The industrial sector in Nepal is very undeveloped. Early industrial ventures, spurred by domestic shortages in the 1930s and 1940s, fared badly due to inexperience. By 1960 there were 63 registered industries, unsupported by adequate institutional organization or infrastructure. With the influx of foreign aid targeted at both the industrial sector and the transport and communications infrastructure, a mix of modern industries and cottage industries slowly developed, numbering 3,557 institutions by 1997. They are small by international standards. Industrial activity, accounting for about 21 percent of GDP, employs only 3 percent of the population. Most of these industries are located around urban centers such as the Kathmandu Valley and in the Tarai region.
Nepal suffers from a lack of both internal and external investment. This stems from low domestic savings, a small domestic market, a severe shortage of skilled labor, chronically corrupt and inefficient public administrations, high transport and operating costs, the inadequacy of power resources and, increasingly, political instability. There have been recent attempts to encourage investment and privatization through the Industrial Policy 1992 and Foreign Investment and One Window Policy 1992, and the creation of industrial centers with governmental land and buildings on lease for private ventures.