At the Global Private Equity Conference in Washington, DC last month discussions ranged from geopolitics and the global economy to investing across borders to releasing $150 trillion of blocked assets in emerging markets—among many other interesting topics that delved on issues of governance, climate change and impact investing. At the same time, halfway around the globe, back home in Nepal, new rules had been put in place that raised the barrier-to-entry for foreign direct investments from Rs5 million to Rs50 million. The logic behind the tenfold increment seems to escape everyone conversant in dealing with foreign direct investments (FDI), especially at a time when the FDI commitments have fallen by 68 percent. According to the fiscal year 2018-19 Economic Survey, the total FDI commitments were Rs34.91 billion last year. In the same period this fiscal year, the amount has dropped to Rs11.18 billion.  Furthermore, with the newly enacted Foreign Investment and Technology Transfer Act (FITTA) expanding the negative list, and adding primary agriculture and dairy to its prohibitive list for foreign direct investments, the hope for an increase in investments coming to Nepal seems unlikely. Ironically, the FITTA, which replaces an act of the same name from 1992 was passed around the same time the Investment Summit 2019 took place, and integrated agriculture was one of the showcased attractions at the Summit. There seems to be a belief among policymakers that FDI is only important for capital injection in large projects and this thought process totally disregards the intangible benefits made by investments—especially the smaller ones.

Do smaller foreign direct investments crowd out local investors?  In Nepal, the answer would be definitely not. With the liquidity crisis in the banking system, the low-risk appetite of banks towards providing loans without collateral and huge interest rates in the curb market—an unofficial market for trading stocks and shares, the missing middle has been addressed by small investments through FDI in recent years. Furthermore, these small investments have been beneficial by pumping productivity and enhancing worker skills along with introducing international best practices and technology to the equation. Small investments have the ability to grow and become large. Access to finance has emerged as the biggest obstacle to Nepali firms according to a recent survey jointly done by The Milken Institute and Nepal Stock Exchange. The survey noted that small and medium-sized enterprises were the hardest hit due to lack of capital.

No doubt, the number of small investors in the market is not commensurate with the volume of investments made compared to the figures of larger investments. However, the employment that these small companies have provided is much greater than the larger investments. According to the Department of Industry data, there were 39 large companies (investments over $500,000) with a total investment of about Rs52 billion ($468 million) and 39 small companies (investments less than $500,000) with total investments of Rs45.66 crores ($41 million) last year. The large companies in aggregate employed 4,091 people directly and the small companies in total employed 9,860 people. There is no further data available on other parameters by which we may have calculated the impact these investments have, but one can surmise that the indirect employment and other benefits to the value chain would be far greater in benefiting a post-conflict fragile nation like Nepal.

Majority of the investments, according to the Department of Industry data, comes from China and India. Last year 80 percent and 9 percent invested in large companies were Chinese and Indian investments respectively; 52 percent and 14 percent invested in smaller companies were Chinese and Indian investments respectively.  The United States with 32 smaller investments and 4 large investments comes third, followed by Japan (90 percent in small investments), France, South Korea, Sweden, UK and the Netherlands. From 2013, Chinese investments have diverted gradually from smaller investments to larger ones: from 37 percent of total investments in 2013 to 88 percent of the large investment segment in the fiscal year 2017-18. The data shows that by limiting the smaller investors, the share of the diverse international pie will gradually shrink in Nepal and Chinese investments will be dominant in the FDI scenario.

Many countries in the region have set entry limits to FDI at $50,000. Tried and tested to their economic development goals for many years, the same minimum had also been incorporated in Nepal. However, this has now suddenly been changed. As the world moves towards an integrated and digitised 21st century, smaller investments in information and communications technology will continue to drive new ideas and innovations. Along with these smaller investments comes the much-needed introduction to new technologies and added know-how.  Not only is Nepal in need of such technology transfers, but we also need to demonstrate to foreign investors, through investments in smaller projects, that their investments are safe, liquid and provide a good return. This needs to be demonstrated before anticipating larger ones where the risk appetite to invest would be much lower. The onus is on us. Arbitrary policy changes do not bid well for investors that are looking for stability across regulatory lines. As much as sound political and economic factors are mandated for foreign investment, mature policy stability is equally expected.

Pandey is the CEO of Business Oxygen Pvt Ltd.