These days in Nepal, discussion on the topic of FDI (Foreign Direct Investment) has got momentum from federal capital city Kathmandu to small village and towns, from east to west and north to south, intellectuals to entrepreneurs and industrialists to farmers.
The key issues are lesson learnt, under realization of FDI in comparison of commitment in the previous days, role and importance of investment to achieve the goal of prosperity and happiness, bureaucratic hurdles and lapses in policies to maintain the balance of payment and to reduce the dependence on remittances as well as to downsize the huge size of trade deficit.
The opinions are focussed on the preparation of the Investment Summit as well as the materialization of commitments in projects along with the actual transfer of dollars in the bank accounts in Nepal. In previous years, very less amount was realized out of commitments in summits and talks.
In Nepal, out of the global inflow of the FDI, the share of Nepal is only 0.01 percent. The ratio of annual FDI flow with GDP of Nepal is near to 0.5 percent and the ratio of outstanding FDI-GDP is around 8 percent. Out of the committed amount in the summit two years back, few amounts less than 15 percent only has been realized in dollars.
Globally, people have realized that in the 21st century, the role of FDI is so vital and inevitable to keep the economy vibrant. FDI is an ultimate way to fulfil the funding gap, basically required in industry and infrastructure sector. So, different countries are undertaking their best efforts to attract FDI and are continuing the process of policy as well as procedure reforms.
In this background, the global amount of inflow of FDI has amounted to US$ 1.43 trillion in 2017 with fell by 23 percent in comparison to 2016. However, basic global macro-economic indicators such as GDP and trade have been improved and expanded. This is one the issue of study to find the reason and rationales. Anyway, regarding the declining of FDI in 2017, it is notable that the fell of flows is concerned with developed and transition economies. The flow in developing economies has remained stable. As a result, the share of developing economies accounted for 47 percent of the total FDI. This figure was 36 percent in 2016. Out of the total FDI flow, the share of Asia is around 25 percent and South Asia is at 3 percent.
But, the story of Nepal is different. In Nepal, out of the global inflow of the FDI, the share of Nepal is only 0.01 percent. The ratio of annual FDI flow with GDP of Nepal is near to 0.5 percent and the ratio of outstanding FDI-GDP is around 8 percent. Out of the committed amount in the summit two years back, few amounts less than 15 percent only has been realized in dollars.
In given context to assess the scenario on FDI, it is very important to review major determinants of the realization of FDI. The determinants can be categorized in economic and non-economic factors; political, social, security and financial. Some independent variables like growth rate of per capita GDP, inflation rate, level and quality of information technology, use of digital technology regarding getting approval as well as other transaction with the governments, labour cost per worker in manufacturing industry, degree of openness, risk and corporate top tax rate also influence the flow of FDI.
But much of their functionality could be achieved by better designed, cost-based incentive mechanisms. The SEZs also are continued to proliferate and diversify the industry as well as to broaden the scope of FDI. In addition, investment screening procedures are becoming more common.
Keeping these things in mind over the past 10 years, at least 101 economies across the developed and developing world have adopted formal industrial development strategies to enhance the level of FDI. In the last five years, the actions of the formulation of new strategies related to FDI have been accelerated.
Countries are trying to address the complex issues regarding the industries, their nature and specifics relating to FDI beyond conventional industrial development and structural transformation such as Global Value chain (GVC) integration and upgrading, development of the knowledge economy, build-up of sectors linked to sustainable development goals and competitive positioning for the New or Fourth Industrial Revolution (NIR).
Some countries are on the way of building new industrial revolution based strategies. Many countries are focusing on vertical policies and some are focusing horizontal competitiveness-enhancing policies designed to catch up to the productivity frontier. Besides these, investment policy tools like providing incentives, performance requirements, Special economic zones (SEZs), investment promotion and facilitation as well as screening mechanisms also play a vital role to enhance the quality FDI. Therefore, many countries have given attention to the use of such tools too. Among these, incentive tools are comparatively more familiar. Performance requirement, mostly conditions attached to incentives, are also widely used.
But much of their functionality could be achieved by better designed, cost-based incentive mechanisms. The SEZs also are continued to proliferate and diversify the industry as well as to broaden the scope of FDI. In addition, investment screening procedures are becoming more common.
Thus in many countries, most measures adopted over the past decade are removed or relaxed foreign ownership restrictions, but entry rules or rather procedures have been tightened in some cases through new screening mechanism. In this way, the favorable global investment environment, characterized by open, transparent and non-discriminatory investment policies is being so much effective to attract foreign direct investment.
In the context of Nepal, these reforms keep same importance as per the character of the economy less or more. If Nepal wants to attract a significant volume of FDI as well as domestic direct investment (DDI); since by the nature of the economy and availability of natural resources and need of upgradation as well as the expansion of physical infrastructure and industrial development, the scope and prospectus of FDI and DDI look fine.
Orally, the government is also committed to providing the spaces by policy and implementation points of view. But, the desires of the potential and existing investors are different. They want to have the commitments translated into practice and behavior. Lacking timely decision making and poor coordination as well as the rent-seeking intention of the administrative as well as political bureaucrats is still creating the bottlenecks.
Another vital thing is conflicts and misunderstanding on the way of implementation of federalism that has also created some barriers in the inflow of FDI and action of DDI. Some local governments have imposed the undue tax and non-tax revenues; intentionally or unintentionally. In a few cases, the federal government is also hesitating to fulfill the commitment, basically on the issue of VAT return and providing additional rates on PPA in case of hydro-power projects.
These behavior and hurdles have sprayed confusions in the psychological era of investors. Under this cloudy environment, the government must be serious to erase these confusions and dotted hazards, in a parallel way with further policy and procedure reform as well as the application of new tools and motivating schemes.
Otherwise, investors do not wait for a long time in the hope of having a positive environment. I remember, my grandmother, in my childhood, always would have reminding me and was used to encourage to continue study and go outside, not to stay in the native village and to search opportunities and a good career. Many times she said to me, a tiger never stays in one place without genuine reason.
The same theory is applicable in case of investors too. Without genuine reasons they do not wait for a long time in one country and projects; they always keep themselves with back up new opportunities. So to attract the FDI in due time of committed by the potential investors, the government should work strategically and wisely.
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