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INTRODUCTION
Foreign Direct Investment (FDI) plays a catalytic role in economic growth. It is a source of
capital formation. Likewise, it helps technology to spillover, supports human capital formation,
enhances international trade integration, creates competitive environment and strengthens
enterprise development. There are three common motives of foreign direct investment: resource-
seeking, market seeking and efficiency-seeking (Dunning, 1993). Moreover, FDI also seeks
strategic assets in a local economy – brands, new technology or distribution channel. Developing
countries, emerging countries and countries in transition have come to consider FDI as a source
of economic development and modernization, income growth and employment (OECD, 2002).
The impact of FDI on an economy can be considered in terms of a number of indicators such as
its potential contribution to: technology and skills; establishment of new industries and export
promotion; formation of new clusters as anchor investors; and creation of linkages with, and
associated upgrading of local enterprises (UNCTAD, 2004).
An empirical assessment suggests that the role of foreign direct investment (FDI) in the
economic growth of the host countries is obviously important. There is a widely shared view that
FDI accelerates host countries’ growth by (1) augmenting domestic savings and investment, (2)
helping transfer of technology from the “leaders,” (3) increasing competition in the host
country’s domestic market, (4) increasing exports and earning foreign exchange, and (5)
imparting several other types of positive externalities (spillovers) to the economy at large. On the
other hand, however, it is sometimes suggested that FDI may (1) repatriate funds almost to the
same extent as it brings in funds; (2) transfer technologies that are inappropriate for the host
country’s factor proportions; (3) “kill” indigenous enterprise through an intense competition,
especially due to the strong economic power of multinational companies that bring FDI; (4)
primarily target the host country’s domestic market and thus not increase exports; (5) cause
distortions in the host country’s policies so as to benefit the foreign investors; and (6) create
distortions in the host country’s social and economic structures by infusing inappropriate social
and cultural norms and behavior patterns (Ram & Kevin, 2002).
2 Foreign Direct Investment (FDI) and Economic Growth
FDI is an essential source of capital inflow and enhances both human and physical capital development to
the host country (Busse and Groizard, 2008). As a result of this, many policy makers and academics are
more concerned about policies that attract FDI inflows in order to enhance economic growth from
positive spillover effects of FDI. In addition to this direct external source of capital, FDI facilitates the
transfer of advanced technologies and management practices from developed countries to developing
countries. This introduction of new technologies to the host country however requires a minimum level of
human capital threshold in order to absorb the anticipated positive spillover effect of FDI. The absorptive
capability of the host country together with the introduction of advanced technology is the vital
determinant for long-term economic growth (Nelson and Phelps, 1966). Despite the fact that many
studies have emphasized the positive relationship between FDI and economic growth the results
are still ambiguous. Some authors confirmed the general positive effect of FDI on economic
growth on the contrary many authors stress that there is negative relationship or no effect on
economic growth at all.
3 Human Capital and Economic Growth
The common concept that investment in human beings results in increased economic growth is
very old and goes back to the period of Adam Smith (1776). The economists of classical school
of thought also stressed upon the investment in human beings. Human capital and economic
development both are interrelated to each other for some additional basis. Furthermore, it is also
necessary for the government to spend additional amounts on education and health sector. By
human capital we consider acquired mental and physical ability of human beings through
education, skill development, training, health care. Generally, the concept of Human Capital is
used for education, skill development, health and other capacities of people that can enhance
their productivity and efficiency (Todaro, 2015).Without sufficient and qualitative human power
in terms of health, knowledge and skills, it is difficult to exploit other means of production such
as capital and natural resources effectively. The development of human resource is one of the
essential conditions for economic growth (Harbinson and Myers, 1964). Human capital also has
significant long run impact on an economy’s income and employment (Romer, 1986; Lucas,
1988; Barro, 1998). Human capital formation takes place through on the job training, schooling,
and other knowledge gained through experience and learning by labour force (Becker, 1974).
Stock of human capital determines the technological absorptive capacity of country (Nelson and
Phelps, 1966). Human capital creates positive spillovers to economy ( Ciccone and Peri, 2002).
4 Statement of Problem
1. What is the impact of FDI on economic growth of Nepal?
2. What is the impact of Human Capital on economic growth of Nepal?
6 Significance of study:
Both FDI and Human capital serves as a catalyst for economic development in Nepal. Since, it
is a least developed country (LDC) characterized by slow economic growth, socioeconomic
underdevelopment and a low level of human development, It is emerging from a politically and
socially fragile post-conflict situation, structurally generated poverty and inequality, and deeply
entrenched forms of social exclusion. Nepal remains one of the few countries to have
accomplished impressive human development gains over the last two decades. But having started
from a very low base, it is still has a low human development status. The economic growth of the
country has averaged 4 percent over the last decade. Absolute poverty decreased from 42 percent
in 1995 to 25 percent in 2010 and decreased further to 23.8 percent in 2015. However, there are
large disparities in the rates of poverty by gender, social group and geographical area. Nepal
aspires to emerge as an inclusive, equitable, and prosperous middle-income country by 2030
with the spirit of a welfare state. The country aims for sustainable poverty reduction and human
development with low vulnerability and higher human security. The country has set the goal of
graduating from LDC status by 2022. Of the three criteria for graduation — per capita gross
national income. (GNI), human assets and economic vulnerability — the country is likely to
achieve two of them and lag behind in terms of GNI per capita (NPC, 2015). With target set by
government of Nepal and implementation of new structure of government, it is pertinent to study
the significant impact of FDI and Human capital on its economic growth and considering
suitable policy recommendation.
HYPOTHESIS OF STUDY
Considering the objectives of the study, following hypothesis will be tasted:
Hypothesis 1
Hypothesis H01: there is not any significant impact of FDI on economic growth of Nepal.
Hypothesis Ha1: there is significant impact of FDI on economic growth of Nepal.
SIGNIFICANCE OF STUDY
Foreign Direct Investment plays an energetic role in developing the evolving market trends.
There is a strong relationship between economic growth and foreign investment as it enables
poor capital country to build up physical capital, create employment opportunities, develop
productive capacity, enhance local labor skills through provision of technologies and
management and also help the domestic market to diversify in global world. FDI will improve in
existing technical process of the country. It also improves quality of product and service and also
increase the attempt of better human resources. FDI also helps to reduce unemployment by
creating new jobs and thus it reduces social problems. It also gives competitive advantage to the
well-run business regardless of the race, color and creed. It also helps in diversification of the
local markets.
REVIEW OF LITERATURE
1.6. LITERATURE REVIEW
There exists an extensive body of empirical and theoretical literature up till date that has been
researched and attempt to establish various relationships between economic growth and
macroeconomic variables and these theoretical findings are mostly in e-books and textbooks and
the empirical findings found in academic journals, articles and publications. This chapter will
critically analyze the previous literatures which contain information and ideas surrounding the
nature of the main idea of this research topic on economic growth. The review of literature will
start with definitions of dependent and independent variables included in the study with
international context and national context related to our study.
THEORETICAL REVIEW
Several theoretical frameworks were presented in thisresearch. First, the main base theory of the
researchfocused on Dunning’s ‘eclectic theory/paradigm’(1988b, 1998). Dunning’s theory
explains the firm’scontribution by investing abroad if the host countrypossesses
certainadvantages to allow an inflow of FDIto a foreign country. FDI must also be coupled
witheconomic growth and political stability for the hostcountry to be willing to invest abroad
(Dunning,1988a). Dunning’s eclectic theory/paradigm alsoprovided three main forms of foreign
investment byMNCs conducting FDI. These are exports, contracts andresource transfer.
The second theorist included Hymer (1960) whofocused on oligopolistic theory. He observed
that FDIwas a means of transferring knowledge and assets, bothtangible and tacit, in order to
organize productionabroad in a foreign country. Hymer’s own dissertationdescribes operations
into foreign countries as costly,due to conditions of hostility and cultural diversity.
The third theory was developed by Adler &Hufbauer (2008). This theory was called inward and
outward FDI theory, which identified technologicalspillovers as a contributing factor for
impacting FDI.
For this research study four macroeconomic variables have been selected to analyze the impacts
of selected variables of India and China’simpact on FDI to Nepal. These variables are then
divided into dependent (FDI) and independent variables. A brief description to rationalize each
dependent and independent variable are given below;
Dependent Variable:
A dependent variable is the variable being tested and controlled in a scientific experiment. The
dependent variable is 'dependent' on the independent variable. As the value of independent
variable changes. The effect on the dependent variable is observed and recorded. The dependent
variable in this research will be amount of FDI per year provided to Nepal.
Independent Variable:
For the purpose of this study, four key macroeconomic variables will be selected in order to
empirically analyze their effects on the dependent variable; the GDP growth rate. They include:
1. GNI Per Capita: Measured by a country’s Gross National Income through GNI per capita atlas
based on the country’s domestic monetary system.
2. Financial Capital: Measured by gross fixedcapital formation and gross capital
formation(Dunning, 1988).
3. Human Capital: Measured by school enrollment andtotal unemployment (Sawalha, 2007).
4. Governmental Factors: Measured by the worker’sremittances and employees’ compensation as
itpertains to a country’s labor system.
EMPIRICAL REVIEW
INTERNATIONAL CONTEXT
NEPALESE CONTEXT
1.7.3 METHODOLOGY:
In order to analyze the data for this study, the study will be including descriptive analysis
of time series data. Descriptive tools such as frequency distributions, means, percentages,
variance and cross tabulations between the identified variables etc. are used. This will be
presented as some summary statistics. This involves the use of tables, graphs, spread
sheets, of a research. Secondly, study will include analytical analysis, in this session
correlation matrix of the used variables is presented to know how the dependent variable
is proportional to explanatory variables in the regression model.
In order to analyze the effects of FDI, unemployment rate, inflation and interest rate on
economic growth, the following model will be used
GDPPCt = α + β1FDIt + β2IFt + β3INTt + β4UMPt …………… 1
Where:
GDPPC= GDP Per Capita
FDI = foreign direct investment net inflow (% of GDP)
INF = inflation (consumer price index) as a %
INT= official bank lending rate
UMP= unemployment rate (% of total labor)
t= time series
α = intercept
βi = parameter where i = 1, 2, …..., 5.
Chapter I includes general background, description of the study area, Statement of the
problem, Objective of the study, Significance of the study, Limitations of the study and
organization of the study. Similarly, chapter II devoted for the brief review of literature
available. Review of Books, International and National research reports, Unpublished
PhD dissertations m. philland Master level unpublished dissertations, Journals articles,
different planning and policies by government etc. are included in this chapter. Further
chapter III presents methodology used in the study. It consists of research design, nature
and sources of data, data collection techniques, method of sampling, data processing and
analysis. However, chapter IV includes the data analysis and findings. In this chapter,
data collected from various relevant sources is presented and analyzed by using various
statistical and econometrics tools and finally chapter V the last chapter and it includes
summary, conclusion and recommendation from the results of the study. A
supplementary section, which includes references, Annex, is also included.
https://unctad.org/en/PublicationsLibrary/wir2018_en.pdf