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DI, through the involvement of large Transnational Corporations (TNCs). FDI under the sponsorship of TNCs gravitates towards the destinations that are inclined to profitable opportunities. These “Global Factories” search for highest financial returns and greatest security for their operation in the host regions. To attract the foreign investors, the successive governments in Pakistan, offered various investment incentives in the form of tax concessions (tax expenditure) and direct expenditure on infrastructural provisions. The taxation policy of a host developing country has great relevance for TNCs’ involvement in production activities. It is perceived to be a significantly influential factor in determining the inflow of foreign investment through the cost of capital and the resulting after tax return. There are also many specific accusations against multinationals. They depress wages and employment at home by moving production abroad. They depress wages in their host countries by exploiting helpless workers. They choke host country growth by displacing local firms and obstructing their technological progress.

The main purpose of this paper is to analyze the effectiveness and impact of the foreign capital inflows (FCI), namely, FDI (Foreign Direct Investment) and ODA (Official Development Assistance) on economic growth of Pakistan. The organization of this paper is as follows: a detailed synopsis of the recent literature on the relevant topic is presented in next section (Section – II). The section – III deals with the data and methodology. Empirical analysis and estimated results are analyzed in Section – IV, while Section – V gives the conclusion and the last Section – VI is about the policy recommendations.

REVIEW OF LITERATURE

Studies show diversified results about the impact of foreign capital on economic growth of a country. There are conflicting views about the opinion that foreign capital accelerates the process of economic growth.

Arshad (2008) in his study considered the role of the foreign direct investment (FDI) as a growth-enhancing factor in developing countries. FDI boost up the level of economic growth and has a tendency to promote and increase efficiency (Shahbaz, et, al., (2007) concluded in case of Pakistan. He further argued that FDI creates a positive effect on economic growth like Pakistan because it comprises of certain very important factors like capital, technology management, and market access (Shahbaz, et al., (2007). Therefore, it can be considered a positive impact of FDI inflow which it exerts on the economic development. Bashier and Bataineh (2007) investigated relationship between FDI & savings and found combination in long span of time between FDI and savings.

Chowdhury and Mavrotas (2005), concluded that FDI: is an important source of capital, complements domestic private investment which is usually associated with new job opportunities; enhances both technology transfer and spillover and human capital (knowledge and skill) enhancement boosts overall economic growth in host countries. Concerning developing countries, macro-empirical work on the FDI-growth relationship has shown that—subject to a number of crucial factors, such as the trade regime, the human capital base in the host country, financial market regulations, banking system and the degree of openness in the economy—FDI has a positive impact on overall economic growth. Al