Foreign Direct Investment in Bhutan: A Short Comparative Analysis with India and China

Tandin Wangchuk

Introduction

Foreign Direct Investment (FDI) plays a critical role in economic growth by infusing capital, expertise, and technology into a country’s market. Despite Bhutan’s consistent regulatory reforms aimed at enhancing FDI inflows, the country continues to attract limited foreign investments. This paper seeks to explore the factors contributing to Bhutan’s struggle to secure higher FDI, juxtaposing its investment climate with that of neighboring economic giants, India and China.

Understanding FDI

FDI is characterized by an investor’s commitment to deploy capital, expertise, and managerial resources in a foreign enterprise, exerting substantial influence over its operations. This form of investment extends beyond mere financial contribution, involving long-term strategic interests and active participation in the target country’s economic landscape. Consequently, investors are driven by prospects of maximized returns and risk mitigation, gravitating toward nations that present the most rewarding environments.

Comparative Analysis: India and China

India stands as South Asia’s largest recipient of FDI, recording a 13 percent increase in 2020 with an inflow of 57 billion USD, largely propelled by advancements in its digital economy. Several factors contribute to India’s attractiveness. With a population exceeding 1.39 billion, India offers a vast consumer base. It boasts an affordable yet highly skilled labor market. Ranked 63rd in the World Bank’s Ease of Doing Business Index, India has improved its regulatory framework, ensuring greater transparency and ease in market entry. Controlled inflation, manageable fiscal deficits, and sustained GDP growth render India an appealing FDI destination.

China surpasses India, emerging as the world’s leading FDI recipient with an inflow of approximately 163 billion USD, outpacing the United States at 134 billion USD. China’s FDI magnetism is attributed to extensive market access, with 1.44 billion potential consumers providing unparalleled market opportunities. China’s low production costs and robust industrial base attract manufacturing and technology-driven investments. Ranked 31st in Ease of Doing Business, China’s infrastructure fosters efficient trade and commerce.

Bhutan’s FDI Landscape

Bhutan presents a contrasting narrative. While the nation enjoys political stability, a constitutional monarchy, and an independent judiciary, its economic and infrastructural limitations hinder FDI inflows.

Bhutan’s stable governance and legal framework provide a secure investment environment. Bhutan’s FDI Policy 2019 and subsequent regulations reflect the government’s commitment to enhancing investment conditions. The 2020 Income Tax Amendment reduced corporate tax from 30 percent to 25 percent, improving profitability for foreign enterprises.

However, Bhutan’s population of approximately 779,000 and limited labor force present scalability challenges for investors. The country’s mountainous terrain complicates infrastructure development and logistics. Despite free trade agreements with India, Bhutan lacks formal trade relations with China, narrowing potential markets. Bhutan ranks 89th in the World Bank’s Ease of Doing Business Index, indicating higher operational hurdles compared to India and China.

Tourism remains Bhutan’s leading FDI sector, contributing 88.65 million USD in 2019. The service sector dominates FDI at 71 percent, reflecting investor confidence in Bhutan’s unique cultural and ecological appeal.

Conclusion

Bhutan’s modest FDI inflows stem not from regulatory shortcomings but from inherent structural and economic limitations. In the competitive landscape dominated by India and China, Bhutan’s smaller market, geographic isolation, and infrastructural deficits constrain its attractiveness. While Bhutan’s tourism sector demonstrates potential, broader economic diversification and infrastructural advancements are essential to bolster its FDI prospects.

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