FOREIGN DIRECT INVESTMENT IN NEPAL: A TREND ANALYSIS Submitted By Devi Ram Khanal Roll No.: 740093 Reg. No: 2007-2-22-0065 A Research Report Submitted To Prof. Dr. Prem Raj Pant Apex College Pokhara University In partial fulfillment of requirements for the course on Research Methodology For the degree of Master of Business Administration Kathmandu August, 2009
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Foreign Direct Investment in Nepal a Trend Analysis
FOREIGN DIRECT INVESTMENT IN NEPAL A TREND ANALYSIS
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FOREIGN DIRECT INVESTMENT IN
NEPAL: A TREND ANALYSIS
Submitted By
Devi Ram Khanal Roll No.: 740093
Reg. No: 2007-2-22-0065
A Research Report Submitted To Prof. Dr. Prem Raj Pant
Apex College Pokhara University
In partial fulfillment of requirements for the course on Research Methodology
For the degree of Master of Business Administration
Kathmandu August, 2009
I
ACKNOWLEDGEMENTS
This Study has been under taken to analysis the “Foreign Direct Investment in
Nepal : A Trend Analysis” under partial fulfillment of the requirement of MBA
degree. The thesis mainly covers the study to analyze the FDI in Nepal,
comparison of flow of direct investment with the world, South Asia, SAARC
countries and least developed countries.
I would like to express my profound gratitude to Professor Dr. Prem Raj Pant,
without whose kind support, timely advice and continuous encouragement, this
report would not have been prepared.
I sincerely acknowledge to my respected supervisor, Mr. Pushpa Raj Joshi and
Mr. Bharat Singh for his continuous guidance and supervision. The report in this
form is the result of their inspiring and invaluable guidance and supervision.
I express sincere thanks to all librarians of Apex College who helped me directly
and indirectly in the course of review of literature.
Finally, my sincere acknowledgement goes to my grand parents, and beloved
brother and sister, who missed their youngest son and brother all time while I
was away from home for this study, and extend their blessings, love and support
to me.
......…….……........ Devi Ram Khanal
II
CERTIFICATE OF AUTHORSHIP
I, hereby declare that this submission is my own work and that to the best of my
knowledge and belief, it contains no materials previously published or written by
another person nor material which to a substantial extent has been accepted for the
award of any other degree of university or other institutions, except where due
acknowledgement is made in the acknowledgements.
Date: …………… ……………………
Devi Ram Khanal
III
TABLE OF CONTENTS Acknowledgements I Certificate of Authorship II Table of Contents III List of Tables V List of Figures VI Abbreviations VII Executive Summary VIII
Chapter I Introduction
1.1 Background 1 1.2 The Problem Statement 5 1.3 Purpose of the Study 6 1.4 Importance of the Study 6 1.6 Limitations of the Study 7 1.7 Organization of the Study 8
Chapter II Review of Literature
2.1 Foreign Direct Investment: An Overview 10 2.2 The OLI Paradigm for Foreign Investment Decision 13 2.3 Why is Transparency Important for FDI? 14 2.4 FDI and Corruptions 17 2.5 Factor affecting Foreign Direct Investment 20 2.6 Review of Nepalese Research in FDI 24 2.7 Concluding Remarks 36
IV
Chapter III Methodology
3.1 Introduction 38 3.2 The Research Design 39 3.3 Data Collection 40 3.6 The Population and Sampling 40 3.7 Data Gathering Procedure 41 3.8 Data Analysis 41
Chapter IV Presentation and Analysis of Data
4.1 Global Foreign Direct Investment 42 4.2 FDI to SAARC and Southeast Asia 44 4.3 Foreign Direct Investment in Nepal 45 4.4 A Pattern Study of FDI in Nepal 47 4.5 Nepal Goes From Bad to Worse 53
Table No. 2 FDI to South Asia and South-East Asia 44 Table No. 3 Number of industries approved for foreign investment 48 Table No. 4 Number of Industries Registered by Categories up to FY
2064/2064 51
Table No. 5 Number of Industries Registered by Scale UP to FY 2064/2065
52
Table No. 6 Failed State Index 53 Table No. 7 Nepal's Ranking in Doing Business 2009 54 Table No. 8 Summary of Indicator 55
VI
LIST OF FIGURES Fig. No. 1 Number of industries approved for foreign investment 49 Fig. No. 2 Number of employment approved for foreign investment by 50 Fig. No. 3 Number of Industries Registered by Categories up to FY
2064/2064 51
Fig. No. 4 Number of Industries Registered by Scale UP to FY 2064/2065
52
VII
ABBREVIATIONS BIMSTEC Bay of Bangle Initiative for Multi-Sectoral Technical and
Economic Cooperation CPI Corruption Index DFI Direct Foreign Investment DoI Department of Industry FDI Foreign Direct Investment FITTA Foreign Investment and Technology Transfer Act FSI Failed State Index GoN Government of Nepal IMF International Monetary Fund masl meters above sea level MNCs Multinational Companies OLI Ownership, Location and Internalization OECD Organization for Economic Cooperation and Development SAARC South Asian Association for Regional Cooperation SAPTA South Asian Preferential Trade Arrangement SEZs Special Economic Zones TNCs Transnational Corporations UNCTAD United Nations Conference on Trade and Development UN United Nations U.S./US United States EU European Union
VIII
EXECUTIVE SUMMARY
Must firms become more multinational to improve their competitiveness and
performance in an increasingly integrated world economy? Foreign direct
investment (FDI) and international networks bring some competitive advantages.
However, performance is also driven by firm specific advantages such as research
and development (R&D) and marketing, and country specific advantages such as
political and legal institutions. The relative contribution of these factors to
competitiveness will vary by industry and country.
The study explores the flow of foreign direct investment in Nepal till date. The
study also attempt to gain some understanding on the awareness of flow direct
investment among least developing countries and neighboring countries, compared
to the inflow in Nepal. It looks after the productive aspects of foreign direct
investment in Nepal. Still Nepal doesn’t receive the minimum FDI compared to
other developing countries. It also scans the obstacle that curtails in receiving it, and
scrutinizes the challenges and benefits of receiving foreign investment in Nepal.
The study is organized into five chapters. Each chapter covers some facts pertaining
to the FDI in Nepal. First chapter covers background information about foreign
investment and its impact on country’s economy; its importance, statement of
problem, and research purpose etc are stated.
Second chapter presents an overview of literature review. This chapter aims to
provide relevant literature in the field of foreign direct investment.
Third chapter presents the research model and research methodology implemented
in the study. It will describe the chosen methods, research design, sources of data,
population and sample, data gathering procedure and analysis of data.
IX
Chapter four has attempted to analyze and draw inferences from the collected facts
in accordance to the outline laid down in the research plan. The collected data has
been systematically presented in the form of tables and diagram.
Finally, chapter five highlights the major findings of the research, conclusions and
recommendations. This chapter basically focuses on the proceedings of the earlier
chapter. In this chapter, the author answers research questions and get conclusions
based on the theory and analyzed data. Major findings are illustrated which is
followed by recommendations based on findings and experiences of the researcher.
1
CHAPTER I
INTRODUCTION
1.1 Background of Study
Most economic theorist and developing practitioners accept that external capital is
necessary for accelerating growth and industrialization. Today, every developing
country irrespective of their size and political systems tries to attract foreign
investment. A large number of developing countries have now established export
processing zones (EPZ) to attract foreign private and public foreign investment.
The developing countries of the world have in genera been recipient of both official
and private financial flows over the last four decades. Understandably so, since in
most of there countries, the level of domestic savings is generally very low, the
financial sector is widely underdeveloped and in most cases repressed, and therefore
the capacity to harness domestic financial resources for development of key sectors
of the economy is quite limited. A wide body of literature has investigated the role
that this flow of external financing could play in development of recipient countries.
The convergence of opinion seems to be that on balance, there is a net positive
relationship between external financial assistance and economic performance of
countries. Particularly if and when such assistance is accompanied by conducive
policy environment (Burnside and Dollar 2000)
In the last decade or so, where as the flow of official development assistant seems to
have decline in relative importance, the flow of the private resources; in particular,
foreign direct investment (FDI) to developing countries has been on the increase. A
number of reasons have been alluded to in terms of this development. One of such is
the end of cold war and relative increase in net official flows to the countries in
transition in Eastern Europe and former Soviet Republic. Other reasons include the
2
growing importance of private flows, particularly in developing countries
themselves, reflecting the new wave of liberalization, and globalization and
therefore the flow of foreign investment to the telecommunications, financial
services and other sectors in many of the countries.
FDI is now recognized as an important driver of growth in the country.
Government, therefore, makes all efforts to attract and facilitate FDI and investment
from foreign investors. Nonresident including overseas corporate bodies (OCBs)
that are predominantly owned by them, to complete and supplement domestic
investment.
In the trend of economic globalization, the role of FDI in promoting economic
development has been widely studied. Studies such as Athukorala and Menon
(1995), Zhang and Song (2001), Zhang and Felingham (2001) and Liu et al (2001)
find that FDI promotes the manufactured exports of recipient countries. Although
there is no consensus regarding the relationship between FDI and GDP growth, to
attract FDI as a strategy of development has become a trend among developing
countries following the development of newly industrialized countries in the 1960s
and 1970s. Athukorala and Chand (2000) and Balasubramanyan et al (1996) provide
some evidence that the growth enhancing effect of FDI would be significant and
strong in countries with open trade policies and better trade regimes with export
promoting FDI. While many developing countries are competing for FDI inflows,
recent studies attempt to identify condition, which would lead to more beneficial
utilization of FDI. For example Narual and Dunning (2000) point out that the
increased competition for FDI is more for the “right” kind of investment and less
developed countries increasingly need to provide unique, non replicable created
assets to maintain a successful FDI-assisted development strategy. De Mello (1999),
finds that the extent to which FDI is growth enhancing depends on the degree of
complementarily or substitutes between and FDI and domestic investment.
Furthermore Zhang (2001) reports that the extend to which FDI is growth enhancing
appears to depend on country specific characteristics.
3
Potential economic benefits of FDI
FDI inflows can lead to a range of economic benefits for transitional and developing
countries, including:
• restructuring their economic activities in line with dynamic comparative
advantage;
• reducing their costs of structural adjustment;
• fostering more demanding purchasing standards by firms and consumers;
• raising the productivity of national resources and capabilities;
• improving quality standards;
• Stimulating economic growth (adapted from Dunning, 1994).
Nepal started planned programs of economic development as early as mid fifties
with the launching of first five-year plan in 1956. The Tenth Plan is now being
implemented since mid July 2002. The Plan seeks to achieve a higher rate of
sustained economic growth of 8.1 percent per annum by enhancing the competitive
capability of industry and commerce sector. To achieve this target, greater emphasis
has been given to the participation of private sector and the involvement of people at
community level. The Plan takes account of the need to attract foreign investment to
meet the five-year capital requirement. The following policies have been spelt out,
among others, for the industrial sector in the Tenth Plan:
• Set up the mechanism to ensure easy availability of financial resources,
through financial institutions, to establish industries.
• Investment will be channelized to undeveloped or underdeveloped regions of
the country, on the basis of national importance, to ensure regional balance.
• Industrial security system will be made effective.
• Foreign investments will be encouraged in those areas where the country has
comparative advantage.
• Local and newly developed technologies will be encouraged for industrial
development.
4
Government of Nepal has adopted an open and liberal policy to pave the way for the
accelerated economic and social development of the country. Especially in the field
of industry and trade, the government policy is aimed at giving the private sector a
dominant role. The private initiatives and enterprises are expected to increase
efficiency and productivity. The government's role will be that of a facilitator
providing infrastructure and conducive environment for investment. Although there
were a few cases of foreign investment and technology transfer prior to 1981, the
industrial policy and the Foreign Investment and Technology Act, 1981 paved the
way for regular inflow of foreign investment and technology transfer into the
country. Solidarity Ministerial meeting was held in 1982 and an Investment
Promotion meeting was held in 1984 for the promotion of foreign investment and
for creating awareness of the investment opportunities in the country. Subsequently,
Nepal Investment Forum was organized in 1992 at Kathmandu, which was a very
successful event in attracting the foreign investors.
In order to make the investment climate more conducive GoN formulated Foreign
Investment and One Window Policy and Industrial Policy based on which Foreign
Investment and Technology Transfer Act, 1992 (FITTA) and Industrial Enterprises
Act, 1992 (IEA) were promulgated. These Acts were subsequently amended in 1996
and 1997, respectively, in order to make these acts more pragmatic based on the
experiences gained.
The Industrial Policy emphasizes on simplification of procedures, transparency in
implementation and improvement of productivity through the up gradation of
technical knowhow and efficiency of the industries in order to compete in the free
and competitive world market by utilizing comparative advantages of the country
with minimum adverse effects on environment. Whereas, the Foreign Investment
and One Window Policy aim:
• To build a strong and dynamic economy by generating additional opportunities
for income and employment through expanding productive activities.
5
• To increase the participation of the private sector in the process of
industrialization.
• To increase productivity by mobilizing internal resources and materials in
productive sectors and by importing foreign capital, modern technology,
management and technical skills.
• To increase the competitiveness of Nepalese industries in international markets.
1.2 The Problem Statement
Nepal is potentially attractive location for foreign investors. Sandwiched between
two emerging countries of the world with India in the south and China in the North,
Nepali manufacturers have free access to the India market, and tariffs on imported
raw materials and components are lower here than South Asian countries. The
varied climate, natural resources and terrain provide a wealth of niche opportunities,
many of which are barely being exploited at all. Nepal has attracted modest FDI in
niche sectors such as tourism, light manufacturing (apparel) and mineral deposits
(lime stone). Investment is mainly in low technology, labor intensive production.
The impact of FDI has also been modest primarily in job creation.
While the FDI laws were liberalized in 1992, there are still obstacles that investors
face. In the short term, Nepal can attract more FDI in its niche sector- such as
tourism and production of herbs with special investment packages. With all these
possibilities, the FDI has been declining and Nepal is not being able to attract
minimum requirement.
There are some of the weaknesses such as weak financial sector and government’s
mandate and restriction for entry of new foreign bank up to 2010, geographical
constraint, unstable policies and insecurity among the bureaucrats, unclear
investment policies, the current political instability, corruption and lack of corporate
governance etc. Beside the Maoist and other parties’ frequent movement and bandhs
6
is the threat to bilateral and multilateral development projects. The challenge for
Nepal is to put in place an investor-friendly business climate that will compliment
its small bureaucracy. This is a serious problem in attracting foreign investment.
Against these backdrops it is a great challenge for Nepalese to accumulate capital
resources domestically as no one can deny the role of foreign investment in
economic growth and development of the country. An assessment of the probable
reasons for the declining FDI is thus recognized as the problem of the present study.
1.3 Purpose of the Study
The basic purpose of the study is to analyze the study in Nepal, comparison of flow
of direct investment with the world, South Asia, SAARC countries and least
developed countries. The specific objectives of the study are as follows:
• To explore the trend of foreign direct investment in Nepal.
• To study facilities provided by the Ministry of Industry & supply and
Government.
• To identify the problems and constraints of FDI in Nepal and its impact in
future.
1.4 Importance of the study
Nepal, a capital poor economy with low domestic saving rate where development
expenditure, to a significant extend, are dependent on the foreign aid, foreign direct
investment are very necessary lubricant to generate economic growth. FDI is
frequently viewed as instrumental in promoting industrial growth and foreign trade
particularly in developing countries. FDI maintains relatively open economies,
stable macro-economic conditions and limited restrictions on foreign exchange
transactions. It frequently stimulates competition, productivity and innovation by
7
local suppliers because local suppliers compete for lucrative contracts with
multinational enterprise.
Further, it generates income and employment opportunities resulting in higher
wages, competitive price, more revenue, skills and technology transfer and
increased foreign exchange earnings. It contributes to the development of a host
country by increasing the countries investment level beyond what would be
permitted by domestic saving alone. Similarly, it enhances entrepreneurial
capability when the foreign firms bring with it some firm specific knowledge in the
form of technology, managerial expertise, and marketing know-how. It also allows
new local entrants to learn about exports markets, provide training for workers and
stimulates competition with local firms.
Thus, Nepal is to achieve faster rate of economic growth at the present context, it is
essential that it create the necessary and amicable condition to attract FDI.
1.5 Limitation of the study
The study has the following limitations:
• Secondary data are use to analyze for result interpretations, so the accuracy
of the findings depends on the reliability of the available information.
• The study mostly focused on previous literature, reports and data on
mapping the mindset of inflow of FDI in Nepal.
• The study covers the collection of data only a period of 5 years from the
fiscal year 2003 to 2008 and conclusion drawn confines only to the above
period.
• Lack of knowledge gap on FDI issues prior to the study.
This study is done for the partial fulfillment of Masters of Business Administration
program of Pokhara University
8
1.6 Organization of the study
The whole research is organized into five main chapters, which are as follows:
Chapter I Introduction
This chapter includes background of the study, statement of the problem, objective
of the study, importance of the study, limitation of the study, and organization of the
study.
Chapter II Review of Literature
The second chapter is review of the literature which includes theoretical framework
of foreign direct investment. Review of related journals, studies, books and
unpublished thesis and other related document in both national and international
level. Since the study is focus on FDI in Nepal: Patterns and Prospects, special
attention has been given to the previous studies on FDI and other studies related to
this topic.
Chapter III Methodology
This chapter deals with the methodology used for the study. It consists of
introduction, research design, and source of data, population and sample, data
gathering procedure and analysis of data.
Chapter IV Presentation and Analysis of Data
This chapter comprises the pattern analysis and presentation of data collected from
the department of Industry. It is the analytical presentation of the study. Nepal has
attracted modest FDI in Niche sector such as tourism, manufacturing (apparel) and
mineral deposits (limestone). The investment is mainly low-technology, labor
9
intensive production. The impact of FDI has also been modest, primarily in job
creation. Foreign affiliates have imparted skills to local employees, and in a few
instances have introduced skills to local employees, and in a few instances have
introduced new exports products and upgraded technology.
Chapter V Summary and Conclusions
This chapter is suggestive framework containing the summary, overall findings,
conclusions and recommendations.
10
CHAPTER II REVIEW OF LITERATURE
The purpose of this chapter is review the available literature related to foreign direct
investment globally and in the context of Nepal. This chapter gives an introduction
of FDI, the OLI Paradigm for Foreign Investment Decision, Why is Transparency
Important for FDI?, financial system and FDI, factor affecting foreign direct
investment, global review of FDI with historical background of FDI in Nepal along
with legal framework.
2.1 Foreign Direct Investment: An Overview Multinational corporations (MNCs) commonly capitalize on foreign business
opportunities by engaging in direct foreign investment (DFI), which is investment in
real assets (such as land, buildings or even existing plants) in foreign firms, acquire
foreign firms, and form new foreign subsidiaries. Any of these types of DFI can
generate high returns when managed properly. However, DFI requires a substantial
investment and can therefore put much capital at risk. Moreover, if the investment
doesn’t perform as well as expected the MNCs may have difficulty selling the
foreign project it created. Given these return and risk characteristic of DFI, MNCs
tend to carefully analyze the potential benefit and costs before Implementing any
type of DFI.
FDI is conventionally defined as a form of international inter-firm cooperation that
involves a significant equity stake in, or effective management control of foreign
firm (de Mello, 1997)
FDI is the international movement of capital for specific investment purposes. Such
investments are made for the purpose of actively controlling property, assets, or
companies located in host countries. Business organizations undertake FDI to
11
expand foreign markets or gain access to supplier of resources or finished products.
FDI occurs when overseas companies set up or purchase operations in another
country.
FDI can be categorized into three components: equity capital, reinvestment
earnings, and intra company loans. Equity capital comprises of the shares of the
companies in countries foreign to that of investor. Reinvested earning includes the
earning not distributed to shareholders but reinvested into the company. Intra-
company loan relate to financial transactions between a parent company and its
affiliates. FDI thus may take many forms, including
• Purchase of existing assets in a foreign company
• New investment in property like land and building.
• Participation in a joint venture with a local partner.
• Merger and acquisition of activities.
Balance of payment accounts define foreign direct investment as any flow lending
to or purchase of ownership in a foreign enterprise that is largely owned by residents
of the investing country. (Kindreberger 1987)
FDI is the act of acquiring assets may be financial, such as bonds, bank deposits,
and equity shares or direct investment and involves the ownership of means of
production such as factories and land. Direct investment is considered to take place
also if the ownership of equity shares provides control over the operation of firm.
(Johnson 1970) has suggested the expansion of the concept of foreign investment so
that it parallels the modern fisherian approach and distinguishes physical human
knowledge capital. Focusing on foreign direct investments undertaken by firms,
industrial organization theorist analyzed the location choices of multinational
enterprises. This approach was pioneered by John Dunning (1977), who suggested
that firms undertake FDI when three factors are present, and the resulting
advantages are sufficient to offset the natural disadvantages of having to operate in
12
foreign country. These are known as the “Ownership, Location and Internalization”
(OLI) advantages. A firm must have some product or technology that enables it to
enjoy some market power in foreign market (ownership advantage), the firm must
see some advantage in producing in foreign location rather than at home (location
advantage), and there must be some reason for it to want to exploit the ownership
advantage internally, rather than use a market based mechanism to gain payments
for it (Such as license or sell its product or technology in the market for a fee.
Hymer (1960) found that American FDI was mainly concentrated in a few industries
and monopolized by several companies. Multinational companies (MNC’s) were the
product of imperfect markets and monopoly advantages where the companies had
the advantage with regards to choosing where to invest. A number of conclusions
can be drawn from Hymer’s analysis that helps frame up this study:
• First, FDI tends to flow into differentiated markets where a MNC believes
they will have an advantage competitively.
• Second, companies that are able to make investments overseas all have
certain advantages, such as economies of scale, differentiated products,
special skills, and low-cost production. These companies will make
investments in regions that do not have these advantages.
• Third, there are many ways in which MNCs can invest overseas in such as
exporting, and licensing, in addition to direct investment. MNCs without
local partners always prefer to choose foreign direct investment.
• Last but not the least Hymer found that about half of the overseas operating
capital of American firms came from host countries; thus FDI tends to flow
into the countries or regions that have developed financial systems and
capital markets.
13
The basic reasons for attracting FDI by developing countries are:
• Capital Transfer: Developing countries lack capital resources. FDI is an
Though Nepal can attract foreign investment in large and medium scale projects,
from the above chart we can identify that most of the foreign direct investment is
belong small industries. The main reason behind this may be the Government of
Nepal is not being able to establish the amicable and stable business environment to
attract foreign investor as well as the foreign investment and technology transfer act
is not clear and suitable to foreign investment.
53
4.5 Nepal Goes From Bad to Worse
The Washington DC- based fund for Peace has fired yet another warning shot:
Nepal has slid several points below its Failed State Index (FSI) this year compared
to the previous year.
In its fifth annual FSI released recently, the Washington DC-based research
organization has listed Nepal among the worst 38 countries, ranking it 25th. The
level of statelessness in the 38 countries send “warning” signal, according to fund
for peace. While countries such as Iraq and Kenya are seems to progressive, Nepal’s
positions in the 2009 index (95.4) is deteriorating compared to the 2008 index (94.2)
the study states.
Nepal stands in the category that includes countries like Somalia, Zimbabwe, Sudan,
Iraq, Afghanistan, Pakistan and North Korea, which make up the list of worst
governed countries reeling under conflict, corruption, poverty, impunity, and
statelessness. Countries like Norway, Finland, Sweden, and Switzerland, which
ranked 177th, 176th, 175th and 174th respectively are seen a best governed.
Table 6 Failed State Index (FSI)
Social
2008 2009 Demographic Pressure B. 1 B. 5 Refugees & Displaced Person 5.5 4.8 Group Grievance 9 9.2 Human Flight 6.1 6
Economic
Uneven Development 9.2 9.2 Economy 8.2 8.5 Legitimacy of the State 8.3 9.2 Public Services 7 6.2
Political and Military
Human Rights 8.8 9.1 Security Apparatus 8.5 9 Functionalized Elite 8.3 9 External Intervention 7.2 6.7
Total 94.20 95.40 Source: FSI, 2009
54
The study has attributed Nepal’s worsening condition to social, economic and
political indicators such as weak and ineffective government, external intervention,
economic decline poverty and widening inequality, impunity, deteriorating rule of
law, violation of human rights and corruption.
Most indicators used to gauge Nepal’s status in the 2009 index show deteriorating
governance. For instance, there is no let up in external intervention, which is as high
as it was in 2008. The gap between poor and rich continues to widen to and the
country’s overall economy shows a downward spiral.
4.6 Doing Business in Nepal
Nepal is ranked 121 out of 181 economies. Singapore is the top ranked economy in
the Ease of Doing Business
Table 7 Nepal's Ranking in Doing Business 2009
Rank Doing Business 2009 Ease of Doing Business 121 Starting a Business 73 Dealing with Construction Permits 129 Employing Workers 150 Registering Property 28 Getting Credit 109 Protecting Investors 70 Paying Taxes 107 Trading Across Borders 157 Enforcing Contracts 121 Closing a Business 103
Source: “Doing Business 2009”, World Bank.
55
4.6.1 Summary of Indicators – Nepal
Table 8 Summary of Indicator of Nepal's Ranking in Doing Business 2009
Summary of Indicator
Starting a Business
Procedures (number) 7Duration (days) 31Cost (% GNI per capita) 60.2Paid in Min. Capital (% of GNI per capita) 0
Dealing with construction Permit
Procedures (number) 15Duration (days) 424Cost (% of income per capita) 248.4
Employing Workers
Difficulty of Hiring Index 56Rigidity of Hours Index 0Difficulty of Firing Index 70Rigidity of Employment Index 42Firing costs (weeks of salary) 90
Register Property
Procedures (number) 3Duration (days) 5Cost (% of property value) 6.3
Getting Credit
Legal Rights Index 5Credit Information Index 2Public registry coverage (% adults) 0Private bureau coverage (% adults) 0.2
Protecting Investor
Disclosure Index 6Director Liability Index 1Shareholder Suits Index 9Investor Protection Index 5.3
Documents for export (number) 9Time for export (days) 41Cost to export (US$ per container) 1764Documents for import (number) 10Time for import (days) 35Cost to import (US$ per container) 1900
Enforcing Contracts
Procedures (number) 39Duration (days) 735Cost (% of claim) 26.8
56
Closing a Business
Time (years) 5Cost (% of estate) 9Recovery rate (cents on the dollar) 24.5
Source: “Doing Business 2009”, World Bank
Starting a Business
Nepal is ranked 73 overall for Starting a Business. When entrepreneurs draw up a
business plan and try to get under way, the first hurdles they face are the procedures
required to incorporate and register the new firm before they can legally operate.
Economies differ greatly in how they regulate the entry of new businesses. In some
the process is straightforward and affordable. In others the procedures are so
burdensome that entrepreneurs may have to bribe officials to speed the process or
may decide to run their business informally.
Dealing with Construction permit
Nepal is ranked 129 overall for Dealing with Construction Permits.
Once entrepreneurs have registered a business, what regulations do they face in
operating it? To measure such regulation, Doing Business focuses on the
construction sector. Construction companies are under constant pressure; from
government to comply with inspections and with licensing and safety regulations
and from customers to be quick and cost-effective. These conflicting pressures point
to the tradeoff in building regulation; the tradeoff between protecting people
(construction workers, tenants, passersby) and keeping the cost of building
affordable. Striking the right balance is a challenge when it comes to construction
regulations. Good regulations ensure safety standards that protect the public while
making the permitting process efficient, transparent and affordable for both building
authorities and the private professionals who use it. If procedures are overly
complicated or costly, builders build without a permit, leading to hazardous
construction.
57
Employee Working
Nepal is ranked 150 overall for Employing Workers. Economies worldwide have
established a system of laws and institutions intended to protect workers and
guarantee a minimum standard of living for its population. This system generally
encompasses four bodies of law: employment, industrial relations, social security
and occupational health and safety laws. Doing Business examines government
regulation in the area of employment.
Registering Property
Nepal is ranked 28 overall for Registering Property. Formal property titles help
promote the transfer of land, encourage investment and give entrepreneurs access to
formal credit markets. But a large share of property in developing economies is not
formally registered. Informal titles cannot be used as security in obtaining loans,
which limits financing opportunities for businesses. Many governments have
recognized this and started extensive property titling programs. But bringing assets
into the formal sector is only part of the story. The more difficult and costly it is to
formally transfer property, the greater the chances that formalized titles will quickly
become informal again. Eliminating unnecessary obstacles to registering and
transferring property is therefore important for economic development.
Getting Credit
Nepal is ranked 109 overall for Getting Credit. Firms consistently rate access to
credit as among the greatest barriers to their operation and growth. Doing Business
constructs two sets of indicators of how well credit markets function: one on credit
registries and the other on legal rights of borrowers and lenders. Credit registries,
institutions that collect and distribute credit information on borrowers, can greatly
expand access to credit. By sharing credit information, they help lenders assess risk
and allocate credit more efficiently. And they free entrepreneurs from having to rely
58
on personal connections alone when trying to obtain credit. Three indicators are
constructed to measure the sharing of credit information:
Protecting Investor Nepal is ranked 70 overall for Protecting Investors Companies grow by raising
capital, either through a bank loan or by attracting equity investors. Selling shares
allows companies to expand without the need to provide collateral and repay bank
loans. But investors worry about their money, and look for laws that protect them. A
study finds that the presence of legal and regulatory protections for investors
explains up to 73% of the decision to invest. In contrast, company characteristics
explain only between 4% and 22%. Good protections for minority shareholders are
associated with larger and more active stock markets. Thus both governments and
businesses have an interest in reforms strengthening investor protections. To
document some of the protections investors have, Doing Business measures how
economies regulate a standard case of self-dealing, use of corporate assets for
personal gain.
Paying Taxes
Nepal is ranked 107 overall for Paying Taxes. Taxes are essential. Without them
there would be no money to provide public amenities, infrastructure and services
which are crucial for a properly functioning economy. But particularly for small and
medium size companies, they may opt out and choose to operate in the informal
sector. One way to enhance tax compliance is to ease and simplify the process of
paying taxes for such businesses.
Trading Across Border Nepal is ranked 157 overall for trading across borders. The benefits of trade are well
documented; as are the obstacles to trade. Tariffs, quotas and distance from large
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markets greatly increase the cost of goods or prevent trading altogether. But with
bigger ships and faster planes, the world is shrinking. Global and regional trade
agreements have reduced trade barriers. Yet Africa’s share of global trade is smaller
today than it was 25 years ago. So is the Middle East’s, excluding oil exports. Many
entrepreneurs face numerous hurdles to exporting or importing goods, including
delays at the border. They often give up. Others never try. In fact, the potential gains
from trade facilitation may be greater than those arising from only tariff reductions.
Enforcing Contract
Nepal is ranked 121 overall for Enforcing Contracts. Where contract enforcement is
efficient, businesses are more likely to engage with new borrowers or customers.
Doing Business tracks the efficiency of the judicial system in resolving a
commercial dispute, following the step-by-step evolution of a commercial sale
dispute before local courts. The data is collected through study of the codes of civil
procedure and other court regulations as well as through surveys completed by local
litigation lawyers (and, in a quarter of the countries, by judges as well).
Closing Business
Nepal is ranked 103 overall for closing a Business. The Doing Business indicators
identify weaknesses in the bankruptcy law as well as the main procedural and
administrative bottlenecks in the bankruptcy process. In many developing countries
bankruptcy is so inefficient that the parties hardly ever use it. In countries such as
these, reform would best focus on improving contract enforcement outside
bankruptcy.
The data on closing a business are developed using a standard set of case
assumptions to track a company going through the step-by-step procedures of the
bankruptcy process. It is assumed that the company is a domestically owned, limited
liability corporation operating a hotel in the country’s most populous city. The
company has 201 employees, 1 main secured creditor and 50 unsecured creditors.
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Assumptions are also made about the debt structure and future cash flows. The case
is designed so that the company has a higher value as a going concern—that is, the
efficient outcome is either reorganization or sale as a going concern, not piecemeal
liquidation. The data are derived from questionnaires answered by attorneys at
private law firms.
To sum up from this chapter, the data on regional and Nepal’s foreign direct
investment trends starkly reveal that Nepal, so far, doesn’t figure on the global map.
Nepal has not even met the necessary preconditions for FDI and has a long way to
go to make the environment investor friendly. It is therefore imperative that Nepal
creates the necessary preconditions for an FDI framework. The most important and
necessary precondition is to create “stability in the business environment”, an
investment climate. With stability in the environment other condition must follow.
They are: political stability, policy stability price level stability, foreign exchange
stability and a dispute settlement regime that is stable and transparent.
Above all, it is still important for the low income developing countries like Nepal to
focus more on policy factors. These will include factors. These will include factors
that could integrate them into the global trading system, fiscal and non-fiscal
incentives, and improvement of infrastructure, human resources development, the
creation and nurturing of local entrepreneurship. All of these will have to be
creating consistent with the entrenchment of suitable political and legal framework
and such other conditions for productive investment and private sector participation
in order to set the stage for the process of growth and development.
Only when these necessary and sufficient preconditions are in place, Nepal would
be in a position to attract private capital flow and foreign direct investment.
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CHAPTER V SUMMARY AND CONCLUSIONS
The final chapter focuses on the proceeding of the earlier chapter. In this chapter the
researcher is going to answer the research questions and get conclusions based on
the theory and analyzed the data. Major findings are illustrated which followed by
the conclusion and recommendations based on the findings and experiences of the
researcher.
5.1 Summary of Findings
The above chapter i.e. data presentation and analysis indicates that the Nepal has yet
to appear in the global FDI map. It has not been able to meet the necessary
minimum preconditions for FDI. Nepal has a long way to go to make the
environment investor friendly. A developed stock exchange, full convertibility of
foreign exchange or free mobility of capital and easy repatriation of profits and
deregulations are some of the preconditions for FDI. These preconditions are yet to
be fully achieved in Nepal.
At the same time, political instability and social and political disturbances have
affected the joint venture projects already operating in Nepal. Some of such
undertakings have been withdrawing their capital. For instance, the French
shareholders have withdrawn their capital from the Nepal Indosuez Bank. Similarly,
the Kodak Company and Colgate- Palmolive have closed down their factories at
Hetauda. Many of Indian business executives running garments and carpet factories
in Nepal has also closed down their operations. These recent developments
appearing in the Nepalese business scenario have been a big set back to the ongoing
efforts of the government to attract foreign investment.
The major findings of this study are as follows:
62
1. The country at present lacks any long terms vision with internal security
emerging as major issues.
2. The local investors have to be encouraged and foreign participation needs to
be increased with the provision of adequate incentives for income tax
holidays, repatriation of investment, and if possible, constitutional guarantee
for private property rights.
3. Foreign aid has to be replaced by foreign investment, especially in export
promoting high technology industries.
4. Security and Maoist insurgency was not only the reason for the declining
trend for foreign investment in Nepal.
5. Failure of the government mechanisms for improving degree of
effectiveness in FDI utilization.
6. Natural and domestic resources should be utilized at maximum.
7. Following the global trend and trying to implement them in context of Nepal
is not going to work, as Nepal presents a different economic scenario and
investment environment.
8. Foreign investment in Nepal has developed a wrong perspective among the
people that is dependency and long term it is very dangerous for the growth
and sustainability of the country.
9. There should be division of areas so that there arise no bottleneck for being
landlocked country.
10. Furthermore, the results indicate that most of the causal links are found in
developing countries which experience a higher level of corruption in the
form of excessive patronage, nepotism, job reservations, “favor-for-favors”,
secret party funding, and suspiciously close ties between politics and
business
11. The policy makers, academicians, and politician should face the present
reality of Nepal and do in depths study. PEST analysis to attract and restore
Foreign Investment in the country rather than make only superficial study.
63
Therefore, the main reasons for the poor inflow of FDI to Nepal are unstable
government policies, bureaucratic hurdles, political uncertainties, weak financial
sector and unsupportive investment environment.
5.2 Conclusions
The review of global, regional and Nepal’s FDI and trade reveals clear patterns and
trends. The global environment of FDI and trade suggests a conducive environment
if competitive one. The tremendous growth in the global FDI and trade as revealed
by the data is testimony to this. On the one hand the trend and patterns for Nepal is
erratic, negative and declining, which is contrary to and reverse of the global trends
and patterns. This appears to suggest that the world economy is moving in one
direction and Nepal in other. The reasons are not hard to differentiate. For private
capital flows and FDI, Nepal has yet to create minimum and necessary
preconditions that would attract private capital flows and FDI. To reverse this
balance of trade gap, Nepal must create products and explore niches that have
competitive advantage in the regional and global market. Failure to do so will lead
to further marginalization in a competitive global economy of the 21st century.
Instead of share of the pie of the global prosperity, Nepal may find itself bottom of
the marsh of poverty.
When the research was started, the reason behind declining in FDI was assumed
only the political instability. But after the research, I have found so many reasons as
constraints for FDI inflow in Nepal. As we know political instability is becoming
one of the major constraints to attract FDI in Nepal. And in other hand there are
other so many bureaucratic hurdles which are also becoming one of the major
constraints. Another major problem Nepal is facing is geographical constraint by it
many multinational corporations think it as another hurdle. We know that
transparency and corruption less state can attract foreign investment. Because it
reduces the costs for MNCs but in Nepal it is also becoming a constraint to attract
64
FDI. A good financial system can also play a vital role to establish amicable
environment to attract FDI but in case of Nepal the financial system is not favorable
to MNCs. The cost of financing from Nepalese financial system is higher than other
countries. Another major determining factor to inflow of FDI is Labor laws and
policies where the labor laws are liberal and stable there FDI and MNCs want to go.
Nepal is the one where labor laws are not clear and labor unions are influenced by
the political parties.
While talking about the prospects of FDI in Nepal, It is clear that in a such
transitional and volatile period no bilateral and multilateral projects will come to
Nepal. As we know Nepal is ranked in the poorest index according to “Doing
Business 2009”, World Bank. These indexes are based on 180 countries and Nepal
is ranked as that. In such scenario there is the probability of no more FDI in future.
The government has now constituted the board of investment under the
chairmanship of the Prime Minister. The purpose of this body is to create a amicable
environment in the country including policy and legal reforms for domestic as well
as foreign investment. The safety of investment would also be the prime concern of
this body. The government has also announced that a Monitoring Unit would be
created in the office of the Prime Minister to supervise and monitor the investment
climate in the country.
• The government has announced FITTA, 1992 to attract foreign investment.
The act is not clear on the definition of foreign investment and technology
transfers. It has yet to modify foreign exchange regulations and tax policies.
• Recent political disturbances have even threatened bilateral and multilateral
development projects. With growing political instability, the government has
failed to control it. The disturbances have instead spread throughout the
country. This is a serious problem in attracting FDI
• Social tension and unrest are likely to grow due to rising unemployment
among youths. Market flourishes when there is a peace, not in the midst of
65
war and unrest. Nepalese economy has vast potential to grow. It needs
foreign capital, which in the presence of political instability and social unrest
would shy away.
• The recent approval of the Indian government to allow its citizens to invest
up to IC 600 million in Nepal, without prior approval, has opened new
opportunities for foreign investment areas are yet to be explored.
• There is lack of proper monitoring and supervision of the registered foreign
projects. Most of such projects exist only in name. They have not yet started
their project construction and operations.
• As there is no strict rule to register only foreign companies, any individual
can apply and get registration of the projects in Nepal. Such projects are
never started; the purpose of the individuals is simply to get their stay
extended in Nepal.
5.3 Recommendations
With the limitation of time and resources, this research could not explore the in
depth study of FDI in Nepal. It is seen that most of the scholar and policy makers of
the Nepal follow the global trend and try to implement in Nepal, which is not going
to work. It is found that generally superficial study is done so there is room for in
depth study to attract and restore foreign investment.
Nepal is very viable place for FDI in terms of natural resources and environment. If
we want we can attract more FDI in Nepal, first we must take initiation to establish
the stable political environment, we should focus on good governance as we know
that good governance can establish so many stable variable which helps to inward
FDI. Similarly Nepal is also lacking a smooth financial system. A good financial
system can also help to attract FDI. In Nepal the cost of financing is higher than
other similar countries. It should be taken under consideration. Another important
factor is that our bureaucratic system. As the report published by World Bank i.e.
66
“Doing Business 2009” expressed that it is so tough to establish and run the
business in Nepal in such scenario no investors want to invest and run the business
in Nepal. In one hand we have political instability and in other hand our labor
unions are controlled by the political parties. Though labor unions have to work on
behalf of welfare of labors and to establish the amicable environment to operate the
business, are fighting for the muscle and money and due to this so many
corporations have already closed down. Now we should focus on these factors and
try to make these factors better. Then it is sure that we can be in the countable
position in terms and FDI and economic growth rate.
We should bear in mind that not all types of foreign investment contribute to income
and employment generation. The government should selective about FDI; the
government should not discriminate against domestic investors. The industries using
FDI should also be evaluated in terms of their potential to create employment,
promote exports, transfer technology and encourage human development friendly
activities. The industries having market prospects in India and other SAARC
countries have to be promoted. The extended South Asian Market after the
implementation of SAFTA need to be kept in consideration in providing public
support to new industries.
Only when the above mentioned necessary recommendations are improved by the
Nepal Government, Nepal would be in position to attract more private capital fund
and foreign direct investment.
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