This thesis aims to investigate important cost (environmental degradation) and benefit (GDP growth) of sectoral FDI in Pakistan. The study uses time series secondary data from 1972 to 2011, taken from State Bank of Pakistan (SBP), World Development Indicators (WDI) and Statistical, Economic and Social Research and Training Centre for Islamic Countries (SESRIC). The Auto Regressive Distributed Lag (ARDL) model has been incorporated to estimate the impact caused by sectoral FDI inflow on Carbon dioxide emissions along with population density variable and to estimate the impact caused by sectoral FDI on GDP along with energy consumption and labor force variable. The results showed that FDI inflow in manufacturing and transport, storage & communication sector is responsible for the CO 2 emissions in Pakistan. Interestingly FDI inflows in mining and quarrying sector are not directly involved in CO2 emissions. The results also indicate the presence of EKC’s within long and short run, furthermore FDI inflow is responsible for environmental degradation in Pakistan. Furthermore, the population density also has positive and significant relationship with Carbon dioxide emissions. FDI inflows in manufacturing and transport, storage & communication have positive effect on the GDP growth. In addition, energy consumption contributes positively towards GDP growth. Interestingly labor force has insignificant relationship with GDP growth. It is therefore recommended that FDI inflow in manufacturing sector and transport, storage and communication sector should only be allowed if it fulfills the environmental concerns. Secondly population variable should be handled because it has effects on both environmental degradation and economic growth. If the technology transfer take place under FDI then it should strictly take place under the regulation set by United Nation Framework convention on Climate Change (UNFCCC). Supervisor:- Dr. Anwar Hussain