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

Variable	Symbol	Description	Unit
Energy sector GDP	EGDP	Contribution of energy sector to national GDP	Rs. million
Energy FDI	EFDI	Net actual FDI inflow into energy sector	Rs. million
Energy capital formation	ECAPF	Gross fixed capital formation in energy sector	Rs. million
Energy employment	EEMP	Number of persons employed in energy sector	Persons

Table 2:

Energy Sector Evolution Period

Indicator	1995–2010	2011–2022	2023–2025	1995–2025
Mean Energy FDI (Rs million)	1,250	45,000	85,000	32,500
Mean Energy FDI share of total	7.2%	26.4%	8.7%	15.1%
Mean realization rate	29.8%	35.2%	24.8%	31.9%
Hydropower capacity (end period, MW)	500	2,200	2,700+	2,700+
Solar licensed (end period, MW)	0	317	1,598	1,598
Electricity sector growth (end period)	5.2%	9.8%	20.93%	20.93% (2025/26)

Table 3:

Augmented Dickey-Fuller(ADF) Unit Root Tests

Variable	Level I(0)	First Difference I(1)	Integration Order
EGDP	2.18 (0.99)	−4.31 (0.002)*	I(1)
EFDI	−3.62 (0.001)*	−6.55 (0.000)	I(0)
ECAPF	−0.44 (0.87)	−4.82 (0.001)*	I(1)
EEMP	−4.20 (0.003)*	−5.18 (0.000)	I(0)

[i] Note: * indicates significance at 5% level.

Table 4:

Lag Length Selection

Lag	LogL	LR	FPE	AIC	SC	HQ
0	−788.45	NA	3.12e+22	63.18	63.38	63.24
1	−726.78	95.88*	8.88e+20*	59.58*	60.56	59.83*
2	−716.21	13.82	1.51e+21	60.02	61.78	60.50
3	−689.56	24.85	9.05e+20	59.18	61.72	59.90

[i] Note: AIC selects lag 1 for the full period.

Table 5:

Cointegration Bound Test

F-Bounds Test		Null Hypothesis: No levels relationship
Test Statistic	Value	Significance	I (0)	I (1)
			Asymptotic: n=1000
F-statistic	4.940610	10%	2.37	3.2
k	3	5%	2.79	3.67
		2.5%	3.15	4.08
		1%	3.65	4.66
Actual Sample Size	24		Finite Sample: n=35
		10%	2.618	3.532
		5%	3.164	4.194
		1%	4.428	5.816

[i] Source: Results from data analysis.

Table 6:

Long-Run Coefficients

Variable	Coefficient	Std. Error	t-Statistic	Prob.
EFDI	0.150	0.128	1.172	0.031
ECAPF	0.112	172.45	6.488	0.001
EEMP	−14.82	5.42	−2.734	0.039
Constant	−14025.33	2987.21	−4.695	0.005

Table 7:

Error Correction Model

Variable	Coefficient	Std. Error	t-Statistic	Prob.
DEFDI	−0.011	0.018	−0.611	0.548
DEFDI -1	0.122	0.023	5.304	0.002
DEFDI -2	−0.186	0.026	−7.154	0.001
DECAPF	179.28	53.12	3.375	0.019
DECAPF-1	−308.45	81.67	−3.777	0.011
DEEMP)	−1.085	0.762	−1.424	0.208
DEEMP-1	6.285	1.238	5.077	0.003
ECT(-1)	−0.589	0.087	−6.770	0.001

Table 8:

Energy FDI Share of Total FDI Series 1995–2025

Year	Energy FDI Share (%)	Phase Context
1995	4.2	Foundation
2000	6.1	Foundation
2005	8.5	Foundation
2010	12.3	Foundation to Boom transition
2015	22.7	Hydropower boom
2020	31.5	Hydropower boom
2022	38.24	Peak of hydropower boom
2023	25.0	Diversification begins
2024	12.0	Solar transition
2025	1.0	Solar dominance

Table 9:

FDI Realization Rate Series

Year	Realization Rate (%)	Note
1995	28.3
2000	−2.1	Negative inflow
2005	−3.4	Negative inflow
2010	35.2
2011	128.8	Peak — actual exceeded approvals
2015	32.4
2020	34.1
2022	35.2
2023/24	13.6	Trough
2024/25	37.9	Recovery
1995–2025 Average	31.9%	Full period mean

Table 10:

Solar Energy Development

Period	Solar Capacity Licensed (MW)	Cumulative Solar	Share of New Licenses
1995–2015	0	0	0%
2016–2020	15	15	<1%
2020/21	310	325	5%
2021/22	7	332	<1%
2022/23	6	338	<1%
2023/24	65	403	10%
2024/25	1,195	1,598	85%
2025/26 (partial)	305	1,903	-

Table 11:

Electricity Sector GDP Growth

Year	Electricity Sector Growth (%)
2000	2.1
2005	3.4
2010	5.2
2015	8.7
2020	6.2
2022	9.8
2023	11.2
2024	15.6
2025/26	20.93

Table 12:

Diagnostic Test Results

Test	Statistic	p-value	Conclusion
Breusch-Godfrey LM	F(2,3) = 3.512	0.158	No serial correlation
Breusch-Pagan-Godfrey	F(18,5) = 1.238	0.441	No heteroskedasticity
ADF on residuals	t = −3.108	0.038	Residuals stationary
Jarque-Bera	-	>0.05	Residuals normal
Ramsey RESET	-	>0.05	Model correctly specified

References

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Articles in this issue

DOI: https://doi.org/10.2478/rsep-2026-0011 | Journal eISSN: 2547-9385 | Journal ISSN: 2149-9276

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Language: English

Page range: 124 - 139

Submitted on: May 15, 2026

Accepted on: Jun 5, 2026

Published on: Jun 30, 2026

Published by: BC Publishing

In partnership with: Paradigm Publishing Services

Publication frequency: 2 issues per year

Keywords:

Energy sector,

FDI,

solar energy,

ARDL bounds test,

Nepal,

long-run relationship

JEL:

F23,

Q42,

Q48,

C51,

O11

Related subjects:

Business and economics,

Management accounting, financial controlling, cost calculation, investment

© 2026 Yadav Mani Upadhyaya, Kul Prasad Pandey, published by BC Publishing
This work is licensed under the Creative Commons Attribution-NonCommercial 4.0 License.

Volume 11 (2026): Issue 1 (June 2026)