In most least-developed and developing economies, foreign capital continues to be a vital driver of economic progress. This capital typically enters through loans, grants, or foreign direct investment (FDI). Each modality offers distinct advantages and drawbacks.
Loans are often accompanied by high interest rates and repayment obligations, creating debt burdens if not managed prudently. Grants, while effective for supporting essential services like healthcare, education, and disaster relief, tend to be short-term, narrowly targeted, and limited in scope. They rarely fuel large-scale economic transformation.
In contrast, FDI emerges as a particularly valuable mechanism for long-term, stable, and transformative capital inflows. When coupled with sound macroeconomic policies, efficient institutions, openness to trade, and consistent regulatory frameworks, FDI can become a catalyst for sustainable development. Research and development literature increasingly emphasize the synergy between all three capital types—loans can finance high-return infrastructure, grants can be channeled into social development, and FDI can drive private sector growth and technological advancement.
Why FDI Matters
There is broad economic consensus that FDI is a powerful enabler of growth, especially in economies with limited domestic capital formation. For countries like Nepal, where national savings are insufficient to fund large-scale industrial or technological projects, FDI is not merely beneficial—it is essential. FDI expands infrastructure, scales up industrial capacity, and diversifies the economic base.
It also serves as a conduit for job creation, directly and indirectly. This in turn boosts household incomes, fuels consumer demand across economic strata, and reduces poverty and inequality over time. Additionally, increased profitability from foreign-backed ventures leads to expanded government revenues through corporate and income taxes.
A defining advantage of FDI is the transfer of knowledge, professionalism, and innovation. Multinational corporations often bring with them advanced technology, efficient production methods, international management standards, and cutting-edge research capacity. Through strategic partnerships, joint ventures, or spillover effects, these benefits are gradually internalized by domestic enterprises, enhancing productivity and elevating national competitiveness.
FDI also strengthens human capital through employee training and skills development. Evidence from sectors such as banking and IT in Nepal illustrates how multinational input has led to improved operational efficiency and customer service within local institutions.
Stability, Scalability and Spillovers
Foreign businesses also bolster public finances through revenue streams that governments can reinvest in critical sectors like transportation, education, and justice. By fostering competition or collaboration, FDI pressures domestic firms to raise their standards, creating a more dynamic private sector. Unlike volatile portfolio inflows or short-term trade credits, FDI tends to be more stable and less prone to abrupt withdrawal, offering sustained developmental benefits over the long term.
Contrary to fears of displacement, the private sector of host countries generally welcomes FDI. In Nepal, too, the private sector sees FDI not as a threat but as a vehicle for partnership, growth, and innovation.
Take holistic measures to boost FDI in Nepal
Global Lessons on Leveraging FDI
Around the world, countries have used FDI as a cornerstone of their economic transformation. China, for instance, achieved explosive growth by attracting export-oriented and high-tech FDI. Singapore leveraged political stability, geographic advantage, and pro-business regulations to emerge as a global business hub. Ireland attracted high-tech and pharmaceutical giants with competitive tax policies and a skilled labor force. India drew FDI into infrastructure, telecom, pharmaceuticals, and digital services, spurring job creation and competitiveness.
In South America and Africa, Brazil and Ghana used FDI to strengthen their natural resource sectors, upgrade energy infrastructure, and modernize communications. Even advanced economies like the United States, the Netherlands, France, and Australia receive substantial FDI inflows due to their large markets, innovation ecosystems, and institutional reliability.
Preconditions for Attracting FDI
FDI attraction depends on a set of key national capabilities: political stability, legal protection of investor rights, and effective governance are paramount. A growing domestic market tempts market-seeking investors, while low-cost, skilled labor attracts manufacturing and IT firms. Transparent tax regimes, business-friendly regulations, accessible financing, and enforceable legal frameworks are also crucial.
Equally important is the presence of robust infrastructure—transportation networks, electricity, logistics, and telecommunications—along with streamlined bureaucratic processes and effective investment facilitation bodies. Countries that actively promote exports, establish special economic zones, and participate in global trade often present more compelling investment climates. Targeted promotional strategies like investment summits, foreign roadshows, and one-stop service centers can bridge investor interest with execution on the ground.
Nepal’s Disappointing Record
Despite repeated policy declarations, Nepal’s FDI performance remains discouraging. Inflows plummeted from USD 185 million in 2019 to just USD 57 million in 2024. The reasons are structural, political, and institutional. Nepal struggles with a fragile investment climate, regulatory inconsistencies, and an implementation gap between policy pronouncements and practical delivery.
Investment pledges made at high-profile summits often go unrealized due to weak follow-through mechanisms and entrenched bureaucratic inertia. Inconsistencies in tax policies, especially regarding dividend repatriation, have further shaken investor confidence. The legal infrastructure is outdated and ill-equipped to handle commercial disputes in a timely or competent manner.
The biggest constraint, however, is political instability. Nepal’s political landscape is fragmented, fraught with frequent leadership changes, coalition dysfunction, institutional distrust, and policy unpredictability. These elements make long-term investment planning exceedingly difficult.
The bureaucracy is frequently seen as resistant or apathetic toward foreign investors, often complicating approvals, licences, land procurement, and project oversight. Nepal continues to perform poorly on global ease-of-doing-business rankings: 135th in starting a business (2020), 151st in enforcing contracts, and 175th in paying taxes. These figures underline a persistent reality—painfully slow, opaque, and expensive administrative processes stifle investor engagement. While some improvement was noted in access to credit (ranked 37th), it is not enough.
This reality has not escaped Nepal’s own business leaders. As Mr. Binod Chaudhary, a Nepalese business tycoon turned politician, once remarked: “One has to get approval from 62 windows to start a business in Nepal.” His words encapsulate the frustrating bureaucratic labyrinth that deters both domestic entrepreneurs and foreign investors alike.
Too often, political leaders express interest in attracting FDI through speeches and summits, yet fail to pursue the systematic reforms required to create a truly favorable business climate. This rhetorical support rings hollow unless accompanied by consistent regulatory implementation, transparency, and institutional accountability.
External Challenges
Global headwinds have also exacerbated Nepal’s inward FDI decline. Post-pandemic FDI flows in South Asia contracted amid mounting geopolitical tensions, trade disruptions, and macroeconomic uncertainty. As a landlocked, infrastructure-lagging country, Nepal faces additional challenges in attracting export-oriented FDI.
Investment commitments received during summits are rarely accompanied by binding legal frameworks or follow-up mechanisms, leading to low realization rates. What foreign investors want is clear: timely approvals, legal stability, and mechanisms for resolving disputes. Unfortunately, Nepal continues to lag on all fronts—due largely to the absence of consistent political will and leadership acumen.
Rhetorically supportive of investment, the government—deeply influenced by a confused interpretation of leftist ideology—tends to blur the distinction between political centralization and economic liberalism. Consequently, FDI-friendly policies are often proposed, but are either diluted during execution or sabotaged through implementation delays.
Democracy and FDI: A Complex Relationship
Nepal has been a democratic state for over three decades, primarily dominated by inefficient and inexperienced communist parties. Importantly, global evidence suggests that the relationship between democracy and FDI is complex, not linear. In theory, democracies offer transparency, institutional accountability, and investor protections—conditions viewed favorably by long-term investors. Empirical studies, including Jensen (2003), show that democratic regimes attract up to 70% more FDI than authoritarian ones.
However, a label of democracy alone does not ensure investor security. Nepal demonstrates this paradox. While democratic in form, its institutions remain fragile, public accountability is low, and political actors often prioritize short-term populism over long-term governance. Leaders appear more focused on power than progress. As a result, Nepal suffers from many of the same investor deterrents seen in authoritarian states—with the added burden of bureaucratic inefficiency and legislative ambiguity.
Interestingly, some authoritarian regimes do manage to attract more FDI—especially in resource-based sectors—by offering regulatory exemptions and expedited approvals. Yet, their investment climate can be unsustainable in the absence of institutional checks, leading to potential regulatory capture. Mature democracies with robust legal safeguards, on the other hand, tend to offer stable, long-term investment environments that balance investor interest with national accountability.
A Path Forward
Data reveal that consistently successful FDI recipients—such as the United States, Singapore, China, and Brazil—share common denominators: strong institutions, regulatory predictability, skilled labor, favorable tax policies, and aligned political and economic governance. Regardless of the system—democratic or otherwise—what investors ultimately seek are four things: predictability, security, opportunity, and competent institutions.
Conclusion
To reverse its FDI trajectory and carve a place on the global investment map, Nepal must embark on deep structural reforms. These entail enacting consistent, legally enforceable investment policies; implementing transparent tax regimes; strengthening infrastructure; and fostering a culture of rule-based, professional public administration.
Investment pledges must be followed by clear timelines, legal responsibilities, and performance-based monitoring. Bureaucratic inertia must be dismantled through digital governance, fast-track clearance systems, and inter-agency coordination. A vibrant democracy that delivers professional governance and policy continuity can be a powerful magnet for FDI.
Nepal holds enormous untapped potential—its location between two economic powerhouses (India and China), abundant natural resources, a youthful labor force, and expanding regional connectivity. If political leaders, regardless of ideology, begin prioritizing economic progress over partisan interest, Nepal could redefine itself as a destination not only for capital but for creativity, sustainability, and inclusive growth.
