Political Stability and FDI in Nepal

The objective of this research is to empirically assess the relationship between political stability and FDI inflows in the context of Nepal. Time series data for the period 1998-2016 is used in the study. This study uses a co-integration approach, bounds test, ARDL model, and Granger causality test. The empirical findings confirm the existence of a long run relationship between FDI and political stability. The results show that a 1% increase in FDI inflows results in a 0.14% increase in political stability in the long run. It implies that an increment of FDI inflows will help create political stability in Nepal. The coefficient in the short run is also significant. In addition, the result confirms bi-directional causality between political stability and FDI in Nepal. Only one of the indicators of the World Governance Indicators (WGI) that represents the political stability is taken into consideration in the study. This paper exclusively considers the case of Nepal in order to determine the relationship between political stability and FDI in Nepal.