Foreign Direct Investment as a Catalyst for Nepal’s Economic Transformation: Insights from Emerging Asian Economies

Abstract

Background: Foreign Direct Investment (FDI) is widely recognized as a critical instrument for economic development, facilitating technology transfer, capital formation, employment generation, and trade integration. Nepal’s FDI inflows remain critically low relative to GDP despite vast untapped potential in hydropower, tourism, and information and communication technology (ICT).

Methods: This study employs a qualitative, document-based comparative research design, synthesizing secondary data from Nepal Rastra Bank, UNCTAD World Investment Reports, and U.S. State Department Investment Climate Statements. Kurtishi-Kastrati's (2013) five-channel framework resource transfer, employment, balance of payments, trade, and competition is applied and extended with absorptive capacity theory to benchmark Nepal's FDI performance against Vietnam, Bangladesh, India, and Sri Lanka, each selected for a specific structural parallel with Nepal's economy

Results: Nepal's net FDI inflows fell about 69 percent, from USD 185 million in 2019 to USD 57 million in 2024, with only 13.59 percent of approved investment actually realized in FY 2023/24. Political instability, inconsistent regulation, and weak profit-repatriation rules limit FDI's benefits, while comparator countries absorb and use FDI far more effectively for jobs, exports, and technology transfer

Conclusion: Nepal's weak FDI performance stems from limited absorptive capacity, not a lack of opportunity. Unlocking its potential requires moving beyond investment-summit pledges toward structural reform, institutional credibility, and targeted strategies in hydropower, tourism, and ICT to realize FDI’s development potential.

Novelty: This study extends Kurtishi-Kastrati's framework with an absorptive-capacity lens for Nepal's post-2026-election context, using the latest (2025–2026) policy data to offer a timely, regionally benchmarked assessment not yet found in the literature.