The impact of external DEBT, FDI inflows and financial development on Nepalese export performance: A gravity modeling approach

Abstract

The primary objective of this thesis is to examine how external debt, Foreign Direct Investment(FDI) and financial development impact Nepal’s export performance. This research is motivated by the need to better understand the factors that influence Nepalese exports and it utilizes a unique dataset that includes Nepal and its top 25 trading partners over a 13-year period from 2007-2019. This study employs a balanced panel and applies the gravity model to align with the framework and econometric advances. The research findings indicate that external debt and financial development have a positive and statistically significant impact on Nepal’s export performance. On the other hand, FDI inflows have a significant but negative impact. The study also reveals that the gravity variables, such as Nepal’s GDP and population as well as the GDP and population of its trading partners, have a significant impact. Another variable, distance, which serves as a proxy for transportation costs, was found to have a negative impact, supporting the previous studies. To my knowledge, this thesis study is the first to use the gravity model of trade to investigate the impact of external debt, FDI inflows and financial development in Nepal. As such, it seeks to contribute significantly to the existing literature both from an empirical and policy perspective. Based on the scientific procedures, the study suggests several strategies including infrastructure development that focuses on trade and manufacturing for GDP growth, creating an investment-friendly environment, using debt for trade policies and logistics and linking education to enhance the export-oriented production system. Keywords: Export, Gravity model, CEPII, Panel data