Foreign Direct Journal Of Nepal

I. Executive Summary

Foreign Direct Investment (FDI) is recognized as a vital catalyst for economic growth and sustainable development in developing economies like Nepal. Despite a long history of policy initiatives aimed at attracting foreign capital, Nepal has consistently faced challenges in translating policy intent into substantial FDI inflows. The nation’s journey began with the Foreign Investment and Technology Transfer Law in 1981, evolving through significant legislative reforms, including the Foreign Investment and Technology Transfer Act (FITTA) of 2019 and recent ordinances in 2025 designed to streamline processes and expand investment avenues.

Currently, FDI commitments in Nepal have shown a recent surge, primarily driven by simplified approval mechanisms such as the automatic route and reduced minimum capital requirements, particularly for the IT sector. However, a persistent and significant disparity remains between these commitments and the actual capital inflows, indicating a “pipeline problem” where pledged investments often fail to materialize. While traditional sectors like hydropower and manufacturing continue to attract investment, there is a notable shift towards services, tourism, and information technology, with China emerging as a prominent investor alongside India.

The procedural framework for FDI in Nepal, primarily governed by FITTA, involves a dual approval system through the Department of Industry (DOI) or Investment Board Nepal (IBN), followed by final clearance from Nepal Rastra Bank (NRB). Despite efforts to streamline these processes, foreign investors frequently encounter bureaucratic inefficiencies, regulatory red tape, and a non-transparent legal system.

Economically, FDI has a proven positive correlation with Nepal’s Gross Domestic Product (GDP) and is critical for capital formation, technology transfer, and job creation, especially in bridging the country’s savings-investment gap. Nevertheless, its overall contribution to Nepal’s GDP remains modest, underscoring an under-realized potential. The nation grapples with a complex web of interconnected challenges, including political instability, policy inconsistencies, inadequate infrastructure, pervasive corruption, and rigid labor laws. These factors collectively increase the “cost of doing business” beyond monetary terms, eroding investor confidence and hindering the conversion of commitments into tangible economic benefits.

To unlock its full FDI potential, Nepal must move beyond legislative reforms to address fundamental issues in governance, administrative capacity, and infrastructure. A holistic approach that fosters political stability, enhances institutional transparency, and improves the practical ease of doing business is imperative for attracting and retaining the sustained foreign investment necessary for achieving its ambitious development goals.

II. Introduction

Foreign Direct Investment (FDI) stands as a cornerstone for economic advancement in developing nations, serving as a critical conduit for capital infusion, technological transfer, and the development of managerial expertise. For a landlocked, resource-constrained economy like Nepal, attracting robust FDI is not merely a supplementary economic activity but a strategic imperative. The nation harbors ambitious aspirations, including its goal to graduate from Least Developed Country (LDC) status and subsequently achieve high-income country status by 2043. Realizing these objectives hinges significantly on its ability to mobilize substantial foreign capital, which can bridge the domestic savings-investment gap, stimulate industrial growth, and foster job creation.

This report undertakes an in-depth examination of FDI in Nepal, navigating its historical evolution, analyzing its current status and prevailing trends, detailing the procedural framework for investment approval, assessing its multifaceted economic impact, and identifying the persistent hurdles that impede its optimal flow. By synthesizing available data and expert analysis, this document aims to provide a comprehensive and authoritative overview, offering insights crucial for policymakers, potential investors, and researchers seeking to understand the dynamics of foreign investment within the Nepalese context.

III. Historical Evolution of FDI in Nepal

Nepal’s engagement with foreign direct investment is rooted in a series of evolving policy initiatives and legislative reforms, reflecting a gradual, albeit sometimes inconsistent, opening of its economy to international capital.

A. Early Policy Initiatives and Legislative Foundations (1980s-1990s)

The formal initiation of foreign investment in Nepal dates back to 1981 AD, with the promulgation of the first Foreign Investment and Technology Transfer Law. This early legislative step laid the groundwork for attracting external capital, albeit within a nascent economic liberalization framework. A more pronounced shift towards an open economic policy occurred around 1990, as Nepal began to actively embrace liberal economic principles and implement measures designed to attract FDI.

A pivotal moment arrived in 1992 with the adoption of an open FDI policy framework and the introduction of a dedicated FDI promotion strategy. This period coincided with the restoration of a multiparty democratic system, leading the newly elected government to implement comprehensive policy measures across various economic spheres. A new industrial policy was a key component of these reforms, specifically aimed at accelerating the process of industrialization by mobilizing both local capital and attracting foreign investment and technology The Foreign Investment and Transfer of Technology Act, 2049 (1992) (FITTA 1992), codified these efforts, establishing the legal requirement for foreign investors to obtain permission from the Department of Industries (DOI) for investment or technology transfer. It also stipulated income tax rates applicable to foreign entities and outlined the permissible amounts of foreign currency repatriation. Furthermore, FITTA 1992 provided a framework for dispute resolution, emphasizing mutual discussion and, if necessary, arbitration based on the United Nations Commission on International Trade Law (UNCITRAL) rules This foundational Act underwent its first amendment in 1996. In these early stages, foreign investments primarily gravitated towards sectors such as manufacturing, tourism, and hydropower. Following the conclusion of the insurgency period (1996-2006), the Government of Nepal has consistently reaffirmed its commitment to fostering an enabling environment for FDI, with a stated objective of driving industrial development, generating employment, and reducing poverty across the nation.

B. Key Acts and Amendments: FITTA 2019 and Recent Ordinances

The legislative landscape for FDI in Nepal has continued to evolve, reflecting ongoing efforts to adapt to global investment trends and enhance domestic attractiveness. The Foreign Investment and Technology Transfer Act (FITTA) was re-initiated in 2014, and subsequently, the comprehensive Foreign Investment and Technology Transfer Act, 2019, replaced its predecessors. This Act represented a significant modernization of Nepal’s approach to foreign investment, aiming to broaden the scope of sectors open to FDI, simplify approval procedures, and reinforce investor rights, including guaranteed profit repatriation and protection against arbitrary nationalization. A core tenet of FITTA 2019 was the principle of national treatment, ensuring that foreign investors receive equitable treatment compared to their domestic counterparts.

More recently, the Nepalese government introduced substantial amendments through an ordinance issued on Poush 29, 2081 (February 6, 2025), further signaling a commitment to promoting foreign investment and technology transfer. These updates are designed to address previous limitations and enhance the ease of doing business:

• The scope of technology transfer has been significantly expanded to encompass a wider array of management and technical services, including those in information technology, marketing, financial services, accounting, engineering, outsourcing, digital data processing, and design services. This reflects a recognition of the evolving nature of global business and the importance of knowledge transfer.
• A crucial change allows for foreign investment in specialized investment funds, such as venture capital funds, registered with the Securities Board of Nepal, a mechanism previously not permitted.⁸ This opens new avenues for diverse forms of foreign capital.
• The ordinance now permits any industry to obtain project loans or financing from foreign financial institutions with approval from Nepal Rastra Bank (NRB), a flexibility previously restricted only to industries with existing foreign investment. This broadens access to international financing for a wider range of Nepali enterprises.
• Repatriation processes have been eased, with the NRB approval timeline for repatriation reduced from 15 days to 7 days, and the appeal period for repatriation decisions at the Ministry of Industry, Commerce and Supplies shortened from 30 to 15 working days. These changes aim to enhance financial fluidity for investors.
• A new provision grants tourist visas to foreign experts, technical, or managerial employees, and their families employed in an industry, addressing a previous limitation that did not extend visa benefits to families.
• Approval processes for industries registered in provinces have been simplified, now requiring only the certificate of industry registration and removing the previous requirement for a recommendation from the provincial ministry. This decentralizes and streamlines bureaucratic steps.
• The government has also clarified and expanded FDI possibilities in emerging business models, explicitly allowing foreign investment up to 70% in ride-sharing platforms and fully permitting “contract manufacturing” without prior limitations, while also broadening the definition of technology transfer to recognize practices like reverse engineering.

C. Major Periods of FDI Inflow and Outflow and Global Rankings

Despite a consistent policy drive to attract foreign investment, Nepal’s historical FDI inflows have remained relatively modest. From 2001 to 2022, FDI inflows as a percentage of GDP ranged between a low of 0.10% (in 2008) and a high of 0.68% (in 2017). This indicates that, unlike many other economies where FDI plays a substantial role, foreign investment has not yet become a significant contributor to Nepal’s economic income.

Nepal’s vulnerability to global economic fluctuations was starkly evident during the Covid-19 crisis. Global FDI flows plummeted by 35% in 2020, and Nepal experienced a corresponding decrease in its FDI inflows, from NPR 37,805.83 million in fiscal year (FY) 2019/20 to NPR 32,172.82 million in FY 2020/21. This decline was further exacerbated by the cancellation of the “Visit Nepal 2020” campaign, which had aimed to boost tourism and related investments. While recent recovery efforts have reportedly rejuvenated interest in key sectors like hydropower, information technology, and digital services , the overall trend in FDI inflows remains concerning, accounting for merely 1% of GDP over the last five years.

Nepal’s standing in global investment attractiveness indices also highlights the challenges. In 2015, the country ranked 124th out of 136 countries in the World Opportunity Index Ranking, with a score of 3.43. Although it saw an improvement to 88th out of 137 countries in the World Competitiveness Index 2017-18 (scoring 4.00), these figures still suggest that considerable effort is required to significantly increase FDI. Furthermore, Nepal’s share in global FDI remained negligible at only 0.01% of the market in 2017 , and the World Bank (2021) explicitly noted that Nepal has not been able to attract as much FDI as its potential suggests.

The historical data reveals a pattern of gradual but inconsistent policy liberalization. While Nepal has a long history of attempting to attract FDI, evidenced by the frequent legislative changes and re-initiations of core laws like FITTA, this very dynamism can be interpreted as a struggle to find a stable and optimal regulatory framework. Each new iteration, while aiming for improvement and greater attractiveness, might inadvertently signal a degree of policy uncertainty to long-term investors who prioritize predictability. This continuous adjustment suggests that previous policies may have been insufficient or faced significant implementation hurdles, necessitating frequent recalibrations rather than a steady, predictable trajectory.

This historical overview also underscores a persistent disconnect between policy intent and actual inflow. Despite the adoption of liberal policies since the early 1990s and the implementation of dedicated FDI promotion strategies, the actual FDI inflows, particularly as a percentage of GDP, have remained remarkably modest. The World Bank’s assessment that Nepal has not drawn as much FDI as it could, despite its efforts, points to a deeper systemic issue. This indicates that the mere presence of a legal framework or a stated policy intent, while necessary, is not sufficient to attract substantial FDI. Other underlying, non-policy-related issues likely impede the translation of policy into tangible investment, creating a persistent gap between Nepal’s aspirations and its achievements in the FDI landscape.

Finally, the historical trajectory demonstrates Nepal’s vulnerability to external shocks and a fluctuating capacity for resilience. The significant drop in FDI inflows during the Covid-19 pandemic, mirroring global trends, highlights how susceptible Nepal’s investment environment is to broader economic downturns. This suggests a lack of inherent resilience in its FDI ecosystem to withstand global crises. However, the subsequent rejuvenation of interest in specific sectors like hydropower, information technology, and digital services post-pandemic indicates an adaptive capacity or a strategic shift in focus towards areas that might be more robust or attractive in a changing global economic climate. This dual observation emphasizes the need for robust domestic policies and diversification strategies to build resilience and attract investment even during challenging times.

IV. Current Status and Trends of FDI in Nepal

The contemporary landscape of FDI in Nepal presents a mixed picture of increasing commitments, evolving investor profiles, and persistent challenges in converting pledges into materialized investments.

A. Recent FDI Commitments vs. Actual Inflows: Analysis of the Disparity

A notable characteristic of Nepal’s FDI performance is the significant disparity between approved or committed investments and the actual capital that flows into the economy. For instance, in FY 2016/17, a substantial NPR 208.04 billion of FDI was approved for 3,905 industries from 90 countries; however, only NPR 10.15 billion of external investments were actually received in the first eight months of that period.³ More recently, in the first nine months of the current fiscal year (mid-July to mid-April), Nepal received FDI commitments amounting to Rs 57.97 billion, representing a significant increase of Rs 27.85 billion compared to Rs 30.11 billion in the same period last year. Despite this surge in commitments, the actual FDI that entered Nepal in the last fiscal year (FY 2023/24) was a mere Rs 5.96 billion.¹² Similarly, Nepal Rastra Bank (NRB) reported actual FDI inflows (equity only) of Rs 8.96 billion during the first nine months of the current fiscal year (ended mid-March), an increase from Rs 6.49 billion in the same period last year. This consistent “pipeline problem” is a critical concern, as the World Bank projects Nepal’s net FDI inflows to remain low, at less than 0.1 percent of the country’s GDP in the first half of FY 2024-25.Overall, the stock of FDI in Nepal has seen some growth, increasing by 14.8% to NPR 227.9 billion at the end of 2020/21 , with a total of Rs 280 billion received as of Baishak in FY 2081.

The persistent gap between commitment and actual inflow represents a significant challenge for Nepal. This recurring pattern across different fiscal years indicates a systemic issue beyond mere seasonal fluctuations. It suggests that while Nepal is becoming more effective at attracting interest and securing pledges from investors, there are significant blockages or deterrents in the subsequent stages of investment realization. These could include complex post-approval procedures, bureaucratic hurdles, or a lack of investor confidence in the operational environment, ultimately leading to a critical “pipeline problem” where a substantial portion of promised capital fails to materialize.

Table 1: FDI Commitments vs. Actual Inflows (Selected Fiscal Years)

Fiscal Year	FDI Commitments (NPR Billion)	Actual FDI Inflows (NPR Billion)	Disparity (NPR Billion)	Actual Inflows as % of Commitments
2016/17	208.04 (Approved) 3	10.15 (Received in 8 months) 3	197.89	4.88%
2019/20	–	37.81 1	–	–
2020/21	–	32.17 1	–	–
2021/22	54.15 12	–	–	–
2023/24	30.11 (Same period last FY) 12	5.96 12	24.15	19.79%
Current FY (9 months)	57.97 12	8.96 (Equity only, 9 months) 10	49.01	15.46%

Note: Data points for commitments and actual inflows may refer to different reporting periods (e.g., full FY vs. 9 months) and may not always be directly comparable for a precise “Actual as % of Commitments” calculation for all years, but the trend of disparity is evident.

B. Major Investing Countries and Their Contributions

Nepal’s FDI landscape is characterized by a diverse, though concentrated, set of investing economies. As of July 2021, Nepal had received FDI from 57 economies. Historically, India has been the dominant source, holding the largest share of FDI approvals (39.08%) in FY 2016/17, followed by China, Hong Kong, South Korea, and British Iceland.³

More recent data, particularly from Nepal Rastra Bank’s 2022 report, continues to position India as a leading FDI investor with Rs 88.59 billion, followed by China (Rs 33.45 billion), Ireland (Rs 20.89 billion), Singapore (Rs 16.7 billion), and Saint Kitts and Nevis (Rs 15.9 billion). However, a significant shift in dynamics has been observed in the last two years (until Jestha 2081), where China has committed the largest FDI, totaling Rs 224 billion, surpassing India, which committed Rs 160 billion. This trend is also evident in China’s emergence as the largest investor in specific sectors like hydropower and manufacturing, where it has reportedly surpassed India. This indicates a strategic shift in Nepal’s primary investment partners, likely influenced by geopolitical factors and China’s expanding regional economic initiatives.

Table 2: Top 5 Countries by FDI Investment/Commitment (Latest Available Data)

Rank	Country	Total FDI Amount (NPR Billion)	Share of Total FDI (%)
1	India	88.59 (NRB 2022 report)	33.5
2	China	33.45 (NRB 2022 report)	12.7
3	Ireland	20.89 (NRB 2022 report)	7.9
4	Singapore	16.7 (NRB 2022 report)	6.1
5	Saint Kitts and Nevis	15.9 (NRB 2022 report)	5.7

Note: While the NRB 2022 report shows India leading in total FDI stock, more recent commitment data indicates China leading in new pledges, signaling a potential shift in future actual inflows.

C. Sectoral Distribution of FDI: Key Industries Attracting Investment

The distribution of FDI across various sectors provides insights into Nepal’s economic priorities and areas of comparative advantage. As per the FDI survey report 2020/21, 694 companies had received FDI approvals from Nepal Rastra Bank. The industrial sector historically accounts for the largest share of total FDI stock (62.6%), with electricity, gas, steam, and air conditioning (predominantly hydropower) constituting 32.8% and manufacturing 29.5%. The service sector holds 37.3% of the total FDI stock, with financial and insurance services at 25.6%, accommodation and food services at 5.3%, and information and communication at 4.8%. The agriculture sector, despite its economic importance, attracts a mere 0.1% of total FDI stock.

Recent commitment data highlights evolving trends in sectoral attractiveness. In the first nine months of the current fiscal year, the service sector attracted the highest amount of investment commitments (Rs 34.92 billion for 63 industries), followed by tourism (Rs 18.38 billion for 189 industries), manufacturing (Rs 2.74 billion for 34 industries), and information technology (Rs 1.11 billion for 185 industries). Energy received Rs 255 million, agriculture Rs 761 million, and infrastructure Rs 20 million.¹² Similarly, in the first ten months of the current fiscal year, the service sector again led with Rs 29.98 billion pledged for 66 projects, with tourism closely behind at Rs 20.73 billion for 213 projects. Communication and IT saw Rs 1.40 billion for 231 projects, and agro- and forestry-based initiatives received Rs 1.42 billion for 10 projects^. Most investment commitments through the automatic route have targeted small-scale industries (272 projects attracting Rs 2.76 billion in pledges), with the information and communication technology sector receiving the highest number of commitments (221 projects) under this mechanism.¹⁰

Table 3: Sectoral Distribution of FDI Commitments (First 9-10 Months of Current FY)

Sector	FDI Commitments (NPR Billion)	Number of Projects	Percentage of Total Commitments (%)
Services	34.92	63	60.2
Tourism	18.38	189	31.7
Manufacturing	2.74	34	4.7
Information Technology	1.11	185	1.9
Agriculture & Forestry	0.761	10	1.3
Energy	0.255	–	0.4
Infrastructure	0.020	–	0.03
Total (approx.)	58.19	481	100

Note: Percentages are approximate based on the provided commitment figures for the first 9 months. Some data points are from 9-month period, others from 10-month period, leading to minor discrepancies in totals.

D. Impact of Recent Policy Reforms: Automatic Approval Route, Revised Minimum Thresholds, and Investment via Funds

The recent surge in FDI commitments is primarily attributed by officials to the amendments in FDI-related laws and a more streamlined approval process. A key reform has been the introduction of an automatic online approval system for FDI in 2023, which was prominently highlighted during the 2024 Investment Summit. This route allows foreign investors to apply online for specific sectors and investments up to NPR 500 million (approximately USD 4 million), receiving immediate preliminary approval. The success of this mechanism is evident: in the first nine months of FY 2024/25, approximately 97% of FDI commitments, totaling nearly NPR 58 billion, were channeled through this fast-track system. This significantly reduces processing time and bureaucratic hurdles for many standard projects.

Another impactful reform is the reduction of the minimum capital requirement for FDI approval from NPR 50 million to NPR 20 million (approximately USD 150,000), a move specifically designed to encourage smaller-scale investments. Furthermore, to bolster Nepal’s burgeoning tech industry, the government removed the minimum capital requirement for investments in the Information Technology (IT) sector when utilizing the automatic route. This policy change makes it considerably easier for tech startups to enter the Nepalese market.

The early 2025 ordinance introduced significant flexibility by allowing foreign investors to make equity investments in Nepali industries by purchasing units of venture capital funds or specialized investment funds registered with the Securities Board of Nepal. This provision opens new avenues for private equity and venture capital flows, offering more diverse participation in local industries. Other notable reforms include the expansion of technology transfer scope, permitting project loans from foreign financial institutions for any industry (not just those with existing foreign investment), easing repatriation processes by reducing approval times, granting tourist visas to families of foreign experts/employees, and simplifying approval for provincially registered industries. These comprehensive changes collectively demonstrate Nepal’s commitment to adapting its regulatory framework to contemporary business trends and enhancing the overall ease of doing business.

The analysis of the current status highlights a persistent gap between commitment and actual inflow, a phenomenon often referred to as the “pipeline problem.” The consistent disparity between investor pledges and the capital that actually materializes in the economy indicates a systemic challenge in converting interest into tangible investment. This suggests that while Nepal has improved its ability to attract initial interest and secure commitments, there are significant bottlenecks in the subsequent stages of investment realization. These could stem from complex post-approval procedures, lingering bureaucratic hurdles, or a lack of investor confidence in the operational environment, ultimately leading to a substantial portion of promised capital failing to materialize. Addressing this conversion deficit is critical for Nepal to fully leverage the potential of FDI.

The recent policy reforms, particularly the automatic route and lowered minimum thresholds, have undeniably driven a surge in FDI commitments, yet the actual impact on capital inflows remains modest. While these reforms have been highly effective in reducing entry barriers and stimulating investor interest and pledges, the volume of materialized investment has not seen a proportional increase. This suggests that while the initial access points for investors are becoming smoother, the underlying issues affecting the conversion of these commitments into tangible investments persist. The observation that the automatic route primarily attracts smaller-scale industries indicates that while the number of commitments may rise significantly, the volume of large-scale capital inflow remains a challenge, necessitating further targeted interventions beyond initial approval.

Furthermore, there is an observable shifting dynamic in investor origin and sectoral focus. Historically, India was the predominant source of FDI. However, recent data indicates China’s growing ascendancy, particularly in hydropower and manufacturing, and in overall new commitments. This signifies a strategic re-orientation in Nepal’s primary investment partners, likely influenced by broader geopolitical and economic alignments. Concurrently, while traditional sectors like manufacturing and hydropower maintain their importance, there is a clear and growing concentration of commitments in the service and tourism sectors, alongside a targeted governmental push for information technology, evidenced by the removal of minimum capital requirements for IT investments. This indicates a positive diversification of Nepal’s economic appeal, moving beyond traditional heavy industries to capitalize on its burgeoning service potential and skilled workforce. This diversification could lead to a more resilient and balanced FDI portfolio for Nepal in the long term.

V. Procedural Framework for FDI Approval in Nepal

Navigating the procedural landscape for Foreign Direct Investment (FDI) in Nepal requires a clear understanding of the governing legal instruments, the roles of various government agencies, and the step-by-step approval process, along with specific capital requirements and prohibited sectors.

A. Governing Legal and Regulatory Instruments

The primary legal framework underpinning foreign investment in Nepal is the Foreign Investment and Technology Transfer Act, 2019 (FITTA). This Act serves as the foundational legislation, comprehensively addressing foreign investment, technology transfer, and the formation of joint ventures. Complementing FITTA are the Foreign Investment and Technology Transfer Regulations, 2021, which provide detailed guidelines for its implementation.

Beyond these core instruments, several other key laws significantly influence the FDI environment: the Industrial Enterprises Act, 2020, which focuses on promoting and regulating industrial enterprises and offers incentives to both domestic and foreign investors ; the Companies Act, 2006, which governs the establishment, operation, and dissolution of companies in Nepal, including registration requirements ; and the Public Private Partnership and Investment Act, 2019 (PPPIA), designed to promote private sector investment, particularly foreign, in infrastructure, construction, and service sectors, while managing public service partnership projects. Matters related to foreign exchange, including the critical aspect of profit and capital repatriation, are regulated by the Foreign Exchange (Regulation) Act 1962 (FERA).Nepal generally adopts a “negative list” approach to foreign investment, implying that all sectors are open to foreign capital unless explicitly restricted or prohibited by law.

B. Roles of Key Government Agencies

The approval and regulation of FDI in Nepal involve a multi-agency framework, with each body playing a distinct role:

• Department of Industry (DOI): The DOI acts as the primary regulatory authority for foreign investments below NPR 6 billion. Its responsibilities encompass initial screening of investment proposals for compliance, issuing operational licenses for approved investments, monitoring the progress of investment implementation, providing guidance and facilitation throughout the investment lifecycle, and verifying adherence to FITTA provisions.
• Investment Board Nepal (IBN): For large-scale foreign investments exceeding NPR 6 billion, or for hydropower projects with a capacity greater than 200 MW, the IBN assumes primary responsibility for approval.⁶ Its jurisdiction extends to major projects in manufacturing, infrastructure, tourism, and other strategic sectors.⁶
• Nepal Rastra Bank (NRB): As the central bank, NRB provides the crucial final approval for the actual infusion of foreign investment into Nepal. It plays a central role in foreign exchange management, authorizing currency transactions, facilitating the repatriation of profits and capital, maintaining a comprehensive database of foreign investments, guiding foreign investors through banking procedures, and monitoring overall capital flows.
• Office of Company Registrar (OCR): This office is responsible for the incorporation and legal registration of companies in Nepal, a mandatory step after initial FDI approval.
• Inland Revenue Office (IRO): Manages the tax registration process for newly established entities.
• Local Ward Office: Handles the local business registration requirements.
• Credit Information Bureau (CIB): Issues a non-blacklist certificate, which is a prerequisite for certain approval stages.
• Department of Immigration: Manages visa-related matters for foreign investors and their expatriate employees, including recent provisions for family visas.
• Industrial Promotion Board (IIPB): Chaired by the Minister of Industry, this board is involved in evaluating and approving large-scale projects, assessing their economic impact and alignment with national development priorities.

C. Step-by-Step FDI Approval Process

The process for obtaining FDI approval and establishing an operation in Nepal involves a series of sequential steps, operating under a dual approval system that requires initial clearance from either the DOI or IBN, followed by final authorization from Nepal Rastra Bank.

Phase 1: Pre-Investment Preparation

Before formally applying, investors undertake preparatory steps:

• Sector Analysis: Investors must diligently identify permitted investment areas, taking into account Nepal’s negative list approach, which specifies prohibited or restricted sectors.
• Legal Structure Selection: Choosing the appropriate legal structure for the investment, typically a limited liability company, is a fundamental decision.
• Investment Threshold Assessment: It is crucial to ensure that the proposed investment meets the minimum capital requirements stipulated by the Foreign Investment and Technology Transfer Act (FITTA).⁶
• Documentation Preparation: All necessary corporate and personal certificates, along with legal documents, must be meticulously compiled, often requiring apostille authentication for documents originating abroad.

Phase 2: Application and Approval

This phase details the formal application and approval stages:

• Step 1: Project Proposal Submission: The foreign investor initiates the process by submitting a detailed project proposal to the relevant authority – either the Department of Industry (DOI) for investments up to NPR 6 billion, or the Investment Board Nepal (IBN) for investments exceeding NPR 6 billion or hydropower projects with a capacity greater than 200 MW.⁷ The proposal must comprehensively outline the project description, investment plan, financial projections, and, if applicable, an environmental impact assessment. Supporting documentation includes the foreign investor’s bio-data or company profile, a corporate resolution to invest in Nepal, a financial credibility certificate from a bank in the country of residence, details on the source and time schedule of investment, a power of attorney, and passport copies.
• Step 2: Investment Approval (DOI/IBN Review): The designated agency conducts a preliminary assessment of the proposal. For larger projects, this may involve inter-ministerial consultation to obtain sector-specific clearances.⁶ A significant recent development is the introduction of an automatic online approval system (accessible via www.imis.doind.gov.np), which allows for expedited preliminary approval for certain sectors and investments up to NPR 500 million, often within a single day. For investments not covered by the automatic route, standard approvals typically take 15-30 days, although practical experience suggests the entire process can extend to 1-2 months.
• Step 3: Company Incorporation: Upon receiving initial FDI approval, the foreign investor proceeds to register the company with the Office of Company Registrar (OCR). This involves reserving the company name, submitting the Memorandum and Articles of Association, appointing directors, and detailing share allotments. This step typically takes 7-10 days.
• Step 4: Tax Registration: The newly incorporated entity must register for tax purposes with the Inland Revenue Office.
• Step 5: Business Registration: Registration with the Local Ward Office is also required.
• Step 6: Industry Registration: The industry must be registered with the Department of Industry.
• Step 7: Non-Blacklist Certificate: Obtaining a non-blacklist certificate from the Credit Information Bureau is a necessary step.¹⁵
• Step 8: NRB Approval for Fund Infusion: Final approval from Nepal Rastra Bank is required to bring the approved investment amount into Nepal. This step typically takes 7-14 days. Required documents include the investment approval letter, bank account details, capital import declaration, and documentation of the source of funds.
• Step 9: Infusion of Investment and Investment Certificate: Once NRB approval is granted, the investment amount is transferred to a local bank account, and an investment certificate is obtained.
• Step 10: Recording at NRB: The infused investment amount is officially recorded by the Nepal Rastra Bank.
• Step 11: Obtaining Necessary Licenses and Permits: Depending on the specific sector and nature of the business, additional licenses or environmental clearances may be required from relevant government agencies before commercial operations can commence.
• Ongoing Compliance Obligations: Companies with FDI are subject to continuous compliance requirements, including holding annual general meetings, filing financial statements with regulatory authorities, renewing tax clearance certificates, and submitting investment monitoring reports.

D. Minimum Capital Requirements and Prohibited Sectors for Foreign Investment

Nepal’s FDI framework includes specific minimum capital requirements and a “negative list” of sectors where foreign investment is restricted or prohibited.

• Minimum Capital Requirements:

• The general minimum investment required for obtaining foreign investment approval has been set at NPR 20 million (approximately USD 155,000) for investments in share capital. This threshold was notably reduced from a previous requirement of NPR 50 million, a change aimed at encouraging a broader range of investments, including those from small and medium-sized foreign investors.
• Specific minimums apply to different investment types: NPR 5 million (approx. USD 38,000) for cash investments, NPR 5 million per single investor entity, and NPR 10 million for venture capital funds.
• Crucially, there is no minimum threshold for technology transfer agreements. Furthermore, in a significant move to boost the technology sector, the government removed the minimum capital requirement for investments in the Information Technology (IT) sector when utilizing the automatic route. This policy aims to facilitate the entry of tech startups into the Nepalese market.
• Prohibited Sectors (Negative List):
  Foreign investors are explicitly prohibited from making investments in industries listed in the Schedule of the Foreign Investment Act, and are also restricted from reinvesting profits or making any form of investment in these scheduled industries.6 These sectors include:

• Primary agricultural production, such as animal husbandry, fish farming, beekeeping, fruits, vegetables, oilseeds, pulses, and dairy business. An exception is made for large-scale enterprises that commit to exporting at least 75% of their output, and the definition of “large industries” has been expanded to include businesses incorporating agricultural technology and mechanization.
• Cottage and small industries.
• Personal service businesses, including hair cutting, tailoring, and driving training.
• Industries involved in the manufacture of arms, ammunition, explosives, nuclear, biological, and chemical weapons, as well as those producing atomic energy and radioactive materials.
• Real estate business (excluding construction industries), retail business, internal courier service, local catering service, moneychanger, and remittance service.
• Travel agencies, tourism guides, trekking and mountaineering guides, and rural tourism including homestay.
• Mass communication media (newspapers, radio, television, online news) and motion pictures produced in national languages.
• Management, accounting, engineering, and legal consultancy services, as well as language, music, and computer training.
• Consultancy services where foreign investment exceeds 51%.
• Ride-sharing services with foreign investment exceeding 70% (though recent amendments allow up to 70%).
• Aircraft operations and services, where foreign investment is restricted to specific limits: 80% for International Airlines, 49% for Domestic Airlines, and 95% for Training Institutes and Maintenance Institutes.

The procedural framework in Nepal reveals a clear effort towards streamlining efforts versus perceived bureaucracy, highlighting an implementation gap. While the government has significantly improved legislative frameworks and introduced efficient mechanisms like the automatic approval route, which promises approvals within a day, investors frequently report encountering complex and opaque government procedures and a working-level attitude that is more hostile than accommodating.¹⁰ The official approval timelines, while seemingly short, often extend to 1-2 months in practice for the full process.⁷ This divergence suggests that the challenge is not solely the written law but the practical application of the law and the prevailing administrative culture. The persistence of bureaucratic inefficiencies, despite policy reforms, indicates a need for comprehensive administrative reforms, capacity building, and a fundamental cultural shift within government agencies to truly foster an investor-friendly environment.

Furthermore, Nepal’s approach to FDI reflects a strategic liberalization with targeted restrictions, representing a balanced approach with inherent trade-offs. The adoption of a “negative list” signifies a general openness to foreign investment, and recent amendments have expanded the scope of technology transfer and allowed investment in specialized funds. The targeted removal of minimum capital requirements for the IT sector is a deliberate move to attract specific types of investment.⁸ However, the continued presence of specific prohibitions and foreign ownership limits in sensitive sectors like primary agriculture (unless export-oriented), cottage industries, certain services, and with specific caps in aviation, indicates a cautious strategy. This approach aims to attract FDI that aligns with national development priorities, such as technology transfer and export potential, while simultaneously seeking to protect perceived sensitive domestic industries. While this provides clarity on permissible areas, the nuanced exceptions and restrictions can add layers of complexity for investors and limit the breadth of potential investment opportunities, suggesting a preference for quality and strategic alignment over sheer volume in certain sectors.

VI. Economic Impact of FDI on Nepal’s Economy

Foreign Direct Investment (FDI) is widely recognized as a critical enabler of economic transformation in developing countries, and Nepal is no exception. Its potential to contribute to Gross Domestic Product (GDP) growth, facilitate capital formation, drive technology transfer, and create employment opportunities is well-documented.

A. Contribution to Gross Domestic Product (GDP) Growth

FDI is consistently identified as a “catalyst for economic growth” and a “crucial element” for Nepal’s sustainable growth and overall development.³ Empirical studies corroborate this perspective, with research covering the period from 2011/12 to 2020/21 revealing a strong positive correlation (correlation coefficient of 0.668) between FDI and Gross Domestic Product (GDP). This finding leads to the conclusion that FDI has a “substantial impact” on Nepal’s GDP.¹⁸ Furthermore, analyses indicate that sectoral FDI investments across various areas, including minerals, construction, energy, manufacturing, and services, also positively influence the country’s GDP.¹⁸

Despite this acknowledged positive impact and potential, FDI’s actual contribution to Nepal’s overall economic income, when measured as a percentage of GDP, has remained remarkably modest. Historical data from 2001 to 2022 shows FDI inflows ranging only between 0% and 0.68%. The current trend is not encouraging, with FDI accounting for merely 1% of GDP over the last five years. The World Bank’s projections for the first half of FY 2024-25 indicate that net FDI will remain less than 0.1% of GDP. This underperformance highlights that while FDI can be highly impactful, Nepal has not yet effectively leveraged its potential to translate into a significant portion of its overall economic output. This is particularly salient given Nepal’s ambitious long-term development goals, including its aim to achieve high-income country status by 2043, which necessitates a significant increase in FDI figures to complement remittance inflows and bolster foreign exchange reserves. The current reliance on remittances for a substantial portion of the economy further underscores the under-realized potential of FDI as a primary economic driver.

B. Role in Capital Formation and Resource Mobilization

FDI serves as a vital source of capital formation for Nepal, a country grappling with inherent resource constraints.⁵ It is particularly crucial for bridging Nepal’s “significant savings-investment gap” and compensating for “limited foreign aid,” which have historically constrained domestic development efforts.¹⁸ Foreign direct investment infuses new and essential resources into the host economy, including not only financial capital but also advanced technology, modern management practices, and effective marketing strategies.¹⁸ The Government of Nepal’s primary objective in mobilizing FDI is to channel it into large infrastructure projects and technological sectors, which are deemed critical for achieving a stable graduation from Least Developed Country (LDC) status and realizing the Sustainable Development Goals (SDGs).¹ This strategic focus underscores FDI’s role not just as a source of financing but as a comprehensive package of resources essential for structural economic transformation.

C. Facilitation of Technology Transfer and Skill Development

Beyond capital, FDI plays a pivotal role in facilitating the transfer of technology, enhancing market competitiveness, and improving human capital within the host country. It induces a spillover of technology, fostering human capital formation and enhancing international trade integration. Foreign investment brings with it management skills that are crucial for Nepal’s industrialization trajectory and its deeper integration into the global economy. In specific sectors, such as agriculture, foreign investors can introduce new farming techniques and advanced technology, leading to improved productivity and value addition. However, it is important to note that Nepal’s relatively low rankings in technological readiness and innovation may limit the full potential for technology transfer and absorption from FDI. The effectiveness of technology transfer also depends on the host economy’s absorption capacity, which is influenced by factors such as education levels and existing infrastructure.

D. Impact on Job Creation and Employment Generation

A significant benefit of FDI, particularly for a developing country like Nepal with a large working-age population, is its vital role in job creation. Since the end of the insurgency, a key objective of the Government of Nepal has been to create an enabling environment for FDI, specifically to support industrial development, generate employment, and reduce poverty. Recent FDI commitments demonstrate substantial potential in this regard: the Rs 56.78 billion in pledges received during the first ten months of the current fiscal year are projected to create approximately 17,746 jobs. More broadly, foreign investment worth approximately Rs 398 billion has been approved in Nepal to date, with a projection to provide employment to over 300,000 people. This underscores FDI’s direct contribution to addressing Nepal’s employment challenges and fostering economic inclusion.

E. Case Studies and Examples of Successful FDI Projects Across Various Sectors

FDI has manifested in various sectors across Nepal, contributing to specific development goals and demonstrating the potential for growth.

• Hydropower Sector: This sector remains a strategic hotspot for foreign investment, leveraging Nepal’s immense hydropower potential. Prominent examples include the Arun III Project, which has attracted significant investment from India’s SJVN Limited, playing a crucial role in boosting energy infrastructure and fostering energy exports to neighboring countries. The Upper Tamakoshi Hydropower Project has similarly been instrumental in enhancing Nepal’s energy infrastructure and continues to attract foreign capital. Another notable project is Upper Trishuli 1, supported by international financial institutions like IFC and ADB, and Korea’s KOSEP, contributing to Nepal’s energy export capabilities.
• Information Technology (IT) Sector: Recent investments in the IT sector, including data centers and software development hubs, are positioning Nepal as an emerging outsourcing destination. This growth is significantly supported by Nepal’s technology-versed and skilled young workforce, which offers competitive labor costs. Examples include Huawei (China) investing in Business Process Outsourcing (BPO) service development and smart city projects, and Ncell (Malaysia’s Axiata Group) contributing to the rapid growth of the ICT sector. Further investments from Japan, South Korea, and the USA in IT infrastructures like data centers and technology parks are also noted.
• Agriculture Sector: FDI has spurred a shift in agriculture towards high-value organic production aimed at export markets. Indian companies are leading investments in herbal products, while Japanese (through JICA) and other Indian agribusinesses are venturing into organic farming and floriculture. Investments from Japan and India in agri-biotech and bio-pharmaceuticals are leveraging Nepal’s rich biodiversity for research and development.
• Tourism Sector: International investments have been instrumental in upgrading tourism infrastructure and services. Marriott International of the USA, for instance, opened its first luxury hotel in Kathmandu in 2019. The Chinese government is funding the construction of the Kerung-Kathmandu-Pokhara-Lumbini railway, which is anticipated to significantly improve tourism connectivity to key destinations like Lumbini. Foreign investment in hotels, resorts, and adventure tourism is on the rise, particularly from China, India, and the USA. Projects like the Chandragiri Hills cable car (with Indian investment) and trekking trails and resorts in Pokhara and Mustang (with Chinese and Malaysian firm investments) are enhancing the overall tourist experience.
• Transport Sector: Key infrastructure projects in the transport sector have also attracted significant foreign investment. Afcons Infrastructure, an Indian company, is involved in the construction of the Kathmandu-Tarai Fast Track. Chinese contractors and the Asian Development Bank (ADB) are contributing to the construction of Gautam Buddha and Pokhara International Airports, which are expected to improve air connectivity and lay the foundation for further tourism growth.⁵
• Mining and Minerals Sector: The Nigeria-based Dangote Group is actively involved in limestone quarrying in Nepal. Firms from Australia, China, and Canada are exploring opportunities in the extraction of gold, copper, and gemstones, indicating a growing interest in Nepal’s mineral resources.
• Financial Services Sector: This sector has benefited from investments by Indian banks and global financial institutions. SBI, for example, is the majority owner of Nepal SBI Bank, and Standard Chartered Bank Nepal is backed by the Standard Chartered Group of the UK. Investors from the US and Europe have also shown interest in fintech and digital banking solutions.
• Education Sector: While not as prominent, some foreign universities and investors have shown interest in partnership compositions. Kathmandu University has collaborations with institutions in Japan, Australia, and Europe, and Indian universities are exploring similar collaborations. Technical institutes like the Lincoln International Academy attract investors from Malaysia and Singapore.⁵
• Health Sector: The health sector has seen foreign investment primarily aimed at developing hospital facilities. Norvic International Hospital operates jointly with India’s Apollo Group, and Grande International Hospital has attracted investments from the USA and Japan. Indian investors are also establishing pharmaceutical production plants to meet local demand.
• Real Estate and Housing Sector: This sector is experiencing growth with investments in both affordable and luxury housing projects from investors in the UK, India, and China. Commercial developments like shopping malls and office spaces are drawing investment from South Korea and the UAE.⁵
• Manufacturing Sector: Foreign firms such as the Indian company Dabur and the UK company Unilever have a significant presence in the production of herbal and consumer goods. Textile factories are attracting investments from China, Bangladesh, and India, particularly benefiting from favorable trade agreements with the USA and Europe. Germany and Japan are also considering investments in pharmaceutical and electronic plants.
• Renewable Energy (beyond hydropower): Beyond large-scale hydropower, solar and wind energy projects are gaining traction. The ADB, Japan, and Germany are financing rural solar installations, while Spain and the World Bank are exploring wind energy projects.⁵
• Media and Entertainment Industry: Bollywood and American companies have invested in Nepal’s movie business, and foreign television channels like Zee TV and Sony Entertainment have entered the market.

The analysis of FDI’s economic impact reveals a significant potential, yet an under-realized contribution to GDP. While FDI is consistently identified as a catalyst for economic growth, with a proven positive correlation with GDP, its actual contribution to Nepal’s overall economic output remains strikingly low, accounting for less than 1% of GDP in recent years. This paradox indicates that Nepal has not yet effectively absorbed or maximized the potential benefits that FDI can offer. The implication is that despite the inherent advantages FDI brings, deeper structural issues within the Nepalese economy are preventing the country from fully translating this potential into substantial, sustained economic growth.

FDI emerges as a critical enabler for addressing Nepal’s fundamental development gaps. It is not merely an additional source of income but a strategic imperative for Nepal to overcome its inherent structural weaknesses, such as a significant savings-investment gap and limited foreign aid. FDI provides not only capital but also essential resources like technology, advanced management practices, and market access, which are crucial for developing large infrastructure projects and technological sectors. The underperformance of FDI therefore has broader implications for Nepal’s long-term prosperity and its ability to achieve ambitious goals like LDC graduation and becoming a high-income country. Without a substantial increase in FDI, Nepal will struggle to bridge these critical development deficits.

Finally, there is evidence of an emerging sectoral impact and diversification driven by FDI. While historical investments concentrated in traditional sectors like manufacturing, tourism, and hydropower, recent trends and case studies indicate a growing and significant interest in new areas such as Information Technology and high-value agriculture. This diversification, often fueled by Nepal’s skilled young workforce and competitive labor costs, suggests a positive evolution in the country’s economic landscape. This shift can lead to more balanced and sustainable growth, reducing over-reliance on a few key sectors and fostering innovation across a broader spectrum of the economy. This diversification is a positive sign for Nepal’s future economic resilience and development trajectory.

VII. Hurdles and Challenges to FDI in Nepal

Despite ongoing efforts to attract foreign direct investment, Nepal faces a complex array of interconnected hurdles that significantly impede its potential. These challenges, ranging from political and bureaucratic inefficiencies to infrastructural limitations and governance issues, collectively create an unfavorable investment climate.

A. Political Instability and Policy Inconsistency

Political instability stands as one of the most persistent and inherent factors contributing to project delays and discouraging FDI in Nepal. The country has experienced a high frequency of government changes, with 26 shifts in leadership over the past 30 years, creating an uncertain environment for both foreign and private investment. This includes intra-party conflicts and instances of parliamentary dissolution, which further exacerbate the instability.¹⁷ The entrenched political partisanship is a significant obstacle to FDI flow. Frequent regime changes lead to “ineffective policy-making and policy intermissions,” often reorienting priorities and significantly slowing down approval processes for long-term development projects, particularly in critical sectors like hydropower. A stark example is the Budhi Gandaki Hydropower Project, which has been severely hampered by political confrontation between successive governments, leading to contracts being cancelled and re-tendered for political and ideological reasons rather than efficiency. Furthermore, the slow implementation of federalism, with its three tiers of government, has created additional administrative and bureaucratic hurdles and delays, as the division of power across these tiers remains a challenge.

B. Bureaucratic Inefficiencies and Regulatory Red Tape

Foreign investors frequently complain about “red tape,” “complex and opaque government procedures,” and a general “working-level attitude more hostile than accommodating to the private sector”.¹ Policy implementation is often hindered by bureaucratic delays, inefficiency, and uncertainty. A significant problem is the lack of interagency coordination, which is a common hurdle. “Lengthy approval processes” are cited as a key factor preventing the optimal exploitation of Nepal’s untapped FDI potential.¹⁸ This is compounded by “overlapping authorities” among various government institutions involved in large projects (e.g., Ministry of Energy, Water Resources and Irrigation; Department of Electricity Development; Investment Board Nepal; Nepal Electricity Authority), which lead to duplication of effort, decision-making traffic jams, and pervasive bureaucratic inefficiencies. For instance, major projects like Arun III and Upper Karnali have suffered from lengthened permit and license processes, Project Development Agreement (PDA) approvals, and Power Purchase Agreements (PPAs) due to these coordination issues. There is an urgent need for a more digital working system and less paperwork to streamline processes.

C. Infrastructure Limitations and Market Access Challenges

Nepal’s landlocked geographical position presents inherent challenges for market access and logistics. Surface transport, particularly road networks, can be difficult, with the shortest reliable route from India to Kathmandu taking a minimum of five hours for just 84 miles. The country’s reliance on a single international airport further creates acute challenges in the air transport sector.¹⁷ Projects located in remote or geologically complex regions face significant logistical hurdles, increasing operational costs and timelines. While improvements are being made, such as the development of additional international airports and integrated checkpoints, inadequate infrastructure remains a fundamental barrier to attracting and efficiently utilizing FDI.

D. Governance Weaknesses, Non-Transparent Legal System, and Corruption

“Weak governance” is explicitly identified as a major obstacle to FDI. Corruption is a pervasive issue, frequently cited by U.S. firms and foreign investors as a significant impediment to maintaining and expanding direct investment in Nepal. Allegations of corruption are common in the distribution of permits and approvals, procurement of goods and services, and the awarding of contracts by Government of Nepal officials. Nepal’s declining ranking on Transparency International’s Corruption Perceptions Index (CPI), slipping to 117th out of 180 countries in 2020 from 113th in 2019, underscores the severity of the problem. Research indicates that corruption negatively impacts FDI, with one study suggesting that a one percent increase in corruption could lead to an approximate 9.1 percentage point decrease in FDI inflows.¹⁰ Corruption increases uncertainty, inflates transaction costs, and adds operational risk for foreign investors. Over time, it systematically undermines a country’s legal and regulatory frameworks, eroding trust in public institutions and actively discouraging further investment.

Compounding this, foreign investors must navigate a non-transparent legal system where basic legal procedures are neither quick nor routine. The bureaucracy often shows a reluctance to apply legal precedent, forcing businesses to re-litigate issues that have been previously decided.Legislation also limits foreign investments in critical services like financial, legal, and accounting, perpetuating regulatory red tape and limiting potential efficiency gains. Furthermore, legislation protecting intellectual property rights (IPR) is still under development, with an IPR Law in draft since March 2017, and its parliamentary consideration remains uncertain due to political instability. The presence of “unclear government regulations” further adds to investor uncertainty. The establishment of transparent and accountable institutions is deemed crucial for creating a predictable environment that attracts sustained foreign investment.

E. Labor Market Issues and Human Capital Shortages

“Labor challenges” are consistently listed among the obstacles to FDI in Nepal. Qualified workers are in short supply, as a lack of economic opportunity and relatively low wages compel millions of Nepali workers to seek employment overseas, leading to a significant brain drain. Businesses frequently express concerns about the need for constant recruitment and retraining of new staff. Rigid labor laws make it difficult to terminate employees, and militant, highly politicized trade unions commonly abrogate negotiated agreements to press new demands, making it challenging for businesses to assemble and retain qualified staff. While labor problems stemming from trade unionism have reportedly subsided with improvements in the political environment, the new Labor Act enacted in August 2017, despite aiming for a more systematic employer-employee relationship, has also increased the costs of doing business. Many small and medium-sized enterprises (SMEs) particularly struggle to meet the requirements of the new Social Security Fund introduced in 2018.

F. Disparity Between Pledged and Realized Investments

As highlighted in the “Current Status” section, the significant disparity between FDI commitments and actual inflows is not merely a statistical observation but a critical hurdle in itself. Despite policy reforms boosting commitments, actual inflows remain modest. This persistent gap reflects a broader challenge faced by developing economies in converting investor interest into tangible capital, indicating that post-approval bottlenecks and a lack of confidence in the operational environment prevent the full materialization of pledged investments.

G. Specific Project-Level Challenges (e.g., land acquisition, environmental assessments)

Beyond macro-level hurdles, specific project-level challenges often derail FDI projects:

• Land acquisition disputes are a major cause of delays, especially for large infrastructure projects. The Budhi Gandaki Hydropower Project, for instance, has been severely hampered by land acquisition and compensation issues, requiring the forced resettlement of over 45,000 people—the largest resettlement case in Nepal’s hydroelectricity sector. Displaced families have protested initial compensation offers as unsatisfactory, demanding market value payments, and confusion in government communication has eroded trust.
• Protracted environmental and social impact assessments (EIA/SIA) processes also contribute to delays. Critics have identified the EIA for the Budhi Gandaki project as flawed, lacking adequate and widespread consultation with indigenous populations, leading to only partial and controversial environmental clearance and adding to administrative approval time. Similarly, the Arun III project faced issues with forced displacement in the absence of viable social measures, delaying the acquisition of social license to operate.
• Technical-geographical challenges are inherent, particularly for projects in remote and geologically complex regions, increasing logistical hurdles and costs.
• Financial constraints and contractor performance issues can also contribute to project delays. For example, issues arose regarding the performance of China Gezhouba Group Corporation (CGGC) on the Budhi Gandaki project, specifically concerning a lack of work plan transparency.
• Natural disasters, governance failures, and socio-environmental conflicts further contribute to derailing project progress.

The challenges faced by foreign investors in Nepal are not isolated but form a complex, interconnected web of hurdles, creating a vicious cycle. Political instability, characterized by frequent government changes and entrenched partisanship, directly translates into policy inconsistency and ineffective policy-making. This, in turn, exacerbates bureaucratic inefficiencies, characterized by overlapping authorities, decision-making traffic jams, and prolonged approval processes. These bureaucratic shortcomings, combined with a non-transparent legal system and pervasive corruption, cultivate an unpredictable and high-risk environment for investors. Such an environment undermines trust and significantly increases the “cost of doing business,” deterring both foreign and domestic investment and perpetuating the low FDI inflows despite ongoing policy reforms. Furthermore, inadequate infrastructure compounds these issues, making operations difficult and costly. This intricate interplay means that addressing one hurdle in isolation, such as enacting new policy reforms, without simultaneously tackling others like bureaucratic capacity, corruption, and political stability, will likely yield limited results. A holistic, coordinated approach is therefore essential to break this cycle.

This situation also highlights a significant discrepancy between legal reforms and practical implementation. While Nepal has made commendable legislative strides by enacting new laws like FITTA 2019 and introducing seemingly efficient mechanisms such as the automatic approval route, foreign investors continue to report frustrations with “complex and opaque government procedures” and a “hostile” working-level attitude. The official approval timelines, though short on paper, often extend significantly in practice. This indicates that the problem is not merely with the laws themselves but with their consistent and effective enforcement and the prevailing administrative culture. The gap between policy intent and on-the-ground reality suggests a critical need for administrative reforms, capacity building within government agencies, and a fundamental shift towards a service-oriented mindset to truly foster an investor-friendly environment.

Finally, the challenges faced by investors in Nepal extend beyond direct monetary costs, encompassing a broader “cost of doing business” that erodes confidence. This includes the increased uncertainty, inflated transaction costs, and heightened operational risks stemming from widespread corruption^. The non-transparent legal system, which often forces businesses to re-litigate previously decided issues, adds further indirect costs and delays. Moreover, labor market issues, such as the shortage of qualified workers, the need for constant recruitment and retraining, and the complexities introduced by rigid labor laws and highly politicized unions, contribute significantly to operational burdens. These non-monetary or indirect costs collectively diminish investor confidence and profitability, making Nepal less competitive compared to other countries that offer not only fiscal incentives but also a genuinely predictable and supportive business environment. Therefore, attracting sustained FDI requires a fundamental improvement in the overall operational climate that reduces these hidden costs.

VIII. Recommendations for Enhancing FDI in Nepal

To unlock its full FDI potential and achieve its ambitious development goals, Nepal must implement a multi-pronged strategy that addresses the systemic hurdles identified in the preceding analysis. Recommendations should focus on translating legislative reforms into tangible improvements in the investment climate.

1. Enhance Political Stability and Policy Predictability:

• Foster Political Consensus: Promote cross-party agreement on core economic policies and long-term development strategies to minimize policy reversals with changes in government. This would provide investors with a stable and predictable regulatory environment, reducing uncertainty and encouraging long-term commitments.
• Strengthen Institutional Autonomy: Insulate key economic and regulatory institutions from political interference, allowing them to operate with greater independence and consistency in policy implementation and enforcement. This builds trust in the fairness and reliability of the system.
• Long-Term Vision for FDI: Develop and consistently communicate a clear, long-term national FDI strategy that transcends political cycles, outlining priority sectors and desired investment types.

2. Streamline Bureaucracy and Improve Ease of Doing Business:

• Implement One-Stop Service Centers Effectively: Fully operationalize and empower existing one-stop service centers (e.g., at DOI, IBN) to genuinely provide all necessary approvals and clearances under a single roof, reducing the need for investors to navigate multiple agencies. This requires enhanced inter-agency coordination and digital integration.
• Digitalize All Approval Processes: Expand and refine the automatic online approval system to cover a wider range of investment sizes and sectors beyond the current NPR 500 million threshold, minimizing physical paperwork and human intervention. This would significantly reduce delays and opportunities for rent-seeking.
• Capacity Building and Mindset Shift: Invest in training government officials at all levels to foster a service-oriented, facilitative mindset towards investors. This addresses the “hostile working-level attitudes” and improves the practical experience of investors.
• Regular Review of Procedures: Establish a mechanism for continuous review and simplification of all investment-related procedures, based on feedback from investors and international best practices.

3. Address Infrastructure Deficiencies:

• Prioritize Critical Infrastructure Development: Accelerate investment in key infrastructure projects, including road networks, reliable energy supply (beyond hydropower, including renewables), and expanded international airport capacity. This directly addresses logistical hurdles and improves market access.
• Develop Industrial Zones and SEZs: Strengthen and expand the network of Industrial Districts and Special Economic Zones (SEZs) with robust infrastructure (power, water, connectivity) and clear, consistent regulations to offer ready-to-operate environments for investors.
• Leverage Public-Private Partnerships: Actively pursue and facilitate public-private partnerships (PPPs) for infrastructure development, attracting both foreign and domestic private capital and expertise.

4. Strengthen Governance, Legal System, and Combat Corruption:

• Enhance Transparency and Accountability: Implement stringent anti-corruption measures, including transparent tender processes, public disclosure of approvals, and robust oversight mechanisms. Strengthen independent anti-corruption bodies.
• Judicial Reform: Work towards a more transparent, predictable, and efficient legal system where legal precedents are consistently applied, and disputes are resolved swiftly and fairly. This includes institutionalizing legal frameworks that protect investment disputes and intellectual property rights.
• Review Restrictive Legislation: Re-evaluate and potentially liberalize foreign investment limits in sectors like financial, legal, and accounting services, where restrictions perpetuate red tape and limit efficiency gains.
• Expedite IPR Legislation: Prioritize the parliamentary consideration and ratification of the Intellectual Property Rights (IPR) Law to provide clear legal protection for investors’ innovations.

5. Reform Labor Laws and Develop Human Capital:

• Flexible Labor Regulations: Review and reform rigid labor laws to balance worker protection with business flexibility, making it easier for businesses to manage their workforce efficiently while ensuring fair labor practices.
• Skill Development Programs: Invest significantly in vocational training and skill development programs tailored to the needs of modern industries, addressing the shortage of qualified workers and reducing reliance on expatriate labor.
• Incentivize Return of Skilled Diaspora: Implement policies and create opportunities to attract skilled Nepali workers back from overseas, leveraging their expertise and capital.
• Promote Constructive Labor Relations: Foster a culture of constructive dialogue and negotiation between employers and labor unions, moving away from confrontational approaches that disrupt business operations.

6. Convert Commitments to Actual Inflows:

• Dedicated Follow-Up Mechanism: Establish a proactive and dedicated unit within DOI/IBN to closely follow up on approved FDI commitments, identify specific bottlenecks preventing actual inflows, and provide targeted support to investors.
• Performance Monitoring: Introduce clear performance indicators to track the conversion rate of commitments to actual inflows and hold relevant agencies accountable for improving this ratio.
• Investor Aftercare Services: Provide robust aftercare services to existing foreign investors, addressing their operational challenges and facilitating reinvestment, as satisfied investors are the best advocates for future FDI.

7. Targeted Sector Promotion:

• Strategic Marketing: Develop targeted marketing campaigns for priority sectors (e.g., hydropower, IT, high-value agriculture, tourism) that highlight Nepal’s specific advantages, such as competitive labor costs in IT or immense hydropower potential.
• Leverage Bilateral Agreements: Actively pursue and strengthen bilateral investment treaties (BITs) and double taxation avoidance agreements (DTAAs) with key and emerging investor countries in Europe and Asia to enhance investor confidence and reduce financial disincentives.
• Promote Diversification: While traditional sectors are important, continue to actively promote and facilitate investment in emerging sectors like IT, digital services, and high-value agriculture, which offer new growth engines and contribute to economic diversification.

IX. Conclusion

Foreign Direct Investment holds immense, yet largely untapped, potential for Nepal’s economic transformation. The nation has a history marked by earnest, albeit sometimes inconsistent, efforts to liberalize its investment regime, culminating in recent legislative reforms like FITTA 2019 and the 2025 ordinance, which have notably streamlined approval processes and expanded investment avenues. These reforms have successfully stimulated a significant surge in FDI commitments, reflecting a growing international interest in Nepal’s emerging opportunities, particularly in the service, tourism, and information technology sectors, alongside traditional areas like hydropower. The shifting landscape of investor origin, with China increasingly complementing India as a major source, signals a positive diversification of Nepal’s economic partnerships.

However, a critical challenge persists: the substantial and consistent disparity between FDI commitments and actual inflows. This “pipeline problem” indicates that while Nepal is becoming more effective at attracting initial interest, fundamental hurdles in the post-approval and operational phases deter the materialization of pledged investments. These impediments are deeply rooted in a complex interplay of political instability, policy inconsistencies, pervasive bureaucratic inefficiencies, a non-transparent legal system, widespread corruption, inadequate infrastructure, and rigid labor market dynamics. These factors collectively inflate the “cost of doing business” beyond monetary terms, eroding investor confidence and limiting FDI’s full contribution to Nepal’s GDP, which, despite a proven positive correlation, remains remarkably modest.

To truly unlock its FDI potential and achieve its ambitious goals of LDC graduation and high-income status, Nepal must move beyond incremental legislative adjustments. A holistic and coordinated approach is imperative, focusing not only on further streamlining entry procedures but, more critically, on addressing the systemic issues that undermine the operational environment. This requires fostering sustained political stability, enhancing administrative capacity and accountability, rigorously combating corruption, investing in critical infrastructure, and reforming labor laws to create a genuinely predictable, transparent, and facilitation ecosystem for investors. Only through such comprehensive and sustained efforts can Nepal convert its significant FDI commitments into tangible economic growth, job creation, and sustainable development.