Why startups from Nepal could not go global?

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While everyone is buzzing about the need for Foreign Direct Investment (FDI) to boost Nepal’s development, there is a side of the story that often gets overlooked. The million-dollar question is — Can Nepali companies invest abroad to expand globally?

The obvious answer most of us think is no. Let’s take a closer look at why Nepali companies might choose to invest in foreign countries instead of focusing solely on domestic investments that could help Nepal prosper. It’s a valid question, after all.

Every country ideally wants its citizens to invest within its borders, especially countries like Nepal that are gradually progressing. The need for generating internal capital is crucial for building the nation. So, why would Nepali companies consider looking beyond their borders?

Furthermore, governments generally prefer that their citizens keep their money within the country. This is because when money is invested abroad, it reduces the government’s control over wealth and income, as well as its ability to tax financial activities. Governments also aim to maintain a balance in payments by limiting the flow of cash out of the country.

Moreover, allowing unrestricted investment abroad can significantly affect the overall economy and pose risks such as increased inflation if not managed properly. So, why would Nepali companies consider looking beyond their borders?

Why company need to invest in a foreign country?

Representational graphic. Image: Freepik/ sentavio

The answer is simple that is to expand globally. If a company aims to reach a large portion of the world’s population, it needs to establish a presence in different parts of the world, just like Facebook, Google, and other global giants have done.

Many multinational companies invest heavily in various countries to increase profits and become leaders in their industries worldwide. However, Nepali companies often face challenges in doing so.

When companies and individuals invest outside their home country, it helps reduce financial and economic risks by diversifying their portfolios internationally. This means they are not solely reliant on one economy or market.

Diversification allows them to explore various avenues for income generation and value addition, strengthening the overall ecosystem. Additionally, it encourages a shift from a saving-focused society to one that prioritises investment, fostering economic growth and prosperity.

Moreover, investing abroad helps generate capital inflow into the home country in the form of Foreign Direct Investment (FDI). As Nepali companies grow and become more profitable, they attract greater FDI into the country. This influx of foreign investment is crucial for economic development. However, it’s essential to address fundamental issues to truly capitalise on this potential. Without addressing these basics, grand discussions like Investment Summits may hold less significance.

Why Nepali company could not go global?

The answer is straightforward: laws and regulations. Nepal’s inflexible and outdated legal framework poses significant barriers, making it nearly impossible for Nepali companies to dream big.

For instance, the Act Restricting Investment Abroad, 2021, explicitly prohibits any form of investment abroad. Section 3 of Act Restricting Investment Abroad, 2021 makes it difficult for Nepali startups to invest abroad and expand globally. Moreover, according to Section 10A of the Foreign Exchange (Regulation) Act, 2019, if any Nepali company wants to invest in a foreign country needs to do so as specified by Nepal Rastra Bank (NRB).

So far, it appears that the authority to regulate and oversee all investments related to foreign countries or foreign currency has been entrusted to the Nepal Rastra Bank (NRB). According to NRB Unified Directive, 2021, there is not any clear statement from the NRB regarding this matter.  However, indications suggest that there are restrictions on capital account convertibility. Capital account convertibility pertains to a nation’s financial system’s capability to freely conduct transactions involving local assets into foreign assets, at market-determined exchange rates.

Let me illustrate this concept with an example:

Imagine Pushpa wants to purchase a watch from the USA, paying in US dollars by converting her Nepali rupees. She visits her local bank, opens a US dollar account, and receives a limit on the amount she can transact in USD. This process falls under current account convertibility, where transactions of a short-term nature, typically settled within a year and without a significant impact on a company’s asset and liability structure, enjoy partial freedom of buying and selling.

However, if Pushpa aims to purchase a house in the USA or if her rapidly expanding online booking platform seeks to venture abroad to compete with global giants or explore untapped markets by investing capital there, there’s a significant hurdle: Nepal lacks capital account convertibility.

In other words, Pushpa and her company face restrictions on freely moving large sums of money across borders for such long-term investments.

There is a certain flexibility in the case of current account liberalisation though. For manufacturing companies, exporting goods worldwide is encouraged by the government through incentives such as zero VAT (Value Added Tax) on exported items, along with VAT credits.

Additionally, there are numerous payment gateways available for transferring funds internationally to import goods or services. However, the scenario is different for tech companies or those driven by technology.

To achieve global success and potentially become billion-dollar enterprises, these companies must expand their operations internationally. This expansion is crucial for earning another spot on the prestigious Forbes list by Nepali. Even for manufacturing companies aiming to achieve significant growth, investing in capital expenditure abroad is often necessary.

What is my say?

Investing in foreign lands is essential not just for business growth but also for retaining Nepali talent within the country. Instead of seeing Nepali youths migrate abroad, we should aim to nurture “Nepali Unicorns” by providing them with opportunities to expand their horizons globally.

By enabling Nepali companies to dream big and go global, we can inspire future generations and create a thriving ecosystem of innovation and entrepreneurship right here at home. It’s time for Nepali companies to lead the charge and become the inspiration for the future of Nepal’s business landscape.

When Nepal achieves a balanced capital account in its balance of payments, the potential returns could be substantial. With lower labour costs and a growing IT sector, Nepali companies are well-positioned to compete in the global marketplace.

By expanding their operations to untapped markets and offering innovative solutions, Nepali companies can pave the way for a new era of progress and opportunity, not just for themselves, but for the world at large.

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Mishra is a student studying Chartered Accountant.

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