Foreign Direct Investment (FDI) in Pakistan is one of the major external sources of funding to meet obligations of resources gap and goal achievement. FDI has played a vital role in the economic growth of Pakistan. FDI contributed significantly in the human resources development, capital formation, and organizational and managerial skills of the people in the country. Total foreign investment was $ 6.0 billion, of which FDI amounted to $ 4.16 billion in the year 2007. The present research study empirically analyzed the impact of FDI on Pakistani imports and exports through time series data. The study applied the Unit Roots test to check the stationarity of the data series used in the analysis. Cointegration technique was used to analyze the long run relationship among the variables. Error Correction Model was used for further analysis.

       The results of the import model showed that FDI positively impacted real demand for imports in the short run and in the long run. In case of one percent increase in FDI; real demand for import would increase by 0.08 percent in the short-run and 0.52 in the long run. The results of export model showed that FDI has negative relation with real exports in the short-run and positive relation in the long run. The export model estimations indicated that with one percent increase in FDI, real export decreased by –0.08 percent in the short-run and increased by 1.62 percent in the long run.