Foreign Direct Investment (FDI): An Observation about ...?1 Foreign Direct Investment (FDI): An Observation about Tourism Sector of Bhutan Abstract Dr. Pawan Kumar Sharma 1, Umesh

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    Foreign Direct Investment (FDI): An Observation about Tourism Sector of

    Bhutan

    Abstract

    Dr. Pawan Kumar Sharma 1 , Umesh N. Jadhav 2 , Elangbam Haridev Singh 3 , Dr. Achintya

    Mahapatra4

    FDI has been an integral component of economic development strategy of many countries in post

    globalization phase. It is essential for creating employment opportunity, increasing the standard

    of life, technology advancement, and sustainability. The new world order due to convergence of

    communication and technology has created a virtual borderless world. Every nation has to pay

    heavy opportunity cost if left isolated. Bhutan is also in the process of opening up its economy,

    in order to tap the opportunity of FDI. It is well known fact that Bhutans tourism industry is

    very important as it employs maximum manpower, and second highest earner of foreign

    exchange in Bhutan. This paper tries to determine the factors affecting FDI in Tourism sector,

    evaluates the policies adopted to attract FDI, and examines the benefits of FDI in the growth of

    Tourism sector.

    Key words: Foreign Direct Investment (FDI), Tourism Industry, Bhutan, Globalization

    1 Associate Professor, Delhi College of Arts and Commerce, University of Delhi, Presently on deputation under

    Colombo Plan, MEA, Govt. of India to Royal University of Bhutan (GCBS) E. Mail: drpawankumar1958@rediffmail.com 2 Sr. Lecturer, Royal University of Bhutan (GCBS)Gedu, Chukha, Bhutan, E. Mail: jumeshin@gmail.com

    3 Lecturer, Royal University of Bhutan (GCBS)Gedu, Chukha, Bhutan, E. Mail: haridevelang @gmail.com 4 Sr. Lecturer, Royal University of Bhutan (GCBS)Gedu, Chukha, Bhutan, Cell No. 00975-17899191 E. Mail: achintyamahapatra@gmail.com

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    Foreign Direct Investment (FDI) has become one of the salient features of economic growth of

    countries. Some view it as an important factor of economic growth, employment generation,

    expansion of import and export business and good price while others look upon it as a negative

    growth for local merchants, profit distribution, investment ratios are not fixed, an economically

    backward class person suffers from price rise, retailers face loss in business, and inflation may be

    increased. More than ever, countries at all levels of development seek to leverage FDI. Bhutan

    introduced FDI as developmental strategy in 2002 including in tourism. Bhutan is famous for its

    natural beauty, rich wildlife and unique culture. The fourth King of Bhutan, Jigme Singye

    Wangchuck, had advocated and implemented the policy of controlled development with

    particular focus on the preservation of the environment and Bhutans unique culture. On 2 June

    1974, for the first time international media were allowed to enter Bhutan, which marked

    Bhutans debut appearance on the world stage to commemorate the coronation of fourth king of

    Bhutan. Later that year, the first group of paying tourists arrived with 287 visitors which have

    since increased up to 64,028 in 2011.

    Tourism sector holds immense potential for Bhutanese economy. Tourism is no longer looking at

    it as a leisure activity, but as a major source of employment. According to the Accelerated

    Bhutans Socio-economic Development (ABSD) initiative, hospitality sector is a key area that

    will boost economic growth and generate employment opportunities for the youth. It is estimated

    that the industry employed around 17800-19600(direct and indirect) people in 2010. At present

    313 tour operators and around 1266 tour guides are authorized by Tourism Council of Bhutan.

    There are 128 hotels and resorts in Bhutan qualified to cater to tourists, with a total of 5,572 beds

    between them.

    Tourism is the second largest net earners of foreign exchange for the country and also one of the

    sectors, which employs the largest number of manpower. Bhutan received 64,028 high end

    visitors in 2011. It recorded highest number of visitor arrivals in the country with a growth of

    56.65% over year 2010. Tourism receipts from international visitors (dollar paying) alone

    generated USD$ 47.68 million as direct gross earnings, which is an increase of 32.52% over

    2010. Of this 14.89 million was generated as direct revenue for the Government through the

    royalty receipts. These earnings do not include revenue from other sectors like airline, handicraft,

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    and additional out-of-pocket spending. Moreover, this high-end arrival figure does not include

    the 36,805 regional tourists and other category who travelled by land into Bhutan and visited

    Thimphu and beyond. Of the 36,805, about 1,728 regional visitors stayed in tourist

    accommodation facilities that are of three stars and above category.

    In order to develop tourism in Bhutan in a systematic manner to harness its direct and

    multiplier effects for employment and poverty eradication in an environmentally sustainable

    manner the Royal Government of Bhutan formulated several policies to facilitate private

    investments through public private partnership and focus on development of this sector including

    FDI.

    Salient Features of FDI for Tourism

    In case of Five Star and above category hotels with minimum project cost of Nu. 200 million,

    100% equity through FDI is allowed by Royal Government of Bhutan. In case of four star hotels

    with minimum project cost of Nu. 25 million, only 75% equity are allowed by way of FDI.

    (Bhutan, Foreign Direct Investment Policy 2010)

    The Bhutan government provides various incentives to the FDI funded projects, the specific tax

    incentives provided to tourism sector are: A 10-year income tax holiday is provided to newly-

    established high-end hotels, a reinvestment allowance of 25% of total capital expenditure

    incurred shall be provided for the up-gradation of the existing hotels, the Income Tax Act has

    been amended to allow entertainment expenses up to 5% of the assessed net profit, Service Tax

    is not levied based on rack rates of the hotels but on published or actual charged discounted room

    rents, Tax on import of furniture and fixtures etc. for tourist-class hotels are exempted, Daily

    tourist tariff/royalty has been waived for foreign participants in meetings, international

    conventions and exhibitions (MICE). (Royal Government of Bhutan, 2010)

    Objectives

    a) To determine the factors affecting FDI in Tourism sector,

    b) To evaluate the policies adopted to attract FDI,

    c) To examine the benefits of FDI in the growth of Tourism sector.

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    Literature Review-

    Krugman and Obstfelds study (as cited in, Don Anura Wickramasinghe, 2007) defines, foreign

    direct investment as international capital flow from a firm in one country, which creates a

    subsidiary of the parent company in other country or which allows the firm to obtain a

    controlling interest in a foreign firm. FDI is distinguished from other forms of international

    capital flows in that it goes beyond a transfer of resources; also it involves the acquisition of

    control of assets in other country.

    World Trade Organizations study (as cited in, Don Anura Wickramasinghe, 2007), defines,

    foreign direct investment as, when an investor based in one country (the home country) acquires

    an asset in a country (the host country) with an intend to manage the assets. However, according

    to the Organization for economic Cooperation and Development (OECD) definition in 1996,

    mean that, foreign direct investment as reflecting the objective of obtaining a lasting interest by

    a resident entity in one economy (direct investor) in an entity resident in an economy other than

    that of the investor (direct investment enterprise). Foreign Direct Investment is the process of

    investing in other countrys economy for long run with the purpose of acquiring the assets and

    managing it as well as to transfer resources such as technology, human resources, skills etc...

    In order to encourage foreign investors, the Royal government of Bhutan have framed various

    policies including custom tariff schedule in 1996, Foreign Exchange Regulations in 1997

    removing several restrictions on foreign exchange transactions and followed by FDI policy in

    2002.

    Pasang Dorji (2011) stated that, the 2002 Policy allows maximum of 70% foreign equity holding

    of a FDI company. The revised policy is expected to look at the possibilities of allowing even

    100% foreign equity holding like in the manufacture of some edible food products, electronic

    equipment, and hydropower sectors. The first impact study of FDI on Bhutans economic growth

    by the economic affairs ministry showed that the existing FDI Policy has failed to attract foreign

    investors. Dambar S. Kharka, an economist, said Bhutan should be open to FDI. However, he

    said some foreign investments come with other objectives than money including political

    interest. There should be a set priority and the negotiation should be within a sound strategic

    framework.

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    Two international resort chains have been approved and commenced its operations in 2004, with

    the approval of the FDI policy in 2002. The first big investment of US$20 million came from

    Bhutan Resorts Corporation Limited. It is a joint venture between the Bhutan Tourism

    Corporation limited and the Inte