Factors Influencing Foreign Direct Investment Inflow to Nepal: A Comparative Study with Bangladesh
Creators: name: Bhupendra, Rai,
Publisher: name: Torrens University Australia
Year: 2025
Subjects: classificationCode: 350207
subject: International finance

description: Since the 1990s many nations, particularly developing countries, have viewed the ability to attractforeign direct investment (FDI) as a vital component for attaining sound economic growth. Thisresulted in an upsurge in FDI in many developing regions which include Asia, Latin America, SubSaharan Africa and Central Eastern Europe. Most South Asian countries also saw an increase in FDIexcept for Nepal that consistently received low FDI inflows comparatively. While commendable effortswere made by the Government of Nepal (GoN) to create an investor-friendly climate throughsignificant legislative and policy reforms, the magnitude of FDI flows to the country remained modest.This study aims at identifying the key determinants of FDI inflows to Nepal over the expansive 41-yearperiod from 1980 to 2021 with the principal objective of understanding the key drivers of FDI. It alsoinvestigates whether the factors that positively or negatively influences FDI to Nepal have the sameeffect for Bangladesh, a South Asia neighbouring country also competing for FDI inflows.The study uses a Non-parametric analysis to first determine the association between FDI and 10variables which include inflation rate, corporate tax rate, exchange rate, market size, trade openness,infrastructure (represented by the two variables - electric power consumption and mobile cellularsubscriptions), wage rate, political stability and corruption index. It further employs Ordinary LeastSquares and Ridge Regression Analysis to determine a causal relationship between the variables andFDI inflows. The key findings of the study are:Electric power consumption, mobile cellular subscriptions, andmarket size are significant andpositively impact FDI inflows to Nepal whereas mobile cellular subscriptions and tradeopenness are significant and positively affects FDI in Bangladesh.While market size affects FDI positively for Nepal, for Bangladesh it has a negative significanteffect, a finding that is intuitively difficult to explain.Trade openness and wage rate showa positive significant effect for FDI in Bangladesh whereasthese variables are insignificant for Nepal. The finding for Bangladesh on wage rate is oppositeto what is mostly found in empirical literature which concludes that low wage rates indeveloping countries contribute to increased FDI flows. However, an increase in wage ratecould be interpreted as having the capacity to attract more skilled manpower which wouldattract multinational corporations (MNCs).Other variables such as exchange rate, inflation rate, and corporate tax rate are insignificantin both countries, and electric power consumption is insignificant in Bangladesh.Based on the identified factors influencing FDI to Nepal and Bangladesh, policymakers of Nepal arerecommended to prioritise investments to improve electric power infrastructure, expand mobilecellular networks, and enhance an investor-friendly business environment to attract and sustain FDI.In the context of Bangladesh, policymakers are recommended to focus on creating a favourablebusiness atmosphere that strengthens mobile cellular subscriptions, has less trade restrictions, andmust ensure it has skilled manpower for the MNCs.