Tapping small investments – lesson from IT

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ITForeign Investment and Technology Transfer Act (FITTA) 1992 has made a provision whereby a foreign investor can invest in any sector in Nepal except arms and ammunition, tourism, cottage industries, personal service business, engineering and legal services and consultancy services. Other than these sectors, an investor can invest as much money as he/she pleases. However, the practice has been such that a foreign investor has to commit to investing at least $50,000. Not only is this practice completely against the spirit of FITTA, it also limits Nepal prospects of realizing foreign investments and the scale is substantial.

Besides being risk-free sources of investment for a host nation, Foreign Direct Investment (FDI) signifies modern technologies, advanced skill sets and lots of employment opportunities. If the business is profitable enough, foreign investors even contribute to developing infrastructure in the sites of their business operation, therefore reducing the fiscal burden of the government.

Nepal, being mired in political instability, inflexible labor laws, poor infrastructure and weak capital markets, bars itself from attracting very large FDIs. Out of tens of billions worth of FDI commitments, investments worth only around one hundred million dollars have been realized till date. If Nepal is to graduate to a Developing Nation status by 2022, we need more economic activities and smaller FDIs can play a big role in the process – IT sector is an example.

IT is one of the fastest growing sectors in Nepal and there are lots of IT companies running on foreign investments and employing hundreds of Nepalese people. One of the characteristics of this sector is that their projects (mostly developing programs) can be carried out with investments ranging anywhere between $8,000 and $12,000. These projects, if they fail to deliver as per the demands of market can be dropped altogether and new projects can be started. Quite a number of projects in this sector are thus dropped. This very fact makes investing in small clusters more preferred to large investments (like the over-$50,000 ones).
However, a move to introduce a floor on amount of permissible FDI – which stems out from the spirit of protecting domestic industries and curbing crime (as some foreigners were found to be conducting illegal activities in Nepal under the protection of a fake small-scale enterprises), has effectively barred genuine small foreign investors from investing in Nepal.

Nepal needs to muster as much foreign capital as it can attract in order to hasten the pace of economic growth. But the lack of bargaining power as a state, owing to the sorry-state of its business environment means that the prospect of realizing heavy investments is miniscule. Therefore, Nepal needs to tap these smaller but scores of investments.

One of the first things to take care of, then, would be to repeal the stipulation that requires at least $50,000 worth of commitment from foreigners to be eligible to invest in Nepal. The Act itself stipulates no such thing. It was introduced through an administrative process and thus a court decision should suffice.

Akash Shrestha

About Akash Shrestha

Akash Shrestha is Coordinator of the Research Department at Samriddhi, The Prosperity Foundation where his focus areas are petroleum trade and public enterprises. He also writes newspaper articles, blogs and radio capsules, based on the findings of the studies conducted by The Foundation.

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