There is no doubt that FDI matters much to a least developed country like Nepal because investment inflows bring not only capital but also advanced technology. By bringing capital and technology, foreign investors can exploit the resources we are endowed with like labour and natural resources. In return, they can export low-cost products to international markets, particularly to our neighbours India and China which are geographically very close and offer immense opportunities due to their market size. As is generally thought, this is one reason why investors should be attracted to pour money in Nepal.

Another attraction which our policymakers are so fond of repeating is that FDI in Nepal can also benefit from the preferential access to our neighbours by establishing factories here and exporting their products. However, it does not make sense any more to hype Nepal’s proximity and the preferential access granted by our neighbours as an advantage. Since globalization has reduced transport costs and trade barriers, it has become easier for international investors to serve foreign markets from their home countries than by establishing manufacturing plants in foreign lands. Therefore, with the Indian and Chinese economies opening up and rapidly integrating with the global economy, the benefits of proximity and preferential access are not truly motivating factors for foreign investors to come to Nepal.

This suggests that the forces which can steer FDI to our country lie elsewhere. Factors such as the size of the domestic market, expected growth rate, cost of production and policy framework are actually more crucial. Ultimately, a congenial business environment is central to the promotion of investment, FDI or domestic. The business environment, therefore, should be politically stable, economically profitable, legally protected and socially acceptable. But instead of guaranteeing these vital things, our policymakers have been focusing on trivial things in their effort to lure FDI.

If we really want an investment boom in our country, we have to encourage domestic investors by giving them top priority. FDI should not be our first choice. This is because there is no dearth of domestic investment in Nepal. Our banking sector is flooded with excessive deposits in search of secure investment opportunities. But there is no environment for investment due to lack of policy consistency. Potential investors are terrified of mood swings in the government, security concerns and bewildering procedures and regulations. Problems of energy supply and labour shortage have only scared investors more. How can we expect FDI to flow into the country when our own investors are not sure of a friendly business and investment climate?

Therefore, it is vital that we set our house in order first. To begin with, all the pending acts and rules that impact directly on the investment environment in the country must be approved. As the private sector has been demanding, the government should not delay in bringing out a new industrial and enterprises act, which is the heart of the investment policy. Implementation of policies relating to labour and economic processing zones has been greatly delayed. The construction of industrial infrastructure should be expedited to cut the cost of operating businesses in the country. If necessary, the government should provide tax and other financial incentives to investors to compensate for the higher cost of operation.

Another important factor is good governance. This is the key to investment promotion in the present context. Good governance cannot be achieved without predictability, accountability, transparency and participation. Predictability depends on clear policies and a legal framework for investment. For accountability, ethical standards for civil servants and a dispute resolution mechanism should be introduced. Availability and access to information is essential for transparency. Regular dialogue between the government and the private sector, such as the recent Nepal Business Conclave, is important for policy advocacy and policy intervention. Only after these controllable factors which are core to a favourable investment climate are guaranteed, external sources of advantage, such as proximity and preferential access to huge markets in our neighbourhood, will make sense.

(Shakya specializes in economics and trade interests of Nepal and LDCs)