Business Environment

Two common methods of environmental scanning are:

1. Systematic (formal) scanning: The firm collects information regularly and in a planned way through market research, surveys, government and industry reports, and a dedicated planning unit.
2. Ad hoc scanning: A one-time study done when a specific issue arises, such as a new law, a new competitor or a sudden change in demand.

Other methods include irregular (continuous informal) scanning and competitive intelligence.

Organizational culture is the shared values, beliefs and norms of a firm. Its impact on business:

• It shapes employee behaviour, motivation and commitment, and so affects productivity.
• It guides decision making, ethics and customer service, and so affects reputation.
• A strong, positive culture supports teamwork, innovation and acceptance of change, which helps the firm adapt to its environment.
• A weak or toxic culture raises employee turnover and resistance to change.

The scope of supply chain management (SCM) covers:

• Procurement and sourcing of raw materials
• Production and operations planning
• Inventory management and warehousing
• Logistics and transportation
• Demand forecasting and order management
• Distribution to retailers and customers
• Supplier and customer relationship management
• Returns (reverse logistics) and information flow among partners

The major economic dimensions of Nepal are:

• Economic system: A mixed economy with public, private and cooperative sectors.
• Structure: Agriculture, a growing services sector (tourism, trade, finance) and a small industrial sector.
• Remittance dependence: Remittance forms a large share of GDP and foreign exchange.
• Trade: A large trade deficit, with heavy dependence on India for trade.
• Other features: Low per capita income, unemployment, poverty and inflation linked to India, and a growing role of the private sector.

Liberalization means reducing government control and restrictions on the economy, such as on trade, investment, licensing and prices, so that market forces can work more freely.

Example: After 1990 Nepal removed licensing in most industries, allowed foreign investment and private banks, reduced tariffs and made the currency convertible on the current account. As a result, private banks, airlines, telecom and insurance companies entered the market.

• Electronic Transactions Act, 2063 (2008): Gives legal validity to electronic records, digital signatures and online contracts, and penalises cyber crimes.
• Consumer Protection Act, 2075 (2018): Protects consumers against defective goods, misleading advertising, hoarding and unfair practices, and provides a complaint and compensation system.
• Others: Nepal Rastra Bank's payment and settlement rules for online payment, the Contract Act, and the Individual Privacy Act, 2075.

The political system affects business in these ways:

• Stability: A stable government gives policy continuity and attracts investment, while frequent changes of government create uncertainty.
• Policies and laws: Taxation, trade, industrial and labour policies are made by the government and directly affect costs and profits.
• Infrastructure and incentives: Government spending on roads, power and subsidies shapes business opportunities.
• Risk: Strikes, bandhs and political unrest disrupt operations and raise costs.
• Corruption and bureaucracy raise the cost of doing business.

The main focus of Nepal's IT policy (Information Technology Policy, 2072 and the Digital Nepal Framework) is:

• Building a knowledge-based society and economy through ICT
• Expanding ICT infrastructure and broadband access to all areas
• Promoting e-governance and digital public services
• Developing IT human resources and the IT industry, including software export and start-ups
• Making IT use safe through cyber security and legal frameworks

Two regional trade agreements in South Asia are:

1. SAFTA (South Asian Free Trade Area), under SAARC.
2. BIMSTEC Free Trade Area, among the Bay of Bengal countries (Nepal, India, Bangladesh, Bhutan, Sri Lanka, Myanmar, Thailand).

(Also: SAPTA and the Nepal-India Treaty of Trade.)

The Nepal Trade Information Portal (NTIP, ntp.gov.np) is a single government website that gives traders complete information on export, import and transit procedures.

• It lists the documents, licences, fees, tariff rates and the laws and agencies involved for each product.
• It improves transparency and reduces the time and cost of trade.
• It was developed by the Ministry of Industry, Commerce and Supplies with support from the World Bank and in line with the WTO Trade Facilitation Agreement.

The business environment in Nepal is changing quickly because of several new forces.

1. Federal structure: After 2015 the three tiers of government (federal, province, local) make their own taxes and rules. This brings both local opportunity and compliance complexity.
2. Digital economy: Mobile wallets, QR payments, e-commerce, fintech and IT services (such as eSewa, Khalti, Daraz) are growing fast, supported by the Digital Nepal Framework.
3. Liberalization and foreign investment: Policies like the Foreign Investment and Technology Transfer Act, 2075 and the Industrial Enterprises Act, 2076 give incentives and open sectors for investment.
4. Hydropower and tourism: Hydropower export to India and Bangladesh, and the revival of tourism, create large opportunities.
5. Remittance and consumer change: Remittance-led demand, a young population and urbanisation are changing consumption patterns.
6. Regional integration: Membership of SAFTA, BIMSTEC and WTO increases market access and competition.
7. Challenges: Political instability, weak infrastructure, power and skill shortages, a large trade deficit and the effects of climate change and global shocks.

Overall, Nepal offers new opportunities, but firms must be flexible and innovative to benefit from them.

Environmental scanning is the continuous process of collecting and analysing information about external events and trends so that a firm can identify opportunities and threats. The main steps are:

1. Identify the environment to scan: Decide which parts matter (economic, political-legal, socio-cultural, technological, competitive).
2. Collect information: Gather data from sources such as newspapers, government and NRB reports, surveys, trade bodies, the internet, customers and suppliers.
3. Analyse and interpret: Study the data for trends and cause-effect relationships, using tools such as PEST/PESTEL and SWOT analysis.
4. Forecast: Predict likely future changes and their possible effects on the firm.
5. Identify opportunities and threats: Decide which developments help or harm the firm.
6. Communicate to management: Report findings to decision makers in time.
7. Formulate strategy and monitor: Use the findings in planning, then keep monitoring and update the scan, because the environment keeps changing.

Organizational structure is the formal arrangement of tasks, authority and reporting relationships in a firm. It affects performance in these ways:

• Coordination and communication: A clear structure removes confusion about who does what. Flat structures speed up communication, while tall structures slow it down.
• Decision making: Centralised structures give control but delay decisions. Decentralised ones allow faster, local response.
• Efficiency: Specialisation by function increases efficiency, but it can create silos.
• Adaptability: Flexible structures (matrix, team-based) respond better to a changing environment and encourage innovation.
• Motivation and accountability: Clear roles and delegated authority raise morale and make performance easier to measure.
• Cost: Too many layers raise management cost.

A structure that fits the firm's strategy, size and environment improves performance; a poor fit causes delay, conflict and waste.

Monetary policy is the use of money supply, credit and interest rates by the central bank (Nepal Rastra Bank) to achieve price stability, growth and a stable external sector. Its tools include the bank rate, the cash reserve ratio (CRR), the statutory liquidity ratio (SLR), the policy rate and open market operations.

Impact on business

• Expansionary policy (lower rates, lower CRR) makes loans cheaper, so investment, borrowing, production and consumer demand rise.
• Contractionary policy (higher rates, higher CRR) makes credit costly and scarce, so expansion slows and demand falls.
• Cost of capital affects project viability, profits and share prices.
• Inflation control keeps input costs and prices predictable.
• Exchange rate and liquidity: Nepal's currency is pegged to the Indian rupee, which affects import and export competitiveness. Directed lending rules (for example to productive sectors and priority sectors) also change credit availability.

Firms must therefore watch NRB's annual monetary policy when planning finance and investment.

Political risks in Nepal

• Political instability: Frequent changes of government cause policy changes and delay decisions.
• Strikes and bandhs: Disrupt production, transport and sales.
• Policy and legal changes: Sudden changes in tax, tariff or investment rules.
• Labour unrest and union pressure, and in some cases extortion or harassment.
• Corruption and bureaucratic delay in permits, land and approvals.
• Cross-border political relations, such as border blockades, which hurt trade and supply.

Managing the risks

• Scan the political environment and keep contingency plans.
• Build good relations with government and stakeholders; use industry associations (FNCCI) to lobby.
• Diversify markets, suppliers and products.
• Maintain buffer stocks and alternate routes.
• Follow all laws strictly and keep ethical conduct; use political risk insurance and the Investment Board's protection for large projects.

Socio-cultural factors are the values, beliefs, lifestyles and demographic features of society. Changes in Nepal affect business as follows:

• Demographic change: A young and urbanising population creates demand for education, housing, fast food, mobile and online services.
• Changing lifestyles: Nuclear families, working women and more exposure through media and migrants change buying patterns, for example ready-to-eat food and branded clothes.
• Migration and remittance: Increased income in households raises spending but reduces the local labour supply.
• Education and awareness: Better-informed consumers demand quality, safety and good service.
• Cultural festivals and traditions (Dashain, Tihar) create seasonal demand peaks.
• Attitudes to work and business: A growing entrepreneurial attitude and a more positive view of private business.

Businesses must adjust products, marketing and HR policies to these changes, while respecting local culture, language and religion.

The Cottage and Small Industry Development Board (the question's SCIDB) is the government body for promoting small and cottage industries in Nepal, working under the Ministry of Industry, Commerce and Supplies, and the Department of Cottage and Small Industries.

Its role

• Policy support: Advises government on policies and programmes for small and cottage industries.
• Registration and facilitation: Helps with registration, technical advice and one-door services.
• Finance: Helps access to credit, subsidised and priority-sector loans.
• Training and entrepreneurship: Offers skill, management and entrepreneurship training.
• Technology and marketing: Supports technology transfer, product design, trade fairs and market linkages.
• Regional development: Promotes traditional and local products (handicrafts, food, textiles), creating jobs in rural areas and reducing poverty.

Through these activities it helps build local enterprises, increase employment and income, and reduce import dependence.

Labour migration means Nepalis, mostly young men, going abroad (Gulf countries, Malaysia, India, Korea and others) for work. Remittance is now about a quarter of GDP or more, so the effects on the economy are large.

Positive consequences

• Macroeconomic stability: Remittance finances the trade deficit and keeps the balance of payments and foreign exchange reserves in surplus, which supports the exchange rate peg with the Indian rupee.
• Poverty reduction and consumption: Households receive income, which has reduced poverty and increased demand for goods and services.
• Savings and financial sector: Remittance raises bank deposits and supports fintech, banks and remittance companies.
• Unemployment relief: Migration reduces pressure on the domestic labour market.
• Skills and investment: Returnees bring skills and savings that can be used for small businesses.

Negative consequences

• Dependence: The economy becomes vulnerable to shocks abroad, such as a Gulf recession, or a pandemic.
• Dutch-disease effects: Remittance pushes up consumption, imports, land prices and inflation, while the real exchange rate rises and hurts exports.
• Labour shortage and brain drain: Agriculture and industry face shortages of workers and skilled workers, and wages rise. The country loses its young productive population.
• Low productive use: Most remittance is spent on consumption, housing and gold, not on productive investment.
• Social costs such as family separation and ageing in villages, which affect the long-term workforce.

Impact on the business sector

• Opportunities: Growing demand for consumer goods, real estate, finance, telecom and education services; remittance and travel agencies grow.
• Problems: Higher labour cost, shortage of workers in construction, manufacturing and farming; weak manufacturing growth because of import-based consumption.

Conclusion

Migration supports short-term macroeconomic stability, but long-term growth needs the government to channel remittance into productive investment (remittance bonds, SMEs, agriculture), create domestic jobs and make migration safe and skill-based.

Nepal is a member of SAFTA, BIMSTEC, SAARC, the WTO (2004), the India-Nepal Trade Treaty and others. Regional trade agreements (RTAs) aim to lower tariffs and barriers among member countries.

Challenges in integration

• Weak production capacity: Nepal has a narrow export base and low productivity, so it cannot make use of the preferences. The exports-to-imports ratio is very low.
• Dependence on India: Most trade and transit are with India. India's non-tariff barriers, such as quarantine, standards, para-tariffs and port delays, limit Nepal's exports.
• Landlocked geography: High transport cost, long transit time and dependence on Indian ports.
• Poor infrastructure: Roads, customs points, power, testing laboratories and logistics are weak.
• Non-tariff barriers and sensitive lists: Countries keep many products on sensitive lists, and rules of origin are hard to meet.
• Revenue loss: Customs duty is an important source of revenue, so lower tariffs reduce it.
• Trade deficit and weak negotiating power; limited institutional and technical capacity to negotiate and enforce.
• Political tensions in the region (for example India-Pakistan) slow SAARC and SAFTA.
• Quality standards (SPS/TBT) are difficult for Nepali producers to meet.

Impact on Nepalese businesses

• Positive: Access to a large market, cheaper raw materials and capital goods, technology transfer, foreign investment, more competition leading to better quality, and export opportunities for products such as tea, cardamom, handicrafts, herbs and hydropower.
• Negative: Import competition harms infant industries, which may close; imports increase, deepening the trade deficit; small firms with low capacity lose market share; and the government loses revenue.

Conclusion

RTAs offer large opportunities, but Nepal must improve infrastructure and trade facilitation, build standards and testing capacity, diversify and add value to exports, and strengthen negotiation skills, so the benefits exceed the costs.

Artificial intelligence (AI) means systems that perform tasks needing human intelligence, such as learning, prediction, language understanding and decision making. Nepal has started using AI in business, although at an early stage.

Positive role

• Customer service: Chatbots and virtual assistants in banks, telecom and e-commerce give 24-hour service.
• Banking and finance: Credit scoring, fraud detection and risk analysis in banks and fintech (eSewa, Khalti) reduce loss.
• Marketing and sales: Personalised recommendations, targeted advertising and demand forecasting.
• Operations: Automation of routine work such as data entry, accounting and inventory, which lowers cost and errors.
• Agriculture and tourism: Crop disease detection, weather prediction, and smart trip planning.
• IT outsourcing and start-ups: Nepal's IT firms can export AI-related services, creating jobs and foreign exchange.
• Decision making: Data analytics gives managers better and faster information.

Critical view (limitations and challenges)

• Weak infrastructure: Internet quality, electricity and data centres are limited.
• Shortage of skilled human resources and a brain drain of IT experts.
• High cost and low awareness among SMEs; most firms are small and traditional.
• Lack of data and Nepali-language tools; data quality is poor.
• Job loss risk in routine work such as clerical jobs and call centres.
• Legal gaps: No clear AI, data protection and ethics laws; risks of privacy violation and bias.
• Cyber security risks and dependence on foreign technology.

Conclusion

AI can raise productivity, competitiveness and innovation in Nepal's business sector, but benefits will be limited unless the country builds digital infrastructure, trains workers, creates an AI policy and regulation, and encourages SMEs to adopt it. A balanced approach, using AI to complement rather than replace human workers, is best.

Legal changes are new or amended laws and regulations. In Nepal, after the 2015 constitution and economic reforms, many business laws have been revised. They affect cost, competition, investment and ethics.

Major legal changes and examples

• Industrial Enterprises Act, 2076: Simplified industry registration, classified industries by size and gave incentives. It encouraged new investment in manufacturing.
• Foreign Investment and Technology Transfer Act, 2075: Raised the limits for foreign investment (no minimum amount in many sectors), allowed 100 percent FDI in many sectors and allowed profit repatriation. It attracted FDI to IT and tourism.
• Special Economic Zone Act, 2073: Gave tax and duty privileges to firms in SEZs.
• Companies Act, 2063: Allowed one-person companies and reformed corporate governance.
• Electronic Transactions Act, 2063 and Consumer Protection Act, 2075: Legitimised online business and protected consumers. Firms must improve the quality and honesty of their products.
• Labour Act, 2074 and Contribution-Based Social Security Act, 2074: Set minimum wages, working hours, bonus and social security contributions. They raise labour cost but improve workers' rights and productivity.
• Banking and Financial Institutions Act, 2073 and Securities Act: Increased capital requirements, which led to mergers of banks and strengthened the financial sector.
• Tax reforms: The Income Tax Act, 2058, the VAT Act, 2052, the Public Procurement Act and the new federal system with local-level taxation change compliance cost.
• Public-Private Partnership and Investment Act, 2075: Promote private participation in infrastructure.

Influence on businesses

• Positive: easier entry, incentives, investment and growth, better protection of consumers, workers and investors, more transparent markets and foreign trade.
• Negative: higher compliance and labour costs, frequent changes create uncertainty, overlapping laws among the federal, provincial and local governments, and weak enforcement.

Conclusion

Legal changes are opening up the Nepali business environment, but their effect depends on stability, consistency and effective enforcement. Firms must monitor legal developments and adapt quickly.

(a) Components of the task and general environment

Task (specific) environment:

1. Competitors: Indian tea producers (Darjeeling, Assam) and other tea exporting countries.
2. Customers: Domestic consumers and buyers in India, Europe, the USA and Germany.
3. Others: Suppliers of fertiliser, labour and workers' unions, regulators such as the Nepal Tea and Coffee Development Board and NARC.

General environment:

1. Economic: High capital costs, exports and trade with India.
2. Political-legal: Government support, trademark and logo registration, Indian import ban demand and Germany's quality tests.
3. Technological: Modern technology use, NARC research.
4. Socio-cultural: Customer preference for organic, eco- and bio-friendly products, strikes and worker productivity.
5. Natural: Climate change.

(b) Opportunities and threats

Opportunities

• Nepal is self-sufficient in CTC tea and has a large international demand for Orthodox tea.
• The international trademark and logo give a unique identity and higher prices.
• Growing demand for organic tea in Western markets.
• NARC research on a distinct Nepali variety and a possible Nepali brand.
• Only four of 20 million kg is Orthodox, so there is room to expand high-value production.
• Export growth: 12 million kg is already exported.

Threats

• Indian demands to ban non-organic Orthodox tea from Nepal.
• Quality and chemical residue problems (the German test), which can damage reputation.
• Strong competition from Indian tea and other countries.
• Climate change, frequent strikes, low labour productivity and high capital cost.
• Weak government support and a long (at least three years) conversion to organic, with possible shortage of fertiliser and fall in output.

(c) Strategies to stay competitive in globalization

1. Quality and organic certification: Shift gradually to organic production and follow international standards (eco-friendly, bio-friendly, HACCP, ISO), with regular residue testing.
2. Branding and differentiation: Use the new trademark and logo to build a unique Nepali brand, the "Himalayan" origin, and geographical indication.
3. Product mix and value addition: Increase Orthodox, specialty and packaged tea, tea bags and blends instead of bulk exports.
4. Market diversification: Reduce dependence on India by entering Europe, the USA, Japan and the Middle East, and through trade fairs and online sales.
5. Technology and research: Adopt modern machinery and apply NARC research; improve productivity.
6. Cost reduction and productivity: Train workers, improve labour relations and use efficient methods; seek cheaper finance.
7. Cooperation and government support: Collaborate through the Tea Board and associations for lobbying, subsidies and trade diplomacy, and form cooperatives and joint ventures.
8. Sustainability: Climate-smart farming and tourism-linked tea estates.

(d) Importance of innovation

Innovation is the introduction of new products, processes and methods. It is important for Nepal's tea industry because:

• Product innovation, such as Orthodox, organic, flavoured and green tea, and a new Nepali variety developed by NARC, creates new markets and higher prices.
• Process innovation (modern processing technology, mechanisation, organic fertiliser methods) reduces cost, raises productivity and improves quality.
• Packaging and branding innovation, such as the logo, trademark and tea bags, differentiates Nepali tea from Indian tea.
• Marketing innovation, such as online sales and direct export, gives access to new customers.
• Innovation helps to meet changing consumer preferences (organic, health-conscious) and respond to challenges such as climate change and a labour shortage.
• It creates a lasting competitive advantage and helps the industry grow and survive in global competition.