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firms in practice have begun to be questioned.

During the fluctuation of capital flows in the 1990s, foreign direct investment (FDI) was the main source of flows to developing countries. Unlike other capital flows, FDI is less volatile. It has therefore become the “favorite capital inflows” for developing countries. Many argue that, given appropriate policies and a basic level of development, FDI plays a key role in the process of creating a better economic environment but potential drawbacks do exist, including a deterioration of the balance of payments as profits are repatriated and negative impacts on competition in national markets. At present, the consensus view seems to be that there is a positive association between FDI inflows and growth provided receiving countries have reached a minimum level of educational, technological and/or infrastructure development. However, there is no universal agreement about the positive association between FDI inflows and economic growth. The potential advantages of the FDI on the host economy are it facilitates the use and exploitation of local raw materials; it introduces modern techniques of management and marketing, it eases the access to new technologies. Foreign inflows could be used for financing current account deficits, finance flows in form of FDI do not generate repayment of principal and interests (as opposed to external debt), it increases the stock of human capital via on the job training. In case of Pakistan the amount of FDI inflows increased from $ 0.24 billion in 1990 to $ 55 billion in 2007(WDI indicators 2008).

Foreign direct investment serves as a strong mechanism for the promotion and spread of business opportunities throughout the developing and industrialized economies. This mechanism raises income level and provides employment opportunities to the working class of the host country giving an overall boost to their economic situation. Host countries find themselves in an advantageous condition on account of foreign direct investment because they get the benefits of new (foreign) technology through licensing agreements, commencement, and competition for resources, employee’s training, export spillovers and direct capital financing. Especially for a developing economy like Pakistan all these are certain crucial incentives as it has a tremendous effect on the major macroeconomic variables like domestic investment and savings, technology, employment generation and labor productivity, environment and export competitiveness. To face the growing challenges of the world economy, this channel helps not only in boosting the potential of an economy like Pakistan regarding an increase in the production level but also the capacity to save resources to the extent possible.

The trends and the patterns have shown that the FDI, ODA, portfolio investment and borrowing through private sources have increased sharply. Pakistan lacks physical, financial & human capital as well as political & macroeconomic stability. FDI in Pakistan has been on the decline. These declining trends in FDI have resulted from public policy and the changing geo-strategic environment of Pakistan. The FDI was constrained by a number of other factors as well, namely, political instability, law and order, economic environment and no proper infrastructure, the instability in stock markets and regulatory regime.

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