This paper aims to contribute to the literature on the developmental role of foreign direct investment through an examination of the Nepalese experience during the period 1988-2001. Despite significant liberalisation of the foreign investment regime and the introduction of attractive investment incentives, Nepal’s achievements during this period, both in terms of the volume of FDI and its developmental impact, failed to mach the national expectations.Nepal obviously has intrinsic disadvantages arising from its geography and other typographical characteristics in attracting FDI. However, comparative international experience suggests that her lackluster achievements as a host to foreign investors cannot beexplained in terms of these factors alone. Policies that underpin the overall investment climate also seem to matter. Mere liberalisation of the investment regime and introducing financial incentives are not a substitute for an all-encompassing effort to improve the investment climate.