Foreign direct investment (FDI) plays an important role in economic development of any country. It is said that the flows of FDI could fill the gap between desired investments and domestically mobilized saving. It also may increase tax revenues, improve management and technology as well as labor skills in host countries, and break the vicious cycle of underdevelopment.
The real flow of foreign direct investment in Nepal is much lower than the commitment made by foreign investors, indicating many potential investors from abroad are not bringing in money that they had pledged. According to the statistics, the amount received by Nepal between mid-July and mid-November is not even 5% of the total FDI made by foreign investors in the last fiscal year. Lower flow of FDI in countries like Nepal affects job creation and economic growth as domestic capital is not enough to provide an impetus to the activities necessary to keep the economy robust.
Nepal does not seem to offer a hospitable investment climate for foreign investors. There are several reasons that could discourage investors from making an investment in Nepal, but three problems stand out. First, the political instability and resulting policy and legal uncertainty can make it difficult for investors to enter the market. Second, poor infrastructure, in particular electricity and road networks, which raises the cost of doing business in Nepal, works as a strong disincentive not only for foreign investors, but also for local investors, to invest in Nepal. Third, activists of trade unions and their demand for increased benefits/facilities, which, according to them, should not necessarily be linked to their productivity, coupled with their questionable work ethics makes for an unpleasant working environment.
Nepal’s FDI potential is heavily under-exploited, despite the fact that the country offers a huge potential not only for market seeking investors but also resource seeking ones. The country needs to remain attractive for FDI in the current context of global competition, especially for such investment that serves its long-term development goals and enhances competitiveness.