Foreign Investment: Portfolio and Direct
Foreign Investment
Foreign investment refers to investments made by individuals or entities from one country into another, either directly or through share-based ownership. It is categorized into two types: Foreign Direct Investment (FDI) and Portfolio Investment. In the current open and liberal global economy, developed and affluent nations have a moral obligation to support infrastructure development and poverty alleviation in poorer and developing countries. Analysis of foreign aid trends shows a shift from grants to loans, increasing the debt burden. Consequently, countries have recognized the superiority of Foreign Direct Investment over traditional aid, as FDI meets investment needs, creates jobs, provides foreign exchange, and avoids adding to the debt burden, making it increasingly popular.
Current Status of Foreign Investment in Nepal
According to the Economic Survey 2080/81, by the end of Falgun 2080, foreign investment worth NPR 478.85 billion was approved, expected to create 322,000 jobs.
Portfolio Investment
Portfolio investment refers to short-term and temporary investments made by foreign investors (individuals, firms, companies, or institutions) in another country through the purchase of shares or securities, without direct involvement in management. This type of investment is indirect, carries lower risk for investors, and does not require active participation in operations.
Foreign Direct Investment (FDI)
FDI involves foreign individuals or entities investing capital in a host country with direct involvement in management, asset ownership, and operations. It encompasses both equity and debt capital investments. In Nepal, FDI plays a critical role in bridging the financial gap to achieve Sustainable Development Goals by 2030, graduate from Least Developed Country status by 2026, and become a prosperous nation by 2100 BS.
Existing Arrangements for Foreign Investment in Nepal
- The Constitution of Nepal, under its economic, industrial, and trade policies, emphasizes attracting foreign capital and technology for infrastructure development, promoting import substitution, and enhancing exports.
- The Sixteenth Plan aims to increase production, productivity, and competitiveness by attracting foreign investment.
- The Foreign Investment Policy, 2071 BS, identifies priority sectors, labor management, establishment of Special Economic Zones (SEZs), non-resident Nepali investment, capital market utilization, and issuance of loans in domestic and foreign currencies for capital mobilization.
- The Foreign Investment and Technology Transfer Act, 2075 BS, provides various facilities and concessions to foreign investors.
- The Special Economic Zone Act, 2073 BS, outlines facilities for industries established in SEZs.
- The Investment Board Act, 2068 BS.
- The Public-Private Partnership and Investment Act, 2074 BS.
- Nepal has formulated various policies to promote investment, joined the World Trade Organization (WTO), and participates in regional cooperation frameworks like SAFTA and BIMSTEC. Additionally, Nepal has signed Bilateral Investment Protection and Promotion Agreements (BIPPA) with six countries and Double Taxation Avoidance Agreements (DTAA) with eleven countries, reflecting efforts to attract foreign investment.
Basic Conditions for Foreign Direct Investment
In today’s globalized era, access to markets and technology is expanding, and large companies from developed countries are seeking investment opportunities. Attracting such investments requires open and liberal economic and national policies. The investment environment is a critical condition, ensuring investors of high returns with minimal risk. Despite efforts in Nepal, foreign investment attraction has not met expectations. Key conditions for attracting FDI include:
- Political stability, rule of law, and governance transparency.
- Corruption-free administration and an active, skilled labor market.
- Simple and investment-friendly tax system.
- Clear and predictable repatriation process for profits and capital.
- Efficient, capable, and independent judicial system.
- Robust and modern infrastructure development.
- Good industrial relations and a welcoming culture.
- Simple and flexible company entry and exit processes.
- Improved financial inclusion and literacy.
Given Nepal’s geopolitical and geo-economic context, fully leveraging opportunities in agriculture, tourism, and hydropower requires active participation from all economic stakeholders to attract substantial foreign investment.
Problems in Foreign Investment in Nepal
Despite Nepal’s significant potential for foreign investment, as highlighted in various government and non-government documents, the country has not been able to attract investment as expected. The following issues contribute to this challenge:
- Lack of timely amendments to investment-related laws.
- Inadequate development of industrial infrastructure.
- Difficulty in providing services due to scattered industries.
- Shortage of skilled labor due to brain drain.
- Lack of inter-agency coordination among investment and industry-related bodies.
- Failure to secure bilateral investment protection agreements with potential investor countries.
- Inadequate promotion of transparency and good governance.
Conclusion
Foreign Direct Investment is a catalyst for economic development in developing and least developed countries like Nepal, playing a pivotal role in capital formation. FDI is a key strategy for Nepal to graduate from Least Developed Country status by 2026, achieve Sustainable Development Goals by 2030, and become a prosperous nation by 2100 BS. By addressing the identified challenges and fulfilling the necessary conditions, Nepal can enhance its attractiveness as an investment destination, fostering sustainable economic growth and development.