Developing countries like Nepal particularly need foreign direct investment (FDI) to push industrialization for economic development. It was after the promulgation of Industrial Policy and Industrial Enterprise Act in 1987 that Nepal began to attract FDIs. Since then, India and China have been dominating the FDI inflows in Nepal.
China and India's domination can be attributed to these countries' proximity to Nepal. India’s contribution towards the total amount of FDI in Nepal was significantly higher as compared to China until 2012 when the latter surpassed the former to become the number one FDI source for that year. Indian investors virtually occupied the top position unrivaled for two decades before that. In the Fiscal Year 2005-06, the southern neighbor's FDI commitment stood at NRs 1.56 billion – almost nine times higher than China’s NRs 0.18 billion.
Chinese investment initially concentrated in the hospitality and tourism businesses in Nepal's capital, primarily resulting from a surge in tourist arrivals from China. Over the past few years, however, Chinese investors are escalating their investment in other larger businesses. Their focus is slowly but surely shifting to Nepal’s hydropower, infrastructure and agriculture sectors. They are now investing in hospitals, hotels, construction and airports. In the fiscal year 2012-13, Chinese FDI commitment in the energy sector rose to NRs 4.23 billion, an amount that was crucial in overtaking India's top position. But interestingly, India still leads China when it comes to investments in the energy sector with NRs 5.94 billion worth of commitments. A memorandum of understanding signed between Nepal Electricity Authority (NEA) and China’s Three Gorges Corporation (CTGC) in 2012 to develop the 750-MW West Seti Project is yet to be implemented and its operationalization can give China the headway in Nepal’s energy sector.
Although Indian monopoly over FDI inflows in Nepal began to wane after 2012, its MNCs and local companies continue to be among the major players in the country’s economy. Among these are Asian Paints (Nepal) Pvt. Ltd., Berger Jenson and Nicolson (Nepal) Pvt. Ltd., Nepal SBI Bank Limited, Everest Bank Limited, Surya Nepal Pvt. Ltd., Dabur Nepal Pvt. Ltd., Unilever Nepal Ltd., Varun Beverege Nepal Pvt. Ltd., United Telecom Limited, Manipal Education and Medical Group Pvt. Ltd. Some of these companies are also among the highest tax payers. In the fiscal year 2014-15, India regained its position as number one source of FDI in Nepal. But it is also true that its investment has slowed down when compared to countries like China and South Korea. Growing political tensions between Nepal and India could be one reason for the slowing investment.
The Chinese company Hongshi Holdings Group and Shivam Holdings Nepal signed a joint venture agreement to set up a NRs 30 billion cement company in 2015. It is one of the largest FDI from China and the third largest FDI in cement industry after the Nigerian based Dangote Group and Reliance Cements of India. China is also the second largest source market for Nepalese tourism sector after India.
Despite its current political instability, Nepal is still an attractive destination for certain investors, especially Indian companies due to physical and cultural proximity. For retaining these and encouraging others to venture in, political differences between the two countries should be put to rest and focus should be on making investors aware of opportunities in Nepal. Nepal can immensely benefit from the investments from world’s two giant economies that are seeking to expand their influence in South Asia. Therefore, Nepal needs to develop an investment friendly environment to attract investors from both the countries.
For this, the government needs to seriously and promptly work on facilitating the investors on issues related to availability of energy, investment subsidies, security and transportation. There must be provision of a strong legal framework which can create a win-win situation for both investors and country. Government agencies, private sector organizations and other stakeholders should work in collaboration with each other for effective implementation of various policies and provide realistic information and assistance to potential investors.
(Rai is a Masters’ student of International Affairs at TU and is currently working as Research Assistant at Asian Institute of Diplomacy and International Affairs (AIDIA))
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