Foreign Direct Investment (FDI) is defined as a “category of cross-border investment” in which an investor from one country invests in another country wherein the investor has significant control over the business it invests in (IMF, 2009). It may also involve a “transfer of technical know-how, managerial and organizational skills”. For a country aiming to expedite its development process, FDI has been one of the factors aiding the development process of Nepal especially in recent years. The government has also made provisions to make Nepal a more investment friendly country. Acts such as The Foreign Investment and Technology Transfer Act (FITTA) 2019 and Foreign Direct Investment Policy 2015 have been created by the government in an effort to create a better environment for foreign investors. The FITTA states that “investors need to bring 25 percent of the pledged investment within a year from the date of registration, 70 percent by the start of operation, and the remaining 30 percent within the next two years.” The Department of Industry (DOI), Nepal Rastra Bank (NRB), and Investment Board Nepal (IBN) are three agencies that implement the laws regarding FDI.
As of 2018/19, the stock of FDI in Nepal was Rs. 182.92 billion of which 48.2 percent was paid-up capital, 42.8 percent were reserves, and 9.0 percent was loans. Of the total FDI stock, the service sector accounts for 51.1 percent and the industrial sector accounts for 48.8 percent. Furthermore, within the industrial sector manufacturing, mining and quarrying industry accounts for 28.6 percent and electricity, gas, and water sector accounts for 20.0 percent of FDI stock. While the level of FDI pledge is high, the actual inflow of FDI is still low.
Looking into the provincial breakdown of FDI statistics, we see the following numbers:
Figure 1: Provincial Breakdown of FDI figures (Data taken from NRB)
From the above graph, we can see that Sudurpaschim province has received the least amount of FDI in all three years (2017, 2018, 2019). The province received FDI of Rs. 13.2 million, 10.8 million, and 27.93 million for the years 2017, 2018, and 2019 respectively. The increase in FDI for the year 2019 can be attributed to the investment brought in for the manufacturing sector (cement industry) and information technology sector (software development industry). Comparatively, Sudurpaschim province lags behind other provinces in terms of being able to attract foreign investment. Years of lack of concrete development plans from the central government, lack of investment in the infrastructure sector and other factors such as a difficult geographical terrain have caused the province to lag behind in terms of development which has affected its current ability to seek investment. Furthermore, delays in current projects have not inspired confidence from the investors.
However, the provincial government in Sudurpaschim has made efforts to bring in foreign investment. The provincial government has started a process to create a Provincial Investment Board in order to streamline projects that require higher investment (projects requiring investment from Rs. 1 billion to Rs. 5 billion). The government also put in extra effort to woo investors during the Investment Summit organized by the Nepal Investment Board. In terms of attracting foreign investment, tourism, manufacturing sector, energy sector, and transportation sector are few sectors that are being prioritized by the provincial government. The provincial policies and programs for the fiscal year 2078/79 has emphasized completing the ongoing projects in order to attract new investment. The recent agreement between the Investment Board of Nepal and NHPC for the development of Seti river hydropower projects also shows promising signs for the province.
As the Sudurpaschim government has been creating ambitious plans to expedite the development process of the province, FDI will play an important role in the process. While the province has a lot to do in terms of catching up to other provinces for bringing in FDI, the steps initiated by the government show their commitment and dedication to the economic development of the province.