Foreign Direct Investment (FDI) is a potential source of capital, technology and knowledge. However,
without technology transfer or other positive "spillover" effects, it is a second-best option as a
source of investment (as compared to domestic investment) because of the repatriation of capital
gains. In Bhutan, the purpose of government and public policy is to advance Gross National
Happiness (GNH) - a philosophy and policy framework for sustainable development - rather than
GDP. GNH takes a holistic approach to development and posits that human happiness (or rather,
wellbeing) is more important than mere economic growth, and is often characterised by its four
pillars of good governance, equitable socioeconomic development, cultural preservation, and
environmental conservation. In 2002, Bhutan opened up to FDI for the first time with the intent of
helping the country achieve the goals of GNH. Hitherto unexplored, my MPhil thesis asks whether
FDI has had any impacts on sustainable development in Bhutan (as defined by GNH) and indeed
whether it promotes the goals of the GNH framework. Focusing on the hospitality sector, I spent
three months conducting qualitative research in three different locations in Bhutan. In addition to
context interviews with relevant stakeholders in the capital Thimphu, I did two case studies of
communities in Paro and Wangdi districts which have received FDI in the form of luxury resorts.
These case studied included both individual interviews as well as focus group discussions with local
community members. I find that in spite of high expectations, FDI hotels have had only a marginally
positive impact on their local communities in terms of socioeconomic development and in Paro has
contributed towards a shortage of freshwater for subsistence farming. Overall, there has been a
positive spillover effect in the country's hospitality sector (via. competition and labour mobility) but
it is a poor target for FDI in terms of technology transfer and employment generation. My broader
findings indicate that FDI in Bhutan is not yet aligned with the overall development goals of the
country, risks exacerbating inequality, and appears to undermine the principles of GNH with an
increasing influence of free-market logic. The case of Bhutan offers lessons on the need for careful
government regulation to ensure welfare gains from FDI.