinvested in foreign subsidiaries, and short-term and long-term borrowing and lending of funds between parent multinational enterprises and their associates in foreign countries.

FDI is repeatedly considered as an instrument in promoting industrial growth and foreign trade, especially in host countries, that foster comparatively open economies, durable macroeconomic situations, controlled regulations on foreign exchange proceedings and custody for private property rights. It habitually spurs competition, productivity, and innovation by domestic suppliers, as they compete for well-paid deals with multinational enterprises that strive to assimilate their foreign operations in host countries. Furthermore, FDI has a more penetrating significance on growth in countries that engage in schemes stimulating exports. The exposition may be that foreign-owned companies aspiring for international competitiveness and global markets have a more significant inducement to bring in technology and training with the concomitant spillover gains. Nepal has been accentuating foreign investment by dislodging the control on foreign investment and furnishing a number of facilities. The Foreign Investment and Technology Transfer Act 1992, which was amended in 2000, enacted in line with open and liberal economic strategies. The intent of the Act was to invite and bring in foreign investment in the form of equity participation, direct investment in domestic production, reinvestment of the earnings gleaned from such investment and transfer of technology, inter alia.

Additionally, the Act stipulated that industries established with foreign investment were also qualified to enjoy all the services and inducements plus income tax facilities provided to domestic investors under the Industrial Enterprises Act 1992.

Generally speaking, notwithstanding, Nepal does not possess much inducement for foreign investors. One conventional attraction, that is, inexpensive labor, is becoming less meaningful in investment decisions. The country can no longer hinge on cheap labor costs alone but also requires high-quality, productive labor to uphold its comparative advantages. Multinational corporations looking to invest not only take for granted the existence of state-of-the art FDI policy groundworks and a gamut of business facilitation schemes but also follow a composite of cost truncation, larger markets, and created assets that can assist them keep a competitive edge. Created assets encompass communications infrastructure, marketing channels, technology and innovative scope and are critical for empowering firms to maintain their competitiveness in a rapidly changing world. A gargantuan chunk of these facilities are unavailable in Nepal.

FDI in small economies typically focuses on production for export. Nonetheless, in the case of Nepal, this is trammeled by a paucity of natural and human resources (as regards the latter, a dearth of educated manpower and shortages of advanced managerial, accounting and technical skills). With respect to infrastructure, as adumbrated earlier, Nepal does not compare propitiously with many other developing countries in terms of power and water supply, telecommunications and transportation. What is more, the country is geographically disadvantaged, being land-locked and cannot provide the low-cost and efficient transportation connections with other countries needed by foreign corporations.

Another quandary in Nepal originates from the fact that amendments have been skimpy. The reform systems need to be undertaken efficiently and speeded up as increased international competition has put companies under tremendous pressure and they are reacting by investing only in most opportune venues.

The country has to rivet on standards that expedite business. These encompass investment promotion, investment incentives, after-investment options, and standards that ebb the expenses of doing business.

One window strategy should be fortified and has to be made a bona fide one window system in practice. Moreover, visa prerequisites, duration of visas and processes of renewal should be streamlined. Correspondingly, repatriation processes for income, consultancy remuneration, managerial emolument and capital should be made more patent and investors suitably apprised.

To conclude, the days ahead are tough and challenging for the Government given the complications identified with the internal condition and the nearly complete shortage of enforcement of investment-friendly methods. Under such situations, it has become crucial for the country to induce additional efforts to attract FDI. Let us hope that this task is jointly undertaken successfully by the Nepal Investment Board formed a couple of years ago and the forthcoming Government.

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