Ministry of Commerce And Supplies - Enhanced Integrated ...

Chapter 5Investment EnvironmentN T I S20105.1 IntroductionInvestment—foreign or domestic—and trade are closely correlated. In particular, investment can bring accessto foreign markets and global value chains, improve productivity through new technologies and managementskills, and provide the much-needed capital to implement investment projects. This explains the focuson investment climate and investment promotion in this chapter. Specifically, this chapter identifies andrecommends concrete actions to enhance Nepal’s investment and trade position. It does so by focusing onkey macro-level investment climate constraints as well as investment promotion issues at institutional andpolicy level. The chapter draws, in part, on the wealth of existing analyses, documents, and action plansprepared in recent year and focusing on these topics.The most obvious relationship between trade and investment promotion strategies is that new investmentprojects may give rise to increased exports from the host location. This link is particularly strong whentargeting foreign investments in export-oriented industries. Furthermore, foreign investment may give rise tolocal sourcing and increased inter-firm trade at local level, thus inserting Nepalese companies in global valuechains. Even though trade can be a substitute for investment and vice versa, earlier studies indicate that thesequence of causality in Nepal seems to run from investment to trade. 1 This is an important observation as itunderlines the importance of creating an attractive investment climate and effective investment promotionregime in Nepal as a means for supporting the trade agenda.Nepal is among the more liberalized economies in the South Asia region. The overall legal and policy frameworkin relation to trade and investment is not restrictive. In fact, the 1992 Industrial Policy, including the ForeignInvestment and Technology Transfer Act 1992 and the ‘single window policy’, gave priority to investmentpromotion as a means to accelerate industrialization of Nepal. To comply with its WTO commitments, theGovernment further liberalized the investment regime and opened up service sectors to foreign investors inDecember 2005. However, it has been slow in implementing those policies, thus delaying growth opportunitiesin this area. At the moment, these policies are being updated to further enhance the policy and institutionalframework for investors in Nepal.5.2 Recent Investment PerformanceIn spite of the visible and important steps taken in the last two decades to improve the trade and investmentpolicy framework, Nepal’s investment performance has been poor. Despite the introduction of more liberalinvestment and trade policies in the country, the stock of foreign direct investment (FDI) stood at a meagre1.0 per cent of GDP in 2008 and 0.2 per cent of gross fixed capital formation in 2007, and it has been unableto serve as a catalyst for economic growth. 2FDI levels in Nepal are among the lowest in the region and among the lowest of all Landlocked Least DevelopedCountries (LLDCs). With an average of US$1.00 FDI per capita for the period 2000-08, Nepal’s FDI flows arewell below the average of US$28 for all LLDCs in the same period. Furthermore, Nepal’s FDI position hasdeteriorated in both absolute and relative terms compared to the previous decade (1990-99) when theaverage per capita FDI inflow in Nepal stood at approximately US$3.0 per capita (compared to an average ofUS$8.00 per capita for all LLDCs). Whereas LLDCs as a group more than tripled their average per capita FDIinflow between 2000 and 2008, average FDI inflow in Nepal went down from of US$3.00 to US$1.00 per capitain the same period! In 2008, FDI inflow in Nepal stood at US$1.0 million and a net disinvestment in FDI wasrecorded in the years 2000, 2002, 2004, and 2006.1Trade and Investment Linkages and Coordination in Nepal: Impact on Productivity and Exports and Business Perception; Asia-Pacific Researchand Training Network on Trade, Working Paper Series, No. 52, February 2008.2World Investment Report 2009: Transnational Corporations, Agricultural Production and Development, UNCTAD 2009.NEPAL TRADE INTEGRATION STRATEGY 2010BACKGROUND REPORT147