The impact of foreign direct investment on economic growth in Nepal

Abstract

The study measures the impact of Foreign Direct Investment (FDI) on Nepalese Economy. It examines how FDI affects economic growth in Nepal. It aims to review Nepal's laws and policies on foreign direct investment. It looks at the structure and trends of foreign direct investment inflows in Nepal. And finally, it analyzes the impact of FDI on Nepal's economic growth. To meet the objectives, the researcher followed descriptive as well as analytical type of research design. The latest econometric techniques have been used to test empirically the hypotheses developed using data. Employed a growth model, the study examines the trend and pattern of FDI; the ordinary least square method; the unit root tests with Augmented Dickey Fuller and Phillips-Person methods; the Johansen co-integration test and vector error correction model for defining the LR and SR relationship among the variables with diagnostic tests of the model. It covers the sample period from 1984 to 2020 employing time-series data. This gives 36 annual observations. The data comes from trusted national and international sources. Nepal has adopted several rule and regulation to achieve more FDI. The trend and pattern of FDI is low compared to South Asian region. The main reasons for low foreign investment inflow are political instability, autocratic harassment of foreign investors, insufficient infrastructures, delay of processing, and challenging business environment.

The study reveals that foreign direct investment, government capital expenditure, remittance and openness have a positive impact in long run, the study shows that a 1 percent increase in foreign direct investment, government capital expenditure, remittance and openness are 0.117 percent, 0.41 percent,0.88 percent and 1.77 percent increases economic growth respectively. On the other hand, gross national savings and Moist insurgency have a negative impact on economic growth in the LR, a 1 percent increase in gross national saving, and Moist insurgency are 0.93 percent, 0.44 decreases GDP respectively. Similarly, the foreign direct investment and remittance have a negative relationship in short run, a 1 percent increases in foreign direct investment and remittance have are 0.04 percent, and 0.14 percent decreases on the economic growth respectively other hand, gross national saving have a positive impact in long run, a percent increases in gross national saving, associate with 0.20 percent increases in economic growth. Remaining variables such as capital expenditure, openness and moist insurgency have not statistically significant. Therefore, these variables have no evidence of SR relationship. Therefore, to achieve the economic growth of Nepal with foreign direct investment, Nepal has need invested the foreign direct investment in the reliable projects. There should be policy stability, transparency and accountability in operations, a culture of correct information flow, development of reliable infrastructure, development of skilled human resources, cordial industrial relations, strong capital market, zero corruption and responsible business behavior. Nepal needs to maintain growth momentum to improve market size, frame policies to make better use of their abundant labor forces and follows open trade policies for attracting more foreign direct investment.