Foreign Direct Investment in Nepal’s Healthcare Sector

Abstract

Despite the growing recognition by the Government of Nepal of the health sector’s crucial role in achieving sustainable development and reducing poverty, the country continues to face serious challenges in mobilizing sufficient financial and technological resources. With public expenditure on health averaging only around 2% of the national income far below the 5% recommended by the World Health Organization the financing gap remains a major constraint to the effective delivery of healthcare services. In this context, Foreign Direct Investment (FDI) can play a transformative role by introducing long-term capital, advanced medical technologies, and managerial expertise that can strengthen Nepal’s health infrastructure and service quality. However, the inflow of FDI also raises complex issues, including the risk of unequal access to healthcare between urban and rural populations, the emergence of a two-tiered health system, and concerns over regulation, profit repatriation, and policy inconsistency. The purpose of this paper is to analyze the role of FDI in Nepal’s health care sector, identify the key challenges and policy gaps, and propose strategic measures to attract responsible investment that aligns with national health priorities and equity goals.

Introduction

In this context, Foreign Direct Investment (FDI) emerges as a potential instrument to address these financial and technological deficiencies. FDI not only provides long-term capital inflows but also facilitates the transfer of advanced technology, international best practices, and managerial expertise that can improve efficiency and service quality in the health sector. In developing countries like Nepal, foreign investment can contribute to building hospitals, diagnostic centers, and pharmaceutical industries, while simultaneously generating employment and fostering competition. However, the attraction of FDI into health care is not without challenges. The liberalization of the health sector may lead to the dominance of private and profit-driven entities, resulting in urban concentration of services, inequality in access, and the risk of a two-tiered system where quality health care becomes accessible only to the affluent.

Nepal’s Health Care Sector – Foreign Presence (FDI)

Foreign Direct Investment (FDI) in Nepal’s health care sector remains limited but carries significant potential for expansion and modernization. The Government of Nepal, through the Foreign Investment and Technology Transfer Act, 2019 (FITTA), allows up to 100% foreign ownership in health services and pharmaceuticals, reflecting an open and liberal investment environment. According to the Investment Board Nepal (IBN), the health sector has been identified as a priority area for investment, including hospitals, diagnostic centers, medical education, pharmaceutical production, and Ayurvedic health care. Despite this policy openness, the actual volume of FDI flowing into health services has been relatively small compared to other sectors such as hydropower, manufacturing, and finance. Data from the Department of Industry and Nepal Rastra Bank show that the share of FDI in “human health and social work activities” accounts for less than one percent of total FDI stock in the country. This indicates that although Nepal’s policy framework is investor-friendly, practical inflows into the health sector have not yet reached their full potential.

Foreign presence in Nepal’s health care system is most visible in private hospitals, medical colleges, and pharmaceutical joint ventures. Several international institutions and investors, mainly from India, China, South Korea, and the Gulf countries, have invested in tertiary-level hospitals, medical equipment, and health-related infrastructure. For example, joint-venture medical colleges and foreign-supported specialty hospitals in Kathmandu and other major cities have contributed to improving the quality of tertiary care and expanding advanced medical facilities. Similarly, in the pharmaceutical industry, foreign investors have provided capital and technology for local production of generic drugs, thereby reducing dependence on imports and stimulating employment in health-related manufacturing.

According to Investment Board Nepal (IBN), domestic pharmaceutical companies currently meet only about 45% of national demand, suggesting a major opportunity for foreign investors to help bridge the supply gap through technology transfer and expanded production capacity. Moreover, Nepal still relies heavily on imported raw materials for pharmaceutical production  with approximately 80% of inputs sourced from India and 10% from China, amounting to an import bill of nearly NPR 9 billion (USD 67 million) in the fiscal year 2021/22. This further highlights the scope for FDI in backward linkages, such as local raw material production, packaging, and research-based pharmaceutical industries, to enhance self-sufficiency and reduce import dependency.

Table : FDI Stock in Human Health and Social Work                          (Rs. million)

Human Health and Social Work	2021	2022	2023		Percent Change %
			Amount	Share in Total %	2021/22	2022/2023
	338.9	735.4	1077.6	0.4	117.0	46.5

According to the Nepal Rastra Bank (NRB), the sector‐wise breakdown for the stock of foreign direct investment (FDI) in Nepal shows that the “Human Health and Social Work” category is very small. For example, the 2020‑21 survey lists the FDI stock for this category at NPR 338.9 million. Another NRB handbook for investors shows that “Human Health and Social Work” had a share of 0.4 % of total FDI stock.

Major Challenges of FDI in Nepal’s Health Care Sector

External Challenges:

Nepal faces several external challenges in attracting and effectively utilizing FDI in the health care sector. A major concern is the unequal access to health services, as most foreign and private investments are concentrated in urban centers like Kathmandu, Pokhara, and Biratnagar, leaving rural and remote areas underserved. This creates a two-tiered system, where quality health care is accessible primarily to higher-income populations. The small market size and low per capita income further limit profitability for high-cost tertiary and specialty health services, leading foreign investors to focus on premium services or medical tourism rather than services accessible to the general population. Additionally, the heavy dependence on imported raw materials for pharmaceuticals approximately 80% from India and 10% from China, with an import bill of NPR 9 billion (USD 67 million) in FY 2021/22 exposes investors to global price fluctuations and supply chain vulnerabilities, affecting the sustainability of health care investments.

Domestic Challenges:

Domestically, several factors constrain the effective impact of FDI in Nepal’s health sector. Weak regulatory and institutional capacity hinders the enforcement of licensing, quality standards, pricing regulations, and ethical practices, which can lead to uneven service quality and increased costs. The shortage of skilled human resources and limited capacity to absorb advanced medical technologies and managerial expertise restrict the utilization of FDI in improving service delivery. Furthermore, policy inconsistency and bureaucratic hurdles, such as frequent changes in licensing procedures and delays in approvals for hospitals, medical colleges, and pharmaceutical projects, create uncertainty for investors. In addition, insufficient domestic infrastructure, including electricity, transport, and logistics, particularly in rural areas, limits the expansion and operational efficiency of foreign-invested health facilities.

Opportunities for FDI in Nepal’s Health Care Sector

One of the primary opportunities lies in tertiary and specialty hospital development, as the country has a limited number of high-quality hospitals and advanced care facilities. Foreign investment can help establish well-equipped hospitals, diagnostic centers, and specialized treatment facilities, improving access to quality health care for urban populations and, with appropriate policy incentives, underserved rural regions.

The pharmaceutical industry also offers major investment potential. Currently, domestic pharmaceutical companies meet only about 45% of national demand, while the remaining 55% of medicines and 90% of raw materials are imported mainly from India and China. This creates scope for foreign investors to engage not only in drug manufacturing but also in backward linkages, such as local production of raw materials, technology transfer, and research and development, which can reduce import dependence and enhance self-sufficiency.

Medical education and training constitute another promising area for FDI. Nepal has a growing demand for medical colleges, nursing schools, and allied health training institutes. Foreign investors can partner in establishing high-quality educational institutions and teaching hospitals, which would enhance the skills of domestic health professionals and strengthen the overall capacity of the health system.

 

The Process of FDI Company Registration in Nepal

Step 1: Foreign Investment Approval (DOI/IBN)

Obtain approval for Foreign Direct Investment (FDI) under the Foreign Investment and Technology Transfer Act, 2019 from the Department of Industry (DOI) or Investment Board Nepal (IBN). This process is essential for legal validation of foreign investment and includes submitting detailed project reports, business plans, and investment commitments.

Step 2: Company Incorporation (OCR)

Register the company with the Office of the Company Registrar (OCR) under the Companies Act, 2006. This step involves selecting the company structure, reserving a name, and submitting required documents, including Articles of Association and Memorandum of Association. Registration ensures the company is recognized as a legal entity in Nepal.

Step 3: Tax Registration (Inland Revenue Office)

Register the company with the Inland Revenue Office for Value Added Tax (VAT) and Permanent Account Number (PAN) under the Income Tax Act, 2002. This ensures compliance with Nepal’s tax system and enables legal operations, including invoicing, tax filings, and employee-related tax obligations.

Step 4: Business Registration (Local Ward Office)

Obtain business registration approval from the local ward office as per the Local Governance Operations Act, 2017. This involves submitting company details, lease agreements, and other supporting documents to secure a recommendation letter, which is often necessary for industry-specific registrations.

Step 5: Industry Registration (DOI)

Register the industry with the Department of Industry as required by the Industrial Enterprises Act, 2020. This step is mandatory for companies engaging in industrial or manufacturing activities. It involves obtaining a recommendation from the ward office and completing the prescribed forms.

Step 6: Non-Blacklist Certificate (Credit Information Bureau)

Acquire a “Non-Blacklist Certificate” from the Credit Information Bureau (CIB) under Nepal Rastra Bank’s directives. This certificate ensures that the directors and stakeholders are not blacklisted for financial irregularities, enhancing credibility for foreign investors and local partners.

Step 7: NRB Approval for Investment Amount Infusion

Secure prior approval from Nepal Rastra Bank (NRB) to remit the proposed foreign investment amount as per the Foreign Exchange Regulation Act, 1962. This step includes submitting details of the source of funds, investment plan, and proof of compliance with foreign exchange laws.

Step 8: Infusion and Recording of Investment Amount (NRB)

Infuse the approved investment amount through a local bank, which will issue an Investment Certificate. Subsequently, record the investment with NRB to ensure it complies with foreign currency regulations. This process solidifies the legitimacy of the capital brought into Nepal under FDI laws.

Documents Required for Foreign Direct Investment Approval Process in Nepal

1. Application form for foreign investment approval
2. Detailed project proposal and feasibility study
3. Joint venture agreement (if applicable)
4. Copy of foreign investor’s passport or company registration certificate
5. Financial statements of the foreign investor
6. Board resolution authorizing the investment (for companies)
7. Power of attorney for local representative
8. Environmental Impact Assessment report (if required)
9. Curriculum vitae of key personnel
10. Any other sector-specific documents required by regulatory authorities

legal requirements for Incorporating FDI Company

Incorporating a business with foreign investment in Nepal requires fulfilling several legal prerequisites under the Companies Act 2063 (2006) and FITTA 2019. The essential requirements include:

• Prior approval from the Department of Industry through the FITT Unit of OSSC is mandatory before company registration.
• Foreign investors must meet the minimum investment threshold of NPR 20 million (approximately USD 150,000), except for IT companies which have no minimum threshold.
• A physical address in Nepal must be designated as the registered office of the company.
• At least one director is required for private limited companies, while public limited companies need a minimum of three directors.
• The Capital must be injected into a Local Bank through approval of Nepal Rastra Bank (NRB).

The incorporation process must follow the sequence established by law, with FDI approval necessarily preceding company registration.

Environmental Impact Assessment (EIA) for Health Sector FDI in Nepal

Legal Basis:

In Nepal, the Environmental Protection Act, 2019 (2076 B.S.) and the Environmental Protection Rules, 1997 (2054 B.S.) govern the process of Environmental Impact Assessment (EIA). Any project that could have a significant effect on the environment is required to undergo a full EIA, while smaller projects may only need an Initial Environmental Examination (IEE).

Applicability to Health Sector Projects:
Although health care facilities such as hospitals and pharmaceutical plants are primarily service-oriented, they can still impact the environment, which makes EIA requirements relevant. Projects that typically trigger an EIA include:

• Large-scale construction of hospitals, medical colleges, or health complexes.
• Establishment of pharmaceutical manufacturing plants, which may involve chemical usage, effluent discharge, or biomedical waste.
• Investments involving waste management systems, significant water use, or energy-intensive equipment.

Provincial Health Service Regulation, 2076 and its Relevance to FDI in the Health Sector

The Provincial Health Service Regulation, 2076 provides a comprehensive legal framework for the operation, quality assurance, and regulation of health institutions within the province. The Regulation outlines the licensing, operation standards, supervision, and accountability mechanisms for hospitals, clinics, diagnostic centers, and other health service providers.

For foreign investors, these provisions are directly relevant because any hospital or medical institution established under Foreign Direct Investment (FDI) must comply with these provincial standards. The Regulation mandates that:

• Every health institution whether public, private, or foreign-invested must obtain provincial registration and operation approval before beginning services.
• Facilities must adhere to infrastructure and human resource standards, including minimum requirements for medical staff, sanitation, patient safety, and waste management systems.
• Monitoring and inspection mechanisms are established to ensure that health institutions maintain quality service delivery and comply with environmental and ethical norms.
• The Regulation also emphasizes the need for coordination with local and federal authorities, ensuring that investments align with the national health strategy and sustainable development goals.

For FDI projects, particularly those involving large hospitals or pharmaceutical units, adherence to this Regulation ensures legitimacy, transparency, and long-term sustainability. It also strengthens investor confidence by providing a clear procedural pathway and minimizing bureaucratic uncertainty.

Regulatory Standards for Establishing and Operating Health Institutions: Implications for FDI in Nepal’s Health Sector

The Health Institutions intent for Establishment, Operation Permission, Renewal, and Upgrade Standards, 2081 serves as an essential regulatory instrument to ensure that health institutions operate safely, ethically, and in compliance with technical and infrastructural standards. This framework outlines the process for obtaining an “intent letter” before establishing a health facility, as well as the subsequent procedures for receiving operation approval, renewal, and institutional upgrading.

The regulation requires that any hospital, clinic, medical laboratory, or other health institution whether privately owned or established through foreign direct investment must first secure an intent approval from the provincial authorities before beginning construction or service operation. Only after meeting the prescribed criteria under the attached schedules (Schedule 1 to 15) can the institution receive a service operation permit. These schedules define detailed standards such as the minimum physical infrastructure, human resources, medical equipment, sanitation facilities, and waste management systems necessary for operating a health institution.

Furthermore, the regulation emphasizes the importance of institutional accountability and service quality. It authorizes the provincial health ministry to conduct regular monitoring, inspection, and renewal assessments, ensuring that institutions maintain continuous compliance with the prescribed norms. Hospitals and clinics seeking to expand, relocate, or upgrade must also obtain fresh approval from the competent authority.

From an FDI perspective, this standard holds particular importance. Foreign investors planning to establish or operate health care facilities in Nepal such as multi-specialty hospitals, diagnostic centers, or pharmaceutical units are required to follow these procedural steps. This framework helps ensure that health investments not only meet international standards but also align with Nepal’s provincial health governance structure. It promotes transparency, public safety, and environmental accountability, thereby supporting sustainable and quality-driven health sector development.

Conclusion

Foreign Direct Investment (FDI) has the potential to play a transformative role in Nepal’s health care sector by providing long-term capital, advanced technology, and managerial expertise. Despite the government’s liberal investment policies, actual inflows into health services, pharmaceuticals, and medical education remain limited, with most foreign investment concentrated in urban areas. This creates challenges such as unequal access to health care, reliance on imported raw materials, insufficient absorption of technology, and regulatory and policy constraints.