Is FDI bad for small & cottage industries?Foreign investment in small scale industries emboldens them to do better in both the national and international markets
The much hyped Investment Summit Nepal 2019 was concluded recently. KP Sharma Oli’s administration appeared to leave no stone unturned to woo foreign investors. To this end, it showcased different projects and even drafted and amended some policies and acts related to foreign direct investment (FDI). The summit, comprising over 600 foreign participants and 300 plus foreign companies, was successful in providing a platform to investors. By the end of the two day event, a total of 15 Memorandums of Understanding (MoUs) had been signed between domestic and foreign investors. The finance minister, Yubaraj Khatiwada, called the event a feat. Now, the projects showcased by the government and the MoUs signed are fuelling negative comments and arguments on two fronts. It would be too early to argue on the government’s ability to fulfil its promises. However, people already seem apprehensive of the possible annihilation of small industries in Nepal due to FDI. The argument is that FDI in small industries like handicraft, garments, and in small scale agro-based industries will oust naïve local entrepreneurs from the market. In this regard, inclusion of access to FDI for small and cottage industries in the Foreign Investment and Technology Transfer Act is gaining much space.
It is important to note that Nepal is in dire need of foreign direct investment. Prime Minister Oli himself pronounced Nepal as virgin land, ripe for growth opportunities. To fulfil its growth potential, investment is needed in every sector—from service to manufacturing, energy to industrial, agriculture to tourism, information and technology to transport and aviation, and in almost all other sectors of the economy. The country in the past has not been able to best utilise available resources due to the lack of skilled manpower, technology, and financial resources in a larger scale. Thus, despite having resources available in almost every sector of the economy, Nepal is still listed in the World Banks’ least-developed countries grouping. Therefore, foreign investment is much needed to give impetus to mega projects, and also to give a legup to small scale industries to expand their capacities and markets. In fact, for example, the handicraft business in Nepal is losing its grip not because it has no potential but because it is lacking resources and technologies to compete in the international market. According to the Federation of Handicraft Associations of Nepal (FHAN), artisans’ move away from the handicraft business and into the foreign labour market has increased the shortage of skilled craftsmen in the industry. This reduction in the supply of skilled labour has ended up making Nepali handicraft products more expensive in the international marketplace.
Furthermore, the craft industry in Nepal is not operating at its full capacity. The industry is lacking resources to compete with Chinese and Indian industries. The large scale production capacity of industries in China and India is further reducing Nepal’s international market share. In fact, FHAN reckoned that handicraft exports plunged by about 11 percent in the first half of the current fiscal year due to its failure to supply the demands. The situation is similar to other small scale industries also: the lack of resource and fund is turning traders away. Therefore, welcoming investments in small scale industries is important. The key here is to combine the use of local traders and artisans and using FDI as a supplement to increase capacity. In the long run, this could further help in reducing Nepal’s large trade deficit.
FDI not only brings the fund into the economy, it also helps to utilise domestic savings in productive sectors. It is well argued by economists that in low-income countries like Nepal, availability of funds does not always matter for economic growth. In fact, the need is cooperation amongst foreign investors who are familiar with the frontier technology and the domestic entrepreneurs who are familiar with the local conditions in order to mobilise available funds into productive sectors. This will help reduce the woes of local traders to find market opportunities and will increase the job security of craftsmen. Thus, the costs of not receiving FDI are greater than the problems associated with it. Therefore, at the current state of the economy, Nepal should focus on attracting FDI, rather than dreading the negative aspects; we have the whole future to monitor and regulate it as per the interests of our economy.
FDI in small scale industries should not be considered as wiping them out, rather it should be considered as emboldening them to do better in both the national and international markets. Besides, rather than discouraging foreign investors to invest in small scale industries, government can put an eye out to back domestic traders’ interest and make everyone better-off. Hence, without losing its current exuberance towards foreign investment, what the current government has to do is to ease the policies and regulations for foreign investors in every sector of the economy. And draw an overt trajectory of execution plan for pledged MoUs and agreements; because the past cries government’s failure louder on the same.
Bist is a member of the faculty at Uniglobe College