RUNNING HEADER: EXPORT MARKET PENETRATION OF NEPALESE PRODUCTS

Export Market Penetration of Nepalese Products

Submitted By:

Birat Acharya

Date of Submission: September 25, 2022

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ABSTRACT

The research paper focuses on the penetration (export market) of Nepalese products in the

international market. In the research, we have discussed the current situation of foreign trade in

Nepal, and also highlighted the prospects that the Nepalese products carry in the international

market. We have also aimed to discover the difficulties that Nepal has to face in the course

foreign trading. The report can be useful for the people wanting to explore the opportunities and

challenges associated with export market penetration of Nepal products.

Keywords: Market Penetration, Gross Domestic Product (GDP), Exports, Balance of

Payments (BoP), Aggregate Demand (AD), Aggregate Supply (AS)

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TABLE OF CONTENTS

ABSTRACT………………………………………………………………………………..…2

1. Introduction………………………………………………………………………….……..4

1.1 Introduction/ Background of the Study…………………………………….…..4-5

1.2 Problem Statement of the Study……………………………………………….…5

1.3 Objectives of the Study…………………………………………………...………5

2. Conceptual Understanding………………………………………………………….…....6-7

2.1 Export Market Penetration………………………………………………………..6

2.2 Prospects and Consequences of Market Penetration……………………………...7

3. Research Methodology………………………………………………………………..……7

3.1 Data Collection Technique………………………………………………………...7

4. Analysis………………………………………………………………………………….8-22

4.1 Current Situation of Nepalese Economy…………………………………………..8

4.2 Opportunities for Penetration……………………………………………………..14

4.2 Challenges Faced by Nepal in Foreign Trade……………………………………..15

5. Conclusion………………………………………………………………………………….23

5.1 Summary of Findings……………………………………………………………...23

5.2 Recommendations………………………………………………………………....24

5.3 Limitations of the Study…………………………………………………...……....27

5.4 Managerial Implication/s of the Study………………………………………….....27

6. References……………………………………………………………………………….….28

7. Annexure................................................................................................................................29

7.1 Annexure-1,2,3.....................................................................................................29-34
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Introduction

1.1 Introduction/Background of the Study

In the contemporary world, the international trades or shares of export markets play an

important role in a nation’s industrial and overall economic growth. The expansion of export

market share by a single product or a group of products is known as export penetration. There are

various internal and external factors that contribute to the ability of an economy to penetrate the

export market such as production levels and quality, marketing, exchange rates and trade

policies. As the exports are one of the major components of the GDP of a country, a country

needs to formulate its laws and regulations in an efficient manner to satisfy the needs of

producers and help them grow not only inside the country but also on the international market.

The current market situation of Nepal stands at an overwhelming imbalance in terms of

exports and imports, where imports stand at Rs. 1.92 trillion in the fiscal year 2021/2022 and

exports stand at Rs.200 billion in the same year. Nepal imports a substantial amount more than it

exports resulting in a massive trade deficit of Rs. 1.72 trillion.

Nepal Trade Integration Strategy (NTIS), 2016 has identified 9 goods and 3 services as

priority export potentials. This identification is made based on the export performance and

inclusive and sustainable development parameters. The list of these 9 goods includes Large

Cardamom, Ginger, Tea, Medicinal and Aromatic Plants (MAPs), All Fabrics, Textile, Yarns

and Ropes, leather, Footwear, Chyangra Pashmina, and Knotted Carpets. NTIS, 2016 has also

identified other 12 export potential goods which include Hydro-electricity, All Fabricated Steel

and Metals, Coffee, Fruit and Vegetable Juices, Honey, Instant Noodles, Lentils, Paper Products,

Ready-made Garments, Semi-precious stones, Silver Jewelry, and Wool Products.

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The entry into and capture of a growing share of export markets (or expansion of export

market share) plays a significant role in a country's industrial and overall economic growth in a

world of heightened international interdependence. Export penetration is the term used most

frequently in the literature to describe the growth of a single product or a group of products'

export market share. Several domestic factors, like production costs where the product is made,

and foreign factors, such the level of competition in international markets where the product is

marketed, determine whether an export penetration strategy is successful or not.

1.2 Problem Statement of the Study

We have formulated some questions for the study to analyze export market penetration of

Nepalese products. The problem statements of the research project are as follows:

a. What are the opportunities of the penetration of Nepalese products in the international

market?

b. What are the challenges faced by Nepal in foreign trade which hampers the export market

and trade relations with the countries around the globe?

1.3 Objective of the Study

The main objective of the study is to understand the challenges and opportunities

associated with market penetration. The other objectives include determining the current

situation of the export market of Nepal and figuring out the possible solutions to the various

challenges.
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Conceptual Understanding

2.1 Export Market Penetration

This metric reveals how far a nation's exports go to established markets. It is calculated

by dividing the number of nations the reporter reports exporting a specific good to by the number

of nations the reporter reports importing the good in that particular year. A low export

penetration may show barriers to trade that are preventing firms from expanding the number of

markets to which they export.

2.2 Prospects and Consequences of Market Penetration

Market penetration is a double-edged sword for most countries, let's look at some the

pros and cons that it presents.

1. Prospects/Advantages of Market Penetration

a. Fast Growth

Market Penetration allows lowering of prices, this allows countries and

corporations alike to reduce their prices in relation to their competitors. Due to the

lower prices, customers are more likely to buy goods from you rather than

competitors.

b. Cost-efficiency

Along with market penetration come economies of scale, when a firm sells

more goods, they can afford to cut down prices leading to even further growth.

These low prices lead to lasting customers and increase in sales.

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2. Consequences/Disadvantages of Market Penetration

a. Unachieved Production Costs

Sometimes it's better to focus on marketing than market penetration,

sufficiently penetrating a market for economies of scale and efficiency to show

results can be difficult for many products as certain fixed costs are involved in all

forms of manufacturing.

b. Lack of Results

Entering a market where a competitor has already established their

presence can be demotivating, market penetration may not show results in such an

environment. A better strategy here would be establishing one's own presence

rather than undermining a competitor.

Research Methodology

3.1 Data Collection Techniques

For this formulation of the report, we have collected the information through secondary

sources like websites, books, articles, videos, and other sources. Also, we have analyzed the

export market of Nepalese products by linking it with economic theories and statistics. For the

purpose of generating this report, quantitative data such as revenue from various institutions and

the economic growth rate from various government websites will be evaluated. Additionally, we
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will examine numerous reputable journals and papers about market penetration of Nepalese

goods and how they affect our economy in order to get qualitative data.

Analysis

4.1 Current Situation of Nepalese Economy

1. Balance of Payments (BoP)

It is a tool used to record the economic transaction of goods and services of a

country with the rest of the world for a specific period of time and examines transactions

of all exports and imports of goods and services. It also helps the government to analyze

the potential of a particular industry export growth and formulate policy to support it.

According to the central bank, the current scenario of Nepal’s Balance of payment

has been lowest in the past nine months of the ongoing fiscal year i.e. 2021/ 2022 which

is deficit of Rs 268 billion. This is the lowest it has been in the history of the country. The

main reason behind the balance of payments of Nepal has taken a significant hit is due to

continuous rise in import. In the latest reports, Nepal total imports recorded an increase of

22.7% year on year whereas Nepal total exports dropped by 2.2% year on year. This has

also affected the country’s foreign exchange reserve which has gone down by Rs 2 billion

over the past month. Here in this case, there is unfavorable BoP because the export is less

than import i.e. Export (X)< Import (M). In other words, it can be said that the

disequilibrium in the balance of payments has arisen from imbalances between exports

and imports of goods and services.

Annexure 1-Fig 1 shows the value of total exports made by Nepal whereas

Annexure 2-Fig 2 shows the value of total imports made by Nepal in the fiscal year
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2021/22. From the figure we can conclude that the imports are way higher than the

exports.

The value of imports is increasing whereas the value of exports is declining every

month. Currently, the export-import ratio of Nepal is just 14% which is low for a

developing country.

The causes of disequilibrium in the balance of payment in Nepal are discussed

below.

a. Import of Services

While importing goods and services from other developed countries, a

huge payment is made thereby leading to deficit and disequilibrium in Balance of

payment. In case of Nepal, its total Imports is recorded to be Rs. 166 billion (1.3

billion USD) in June 2022, compared with a value of Rs. 140 billion (1.1 billion

USD) in the previous month. The data has reached an all-time high of 1.6 USD

billion in Dec 2021 and record low of 121.9 USD million in March 2005, this data

suggests that the imports in the country are way higher than the exports. The

industrial base of Nepal isn’t capable of producing goods and services to fulfill

the needs of people due to which the nation has to import goods and services at a

higher rate. This slows the economic growth of the country.

b. Political Factors

Political instability of a country has an adverse effect on the BOP of a

country. In the same way, international relations of a country do matter and have a

favorable and unfavorable impact on BOP. Nepal being a politically unstable

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country having frequent changes in government leadership has resulted in weak

policy implementation.

Nepal mostly depends on foreign aid from other developed countries for

any kind of developmental programs and in the end of it Covid-19 pandemic has

diverted the government priorities on other issues with the country facing political

crisis. But, the government has been struggling to spend the development budget

and that’s the reason the country is facing economic problems such as liquidity

crunch in the banking sector, Balance of payments deficit, depletion of foreign

exchange reserves and reduced inflows of remittances threatening economic

stability.

2. Trade Deficit

Nepal is an import-based country and its external trade is highly characterized by

large trade deficits and is highly dependent on trade with India. The value of imports

increases every year which results in expansion of the trade deficit. While the total trade

value is rising, imports have been increasing at a higher rate as compared to exports.

High import growth rate leads to an increase in remittance that compensates for a

sluggish domestic industry. (As shown in Annexure 1- Fig 3)

As shown in Annexure 2-Fig 1, during the first eight months of 2021/22,

merchandise exports increased by 82.9% to Rs.147.75 billion compared to an increase of

7.8% in the same period of the previous year. During this period export of goods to India

increased whereas export to China decreased by 11.00%. In the period, the export of

palm oil, soybeans oil, polyester yarn and thread, and woolen carpets had increased.
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Similarly, during this period, the merchandise imports increased by 38.6% to

Rs.1308.73 billion as compared to an increase of 2.1% a year ago. The value of imports

has been going up every year. Imports from China, India, and other countries have

increased by 28.1%, 36.7%, and 75.4% respectively. Imports from all the custom points

have increased during the period. The total trade deficit increased from 34.5% to

Rs.1160.99 billion during 2021/22. The trade deficit had increased by 1.6% in the

corresponding period of the previous year. So, we can say that the trade deficit of Nepal

is decreasing as a result of increasing exports. But the trade deficit is still at the higher

end.

Annexure 2-Fig 2 shows that the real GDP of Nepal is lower due to the lack of

export surplus. The AD curve is at a point lower than the domestic demand curve i.e AD’

which shows that the increasing imports result in a leftward shift of market equilibrium.

The items like textile and apparel products including yarns and carpet continue to

rank high in the country’s exports while Nepal is not endowed with the raw materials for

these products, it manufactures them for India at factories owned and operated by

Nepalese and Indian companies. Major imports include metal products, food items,

machineries, and petroleum products/ mineral fuels.

3. Foreign Exchange Rate

Exchange rate is a key variable in managing international trade. It is the price of

domestic currency in relation to foreign currency. In other words, it is the price at which
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domestic currency is converted into foreign currency or vice versa. A country's currency

exchange rate will also play an important role. If a currency loses value relative to other

national monies, producers can produce and sell those goods abroad for relatively

cheaper (and the reverse is true if the currency value rises).

Because of this, a country's government or central bank of an exporting country

may employ monetary policy tools if the currency starts to rise in global markets.

Overvalued exchange rate mainly promotes trade deficit while under-valued

exchange rate can foster trade surplus. Thus, countries employ the exchange rate as a

strategic policy variable to improve trade balance, especially in emerging and developing

economies, which focus on export-led growth where the under-valuation is maintained

for promoting exports to bring about positive effects on the trade balance. The

equilibrium rate of foreign exchange in the foreign exchange market is determined

through the point of intersection between the supply and demand curves of foreign

exchange. The rate of exchange refers to the rate at which the currency of one country

can be converted into the currency of another country. Thus, it indicates the exchange

ratio between the currencies of two countries.

In Annexure 2: Fig 3 the demand for and supply of foreign exchange have been

measured along the axis OX, and the rate of exchange along that of OY. Whereas DD

curve indicates the demand for a foreign currency. The SS curve indicates its supply.

Both intersect at P demand and supply being equally represented by OL, the rate of

exchange is OR. When supply of foreign exchange rises to OM, its demand remaining

constant, the rate of exchange declines to OR and when the demand for foreign exchange
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rises to OM, its supply remaining constant, the rate goes up to OR. Thus, we conclude

that if the demand for a foreign currency increase, its rate of exchange must go up, and if

its supply exceeds its demand, the rate must decline.

Nepal has followed the conventional fixed peg exchange rate regime with Indian

currency and flexible exchange rate regime with the rest of the currencies. The fixed

exchange rate with Indian Currency is determined by Nepal Rastra Bank and the rate of

other currencies is determined by demand and supply interaction of the currencies. Nepal

has adopted Rs 1.60 as exchange rate with Indian Currency from 1993. There is also the

issue raised to review this exchange rate system but many economists are in favor of a

fixed rate with India because of the porous border with India and smaller GDP of Nepal.

If a flexible rate is accepted, there is the possibility of smuggling of Nepalese and Indian

currency between two borders.

Nepal also uses Demand Draft, Telegraphic Transfer, Mail Transfer, Banker's

Cheque, Traveler’s Cheque, Bills of Exchange, Credit Card, Debit Card, Master Card,

Visa Card, International Money Order as basic methods of foreign currency payment.

SWIFT is used to transfer from one country to another which is the fastest medium to

exchange transactions of different currencies.

When a currency appreciates, its goods are more expensive to other countries.

When a currency depreciates, its goods are less expensive to other countries. Therefore,

anything that changes a currency’s value can impact real GDP, unemployment, and the

price level. Trade deficit is linked with the foreign exchange reserves. A higher trade

deficit lowers the foreign exchange reserves. A holding of foreign exchange reserves is
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essential for external transactions to those countries whose currencies are not reserve

currency. Hence, maintaining a certain level of foreign exchange reserve is a policy

objective for countries with non-reserve currency.

Appreciation of currency makes exports more expensive and imports cheaper

which decreases the quantity of exports and increases the quantity of imports that

deteriorates the balance of payment. It causes a lower level of inflation and fall of

aggregate demand which slows down economic growth.

The depreciation of currency has a reverse effect. It is a flexible exchange system.

Devaluation of currency results in import more expensive and exports cheaper. It causes

lower quantity of imports, increased quantity of exports which improves current account

balance of payment. Finally, there will be a higher level of inflation which raises

aggregate demand which leads to an increase in economic growth rate.

Depreciation of currency further deteriorates the situation and there will be

improvement as shown in the below figure. Since multinational companies and

international business are already fostering in Nepal, bringing such instruments in

practice has become a necessity rather than a requirement. As a result, we can increase

the economic growth of the country as well. As the currency of Nepal is not high in

comparison to USD and Pound Sterling, the goods produced in Nepal are cheaper for the

foreigners than the goods of countries like the USA or the UK. Thus, Nepal has a good

chance to penetrate the export market, from a currency point of view.

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4.2 Opportunities for Export Market Penetration

Nepal is not ahead in technology as compared to other countries. The technological

development of the nation has been very poor. So, we can say that Nepal can’t compete with the

big world nations in terms of technology and products based on technology like machineries and

automobiles.

But Nepal still stands a chance to increase its exports. Currently, the top export products

include garments, leather products, tea leaves, herbs and medicinal products, vegetable oil/seed

oil and handicrafts. The government can develop an infrastructure to scale these products with

high potential in the international market.

Nepal is located between two of the world's most popular countries (India and China)

with easy access to both vibrant markets. It has significantly lower tariffs on imports as

compared with India which can make Nepal an attractive location to Indian investors. Other

advantages in Nepal are affordable labor, high profitability, low cost and an accessible

bureaucracy. Nepal is entitled to preferential treatment in a number of developed country

markets. The country has a range of climatic conditions. The topography is generally

mountainous in Himalayan, moderate in hilly and hot in terai. Nepal can grow various

agricultural products, medicinal herbs and high-quality tea. There is also a huge potential for

hydropower.

As we all know that Nepal is a rich country in terms of culture and traditions. So, the

products that carry historical importance and can reflect the past can be exported to other

countries. For example: the handicrafts are exported to around 85 countries and in the year 2016

the export value of these products was about Rs. 6 billion. Also garments like pashmina and even
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hand knitted carpets are exported to various countries around the globe. Also, the seed and

vegetable oil like soya-bean oil and palm seed oil also contribute a lot in the export value (about

Rs. 9 billion in the first 5 months of the fiscal year 2019/2020). Nepal’s top five exports include

soya-bean oil, palm oil, hand knit carpets, pashmina and cardamoms which accounts for around

60% of total exports.

Thus, Nepal has the capacity to penetrate the international market with the products that

are unique in itself and attract foreign buyers. The price of these products isn’t too high due to

which most of the population in the foreign countries can buy these goods. We will discuss the

steps that can be taken to enhance the export rate and value of the products later in the report.

4.3 Challenges Faced by Nepal in Foreign Trade (Primarily Exports)

Foreign trade is important for a nation to not only fulfill the needs of people but for the

proper balance in the economy. Foreign trades contribute significantly to a country’s economy.

While the big economies like the USA, China, Japan, Germany and India’s major share of the

national economy is held by foreign trades (mainly exports), Nepal hasn’t been able to capture

the global market with the Nepalese products. As mentioned earlier, Nepal is facing a problem of

trade deficit. Here are some of the factors that have affected the Nepalese foreign trade.

a. Landlockedness

Water transport is the most suitable mode of transport for foreign trade. The cost

of water transport is cheaper as compared to the other modes such as road and air. The

countries who are able to exhibit a high level of foreign trades use water transport such as

sea transport by ships and boats. Transport by water allows a nation to ship large volumes
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at a lower cost. But Nepal is unable to access water transport/ seaports due to the

landlockness of the country. The major mode of foreign trade is road transport due to

which Nepal isn’t able to trade with many countries. Road transports are more expensive

as compared to water transport and slow paced. The toll charges and fees involved in

road transports increase the cost resulting in the increase of prices of the goods.

Also, when it comes to road transport, low quantities are delivered at a time.

Nepal has to depend on neighboring countries for international trade (specially India as

the North range is not suitable for trade due to the geographical conditions). As the air

transport is too expensive, the cost of goods would be higher if trade is conducted

through the air. Due to the lack of access to water bodies Nepal isn’t able to trade much

with countries except India and China. Nepal only exports rare goods such as herbs, oil

seeds, handicrafts, carpets, jute and garments which aren’t readily available in other parts.

Nepal imports a lot of goods and services from India and China. While the Nepalese

products can be penetrated in opposite parts of the globe, the transport problem acts as a

barrier for exports.

As modes of transport affect foreign trades of a nation, we can say that the

landlockedness of Nepal has been a major reason behind the poor condition of foreign

trade in Nepal.

b. High Cost of Production

The cost of production of an economy depends on the status of the factors of

production. There are mainly four factors of production as enlisted below.

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i. Land

In the context of Nepal, the geographical division has affected industrial

development. The Terai range is the most suitable region for industrial activities. The

Hilly and the Himalayan region aren’t favorable for establishment of industries due to

natural constraints.

So, Nepal has limited land available for establishing factories and industries.

Nepal is an agricultural country with about 36% contribution in national GDP. The land

of Nepal is suitable for agriculture but no other minerals are available. The geographical

structure of Nepal has affected the production capacity and also increased the cost of

production due to limited territory for industrial foundation

ii. Labor

Nepal has a low population of adults (about 12 million), and among them many

are engaged in foreign employment due to the lack of opportunities in the nation. The

majority of the remaining labor is engaged in agriculture. The semi-skilled and unskilled

labor in Nepal is higher as compared to skilled labor. Due to the lack of skill set, people

lack the ability to expand the industry. Due to the low availability of manpower, the cost

of labor increases which subsequently increases the cost of production.

iii. Capital

The industrial infrastructure is not well-developed in Nepal and the investments

made to expand the economy is very low. Many industries use obsolete technology due to

which the production is hampered.

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The investments in the field of innovation have been low. The raw materials used

in the manufacturing or production are imported from other countries due to which higher

pre-production costs are incurred by the firms. The production process is highly costly

due to the lack of technology and low scale production.

iv. Entrepreneurship

Entrepreneurship is a skill that combines all the other three factors of production.

In the context of Nepal, the highly skilled manpower is very low due to which the

resources have not been utilized properly. This leads to wastage or underemployment of

resources which leads to increase in cost of production. The cost for producing depends

upon the method and scalability of the production. If incompetent people lead an industry

it leads to low efficiency which causes increase in cost of production.

Due to all the factors mentioned above, the cost of production of goods in Nepal

is higher as compared to other countries. Countries with better technology and manpower

are capable of large-scale production and manufacturing which ultimately lowers the

production cost. Because of higher cost of production, the price of the commodities is set

higher as compared to other nations which makes Nepal an expensive market for foreign

countries. So, the countries prefer not to import goods from Nepal, which has resulted in

a trade deficit of Nepalese economy.

c. Lower Level of Production and Low-Quality Goods

Whether or not an economy can produce largely depends upon the utilization of

available resources. The production capacity of Nepal is not high due to the lack of
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capital and skilled/unskilled manpower. As the state of technology can affect the total

factors of production, usage of outdated and primitive technology in the field of

agriculture (which happens to be the major contributor in GDP) and other commercial

industries has resulted in low productivity of Nepal. Moreover, the lack of availability of

resources such as fossil fuels limit the production capacity of an economy.

Thus, Nepal has not been able to produce at a large scale. Even if the limited

production is possible, the available factors of production in Nepal are not suitable for the

manufacturing of high-quality goods. In comparison to the goods of other countries like

India, China and Japan, the quality of goods in Nepal is substantially low. As a result,

foreign countries refrain from importing goods from Nepal as the price of the goods

doesn’t match the quality and the products of Nepal aren’t able to compete in the

international market.

d. Comparative Cost Disadvantages

For a country to be a net exporter (Exports> Imports), it must have products that

international/foreign buyers want and the capacity to produce those goods that have

relatively low cost. Countries should export those goods in which they have comparative

cost advantage i.e lower opportunity cost to gain advantage from foreign trade.

Countries like Nepal can enjoy an absolute cost advantage in certain products i.e.

rare raw materials and natural resources that are not readily found everywhere. There will

be high demand for the products which can increase the net exports.
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Comparative advantage plays an important role in determining what goods and

services certain countries can choose to import and export. Countries can analyze their

comparative advantage in different areas so that they can determine the products which

can be produced at lower opportunity cost than other countries. It is a key principle used

in international trade that forms the basis for why free trade is beneficial to all countries.

Many countries and economies use it to determine what goods and services they plan to

import or export. Countries that have a comparative advantage producing a specific good

or service often choose to specialize in this area since it is more efficient and cost-

effective than producing other goods and services.

They may channel additional labor, capital and natural resources toward the

production of this specific good or service to take advantage of a lower opportunity cost

and improve their profit margins.

For example: If Nepal decides to channel its resources i.e., labor and capital into

producing electronic gadgets. Let’s assume that with the available resources Nepal can

produce 10 million TVs and 40 million mobiles in one year. But on the other hand, India

has already been channeling its resources, labor and capital into producing electronic

gadgets and can produce 80 million TVs and 100 million mobiles on average each year.

We can say that the comparative advantage is with the other countries who can

channel their resources and exhibit high levels of productivity.

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d. Publicity and Advertisement

Advertisement and publicity are crucial factors in foreign trade. A country must

be able to promote their products in the international market in order to attract buyers.

But in the case of Nepal, the emphasis on publicity has been next to none. Producers

aren’t willing to spend on marketing and advertising due to which the products are not

able to gain international recognition which hampers the foreign trade. As market

penetration requires a high level of advertisement and recognition, inability to do so can

result in the inability to export products.

e. Slow Industrial Development

For a nation to engage in international trades, the industrial base of the country

must be strong. The standards of production level and quality must be met so that the

country can export goods. The technological evolution and innovation in production takes

place through industrial development. But in the case of Nepal, the pace of industrial

development has been very low. The government hasn’t been able to invest in the

development of the industrial sector which is reflected by the statistics. In the year 2020,

the industrial sector contributed a mere 11.8% to the GDP of Nepal. In the year 2018 and

2019 the sector contributed 13.2% and 13.01% respectively to the GDP of Nepal. Thus,

we can conclude that the slow industrial development has been one of the key reasons for

Nepal's trade deficit.

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Conclusion

5.1 Summary of the Findings

From the research, we discovered that the foreign trade condition of Nepal is not ideal.

The rate of increase of imports is way higher than the increase of exports. This has led to a

situation in which the trade deficit of Nepal is excessive. To compensate for this, the government

must adopt various measures in order to increase productivity which would decrease the

dependence on neighboring countries. Though market penetration seems challenging for Nepal

due to various circumstances, the government must be able to promote and scale the

business/products having high potential to attract buyers in the international market. In a

nutshell, the productivity of firms in Nepal must increase to prosper export market penetration to

sustain the economy.

5.2 Recommendations

1. Developing Manufacturing Focused Infrastructure

In order to develop the trade competitiveness and production levels, the

government must prioritize the manufacturing industries. As mentioned earlier, due to

various geographical constraints, the industrial base in Nepal is limited due to which

production requires higher costs. One of the main reasons Nepal is unable to actively

participate in international trade (exports) is the unavailability of exportable surplus.

Nepal is only able to export a few products like jute, herbs, garments and handicrafts. As

discussed earlier in the challenges (in chapter 4.3), the lack of FOPs is the reason behind

such a situation.
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Thus, to cope with the increased costs, Nepal needs to strengthen the

manufacturing infrastructure and produce at a large scale so that productivity is high at a

lower cost. The government must build infrastructure which is favorable for exports. The

government must focus on developing global connectivity through airlines or seek help

from neighboring countries like India and China to access the seaports so that Nepal can

establish trade relationships with countries across the globe.

If infrastructures are developed with emphasis on manufacturing, the cost of

production can be lowered whereas the quantity of production can be increased. Thus,

Nepal will be able to export more and import less due to which the Real GDP of the

nation can increase as shown in the figure. (Annexure-1 Fig 1)

As shown in Annexure 3- Fig: 1, Shift in AD curve due to increase in Exports, the

equilibrium shifts from E1 to E2 after the exports are increased through prioritizing the

manufacturing industry.

The aggregate demand curve shifts from AD1 to AD2 while the supply remains

unchanged. The increase in AD curve causes a rightwards shift in Real GDP from Y1 to

Y2.

Thus, the government must focus on developing manufacturing-based

infrastructure to enhance economic growth.

2. Enhancement of Trade Relations

The latest available country-specific data shows that 94.6% of products exported

from Nepal were bought by importers in: India (72.9% of Nepal’s global total), United

States of America (10.2%), Germany (2.8%), United Kingdom (2%), Turkey (1.4%),
EXPORT MARKET PENETRATION OF NEPALESE PRODUCTS
25
France (1.1%), Japan (0.9%), Canada (0.75%), Australia (0.73%), mainland China

(0.67%), Italy (0.65%) and Bangladesh (0.5%).

This shows that the trade relationship of Nepal is limited to only a few nations. If

the marketplace for Nepalese products is widened to other countries as well then Nepal

can see an increase in exports. Thus, the government must sign trade agreements with

many countries so that the value of foreign trades between the countries can get a boost.

3. Fiscal Policies: (Supply Side)

The fiscal policies that regulate the government policies in order to increase the

aggregate supply are known as supply side fiscal policies. These policies help to achieve

full employment, achieve long run growth and decrease the price levels.

In the supply side fiscal policies, the government imposes lower taxes and also

subsidizes various industries which leads to increase in production levels. In the context

of Nepal, the policy can be highly useful to increase employment opportunities and

output levels. Nepal being a trade deficit economy, the production levels must be high in

order to increase the export surplus so that the deficit can be cut. Also many industrialists

would be open to expand their businesses as the returns would be higher as the taxes are

lower.

So, the excess profit can be used to purchase new machinery and can also be

invested in technologies and innovations. But on a longer run, it is difficult to sustain.

As shown in Annexure 3- fig 2, adoption of supply side fiscal policies leads to

increase in supply levels i.e., from AS to AS’ which reduces the price from P1 to P2 and
EXPORT MARKET PENETRATION OF NEPALESE PRODUCTS
26
increases the output from Y1 to Y2. If the domestic aggregate supply increases in the

Nepalese economy, then the excess/surplus products can be exported to foreign nations

which can lead to economic growth.

4. Decreasing Brain Drain

Brain Drain refers to the emigration of skilled workers from a particular country.

In the case of Nepal, the unemployment rate is 11.4% due to which qualified

manpower/labor can’t seek employment opportunities in the country. Also, the lack of

industrial development has led to a dip in the country’s production. There is

unemployment of resources which hampers productivity.

Labor is the most important FOP for a nation like Nepal as the economy of Nepal

is labor-intensive. In the current situation, the resources aren’t wisely utilized and

production is not able to occur at PPC. So, the government must attract the emigrated

workers with various employment opportunities.

As shown in the Annexure 3- Fig 3, due to the inefficient utilization of resources

and even lack of FOPs, production occurs at point A which is within the PPF curve which

displays that output is not maximized. So, by reducing emigration of workers and

development of infrastructures, the Nepalese economy can produce at point B which

showcases optimum output levels.

5.3 Limitations of the Study

Despite all we’ve researched, there are still some constraints to our study, these are as

follows:
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27
1. This research paper uses only secondary sources for its data. This data could contain

some unidentified elements that could cause misinterpretation.

2. There may be some errors given the low amount of data on the adoption of Nepalese

products in the global marketplace.

5.4 Managerial Implications

As a manager, one must expand your company in a way that allows the products it

manufactures to compete not only in the country of manufacture but also internationally and be

able to successfully enter and dominate global marketplaces.

EXPORT MARKET PENETRATION OF NEPALESE PRODUCTS
28

References

Educba (2019), Market Penetration. Retrieved from:

Market Penetration | 10 Awesome Market Penetration Strategies (educba.com)

International Trade Administration (2021), Market Overview of Nepal. Retrieved from:

https://www.trade.gov/country-commercial-guides/nepal-market-overview

Nepal Rastra Bank (2022), Current Macro and Financial Situation of Nepal. Retrieved from:

https://www.nrb.org.np/contents/uploads/2022/04/Current-Macroeconomic-and-

Financial-Situation-English-Based-on-Eight-Months-data-of-2021.22.pdf

Statista (2021), Nepal’s GDP Distribution. Retrieved from:

https://www.statista.com/statistics/425750/nepal-gdp-distribution-across-economic-

sectors/
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29

Annexure - 1

Annexure 1-Fig 1: Value of Exports of Nepal

Annexure 1-Fig 2: Value of Imports of Nepal

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Annexure 1- Fig 3: Trade Deficit of Nepal (in millions)

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Annexure-2
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Annexure 2-Fig 1: Foreign Trade in 2021/22

Annexure 2-Fig 2: Export Surplus

Expenditure
AS
E
2
C+I+G (AD’)

E C+I+G+X-M(M>X) [AD1]
1
C+I

Real GDP
Y1 Y2

Annexure 2- Fig 3: Foreign Exchange Rate

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33

Annexure- 3

Expenditure
AS
E2 C+I+G+X-M (X>M) [AD2]
C+I+G

E1 C+I+G+X-M (M>X) [AD1]

C+I

Real GDP
Y1 Y2
EXPORT MARKET PENETRATION OF NEPALESE PRODUCTS
34
Annexure 3- Fig: 1: Shift in AD curve due to increase in Exports

Annexure 3- Fig 2: Supply Side Fiscal Policies

Output of Y

Output of X

Price
AS

AS’

P1 E1

E2
P2

AD

Real GDP
Y1 Y2

Annexure 3- Fig 3: PPF Curve