Advantages And Disadvantages Of FDI In Nepal

All countries in the world are unique. They are different form one another on their

Figure 1.7 The structure of the dissertation Figure2.2 Modes of entering foreign markets Table 2.32 Factors affecting the FDI decision Figure 2.33 Types of FDI 12 15 19 22

With an advent of the New Economic Policy (NEP) reforms, Chand (n.d) states that FERA (Foreign Exchange Regulation Act, 1973 was abandoned and FEMA (Foreign Exchange Regulation Act) was enacted. Due to this there were huge number of Multinational Companies (MNC’s) entering the Indian market. Industries of high technology and high investment priority were provided automatic permission of Foreign Direct Investment (FDI) up to 51% of

The effects can be negative or positive. According to the theory of Hill (2003), FDI can affect host countries on resources-transfer effects, employment, competition and product and process innovation. There are a small number of research available that explain the behaviour of local companies when FDI take place. Nevertheless, there are many research that explain the benefits for the local economy. Foreign direct investment can increased indirect productivity for host country companies through the realization of external economies. Generally these benefits indicates the importance of the way in which the influence is transmitted that referred as “spillovers” (BlomstrOrn,

Kobrin and Le (2005) and Ata ul lah (2006) such advantages accept encouraged the developing countries, including Pakistan, to allure FDI inflows. Inorder to actuate the actuality of such merits, several studies accept been conduct to analysis the appulse of FDI on bread-and-butter growth. However, theories and empiric abstract appear to action alloyed adumbration apropos the appulse of FDI on bread-and-butter advance in developing countries.

FDI grew quickly in the 1990’s. The U.S is the top destination of FDI and China and Brazil are in top five. The reasons for the increased activity were the opening of markets due to trade liberalisation and deregulation, pressure of competition brought about globalisation and technological changes, the importance of size as a factor in creating economies of scale and the desire to strengthen market position.

Another incentive for prospects of FDI in developing countries has moved from location advantage to competitive advantage. Before, investing firms based their FDI motives on natural resource allocations, cheap labor and production. Now, it is becoming a bigger trend for these firms to count more on the `availability of knowledge creating activities' that allow them to exploit their advantage over competition through the new technology they bring to the developing countries. A further incentive deals with `asset control' that leads to cost reduction and larger markets in which

Analyzing various researches on the benefits of the FDI in different industry such as the manufacturing and service, it appears that the benefits vary significantly between the two. The main case for FDI (host country) is that it can positively affect the development of the host country because of the direct financing it supplies and the technology and management

Ekpo, A.H. (1995) investigated that the element like higher gain from investment, low labor and production cost, political stability, enduring investment climate, official infrastructure facilities and helpful regulatory atmosphere also serve to invite and guard FDI in the host country.Chadee and Schlichting (1997) investigated some of the aspects of FDI in the

FDI plays in the economic growth process of the host country. A good number of the studies and discussions show that there exists a strong correlation between FDI and economic progression. In addition to being an engine for diffusion of knowledge and transfer of technology, FDI also stimulates international trade, domestic investment, expands host nation 's domestic savings, and increases the host country 's foreign exchange reserves adjusting its Balance of Payment post. These factors increase the economic growth of the host nation.

Over the recent years, FDI has responded to new information technology systems, the reduction in global communication costs and the liberalisation of the national regulatory framework which controls investment in enterprises, (easing of restrictions and on foreign investments and acquisition in many nations) have simplified the management of foreign investments as compared to the past ( Spaulding and Graham, 2004). These are some of the factors which fuelled FDI’s expanded role in today’s global business. According to the UNCTAD (2004) foreign direct investment flow in developing countries has exploded through mergers and acquisition and internationalisation of production in a range of industries. FDI in developed countries rose from $481 billion in 1998 to $636 billion in 2004 (UNCTAD, 2004).

In the recent time, significant rise of outward foreign direct investment (FDI) was witnessed from developing countries like China and India. The Organisation for Economic Co-operation and Development (OECD) defines FDI as an investment that reflects the objective of establishing a lasting interest or long-term relationship by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the

High inflow of foreign investment is needed for a country to gain a high sustainable economic growth. For an economy to grow by 7 to 8 percent a year, there is a need to invest about 30 to 40 percent of GDP. FDI is good and strong developmental equipment that contributes to the economic growth of host country. This growth are contributed by the high increase of capital stocks in the host country, increase in productivity and availability or creating of new jobs. These new creation provided by FDI also leads to productivity and knowledge spillover on the domestic firm. Productivity and knowledge spillover increases when the productivity of the local firm is gained through the leading edge of technologies employed by the foreign companies. However, there is some negative impact on this because the foreign firm or investor has the ability to draw the demand away from the local firm because of the price of reduction to their new different and innovative products or goods and due to this, the local firm’s productiveness will decrease because of the market run down by the foreign firm or investor. The ability of a local firm to take the spillover benefits is dependent on how the local firm takes in the foreign firm skills and technological know how.

FDI is where the MNE invests directly in production or other facilities over which it has effective control in a host economy (j &t). According to Pollan (), the definition of the terms “investment” is highly significant to Foreign Direct Investment, which can be typical comprehend as the conveyance of capital to a country. Investment can be defined as money committed or property acquired in order to gain profitable returns, as interest, future income or appreciation in value (business dictionary, 2014). The commonest definition used to understand the idea of FDI is the definition provided by International Monetary Fund’s (IMF). The IMF definition of FDI introduces systems and structures which clearly demarcates foreign direct investment from portfolio investment. According to the IMF, direct investment creates a lasting interest in an enterprise, consisting of a long-term relationship between the investor and the enterprise and that the investor has an outstanding amount of control on the management of the enterprise, while portfolio investment does not create an extended relationship and the portfolio investor is rarely directly partaking in the day-to-day management of the enterprise (Pollan,). FDI however has no comprehensive, authoritative and ubiquitous legal definition and the test for the existence of enough degree of control differs in scope depending on applicable law in a

On the other hand, John Dunning claimed that there are four types of FDI in terms of their motivations: resource seeking FDI, efficiency seeking FDI, market seeking FDI and strategic asset or capability seeking FDI. According to resource seeking FDI, companies invest in foreign countries with the purpose of acquiring resources of higher standard and at a smaller cost than in their own country. Examples of resources are raw materials, labor force, infrastructure (roads, telecommunication) and technological level (Dunning, 2008). As claimed by market seeking FDI, firms invest in a country with the purpose of supplying goods and services to the host country’s market. It highly depends on market size and products distribution channels. At the same time, efficiency seeking FDI has the aim to exploit greater availability and lower costs of all relevant components from foreign countries. Last, strategic asset seeking FDI is driven by the strategic goals in the long run of foreign firms such as encouraging and promoting their worldwide competitiveness or weakening their rivals (Wadhwa, 2011). If we analyse the FDI amount in Romania during 1990-2009, over 50% of it was concentrated in the secondary sector (manufacturing). So investors