Foreign Direct Investment or FDI happens when a home country decides to invest directly in a host country in order to benefit from the services provided to produce or market goods (Hill, 2009). FDI occurs when the investors are said to have the possession of the 10% interest or more than that in a foreign business venture (Feenstra 1998). A firm is regarded as a Multinational Enterprise or MNE when it successfully commences with the FDI.

The importance of foreign direct investment (FDI) is well acknowledged in literature for both the developing and developed countries (Hill, 20009: Lal, 1975: Giroud, 2003). Over the period of last ten years foreign direct investment have shown twofold growth as rapidly as trade (Meyer, 2003). Developing countries require capital for the improvement of their industrial and economical sector whereas on the other hand developed countries are seeking to benefit from the high productivity factor on investing in developing countries, thus making FDI a process having joint impact on the development of both the industries .The process of liberalization of world economies in many industrially deprived countries has markedly increased the market competitiveness in terms of the inward flow of FDI. The enforcement of selective trade policies over foreign operations are designed to attract more foreign investors in the developing countries (Aqeel & Nishat, 2004).

Investments are made in sectors where the home country have a relative advantage over the host country in terms of market and economy so that the investing firm could increase their marginal productivity factor. According to Zakaria (2008) ‘foreign investment consists of a package of capital, technology management, and market access’. In other words foreign ventures bring along with them the tools required for the development of the economical and technological environment of the country. FDI helps in facilitating access to foreign markets and provides the local labour with the training and knowledge required to enhance their skills. Foreign trade and production is also influenced by the inward flow of FDI in the host country. Positive impacts of FDI are recorded on the export industry of the host country as foreign firms have that experience and knowledge which could help them to take immediate actions in response to the fluctuating demands and needs of the globalized business industry. Whereas negative impacts of FDI are seen on the import industry of the host country (Zhang, 1999). Domestic firms may find themselves in a very complex situation due to the invasion of foreign investors in the local market, sudden increase in the cost of factors of production can prove to be disadvantageous for the local investors and the local production of goods that were imported earlier could be a negative point for the investors in the import industry (Agosin and Mayer (2000).