Foreign Direct Investment (FDI) in Bhutan: Growth, Challenges, and Future Prospects
Foreign Direct Investment (FDI) is a crucial driver of economic development in Bhutan, bringing in capital, expertise, and employment opportunities. While Bhutan has seen a steady increase in FDI inflows over the years, challenges such as limited market access, labor shortages, and policy constraints continue to hinder growth. A recent industry census on FDI in Bhutan provides a comprehensive overview of the current landscape, shedding light on the composition, challenges, and recommendations for future improvements.
The Current State of FDI in Bhutan
As of 2024, Bhutan has 50 licensed FDI companies operating across various sectors. Of these, 90% (45 companies) are structured as Private Limited firms, while the remaining 10% (5 companies) are Public Limited companies. These companies vary in scale, with large-scale FDIs accounting for 40% of the total, medium-scale FDIs making up 36%, and small-scale FDIs comprising 24%.
While Bhutan has been successful in attracting investments in key sectors, the overall number of FDI projects remains relatively low compared to other developing economies. The limited number of foreign investors can be attributed to Bhutan’s restrictive investment policies, small domestic market, and geographical constraints.
Sectoral Distribution of FDI in Bhutan
The service sector dominates Bhutan’s FDI landscape, with 70% (35 companies) engaged in service-based industries. The remaining 30% (15 companies) operate in production and manufacturing. Within the service sector, the accommodation and food services industry is the largest recipient of foreign investment, accounting for 46% of total FDI projects. This reflects Bhutan’s growing reputation as a high-value, low-impact tourism destination.
The manufacturing sector follows, making up 24% of total FDI projects. Key areas of investment include agro-processing, construction materials, and consumer goods. Meanwhile, the information technology sector represents 10% of total FDI companies, with investors attracted to Bhutan’s potential in IT-enabled services, data centers, and software development.
Geographical Distribution of FDI Companies
Thimphu remains the most preferred location for foreign investors, with 58% (29 companies) operating in the capital city. This is followed by Chhukha (14%) and Paro (10%). The concentration of FDI in urban areas (64%) highlights the challenges of attracting investments to rural Bhutan, where infrastructure and market access remain limited.
Despite the government’s efforts to promote balanced regional development, rural areas account for only 36% of total FDI projects. The lack of basic infrastructure, skilled labor, and adequate supply chains in remote regions makes it difficult for investors to establish and sustain businesses outside major urban centers.
Market Orientation and Raw Material Dependency
A significant portion of FDI companies (72%) cater primarily to the domestic market, indicating that most foreign investors target Bhutanese consumers rather than international markets. Around 26% of FDI firms serve both local and global markets, while only 2% focus exclusively on exports.
Bhutan’s import-dependent economy presents challenges in terms of sourcing raw materials. FDI companies spend nearly equal amounts on locally sourced (Nu. 1.12 billion) and imported (Nu. 1.07 billion) raw materials, highlighting the need for a more robust local supply chain. Many investors rely on imports due to the limited availability of high-quality raw materials within the country.
Employment and Skill Gaps in the FDI Sector
One of the most significant benefits of FDI is job creation. However, the industry census reveals that FDI companies in Bhutan struggle to find skilled labor. The shortage of qualified professionals, especially in technical and managerial roles, remains a major obstacle to business growth.
Around 32% of FDI companies cite labor shortages as their biggest challenge, followed by market access issues (26%), difficulties in sourcing raw materials (22%), and financing constraints (20%). The reliance on expatriate workers further increases operational costs for investors, making it difficult for companies to remain competitive.
The need for workforce development is evident, with FDI firms urging the government to invest in education and vocational training programs that align with industry needs. A stronger emphasis on science, technology, engineering, and mathematics (STEM) education, as well as hands-on training in business and hospitality sectors, could help bridge the skills gap in the coming years.
Challenges Faced by FDI Companies
Despite Bhutan’s efforts to create a business-friendly environment, several challenges continue to deter foreign investors. Some of the key concerns raised by FDI companies include:
- Regulatory and Policy Barriers
- Lengthy approval processes and bureaucratic hurdles discourage investors.
- Policy inconsistencies create uncertainty for businesses.
- Restrictions on foreign ownership in certain sectors limit investment opportunities.
- Limited Market Size and Export Challenges
- Bhutan’s small consumer base limits revenue potential.
- High transportation costs make exporting goods and services difficult.
- A lack of trade agreements with key international markets restricts global expansion.
- Infrastructure and Logistics Constraints
- Poor road connectivity in rural areas hampers supply chain efficiency.
- Inconsistent power supply affects industries that rely on uninterrupted electricity.
- Limited warehousing and cold storage facilities pose challenges for agro-based FDIs.
- Financial and Investment Constraints
- Difficulty in securing financing from local banks due to stringent lending requirements.
- High cost of capital discourages business expansion.
- Foreign investors face restrictions on repatriation of profits, affecting long-term investment plans.
Government Initiatives to Promote FDI
The Bhutanese government has introduced several reforms to attract and facilitate foreign investments. The Foreign Direct Investment Policy 2019 offers incentives such as tax holidays, duty exemptions, and streamlined business registration processes. However, implementation gaps remain, and investors continue to face challenges in navigating the regulatory landscape.
To address market constraints, Bhutan is actively seeking partnerships under the South Asian Free Trade Agreement (SAFTA) and other regional economic cooperation initiatives. Improved trade relations with India, Bangladesh, and ASEAN countries could open new export opportunities for FDI firms.
Additionally, the government is investing in special economic zones (SEZs) and industrial parks to attract investors. The planned Jigmeling Industrial Park in Gelephu aims to become a major hub for manufacturing and technology-driven FDIs, providing better infrastructure, policy incentives, and market access.
Recommendations for Boosting FDI in Bhutan
Based on insights from industry stakeholders, the following measures could help Bhutan attract and retain more foreign investment:
- Policy Reforms and Ease of Doing Business
- Simplify approval processes and reduce bureaucratic delays.
- Revise foreign ownership restrictions to encourage more investments.
- Ensure policy consistency to build investor confidence.
- Workforce Development and Skill Enhancement
- Expand vocational training and STEM education programs.
- Strengthen partnerships between educational institutions and industries.
- Provide incentives for FDI companies to train and upskill local employees.
- Infrastructure and Logistics Improvements
- Invest in better road networks, power supply, and digital connectivity.
- Develop logistics hubs and warehouses to support FDI companies.
- Enhance trade agreements to facilitate easier access to international markets.
- Financial and Investment Support
- Offer more flexible financing options for FDI firms.
- Improve foreign exchange policies to ease profit repatriation.
- Develop venture capital and private equity ecosystems to support business expansion.
FDI remains a vital component of Bhutan’s economic growth strategy. While the country has made progress in attracting foreign investments, addressing key challenges is essential to unlocking its full potential. By implementing investor-friendly policies, enhancing infrastructure, and investing in human capital, Bhutan can position itself as an attractive destination for FDI in the long run.
With a strategic focus on sustainable and high-value industries, Bhutan has the opportunity to harness foreign investments for job creation, economic diversification, and long-term prosperity. The government’s proactive engagement with investors and commitment to business reforms will play a decisive role in shaping the future of FDI in Bhutan.
