Factors affecting FDI inflow in Nepal

Abstract

Nepal is least developed and landlocked country. It is located between two giant countries China and India. It lacks resources for economic growth and development. Without investment economic development is impossible within the country. To become a middle-income country and achieve sustainable development goals by 2030, Nepal needs financing gap of Rs. 585 billion per year to meet the SDGs. this resource gap can be bridged through FDI. In order to attract FDI, Constitution of Nepal 2072 encourage to mobilize foreign capital and technology investment for infrastructure in the area of export promotion, and import substitution and infrastructure development to suit national interest. Other Legal and institutional arrangement have been applied and policy reforms on FDI is continuously undertaking. However, Nepal is a poor performer/host of FDI and contribution of FDI in GDP is one of the lowest in the world. This study aimed to analyze trend of FDI inflows from F/Y 2069/70 to F/Y 2078/79 and examine individual impact of geographical location and diplomatic mission on FDI inflows in Nepal. The hypothesis followed was Geographical Location and Diplomatic Mission affects significantly in FDI inflows in Nepal. Mixed research design was applied and collected both quantitative and qualitative data. The quantitative was presented and interpreted to examine the effects of geographical location and diplomatic mission on FDI inflow in Nepal. Whereas, the qualitative data obtained through interview from the experts, employees and foreign investors provided the clear issues, climate of FDI in Nepal. The secondary data obtained through reports and documents of IBN, DOI, FNCCI, NRB, MOF and other sources helped to analyze the trends of FDI in Nepal. Finally, to obtain concrete result analytical generalization technique was applied to merge the qualitative and quantitative data. The regression analysis of trend data showed the insignificant inflow of FDI over 10 fiscal years. Similarly, the regression analysis with FDI inflows as dependent variable and geographical location as independent variables shows positive and significant relationship with each other. The result reported in the regression result are R Square=0.360 and P is equal to 0.001. Therefore, the given hypothesis H1 is accepted. i.e., FDI inflows is affected by geographical location. Likewise, the regression analysis result also proved the hypothesis that FDI inflows is significantly affected by diplomatic mission. The result reported in the regression result are R Square=0.271 and P is equal to 0.001. From the qualitative perspective, Majority of the respondents viewed that lack of adequate infrastructure, increased cost of doing business, production of goods and services, increased transaction cost and time, narrow domestic markets, safety issues and bureaucratic long and complicated legal hassles as a supplementary has broadly demotivated the intention of foreign investors to invest into the country. Most of the respondents viewed that we lack good business environment. The present diplomatic mission on economic development is not sufficient to attract stipulated amount of FDI inflows in Nepal. We are far behind the diplomatic proficiency in order to lobby for trade liberalization, technology transfer, market access, investment promotion, dissemination of potential areas of investments, capacity development of existing human labor and facilitate on investment decisions to foreign investors. The view of the key respondents coincides with quantitative data regarding impact of geographical location and diplomatic mission on FDI inflows in Nepal.

Keywords: Foreign Direct Investment, Geographical Location and Diplomatic mission, Nepal