I came across news that highlighted that foreign direct investment (FDI) in Nepal has fallen significantly. This is not surprising given the two major crisis that has to be considered while evaluating Nepal’s performance in the year 2072 (2015-2016) – the earthquake and the fuel crisis. Foreign investments are actively sought for the various benefits that they come with – increase in revenue, import of technology, the brand name that comes with it – to name a few, among others. People are also against foreign investments, for the reasons such as the businesses of the host country are rendered weaker as they become unable to withstand the competition and for the uncanny use of resources that the modes of operation of international companies demand.
I questioned myself after having read the news – do I stand for or against increased foreign investment in the country, does it have to be one or the other, or can I stand for both sides of the argument? It was difficult for me to come to a conclusion as I sat reading the theses and the counter-theses that were produced. I was confronted with many questions – do I like it because it appeals to my ‘branded’ sense of consumerism? Do I see it as necessary step to increase the country’s revenue and employment rate? Or, do I find it unhelpful as it increases government’suntethered spending and be a hindrance for Nepali businesses to succeed?
Before digging deeper into these issues, I found it necessary to ponder upon the question – Is the increase or decrease in foreign investment a result of an intentional step taken by the country’s institutions or is it a sign of institutions that are not as strong to decide on and implement necessary regulations around FDI in Nepal? In other words, it may be more fruitful to decide on the effects of FDI on a country’s economy not by its direct or indirect consequences, but by the events or organizations in the country that leads to the increase or decrease in the FDI.
Let us take a few examples to unpack this statement further. FDI in Nepal decreased last year owing to the disastrous earthquake and the five month long blockade, which may have severely discouraged businesses from investing in the country. Therefore, the decrease in FDI was unintentional and was a result of weak political institutions or decisions, not to mention a natural disaster of an unimaginable scale. Nepal has been categorized as a country with untapped potential in many areas, especially in hydropower and tourism. However, the level of corruption in the country, political instability, higher proportion of unskilled workforce in the country, and lack of transparent legal and regulatory systems, and such may have led to decreased FDI for the past few years. In this case as well, decrease in FDI has been the result of weaker institutions and regulations in the country. Apart from 2015, there has not been lack of interest on the part of investors. British and Chinese investors are still interested in investing in the country despite last year’s natural and political crisis. Nevertheless, the country has not been able to make the best use of the increased interests to invest in the country, leading to decreased FDI. Moreover, the decrease in FDI over the past many years cannot be correlated with increase in domestic trade or strengthened national businesses. Therefore, one cannot help but conclude that decrease in FDI in Nepal is a result of weakened institutions. Therefore, it is difficult for anyone, even those who are against increased foreign investment, to claim that decrease in FDI, due to such factors, is beneficial for the country.
In case of an increase in FDI in the country, for instance in 2012, when FDI in Nepal reached an all-time high of 9195.40 NPR, one has to really dig deep behind the reasons for the increase in order to determine whether the increase in actually beneficial or harmful for the country. Again, the increase in the FDI may have been a sign of weakness on the host country’s part. FDI is more likely to foster in those economically backward countries that has weak markets. In such scenarios, it may be easier for foreign investors to operate without relying or competing in local financial markets or amidst legal arrangements. An increase in the FDI in the country may also be the result of adoption of free market policies, which may not be beneficial for many underdeveloped or developing countries.
It is difficult to negate the well-proven argument that increase in FDI is generally beneficial for country with poor or deteriorating economy. However, a nation also has to be cautious – an increase in FDI should not lead to further deterioration of a country’s financial and legal institutions and to economic colonization.