The kingdom of Bhutan is a relative stranger to foreign investment activity. There are less than 30 officially approved FDI projects in this small, sparsely populated and landlocked country, hidden in the eastern foothills of the Himalayas and sandwiched between the mighty economies of China and India. Bhutan is perhaps best known for its chosen stance of relative isolation, if not quite a hermit kingdom. But all this might be about to change. In 2005, the former king – Jigme Singye Wangchuck – announced that elections would be held in the country for the first time, and that his son, Jigme Khesar Namgyal Wangchuck, would assume the throne one year later. He is now one of the world’s youngest monarchs. And, following national elections in 2008, Bhutan is now one of the world’s youngest democracies.

The pursuit of happiness


Bhutan is the spiritual home of the concept of ‘gross national happiness’ (GNH), which seeks to balance the pursuit of economic growth with other factors that affect the quality of life. The four pillars of GNH are sustainable development, preservation and promotion of cultural values, conservation of the natural environment and good governance. Nobel laureate economist Joseph Stiglitz, who recently paid his second visit to Bhutan, is an advocate of GNH, having been critical of the more typical headlong and shortterm pursuit of GDP growth by many countries.

But Bhutan’s government also recognises the basic need for the economy to grow and has been searching for ways of delivering on the pledges made in the 2008 elections to develop a more robust, sustainable and vibrant economic base.

Unusually for a sovereign country, Bhutan’s government has not turned to members of the international donor community to help it come up with an economic development strategy; instead, it has retained management consultancy McKinsey & Company as advisers.

In 2005, the government issued its first rules and regulations on FDI, following a policy document on the issue three years previously. The rules were relatively liberal in tone, but certainly did not trigger a large wave of FDI inflow.

There were just four FDI projects approved in the country in each of 2006, 2007 and 2008, and a mere three projects in 2009. So in mid-2009 a new FDI policy document was issued by the Ministry of Economic Affairs and was approved in May this year by the fledgling parliament.

One aim of the new policy is to trigger greater private sector investment in a country where the public sector still dominates and the vast majority of private domestic firms are very small businesses. Foreign investment is needed to stimulate job creation, as domestic investment activity is not sufficient, even for a country with a population of less than 1 million.

Tourism boost

Thanks to the stunning natural beauty of Bhutan, the tourism sector has seen some of the largest private foreign investment, notably in a number of top-end resorts – such as those of Uma and Amankora – that serve as luxury staging posts for well-heeled travellers in a country that boasts just one airport and no domestic flights.

India’s Punjab Bank also opened a jointventure commercial bank – Bhutan’s first – in the capital, Thimphu, in January.

However, Bhutan’s investment policy contains a relatively small list of ‘negative sectors’ that are closed to FDI. One-hundred-percent foreign ownership is permitted in many service sector fields, while foreign ownership in the manufacturing sector is capped at 74%, and 51% for financial services. Conversely, foreign equity in an FDI project must be at least 20%. Foreign investment in new projects or existing businesses is permitted, although the latter must entail an increase in equity size and the issuance of new shares, to thwart outright acquisitions of local firms.

Foreign portfolio investment, such as in the 20 or so companies listed on Bhutan’s sleepy stock market, remains off limits. Bhutan has also yet to decide whether it wants to pursue World Trade Organisation accession. But it does look as if Bhutan is slowly coming out of its shell.