Outbound FDI : Can Nepali Businesses Go Global?

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Cover Story
 
--By Siromani Dhungana
 
A 50-year old law entitled ‘Act Restricting Investment Abroad, 1964’ is still in force in Nepal which stops Nepali citizens from investing in a foreign country. The existing fear is that the country’s economy will suffer if Nepal allows outbound FDI. But many evidences suggest that despite this law, Nepali people are investing in different other countries through one channel or other. And such evidences are becoming more visible. Policymakers are in dilemma while the business community is also largely divided on the issue. However, the debate on legitimatizing outbound FDI is heating up in recent times. What impact will it have on a country like Nepal where the national economy is not strong? Will it create BoP deficit as many fear? What happens if all businessmen start to set up industries in foreign countries which have better policy stability and lesser labour problem? New Business Age tries to analyse some of these major concerns:
 
It is not surprising that Nepali businessmen, like many around the world, want to be competitive and set their footprint in the global market. But existing policies are keeping their dreams from being materialized. The government remains skeptic and reluctant to allow outward FDI citing probable impact on the national economy.
 
However, zero capital mobility in and out of a country cannot be expected. Many evidences suggest that the investment is going abroad through one channel or the other. Any state should allow aspiring businessmen to invest anywhere globally because this will help the currency get its true value recognized, Dr Chiranjibi Nepal, Economic Advisor to the Prime Minister claims. “Investment is a must to increase the value of the money. The government should open up avenue for outward FDI to acknowledge this fact.”
 
Evidences also show that the flow of money cannot be barricaded by any laws or policies. For instance, Nepal, according to a report of Global Financial Integrity (GFI), lost a total of $ 8.01 billion between 2001 and 2010 due to illicit capital flight. It means that on an average, $ 801.4 million (Rs 70.39 billion) went out of Nepal annually during that period of almost a decade. 
 
 
GFI’s another report entitled ‘Illicit Financial Flows from the Least Developed Countries: 1990-2008’ had put Nepal’s annual capital flight at $ 480.4 million. Based on the amount of capital flight, Nepal has been ranked 58th among 143 countries surveyed and sixth among the Least Developed Countries (LDCs) for exporting funds illegally.
 
The report clearly points to the huge illegal financial flows from Nepal and it is high time that the government addresses this problem without making any further delays, Nepal opined. “The government should legalize outward FDI to keep the record of outflow of financial transaction in the formal system,” he said.
 
Existing Laws Related to FDI
 
Foreign Investment and Technology Transfer Act – 1992
Foreign Investment and Technology Transfer Act (FITTA) – 1992 & Industrial Enterprises Act - 1992 are the two most important laws for the promotion of industries in Nepal. These two acts are highly encouraging acts for attracting FDI or Joint venture investments in Nepal. 
 
FITTA includes provisions related to facilities and concessions. This Act treats foreign investors as equals to local investors and provides them same incentives and facilities.
 
The Act is also very positive on providing visa to foreign nationals. The Act has ensures 6 months non-tourist visa to a foreign national if he/she want to conduct survey, study or research with the objective of making investment in Nepal. 
 
After that if he or she makes investment or establishes an industry, the investor (along with the dependant family members) is granted business visa until the investment is retained. Similarly, residential visa is granted to a foreign investor and his family if s/he makes an investment of one hundred thousand US dollars in one business. All these are highly encouraging statements. However in actual practice, the investors face various problems, time and again. 
 
FITTA and IEA also offer some fiscal incentives including income tax relief. But the amended Finance Act and New Income Tax Act have withdrawn all such incentives, which is considered a controversial decision. Several amendments to FITTA through the Finance Act of 2001 and the progress made in this regard helped the nation in its efforts to gain membership of WTO, SAFTA, and BIMSTEC, but these amendments too are not enough, say investors.
 
Industrial Enterprises Act - 1992
The IEA has  one-window committee (OWC) provision, which is coordinated by the director general (DG) of Department of Industry (DoI) and has DGs of Customs, Inland Revenue, Value Added Tax (VAT) and Commerce as well as representatives from central bank, Federation of Nepalese Chambers of Commerce and Industry (FNCCI) and the government.
 
Dr Chiranjivi NepalNeed: A Positive Beginning
Nepal's legal system begins from the word restriction, which, according to many, rightly articulates the government’s mind-set. A 50-year old law entitled ‘Act Restricting Investment Abroad, 1964’ is still effective in the country. The law was introduced to restrict Nepalis from investing abroad. 
 
We need a fresh and positive beginning, economist and former chief secretary Dr Bimal Koirala told New Business Age. “The government should reform existing laws to facilitate businessmen to invest in foreign countries instead of imposing restriction.” The fear among policymakers is that what happens if businessmen do not bring back money to the country. And, the answer to this fear is to set up effective monitoring bodies that will keep record of every businessman who invests abroad, he suggested. 
 
Given the low trade volume of the country and frequent fluctuation in the Balance of Payment (BoP), some experts advise against allowing Nepali businessmen to invest abroad. Koirala slams such opinion claiming it to be an out-dated concept. 
 
Times have changed and the government has to realize this fact. The government should understand and accept the new liberalized and globalized world and business scenario, Koirala opines.
 
Act Restricting Investment Abroad, 2021BS (1964)
 
Article 3 Restriction on making investment abroad: 
 
(1) No one shall make any kind of investment abroad after the commencement of this Act.
 
(2) Notwithstanding anything contained in sub-section (1), in relation to any specific kind of investment, the Government of Nepal may, by a notification in the Nepal Gazette, grant exemption from the restriction set forth in that sub-section, and specify the kind, extent, period of the investment so exempted and other necessary terms pertaining thereto.
 
Past Initiatives
Nepal started systematic initiative of attracting FDI in 1981. The Sixth National Plan (1980/81-1984/85), for the first time, incorporated a policy for utilizing foreign capital and technology as a useful supplement. The Plan mentioned that foreign investment and technology was primarily required in large-scale industries and mineral industries. Since then, the government continued revising policies related to inward FDI. Foreign Investment and Technology Transfer Act was introduced in 1992 and amended in 1996 in line with open and liberal economic policies. But outward FDI-related provisions remained unchanged. 
 
Recently, the government has started fresh initiative to review the policy. Foreign Investment Policy 2014 has been prepared and consultations with stakeholders are underway on it, according to Ministry of Industry.  However, business community blames the government for not being proactive to introduce new policy.  
 
Policies that Restrict Outward FDI
Act Restricting Investment Abroad, 2021(1964): This law, as its name suggests, restricts any Nepali citizen from investing outside of Nepal. While this may be an old Act, it is still valid in the country. It defines restricted investments as foreign securities, partnership with foreigners, foreign bank accounts, owning house and land in a foreign country and any foreign investment in cash or kind except as prescribed by the government. This law has severely affected outward FDI as Nepali citizens cannot freely invest outside the country. Despite a provision within the Act that leaves a space for aspirant businessmen to invest abroad by taking approval from the government, nobody has received such approval. 
 
Foreign Exchange Regulation Act: This act does not allow Nepalis to open bank accounts in foreign countries if the money is earned in Nepal. Nepalis can open bank account abroad only if they earn money outside Nepal. But the account holder should inform Nepal Rastra Bank about the account. 
 
Changing Times but Unchanged Laws
The existing laws were formulated at a time when entrepreneurship in Nepal was at a primitive stage and Nepali businessmen did not have sufficient capital and expertise to invest abroad, said Basudev Adhikari, Director of Nepal Rastra Bank. 
 
Nepali business community has come a long way since 1964. “For instance, now we have a Forbes-listed billionaire that shows that our businessmen have enough capital to invest in various sectors,” said Adhikari. Competitiveness of Nepali business sector has tremendously increased over the last few years. Lawmakers should reform existing laws considering the changed scenario, he added. The prevailing laws have failed to prevent outflow of capital from Nepal anyway. 
 
Anup Bahadur MallaNeed for Caution
Still the policy of allowing Nepalis to invest abroad cannot be introduced without caution. The most challenging job for the government is to set the ceiling for outward FDI, opined Anup Bahadur Malla, executive member of FNCCI. The government should not introduce any law haphazardly, he suggested. Meticulous studies are required even when formulating laws related to inward FDI, he said. 
 
There are flaws in inward FDI policies as well which have created some adverse impact on the economy, according to him. Foreigners in Nepal are venturing into small businesses which have nominal contribution to the national economy, he argued. For instance, Chinese nationals, according to him, have been replacing Nepali small entrepreneurs from Thamel and other places but their contribution to the national economy and employment generation is negligible. From this, the government should learn that both inward and outward FDI can be harmful if laws are formulated without rigorous study, he claimed.
 
Along with fixing ceiling, he claims identification of competitive sectors is the most challenging job for the government. It should initiate debate on maximum investment-ceiling limit on outward FDI, and identify the sectors where Nepalis can take competitive advantages, he suggested. 
 
Defining FDI
Foreign direct investment (FDI) is defined as an investment involving a long-term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate enterprise or foreign affiliate). FDI implies that the investor exerts a significant degree of influence on the management of the enterprise resident in the other economy. 
 
Such investment involves both the initial transaction between the two entities and all subsequent transactions between them and among foreign affiliates, both incorporated and unincorporated. FDI may be undertaken by individuals as well as business entities.
 
Flows of FDI comprise capital provided (either directly or through other related enterprises) by a foreign direct investor to an FDI enterprise, or capital received from an FDI enterprise by a foreign direct investor. FDI has three components: equity capital, reinvested earnings and intra-company loans.
Equity capital is the foreign direct investor’s purchase of shares of an enterprise in a country other than its own.
Reinvested earnings comprise the direct investor’s share (in proportion to direct equity participation) of earnings not distributed as dividends by affiliates, or earnings not remitted to the direct investor. Such retained profits by affiliates are reinvested.
Intra-company loans or intra-company debt transactions refer to short- or long-term borrowing and lending of funds between direct investors (parent enterprises) and affiliate enterprises.
(Source: World Investment Report 2012, UNCTAD)
 
 
Outbound FDI: An Open Secret 
Policies on outward investment have been seen as a screening device to restrict the outflow of capital from the country. But it is an open secret that Nepalis have already started investing abroad. 
 
Chaudhary Group (CG), a company owned by Forbes-listed billionaire and renowned industrialist Binod Chaudhary who has invested abroad through Cinnovation Group, a multi-dimensional conglomerate established in 1990 headquartered in Singapore. The company was created to take CG’s business interests global. Currently, it is expanding its footprint in global market. 
 
Business leaders and government officials hesitate to give opinion regarding outflow of capital from Nepal in public.  But they privately confide that there are many instances where the investment is going abroad through one channel or the other. India has been one of the easiest destinations for Nepali investors to invest, one businessman told New Business Age. “Businessmen channel capital to India through their relatives and acquaintances living in India,” he disclosed. More than a dozen of reputed Nepali business houses have invested in India in one or other way and even government officials are aware of this fact, he claimed. So, it is better to legalize outward FDI to control informal outflow of money. 
 
Dr Bimal KoiralaDrives of Outward FDI
A question worth asking is: what triggers outward FDI from Nepal? There is not an easy answer. Generally, two major drives can be analysed: market-seeking drive and resource-seeking one. Nepali businessmen want to go outside country for market-seeking purpose, said Pradeep Jung Pandey, president of Federation of Nepalese Chambers of Commerce and Industry (FNCCI). 
 
Businessmen eye foreign market when their businesses are saturated in the home country, he said. It can thus be said that the drivers of outward FDI from Nepal are largely determined by market-seeking factors with little role played by policy measures. 
 
Political instability, labour unrest and terror created by conflicting parties might have triggered businessmen to invest abroad during a decade-long conflict, he said. But the situation has changed now and businessmen do not want to go global if there is prospect of good business in Nepal. 
 
Anti Outward FDI Logics
1. Positive Financial and Macro Economic Indicators: Experts say that the overall economic indicators including economic growth should be in positive direction and should be stable to allow Nepalis to invest in foreign country. Given Nepal’s volatile economic situation, some economists advise not to allow outflow of the capital. 
 
2. Investment Climate: Why do our businesses want to go outside though market in Nepal has been growing? An easy answer is that there is no investment climate in the country. It is not possible to open up outward FDI without ensuring investment climate in the country. Our own country is in dire need of investment in almost all sectors and it is a matter of concern as to why businessmen are lobbying to open up outward FDI, an economist questioned. Several structural bottlenecks and supply-side constraints are impacting the investment climate in Nepal. Tough reform measures have to be formulated before bringing policies related to outward FDI, he suggested. 
 
 
3. Trade Deficit: Nepal has been witnessing a whopping trade deficit year after year. Nepal imports essentials goods and services by drawing on its foreign currency reserves, which are primarily contributed by remittances. Many experts fear that foreign currency reserve may deplete if the country allows businessmen to invest aboard. 
 
4. Distrust on Businessmen: Another crucial problem is trust deficit. The government is not certain that businessmen who invest abroad will sincerely send their profit back to the country. “The country that does not trust its own businessmen cannot make progress. The environment of trust should be built between business community and the government that will facilitate the process of bringing policies related to outbound FDI,” opined CNI vice president Haribhakta Sharma.
 
 
5. Competitiveness: According to Global Competitiveness Report released by World Economic Forum, Nepal ranked 117 among 144 economies in 2013-14. In order to succeed in the global business, businessmen should be competitive. But, can Nepali businessmen be competitive when they have not been able to show their competitiveness in domestic front, questioned Dr Chiranjibi Nepal. He suggests that the government should provide competitive business environment.
 
6. Absence of Entrepreneurial Attitude: Entrepreneurship needs innovative ideas and risk taking skills. Given their low entrepreneurial activities in homeland, many argue that the business community in Nepal still lacks entrepreneurial attitude. Most of the businessmen are involved either in hereditary business or in service sector or trade activities. These traits are not sufficient to compete in global market and most of them do not have entrepreneurial bent of mind, claims an expert. “This fact should be kept in mind while formulating policies.”
 
7. Poor Performance of Manufacturing Sector: Nepal’s manufacturing sector is in weak state. The country cannot create much employment in absence of manufacturing activities.  On the other hand, the country relies heavily on imports to meet daily consumer needs. In such circumstance, opening up outward FDI without improving the performance of country’s manufacturing sector might be suicidal, says a FNCCI member requesting anonymity. 
 
8. Fluctuation in BoP: Generally, businessmen prefer to invest in a strong economy where their capital is safe. If allowed to invest abroad, Nepali businessmen may make majority of their investment in the countries which have strong economy. Currently, remittance has helped maintain Nepal’s Balance of Payment (BoP). If in the future, inflows of remittance drops and at the same time businessmen take capital abroad, there will be severe BoP crisis. This is why the government is still reluctant to introduce outward FDI-related policies, an official at Finance Ministry said.
 
Rhetorical Logics and Laxity of the Government 
Some experts vocally criticize the government’s laxity in creating business friendly environment and improve overall macroeconomic scenario. For how long can Nepal restrict businessmen from investing abroad, questioned economist Dr Posh Raj Pandey. The government and experts who do not favour the idea of opening outward FDI often repeat the same rhetorical logic but do nothing to improve the scenario, he said. 
 
The government is literally idle in terms of bringing any policy to foster an environment favourable for investment. Presently, the government is not taking any risks as the remittance influx has helped maintain economic stability. But the same situation cannot continue forever, according to him. He said that the government should not always repeat same logic to restrict outward FDI. If our government wants to promote economic prosperity, it should be ready to take risks and formulate smart policies, he suggested.
 
FDI and Mobility of Money 
Numerous positive aspects of outward FDI are overshadowed by a few negative ones, said Dr Bimal Koirala, economist and former chief secretary. Outflow of capital also helps create more opportunities to lure inward FDI and Nepali businessmen come back to the home country with more expertise and skills which will ultimately contribute to the domestic economy, according to him.
 
The mobility of money in and out of a country does not stop simply by laws. A state should facilitate in the continuity of the mobility of money because if the movement of money slowsdown it will depreciate the value of currency. Investment, regardless of the frontiers, is a must to increase the movement of the money. Acknowledging the fact, the government should open up avenue for outward FDI, said Dr Chiranjibi Nepal.
 
Pragmatic Approach
Some experts suggest the government to allow Nepalis to invest abroad but only in competitive sectors. According to economist and former finance secretary Rameshore Khanal, the government should identify competitive sectors and should allow businessmen to invest only in those sectors. Some of these sectors, according to him, are:
1. Tourism (eco-tourism, home stay)
2. Adventurous sector (climbing, rafting)
3. Hospitality sectors: Hotel and restaurant (antique hotels like Dwarika)
4. Banking/insurance
5. Construction
 
Way Forward
The government should carry out empirical studies on the effect of outward FDI on domestic economic activities. Before formulating laws, the government should assess some aspects of outward FDI including whether it will have a positive and significant impact on economic growth, and potential adverse impacts on various sectors. 
 
On the part of the government, it is not appropriate to remain literally idle on the issue of outbound FDI. The government should not see policies as a screening device to restrict the outflow of capital from the country. Rather it should formulate policies that will facilitate it. The Nepali private sector’s long wait to go around the globe to invest should take a positive turn soon.

 

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