Industrialization and Global Value Chain Participation: An Examination of Constraints Faced by the Private Sector in Nepal

Abstract

The world’s trade landscape is being shaped by global value chains, which present new opportunities as well as challenges to developing countries. While large developing countries are leveraging the benefits of global value chains, smaller economies have been less successful. In this paper we examine the constraints faced by Nepal, a land-locked least developed country, in participating in global value chains. We find that weak and ineffective industrial policy has led to de-industrialization, which in turn has reduced productive capacity. The high cost of transport and energy, inadequate provision of public goods and low levels of investment reduce the country’s ability to participate in global value chains. As a land-locked country, Nepal is dependent on regional neighbors for access to global markets. Shallow regional integration, the prevalence of non-tariff barriers, and inefficient transit trade further disadvantage Nepal.