Attracting Foreign Direct Investment: Experiences and Challenges

Since the past two decades, developing countries have begun liberalizing their national policies to set up a hospitable framework for FDI by relaxing rules regarding market entry and foreign ownership, improving the standards of treatment provided to foreign firms, and improving the functioning of markets. The benefits from FDI appear to be maximized when foreign investors operate on a sound and competitive playing field. In this respect, this paper spells out the determinants and some core issues for enhancing FDI inflows. Although South Asia has not been successful in attracting a proportionate share of FDI on the basis of the region’s size and population, policy liberalization and reform measures are ongoing towards this purpose. However, these reforms need to be deepened, accelerated, and maintained over the long term. With respect to China, the macro perspective of the investment climate is an area in which the country seems quite comfortable and provides important lessons for developing countries. Against this backdrop, the measures for boosting FDI both in China and South Asia are delineated. Attracting FDI is a difficult task particularly for small countries with limited resources and relatively undeveloped infrastructure such as Nepal. The paper reviews the various policies of the Government and a survey of 16 foreign firms on different FDI-related issues is conducted. The concluding part of this paper examines some existing hurdles in attracting FDI into Nepal and makes some recommendations.