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Introduction

Nepal is a small country which is found between India and China. Nepal is also considered to be the least developed nation all around the world. Nepal is majorly dependent on imports which include necessary basic material such as agriculture and forest from foreign markets. The import also includes other necessary products such as metals, fertilizers, construction materials, consumer goods and exports including rice, timber, textiles, jute etc. This research paper seeks to assess the political, legal, economic influences, natural resources, foreign currency, level of foreign direct investment, existing trade policies, system, barriers, incentives etc. In the last, the research paper will provide the summary and recommendation.  

General Overview

Nepal has a very divergent climate and culture with an ancient heritage. Nepal has the Himalayas which is an awe-inspiring backdrop. Nepal still remains one of the poorest countries in the world. The estimated population in Nepal is around 28.853 million in the year which is forecasted to reach 30.9 million in the year 2022. Due to the lack of natural resources the productivity of Nepal is low (Pyakuryal, et. al., 2010). The currency of Nepal is the Nepalese rupee. Nepal is commonly considered as agriculture country and gives employment to over 80 percent of the population of the labor force and contributes to GDP effectively. There are the biggest export and import partner of Nepal such as India, China, and the US. Further, the unemployment rate in Nepal is also very high which is marking around 50% of the population. The earthquake is having a devastating effect on Nepal.

Political, Economic, Social and technological influences and environment

Political

There is instability in the political environment in Nepal which is becoming a barrier to foreign investment. The government of Nepal is unstable which is badly hampering the development and growth of the Nepal economy (Bhattarai, 2016). A large number of foreign Companies are in line but politics fluctuation is leading Nepal to grown on its own. Nepal is also found to have a terrorist attack which detracts the business to invest.

Economic

The economy of Nepal is much dependent on the foreign markets; hence any change in interest rates, tax rates, and deflation inflation is going to impact the economy of Nepal. There is a frequent change in the interest rates and exchange rates in Nepal which impacts business and society greatly. The rate of GDP is gradually increasing and is 6.30 percent in the year 2017. The Nepal economy is based on both farming and crop production.

Social

The poverty in Nepal is high which has decreased the purchasing power and capacity of people to buy even the basic items. The NGO’s and organization environment can easily be set up for supporting the people of Nepal but there is less chance of success for the business. There is also discrimination on the basis of caste which is also a high concern for the business. The government of Nepal is constantly working on the elimination of poverty.

Technological

Nepal is also not much advanced in technology which is making the country behind of other countries using advanced technology in production and manufacturing of goods and services. Nepal still needs to adopt the structure of private, public or semi-public for providing technology services to firm and society for their upliftment and growth.

Legal

The government of Nepal has set more burdensome process of approval process which is lacking transparency and cronyism (Sanogo and Amadou, 2010). The judicial system is ineffective and undermined which is also an unattractive point for foreign investment and even for local business as there is an unsafe environment for using skills and talent of one's own in business. There is a substantial amount of corruption which is also weakening the legal environment of business.

Environment

The environment is Nepal is also unsafe for the purpose of business. Earthquakes are frequently taking place in Nepal which is deteriorating the business climate. This leads to an interruption in not only the stability of business but also the life of society.

Natural resources and factors endowments

Nepal is not rich in natural resources and has small and barely developed resources such as coal, copper, magnetite, iron ore and pyrite (Pearce, et. al., 2013). The river system of Nepal is providing the massive potential for development of hydroelectric. Hence Nepal has a huge capacity of hydroelectricity which is becoming a core competency for Country. The most prominent hydroelectric project in Nepal is currently operating in Khimti Khola and Bhote Koshi project on which many countries are dependent. Nepal has more than 80000 MW theoretically and 42133 MW of technical hydroelectric potential which is viable. This can be said as a principal market of power generation in Nepal and if developed and utilized greatly by the country and exported to any country then it can lead to the mainstay of the country's economy.

Agriculture is the foundation of the economy of Nepal. There is the cultivation of rice, wheat, maize which accounts for half of the country earnings through export. Timber is one of the major sources for providing revenue to the country (Chhetri, et. al., 2012). Most of timber is exported to India and Timber Corporation of Nepal which is an owner of limber processing concern involved in the supply of Kathmandu valley including furniture wood and construction with the valley. Agriculture production is also found to be increased in Tarai.

Foreign currency and exchange influences

The currency of Nepal is pegged with the currency of India and thus the Nepalese rupee can be said to the direct equation of rate of exchange between the US dollar and Indian rupee. Nepal has a great influence on the decrease and increases in the value of the dollar. The devaluation in the currency of Nepal may due to a decrease in demand and an increase in the supply of Nepal currency. Since most of the dealing of Nepal is associated with India, the US and China. Hence the change in the US government has created a major impact on the Nepal market. With the change in government, there is a change in business policy in the US which has impacted the rate of import for Nepal and required business in Nepal to pay high than before for importing things from the US. Hence this resulted in the decrease in US dollar with Nepal and devaluation in the value of Nepal currency. The foreign exchange reserves of Nepal decreased from $10.3 billion U.S. dollar. The imports due to the devaluation of Nepal currency made import more expensive. The change in US government and the presidential election has reversed the global condition of U.S(Bhattarai, 2016). There is also a risk to the manpower of exports of Nepal due to the lack of demand from nation exporting oil.

Hence it can be said that the Nepal currency appreciates and depreciates with the change in any trade policy, government or economic change in any other country having to deal with Nepal. The positive change appreciates the value of Nepal currency and negative change depreciates the value of Nepal currency which means more Nepal currencies are submitted to foreign reserve department to receive the foreign currency for exporting and importing or any other transaction.  

Existing trade policies, system, barriers and incentives

Nepal still has restricted trade policy and investment. The new recent trade policy of Nepal includes provision for the promotion of service trade, intellectual property rights and making an agreement with the international organization in order to access the international market more effectively. Due to old trade policy of Nepal, the trade deficit was growing rapidly but after the new trade policy of Nepal, the policy is trying to narrow down the gap of trade between supply-side constraints and enhancement in export-oriented service firms. The trade policy also includes the reduction in the transaction cost via facilitation of trade and capacity building of the institution (Nightingale, 2011). It is an expansion of the export market in Nepal through diplomacy in the economy and using trade bloc.

In order to avoid double taxation, the government of Nepal entered into much double taxation agreement with more than 9 countries and also has investment protection agreement with five countries. Nepal has also set a limit of the foreign grants and commercial loans which is taken from development partners.

Nepal does not have major trade barriers, especially on imports. There are some standard technical barriers applied to small manufactured products such as refrigerators and vehicles. There are many restrictions on the import of vehicles and Nepal is required to qualify under Euro I and CFC gas free. The import of used items is also not allowed under import regulations such as refurbished products(Paudel and Burke, 2015). There are a number of export barriers when exporting goods to India or any other countries by Nepal. One of the technical barriers is there in sanitary and phytosanitary standards. There are countervailing duties on the garments which also required a separate license. The need of license is also there in agro products and ginger. The other barriers such as anti-dumping duties, the process of documentation, quarantine issues and provision of quota and gateway limits are hitting Nepal.

The main exports by Nepal are knotted carpets, pashmina, noodles, handicrafts, steel, iron, and handicrafts (Sapkota, 2013). The beverages are also exported such as tea, ginger, and cardamom etc. More than 60% of exports are made to India by Nepal and other exporting countries are China, Bangladesh, the US, Japan, South Korea, Turkey, and other European Countries. The products of Nepal face the non-Tariff barriers in many of the above-discussed market which is stifling the export of country and pushing up of trade deficit. 

Existing level of foreign direct investment

Several investments come in Nepal from small foreign investors investing in tourism, real estate, shopping malls, and plazas etc. Foreign direct investment in Nepal is increased in recent years. In the year, 2017, foreign direct investment increased by the 13503.90 NPR. This is the highest record of foreign direct investment in the history of Nepal.

Existing level of foreign direct investment.

The foreign investment and technology transfer act is encouraging foreign investment and technology in order to make the economy more viable, competitive and dynamic. The FDI in Nepal is regulated by the Industrial Enterprise Act and is making all efforts to attract foreign investment (Seid, 2018). The FDI in Nepal was lowest recorded in the year 2006 which improved by the year 2017. Most of the foreign investment is from India and China amounted to 2.2194 billion dollars and 247 million dollars. The major cause of low FDI in Nepal is Repatriation where investors are allowed to transfer 75% of their income to their own country even after completing all paperwork. There are complications in the fulfillment of laws and have disruptive labor issues creating disruption in the continuation of business and many Companies were also forced for closing their business because of a labor union.

Summary and Recommendation

Nepal is still found to unable to take advantage of geographical proximity possessing economic superpowers. Nepal is also not able to optimum utilized its potential as there is a lack of protection and motivation to investors which has lead Nepal to be risky for foreign investment. The government of Nepal should ensure peace in order to ensure foreign investment effectively. There is also a need to make more emphasis on the investment sectors in order to perform proper marketing of these sectors. Vocational and training should be a regular process in Nepal in order to ensure the availability of technical and skills labor force in Nepal.

Proper development of infrastructure facilities can enhance the growth of local and any foreign investment in Nepal. The core competencies which are a competitive advantage to Nepal such as hydropower projects should be more focused and improved for availing as many benefits as possible and achieve an advantage. Nepal government is required to make healthy relations with other countries for prompt development and growth of society and industries.

List of References

Bhattarai K., 2016.Nepal Unending political instability.Available at https://thediplomat.com/2016/07/nepals

unending-political-instability/. Accessed on 11.12.2018

Chhetri, N., Chaudhary, P., Tiwari, P.R. and Yadaw, R.B., 2012. Institutional and technological innovation:

Understanding agricultural adaptation to climate change in Nepal. Applied Geography33, pp.142-150.

Deshar, B.D., 2013. An overview of agricultural degradation in Nepal and its impact on economy and

environment. Global Journal of Economic and Social Development3(1), pp.1-20.

Khanal R., 2017.Non-tariff barriers holding back Nepal export trade.Available at

http://kathmandupost.ekantipur.com/news/2018-03-29/non-tariff-barriers-holding-back-nepals-export-

trade.html. Accessed on 11.12.2018

Kundan, M.P. and Gu, Q., 2010. A time series analysis of foreign direct investment and economic growth: A

case study of Nepal. International Journal of Business and Management5(2), p.144.

Nightingale, A.J., 2011. Bounding difference: Intersectionality and the material production of gender, caste,

class and environment in Nepal. Geoforum42(2), pp.153-162.

Paudel, R.C. and Burke, P.J., 2015. Exchange rate policy and export performance in a landlocked developing

country: The case of Nepal. Journal of Asian Economics38, pp.55-63.

Pearce, D., Barbier, E. and Markandya, A., 2013. Sustainable development: economics and environment in the

Third World. Routledge.

Pyakuryal, B., Roy, D. and Thapa, Y.B., 2010. Trade liberalization and food security in Nepal. Food

Policy35(1), pp.20-31.

Regmi, B.R. and Bhandari, D., 2013. Climate change adaptation in Nepal: Exploring ways to overcome the

barriers. Journal of Forest and Livelihood11(1), pp.43-61.

Sanogo, I. and Amadou, M.M., 2010. Rice market integration and food security in Nepal: The role of cross-border trade with India. Food Policy35(4), pp.312-322.

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