Lately, the world system seems to be going through uncertainty. Issues and events such as the Russia-Ukraine conflict, the India-Pakistan conflict and the latest Israel-Iran conflict have affected the global economic system as well as world politics.

New challenges such as internal conflicts within states, geopolitical tensions, poverty, hunger, climate change and artificial intelligence have affected every nation in one way or another.

Nations need to combine adequate financial resources, clear legal systems, sustainable political leadership and skilled human capital to move forward on the journey to prosperity with long-term solutions to these challenges. As Nepal continues to implement the sustainable development goals, domestic resources alone are not enough, so the need for foreign direct investment seems to be increasing.

concept 

Foreign direct investment (FDI) is an investment made by a person, company or organization of a country with the aim of gaining long-term benefits and control over an enterprise located in another country. Through it enters not only monetary capital but also knowledge, technology and management skills. The historical background of FDI starts from the ancient commercial relations, the reconstruction efforts after the Second World War, the flow of American capital to Japan and Europe and the recent privatization and liberalization campaigns have seen a radical change in its trends. The dramatic advances in

technology, the ease of transportation and communication, and the development of international legal mechanisms have expanded FDI globally. After the Second World War, the expansion of international trade, the rise of multinational companies, liberalization policies and economic integration processes have institutionalized and promoted FDI globally.

International organizations including the United Nations Conference on Trade and Development have promoted this concept by linking it with clarity, transparency and sustainable development. FDI plays an important role in increasing production capacity, technology transfer, human resource development and expanding access to international markets. FDI also helps in integrating the domestic economy with the world market.

World Context and Trends

In the world, especially with the globalization of the 1980s, FDI flows have increased rapidly. In terms of sectors, infrastructure, green energy, digital services, health and agriculture sectors are prioritized. South and East Asia, Africa and Latin America are emerging as FDI destinations.

According to the 2023 data of the United Nations Conference on Trade and Development, about 41 trillion US dollars have been invested as FDI in the world. Which is about 36 percent of the global gross domestic product. Global FDI inflows in 2022 were about USD 1.3 trillion. FDI flows are high in countries like USA, China, Singapore and India. The TRIMS Agreement of the World Trade Organization, bilateral and multilateral investment agreements and the OECD's sectoral guidelines have played an important role in the assurance, transparency and dispute resolution of FDI flows.

Especially after the Second World War, the advancement of technology, transportation and communication, the adaptation of the tax system and the changes in the international political structure seem to have accelerated the expansion of FDI. Climate, energy sector, digital technology, food security and other sectors are receiving investment priority in the last decade to attract FDI, most of the countries have adopted measures such as construction of investment-friendly legal structure, tax and customs exemption, implementation of one-door service system, establishment of special economic zone (SEZ). 

Legal foundations

Nepal has tried to make various policy, legal and institutional reforms to attract foreign direct investment. Especially after the political change of 2046, it was necessary for Nepal to attract foreign investment in its areas of potential in order to join hands with the campaign of privatization, economic liberalization and globalization that started all over the world.

Foreign investment and one-way policy, 2049, Foreign investment and technology transfer act, 2049, Privatization act, 2050 and other initial policy and legal provisions until today, foreign direct investment has also been provided with constitutional protection.

Timely policy, legal and organizational arrangements can be found to have undergone extensive and empirical improvements. Public-Private Partnership and Investment Act, 2075, Foreign Investment and Technology Transfer Act, 2075, Industrial Business Act, 2076, Forest Act, 2076, Environment Protection Act, 2076, Nepal Rashtra Bank Act, 2058 etc. have been provided with various provisions for facilitating foreign direct investment.

Investment Board, Industrial and Investment Promotion Board, Department of Industry, Provincial Investment Authorities are working to develop Nepal as an excellent investment destination by attracting foreign direct investment institutionally.

Opportunities and challenges of FDI

There are many areas where FDI flows in Nepal. The legal basis of project implementation is becoming stronger through public-private partnership from the union, state and local levels. With the activation of the Investment Board Nepal, an environment has been created to advance strategic projects in an institutional manner.

Hydroelectricity, information technology (areas with special potential such as digital exports and data centers), agriculture and food processing, tourism (cultural and adventure), green economy (electric vehicles, solar energy) have attractive prospects for foreign investors. Likewise, regional cooperation platforms such as BBIN, BIMSTEC, BRI have provided Nepal with opportunities for strategic development in transportation, energy trade and network expansion.

However, despite the target of raising the ratio of total foreign investment to 3 percent of GDP, the ratio is limited to only 0.2 percent in the financial year 2079/80, which shows the clear gap between Nepal's expectations and actual achievements. This indicates a low level of foreign investment and a policy challenge.

The Sixteenth Five Year Plan currently under implementation has given special priority to FDI. The plan includes the goals of mobilizing foreign investment through public-private partnerships to meet existing capital and technology needs, making Nepali diplomatic missions abroad more active for promoting FDI in Nepal and increasing export trade, attracting multinational companies to invest, restructuring foreign investment for sustainable management of financial resources, and developing FDI as an alternative investment source. 

Similarly, various measures have been proposed for FDI attraction and management in the 2082/83 annual budget. It has been arranged that 'Anchor Investment' policy will be adopted to increase the flow of investment in the national priority areas. which aims to ensure initial investment in large infrastructure projects. In order to attract foreign investment in the information technology sector, the proposal for a feasibility study to establish a data center in the Madhyapahari region seems to try to coordinate investment with infrastructure development.

Moreover, a provision to allow the operation of 'hedging services' to manage foreign exchange risk, which has been a challenge for foreign investment in Nepal for a long time, has also been proposed in the budget. This provides the basis on which qualitative improvement can be expected along with the quantitative growth of foreign direct investment.

But along with these possibilities, there are also many challenges. The process of obtaining necessary permits for investment still tends to be complicated and slow. Political uncertainty and policy instability also seem to be becoming risky for investors.

Due to the lack of coordination within the federal structure, there is a bottleneck in the implementation phase of investment. Fluctuations in foreign exchange and lack of clarity in the process of repatriation of profits have become a source of discouragement for foreign investors. It seems that some domestic industries are still suspicious of foreign investment for fear of competition. Lack of infrastructure, especially transport and energy infrastructure, as well as delays in the digital transformation of government systems and the ambiguity of environmental and forest tenure are additional problems. Which seems to create a barrier in the flow of FDI.

Solving these challenges requires a clear, strategic and long-term approach. Along with expanding the automatic approval system, the full implementation of the digital single door system will make the investment process smooth and transparent. There is a need to strengthen investment promotion diplomacy by reviewing existing bilateral investment agreements. Establishment of FDI hedge funds can be an effective option to mitigate the risks of foreign investment. Development of sectoral investment mapping will help attract targeted investment. Trust can be built by collaborating with anchor investors and institutional investors. Also, using diplomatic missions abroad as a mechanism for investment promotion will strengthen the image of Nepal as an investment destination in the international world. Ultimately, it is necessary to develop a reliable project finance mechanism by empowering the project bank for the systematic management of investment projects.

Conclusion

In today's global interconnected and interdependent era, FDI has become an indispensable basis for economic growth and prosperity. It provides an important opportunity for developing countries to improve their economic status through productivity enhancement, job creation, technology transfer and capital transfer.

There is no doubt about the fact that the country's dream of prosperity will materialize rapidly if it is possible to attract direct foreign investment to the country's existing multifaceted resource availability and needs by objectively identifying the areas of need. One does not have to go far to find a vivid example of this, our two great neighboring nations stand before us with a considerable store of experience and learning.

But since FDI is not only a mine of opportunities but also a bearer of some complex challenges, it seems necessary to strategically manage aspects such as the external flow of profits that come with foreign investment, resources and inequality of foreign monopoly and technology transfer that can be seen in the market. For a developing and geographically strategic country like Nepal, comparative advantages from FDI can become a strong basis for turning these challenges into opportunities.