Foreign direct investment (FDI) is a financial investment made by a person, company, or government of one country into business interests in another country. Foreign direct investment is a powerful economic tool that drives international business and helps shape the global commerce landscape. It plays a key role in widening the sources of financing and crowding domestic investment in countries like Nepal with financing constraints. In this context, Nepal has introduced legal, institutional, and regulatory reforms in recent years to attract foreign direct investment inflows.
The foreign direct investment inflow is rather modest when compared to other economies in the area. China stands out as a significant recipient of Foreign direct investment, with a net foreign direct investment of USD 189.1 billion, followed by India with USD 70.9 billion.
In the case of Nepal, the country still has not been able to attract half a billion worth of foreign investment as it stood at around USD 139 million in 2022. The importance of foreign investment has increased even more due to the decreasing foreign reserves in recent years. Foreign direct investment has emerged as a substantial provider of private external funding in numerous countries. In developing economies, foreign direct investment plays a crucial role since it facilitates the transfer of technology, skills, access to global markets, and financial resources.
The role of foreign direct investment
Foreign direct investment is of utmost importance in stimulating economic expansion in underdeveloped nations such as Nepal.
It can attract external capital, which can effectively address capital shortages that frequently impede economic progress.
The arrival of this money can be allocated to crucial areas such as infrastructure, manufacturing, and technology, so enabling their growth and modernisation.
Additionally, it often brings with it advanced technologies and management practices, which can contribute to increased efficiency and productivity within domestic industries. Furthermore, the presence of foreign investors can stimulate job creation, thereby reducing unemployment rates and improving living standards.
Foreign direct investment can also act as a stimulant for the development of skills since it exposes local workers to new techniques and approaches. Moreover, the integration of a country into the global economy through foreign direct investment can enhance its competitiveness and market access.
However, for it to be truly beneficial, a conducive regulatory environment, political stability, and effective governance are essential to attract and retain foreign investors. In summary, foreign investment has the potential to be a significant driver of economic growth in developing countries by providing much-needed capital, technology transfer, job opportunities, and global market linkages.
The survey conducted by Nepal Rastra Bank indicates a substantial growth of 14.8 per cent in the stock of foreign direct investment, which has reached a total of Rs. 227.9 billion by the conclusion of the fiscal year 2020/21. The primary constituents consist of paid-up capital, which accounts for 53.9 per cent of the total, together with reserves and loans, which make up 31.6 per cent and 14.5 per cent respectively.
India is the leading country in terms of contribution, followed by China, Ireland, Singapore, and Saint Kitts & Nevis. The industrial sector holds the majority share of foreign direct investment stock, accounting for 60.5 per cent of the total. This dominance is particularly evident in the areas of electricity, gas, steam, air conditioning, and manufacturing. The service industry accounts for 39.4 per cent of the total, with financial and insurance services taking the lead at 26.9 per cent.
Hydropower receives 30.8 per cent of FDI stock and 40.0 per cent of total paid-up capital. Additionally, 50.1 per cent of 2020/21 foreign loans are received by the sector. In the review year, FDI-based manufacturing companies had 64.9 per cent capacity utilisation and 14.7 per cent profitability.
While there are many advantages to FDI in a nation like Nepal, there are also possible drawbacks that need to be considered: The possibility of becoming dependent on foreign investors, which leaves the economy open to external shocks, is one of the main obstacles.
Furthermore, imbalances in certain sectors or regions may result from the unequal distribution of FDI benefits, which can worsen income and wealth gaps. Environmental concerns may arise as certain FDI-attracting industries could pose risks to the environment without adequate regulatory safeguards.
Social disruptions, such as the displacement of local communities and cultural shifts due to rapid industrialisation, are additional challenges that need careful consideration. Furthermore, there is a risk of losing control over strategic assets as foreign entities invest in or acquire critical resources and infrastructure, prompting concerns about national sovereignty. Balancing the positive impacts of FDI with these potential drawbacks is crucial for sustainable and inclusive economic development in Nepal.
FDI offers significant potential for countries such as Nepal. FDI has the potential to stimulate economic growth by attracting external capital, and advanced technology, and creating employment opportunities.
Nevertheless, achieving success hinges on establishing an inviting atmosphere for investors by implementing consistent regulations and ensuring transparent governance. To ensure that the advantages of foreign investment are distributed to all sectors of society, Nepal must adopt a fair and comprehensive strategy. By implementing effective strategies, FDI can facilitate positive transformation, fostering progress and affluence in developing countries such as Nepal.