Impact of Foreign Direct Investment on Nepal's Energy Sector Growth: An ARDL Bounds Testing Approach (1995–2025)

The purpose of this study is to analyze the lasting influence of foreign direct investment (FDI) on Nepal's energy sector from 1995 through 2025. We employ an autoregressive distributed lag (ARDL) bounds testing approach plus an error correction model (ECM). Unit root tests show that the variables are integrated of order 1 in both levels and first differences. The bounds test also indicates a long-run cointegrating relationship. During the analyzed period, a 1% increase in energy sector FDI leads to a 0.15% increase in energy sector GDP in the long run and to a 0.33% rise in the short run, while the speed of adjustment to equilibrium is 58.9%. Capital formation has a long-run elasticity of 11.2%. Employment, though, has a negative coefficient of −14.82, and the reason is that Nepal has continuously had a high rate of vulnerable employment. The change in Nepal's energy sector during these three decades has been through three connected phases: a first growth phase (1995–2010), an FDI-driven hydropower boom (2011–2022), and a renewable diversification phase (2023–2025), which is characterized mainly by a solar energy increase and electricity sector growth of 20.93% (2025/26)—the fastest in the economy. The average difference between approved and realized FDI during the analysis period was 31.9%. This difference ranged from negative inflows in the early 2000s to 128.8% in 2011 and 13.6% in 2023/24. Tests for diagnostics show no serial correlation and heteroskedasticity. Our findings show that energy FDI has been one of the major positive factors behind Nepal's economic growth for 30 consecutive years. Still, different forms of energy from hydropower to solar integration will require the government to continually introduce changes to its energy policy. I believe that FDI will continue to strongly support Nepal's economic growth when it graduates from LDC status in 2026.