The Role OF Foreign Direct Investment Inflows In Nepal

A Seminar Paper

By
Name: Shashi Bhusan Yadav
Bachelor of business Administration (BBA)
Second Semester

Submitted to
Faculty of Management / Department
People’s campus
Tribhuvan University

September, 2024
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Acknowledgement

I would like to extend my sincere gratitude to Mr. Ganesh Paudel for his invaluable guidance and support
throughout the preparation for this seminar report on the role of FDI inflows in Nepal.His constructive
criticism and encouragement motivated me to delve deeper into the intricacies of FDI and its impact on
Nepal's Economic landscape.I am also thankful for his patience and willingness to engage in meaningful
discussions that enriched my understanding of the subject matter.His expertise in the field has been a guiding
light,steering me throughout the complexities of economic theories and their practical implications

Thank you, Mr. Ganesh Paudel sir for being a beacon of knowledge and inspiration.

Shashi Bhusan Yadav

BBA Second Semester
People’s Campus
 Table of content

CHAPTER I......................................................................................................................................................5
INTRODUCTION..............................................................................................................................................5
1.1 Background Of The Study....................................................................................................................5
1.2 Statement of the Problem...................................................................................................................6
1.3 Objectives of Study...........................................................................................................................6
1.4 Significance of the study......................................................................................................................6
1.5 Methodology.........................................................................................................................................6
1.5.1 Research Design.........................................................................................................................6
1.5.2 Nature of Data...........................................................................................................................6
Chapter II.........................................................................................................................................................8
DESCRIPTION AND ANALYSIS.....................................................................................................................8
2.1 Theoretical Review...............................................................................................................................8
2.2 Empirical Review..................................................................................................................................9
2.3 Data Analysis.....................................................................................................................................10
Chapter III......................................................................................................................................................17
3.1 Conclusion.............................................................................................................................................17
3.2 References..............................................................................................................................................18
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List of Tables

Table 1: FDI Inflows by Economy and Region……………………………………………..10

Table 2: FDI Stock…………………………………………………………………………..13

Table 3: FDI Stock by Major Sectors……………………………………………………….14

Table 4: Province-Wise FDI Stock…………………………………………………………15

Table 5: Foreign Assets and Liabilities of Nepal…………………………………………..16

List of Figures

Figure 1: Net FDI Inflow………………………………………………………………………….11

Figure 2: Approved FDI and Actual Net FDI Inflows…………………………………………12

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CHAPTER I

INTRODUCTION

1.1 Background Of The Study

Foreign Direct Investment (FDI) Plays a Significant role in the economic development of developing
economies. The infusion of FDI serves as a mechanism for bridging gaps in domestic capital availability to
sustain a desired economic growth and development trajectories. FDI brings not only financial resources but
also advanced technology, managerial expertise and access to global markets.Nepal has initiated institutional
and legal reforms in recent decades with the aim of promoting FDI to complement the resource gap in capital
formation.Gradual liberalisation of FDI inflows in various sector has been encouraged by creating an
investment-friendly environment and prioritising foreign investment-related reforms.There are several legal
frameworks for guiding and encouraging FDI in Nepal as follows:

Foreign Investment Policy, 2015,

Nepal Rastra Bank Foreign Investment and Foreign Loan Management By-law, 2021(Second Amendment)

Nepal started its effort to attract Foreign Investment (FDI) since the sixth five-year Plan (1980-1985), but an
FDI promotion strategy was only adopted in 1992. After the Restoration of Multiparty democratic system in
the country in 1992,the elected government adopted the new policy measure in several economic spheres
including new Industrial policy for speeding up the process of industrialization through mobilizing the Local
capital as well as attracting foreign investment and technology in the country.The Foreign Investment and
Technology Transfer Act 1981 as amended in 1922 lays down the law governing foreign investment and the
applicable rules and regulation. The Industrial Policy 1922 identifies foreign investment promotion as an
important strategy in Achieving the objectives of increasing industrial production to meet the basic needs of
the people,and to pave the way for the improvement in the balance of payments. The industrial policiy of
1992,Industrial Enterprise Act 1992, Foreign Investment and Technology Transfer Act 1992 have made
many provisions to the foreign investors with Facilities and concessions especially for tax facilities,
licensing and also for the settlement of disputes regarding VISA facilities. 1996 amendment eliminates the
fixed assets limit and expands the scope of foreign investment in all industries except those few on the
Negative list.

Reliable FDI statistics are crucial for the analysis for its trend, and cross-border financial assessment.
Moreover, it is important to identify the sources of foreign investment and recipient industries.such data
helps policy makers to attract and utilise foreign investment and formulate evidence-based policy. In this
context ,NRB has conducted this survey to update FDI statistics in Nepal up to 2022.The influx of Foreign
Direct Investment has become a pivotal force driving the economic growth. As of 2023, the country has
attracted substantial foreign capital, transforming its economic landscape.The historical context of Nepal’s
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economic development sets the stage for understanding the current role of FDI in sharping the nation’s
prosperity

1.2 Statement of the Problem

The role of Foreign Direct Investment (FDI) inflows in Nepal is a critical area of concern.despite efforts to
attract foreign investment, there is a need to examine the impact of FDI on Nepal’s economic development,
employment generation, and overall socio-economic indicators.

1.3 Objectives of Study

● To know the role of FDI inflows in Nepal.
● To identify the challenges and barriers to Foreign Direct Investment
● TO assess the Impact of FDI on Nepal’s economy
● TO explore opportunities for enhancing FDI inflows

1.4 Significance of the study

The significance of studying FDI in Nepal Lies in its Potential to Stimulate Economic growth, create
employment opportunities and contribute to infrastructure development.Understanding the impact of FDI
can Help policymakers formulates strategies to attract and manage foreign investment effectively, fostering
sustainable economic progress in the country.

1.5 Methodology

1.5.1 Research Design

The research adopts a mixed- methods approach,combining both quantitative and methodologies to
comprehensively analyse the role of Foreign Direct Investment (FDI) inflows in Nepal .Quantitative
methods involve the collection and analysis of numerical data.A longitudinal study will be conducted to
analyse historical trends in FDI, utilising data from reliable sources such as the Nepal Rastra Bank and other
relevant financial institutions.statistical tools and software will be employed to interpret and visualise trends.

Qualitative methods encompass in-depth interviews, surveys,and case studies.stakeholders including

government officials, industry experts, and representatives from the business community will be interviewed
to gain insights into the impact of FDI on key economic indicators and its role in shaping Nepal’s economic.

1.5.2 Nature of Data

Data collection Methods:

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Quantitative Data : Use statistical methods to analyse numerical data, including FDI inflows
figures,economic indicators, and relevant financial metrics .This involves collecting data from official
reports, databases, and surveys.

Qualitative Data : Employ qualitative research methods to gather non-numerical information,such as insights
from interviews and opened- ended survey responses. This provides a deeper understanding of
attitudes,motivations, and challenges related to FDI.
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Chapter II

DESCRIPTION AND ANALYSIS

2.1 Theoretical Review

Historically,the first attempt to explain international trade and FDI was considered Ricardo’s theory of
comparative advantages (Denisia, 2010).Though realistic, one should note that FDI cannot be explained by a
theory that is based only on two countries, two products and perfect mobility of resources.Recently, capital
flow, international trade and FDI marked an enormous increase. The choice of FDI depends on preliminary
analyses, factor analyses and long-term objectives of the investors. Numerous theories and hypotheses are
used to separate FDI from international trade theory . To clarify the terminology, we use the term ‘general
FDI theory to encompass all the mainstream theoretical variety on the issue.In this line,theories and
hypothesis seeking to explain the motivation behind FDI are related with MNCs’ choice of particular entry
modes and localization.several studies provide overviews of FDI theories :for example,Agarwal (1980);
Calvet (1981); Helldiver (1989); Cantwell(1991);Meyer (1998);Markusen(2002) and more
recently,Faeth(2009) and Denisia (2010).Overall, in particular based on a classification proposed by
Faeth(2009),there are 12 main branches of FDI Theory:

1. Monopolistic advantage theory ,( Hymer,1960;Vernon,1966)

2.Aggregate variables as determinants of FDI (Scaperlanda and mauer,1969)
3.The substitute theory (Mundell,1968),
4. The complement theory (Kojima,1975),
5. OLI Paradigm (Dunning,1981),
6.The theory of traditional multinational activity determinants of horizontal FDI according to the proximity-
concentration hypothesis and vertical FDI according to the factor-proportions Hypothesis (Markusen,1984;
Helpman,1984),
7.The resource-based theory (Wernerfelt,1984; Barney,1991),
8.The business network theory(Jarillo,1988;Ebers and Jarillo, 1988),
9.Theory of new economic geography (Krugman,1995),
10.Diversified FDI and risk diversification model (Rugman,1975,1976;Kopits,1979; Miller and
Pras,1980),and
11.Policy variables as determinants of FDI (Bond and Samuelson, 1986;Black and Hoyt, 1989;Haufler and
Wooton,1999;Haaland and Wooton,1999).

Another approach of studying FDI theories is by classifying all theories under Two headings: i) from
macroeconomic point of view,FDI is a “particular form of capital flows across borders, from countries of
origin to host countries, which are found in the balance of payments.The variable of interest is capital flows
and stocks, revenues obtained from investment”(Denisia 2010);and ii) from microeconomic point of view
that tries to put forward the main motivations of foreign investors (Lipsey, 2001),It also examines the
“consequences to investors, to the country of foreign and to the host country,of the operations of the
multinationals rather than investment flows and stock”(Denisia 2010)

Even the newest theories on FDI cannot Capture entire complexity of FDI, and other forms of foreign
Investment, thereby,are difficult to find a general framework, approach or theory that is accepted and
explains everything about FDI and some classification of FDI theories may result in some overlap(Agarwal
1980; Lizondo 1991; Dunning 2008; Vasechko 2012).
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Despite numerous classifications of FDI theories , for our purposes, the standard classifications and approach
employed by the author is the one followed by Agarwal (1980),discussed and analysed in Moosa (2000) and
Denisia (2010) that splits most FDI theories into two categories:1)Theories assuming perfect markets; 2)
Theories assuming imperfect markets

2.2 Empirical Review

Falki (2009) has done a study on the pact of foreign direct investment.he study has provided every variable
like domestic capital, foreign-owned capital and labour force of the country as the major. The study was
done with the help of regression analysis, and the endogenous growth theory was applied. The major finding
of the study are,there is a negative statically insignificant relationship between GDP and FDI inflows. Adam
and Tweneboah(2009) examined the Foreign Direct Investment and Stock Market development in
Ghana.This study shows that FDI has a significant influence on the development of the country.There is a
long-run relationship between the FDI and the exchange rate with the stock exchange of the country. The
study by Hoang, Wiboonchutikula and Tubtimtong showed that there is a strong impact of FDI on economic
growth in Vietnam. The main findings of the study are there is a significant effect in the financial market,
capacity human capital and the technology of the foreign direct investment in the country.Aizhan and
Makaevna (2011) explored the “Impact of Foreign Direct Investment on Economic Growth in Kazakhstan”
to show the role played by FDI in Kazakhstan is one of the rapidly growing and one of the most FDI
attractive countries which attracted 58 percent of all FDI to landlocked developing countries in 2009.
According to UNCTAD, Kazakhstan is FDI attractive.Meanwhile,it has a high dependence on the energy
sector. Being highly dependent on the energy sector can have a negative impact on the economy of
Kazakhstan. They suggested that it could be better to direct FDI to other sectors to assure long-term
growth.In a study done by Pyakurel(2018),on foreign direct investment, FDI in the context of Nepal has
several location factors like cost, market, infrastructure,technological,political,legal and socio-cultural
factors.The main objective was to assess volume and status of FDI and to analyse contributions of FDI on
employment generations through the secondary data followed by descriptive/explanatory research
approach.The findings were that the country owns its unique advantages and opportunities of FDI are useful
for a country’s prosperity. In a study on Economic liberalisation in Nepal by Bista (2005),the relationship
between GDP and FDI was examined. Multiple regression models, following the econometric model, was
used to analyse the data.The major findings are there is a positive relationship between the FDI and
GDP.The major determinants of the FDI are FDI stock,GDP, policy environment and security. This shows
that FDI is the potential resource which can contribute to the GDP with the help of industrial growth in the
nation. In a survey done by Nepal Rastra Bank(2018) on Foreign Direct Investment in Nepal, it shows that
The FDI inflows are low while compared to the neighbouring countries.Compared to the other sectors, the
service sector is seen receiving the major share of the FDI. The second one is the industry, and the third one
is the agricultural sector. Within the service sector, transport,storage and communication receive a higher
amount of the share .This shows that the major attraction of FDI is in the service sector.The study has shown
that 39 countries have invested in 252 firms where India is the top investor in terms of paid-up capital .The
above literature shows that there are higher chances of FDI in the context of developing countries like Nepal.
The relation between the FDI and the GDP is also seen positive as there are some hindrances in the
implementation .If the FDI friendly acts are implemented, and the conducive environment is made, then FDI
can be a good resource for the development of the nation.
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2.3 Data Analysis
Global and Regional Trends in FDI Flows
The World Investment Report 2024 published by UNCTAD shows that global FDI flows decreased
marginally by 1.8 percent to USD 1,331.8 billion in 2023 from USD 1,355.7 billion in 2022. Excluding the
effect of a few European conduit economies, global FDI flows decreased by more than 10 percent in 2023.
2.2. FDI in developed economies increased 9 percent to USD 464.4 billion in 2023 from USD 426.2 billion
in 2022. However, inflows to developing economies decreased 6.7 percent to USD 867.4 billion in 2023
from USD 929.6 billion in 2022 (UNCTAD).

Table 1: FDI Inflows by economy and region

(USD billion)

Year 2018 2019 2020 2021 2022 2023 Percent

change
2023

World 1376.1 1729.2 984.6 1621.8 1355.7 1331.8 -1.8

Developed 674.8 1024.8 337.6 731.8 426.2 464.4 9.0

economies

Developin 701.4 704.5 647.0 890.0 929.6 867.4 -6.7

g
economies

Asia 501.9 497.8 513.1 666.5 677.8 621.1 -8.4

China 138.3 141.2 149.3 181.0 189.1 163.3 -13.7

Singapore 73.1 97.5 74.9 126.7 141.1 159.7 13.1

Hong 104.2 73.7 134.7 140.2 109.7 112.7 2.7

Kong-
China

South Asia 52.3 59.1 71.0 52.7 57.5 36.0 -37.5

Source:UNCTAD (2024)

FDI inflows to Asia decreased 8.4 percent from USD 677.8 billion in 2022 to USD 621.1 billion in 2023.
The region remains the largest recipient of FDI, accounting for 46.6 percent of global FDI. However, the
inflows are highly concentrated among its largest recipients: China (USD 163.3 billion), Singapore (USD
159.7 billion), and Hong Kong-China (USD 112.7 billion). Following the global trend, FDI inflows to South
Asia decreased 37.5 percent to USD 36 billion in 2023. FDI in India, the largest FDI recipient of the sub-
region, decreased 43 percent with inflows of USD 28.2 billion in 2023.

FDI Inflows to Nepal

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In line with the global trend, gross FDI inflows decreased 59.6 percent to Rs.7.8 billion in 2022/23. The divestment of
foreign investment (repatriation of investment) during 2022/23 remained at Rs.1807.3 million which is around 23.3
percent of gross FDI inflows (NRB, 2023a). 2.6. Net FDI inflows to Nepal decreased 67.9 percent to Rs.6.0 billion in
2022/23 (Figure 1).

Figure 1: Net FDI Inflows

Source:NRB(2023)
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Figure 2: Approved FDI and Actual Net FDI Inflows

Figure 2 presents the approved FDI and actual net FDI inflows over the period. Between 1995/96 and
2022/23, the total actual net FDI inflow stood at around 35.0 percent of total FDI approval.The FDI approval
may simply indicate an intended investment or there may be significant time lags between approval and
actual investments. In some instances, the realisation of the approved investment may take place over several
years as usually seen in projects with longer gestation periods. As a result, there exists a gap between FDI
approval and actual net FDI inflows.
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Foreign Direct Investment in Nepal : Survey ResultFDI Stock

This chapter summarises the results of the survey related to FDI stock in Nepal as of mid-July 2023. The
comparison across the previous survey reports needs to consider the change in coverage due to the addition
and removal of FDI enterprises.

Table 2: FDI Stock

(Rs million)

S.N Components As of Mid- July Percent Change

2020 2021 2022 2023 2021/22 2022/23

1. Paid-up Capital 108072.3 122,885.5 141962.5 155,909.6 15.5 9.8

2. Reserves 67071.9 71982.1 83786.1 99,662.4 16.4 18.9

3. Loans 23,376.6 33079.3 38,581.0 39,924.6 16.6 3.5

Total FDI Stock 198520.8 227946.9 264329.5 295,496.6 16.0 11.8

Source:Survey Estimate(NRB)

The stock of FDI has increased by 11.8 percent during 2022/23 and stood at 295.50 billion as of mid-July
2023.The paid up capital, reserves, and loans have increased 9.8 percent, 18.9 percent, and 3.5 percent
respectively.

FDI Stock by sectors

The electricity, gas, steam, and air conditioning sector holds the highest FDI stock at Rs. 88.61 billion,
followed by the manufacturing sector at Rs. 86.77 billion, and the financial and insurance services sector at
Rs. 76.75 billion.The industrial sector accounts for 59.7 percent of total FDI stock . It includes the
electricity, gas, steam, and air conditioning sector and manufacturing sector along with the construction
sector and the mining and quarrying sectors, the latter two sectors with minimal FDI stock.
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Table 3: FDI Stock by Major Sector

(Rs. million)

S.N Sectors As of Mid-july Percent change

(%)

2021 2022 2023 2021/22 2022/23

Amount Share in
Total (%)

1. Electricity,gas,steam and air 70147.3 86852.6 88611.8 30.0 23.8 2.0

conditioning

2. Manufacturing 67352.0 77928.7 86774.6 29.4 15.7 11.4

3. Financial and Insurance 61399.5 67780.5 76752.2 26.0 10.4 13.2

services

4. Information and 10858.2 12733.0 19741.4 6.7 17.3 55.0

communication

5. Accommodation and food 12975.9 13884.1 18546.2 6.3 7.0 33.6

services

6. Education 1926.4 2074.7 1697.2 0.6 7.7 -18.2

7. Construction 492.0 623.3 855.7 0.3 26.7 37.3

8. Agriculture,forestry and 240.9 267.9 302.6 0.1 11.2 12.9

Fishing

9. Human Health and social 338.9 735.4 1077.6 0.4 117.0 46.5
Work

10. Mining and Quarrying -2.9 36.1 83.5 0.0 - 131.1

11. Transport and storage -6515.9 -7678.8 -7840.1 -2.7 17.8 2.1

12. 8734.7 9092.1 8894.0 3.0 4.1 -2.2

Total 227946.9 264329. 295496.6 100.0 16.0 11.8

5

Source: Survey Estimates(NRB)

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Table 4: Province-Wise FDI Stock

Bagmati province constitutes the highest share of FDI stock (59.7 percent) whereas Lumbini, Karnali, and
Sudur Paschim Province account for less than 1.0 percent of total FDI stock

Province FDI Stock Share in Total(%)

Koshi 43,451.8 14.7

Madhesh 25960.2 8.8

Bagmati 176430.6 59.7

Gandaki 44644.2 15.1

Lumbini 2238.9 0.8

Karnali 52.5 0.02

Sudur Paschim 2718.4 0.9

Total 295496.6 100.0

Source:Survey Estimate(NRB)

Capacity Utilizations

The survey also captures the capacity utilization of FDI enterprises in manufacturing sector. The capacity
utilization stood at 60.69 percent on average11 during 2022/23 which was 71.1 percent a year ago.

Sales from Operation and Profitability

The survey also includes data on sales from the operation of FDI enterprises. The total sales of surveyed
enterprises during 2022/23 stood at Rs.450.23 billion which was Rs. 445.4 billion a year ago. Similarly, the
average return on equity (ROE) of surveyed FDI enterprises stood at about 11.61 percent for 2022/23, which
was around 14.3 percent a year ago.

International Investment position(IIP) of Nepal

The international investment position (IIP) is the statistical statement that shows the value and composition
of financial assets of residents at a point in time which are claims on non-residents and liabilities of residents
of an economy to non-residents. As of mid-July 2023, the foreign assets increased 24.3 percent to Rs.1,654.5
billion against a decrease of 10.2 percent in the previous year. The foreign liabilities increased 8.0 percent to
Rs.1,729.4 billion compared to an increase of 14.3 percent in the previous year. Consequently, net IIP
 16
remained negative of Rs.74.9 billion in 2022/23 compared to the negative of Rs.271.3 billion in the previous
year.

Table 5: Foreign Assets and Liabilities of Nepal

(Rs. million)

Description As of Mid-July Percent Change

2021 2022 2023 2021/22 2022/23

Assets 1481123.9 1330654.4 1654496.9 -10.2 24.3

Liabilities 1401003.4 1601,991.7 1729394.5 14.3 8.0

o/w Direct Investment 227,946.9 264329.5 270290.8 16.0 2.3

Net International Investment 80120.5 -271337.2 -74897.6 - -

position (IIP)

Source: NRB(2023)

The foreign assets are direct investment, portfolio investment, official reserve assets, and other investments,
which include other equity, currency and deposits, loans, trade credit and advances, and other account
receivables. Official reserve assets constitute the highest share of foreign assets (87 percent) followed by
other account receivables (7.5 percent) and currency and deposits (4.1 percent) . As of mid-July 2023, the
official reserve assets increased 25.8 percent to Rs.1,440.1 billion against a decrease of 11.9 percent in the
previous year. Other account receivables increased 73.6 percent while currency and deposits under foreign
assets decreased 21.0 percent in the review year . The foreign liabilities cover direct investment, portfolio
investment, and other investments, which include other equity, currency and deposits, loans, trade credit and
advances, other account payables, and special drawing rights. Loans constitute the highest share of foreign
liabilities (70.5 percent) followed by direct investment (15.6 percent) and trade credit and advances (7.4
percent). As of mid-July 2023, foreign loan liabilities increased 8.4 percent to Rs.1,218.43 billion compared
to an increase of 13.7 percent in the previous year. Direct investment and trade credit and advances under
foreign liabilities increased 2.3 percent and 8.0 percent respectively in the review year .
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Chapter III

3.1 Conclusion

The above analysis shows that despite the growing salience of FDI, not only for traditional business-related
activities but also for financing development, LDCs in general have not been able to tap this opportunity.
South Asia as a whole has been receiving a reasonably good amount of FDI,although the total FDI received
by the region represents a meagre 2.6 percent of the global FDI inflow. Even within this, 80 percent of FDI
went to India, leaving other seven countries in the region with a share of remaining 20 percent. It is
disheartening to note that despite a recent growth in FDI achieved by Nepal, the country still receives the
lowest amount of FDI in the region.

Nepal's FDI potential is heavily under-exploited, despite the fact that the country offers a huge potential not
only for market seeking investors but also resource seeking ones. A country of nearly 28 million people,
where the richest 20 percent of the population has a combined income of USS 7.26 Billion, cannot be
considered a small market by any standards. Besides, due to favourable market access opportunities it has
received, particularly in the European and Indian markets,market-seeking investors should find it worthwhile
to invest in Nepal. Resource-seeking investors can invest in Nepal to tap the immense hydropower
potentials. Besides, those foreign investors,who are now mature enough and can take long-term risk, could
make investment in other infrastructure projects such as road, rail and airport construction.
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3.2 References
1.MOICS (2023). Industrial Statistics [2021/22]. Ministry of Industry, Commerce and Supplies

.2.NRB (2023). A Survey report on Foreign Direct Investment in Nepal. Nepal Rastra Bank

3. NRB (2023). Current Macroeconomic and Financial Situation (Based on Annual data of 2021/22). Nepal
Rastra Bank

4.NRB (2023). Current Macroeconomic and Financial Situation (Based on Annual data of 2022/23). Nepal
Rastra Bank
.
5.OECD (2008), OECD Benchmark Definition of Foreign Direct Investment 4th Edition Organization for
Economic Cooperation and Development.

6.UNCTAD (2024). Nations World Investment Report 2024. United Confèrence on Trade
and Development.