Terrorism has negatively affected growth & development and forced an intense economic burden on the economy of Pakistan. The general loss of self-assurance in economy resulting helplessness to catch the attention of foreign investors and high defense & security expenditures leads to economic distortions which further affect the economic growth and instability in the country. The objectives of the study are to analyze empirically the long run impact of terrorism on foreign direct investment and economic growth along with other macroeconomic variables (human capital, inflation rate, capital domestic investment, population growth rate, trade openness and unemployment rate and exchange rate) in Pakistan during 1980-2014. To measure the short run relationship between the dependent and independent variables of the models. To explores the influencing directions between macroeconomic variables, terrorism, economic growth and foreign direct investment of Pakistan and to make appropriate suggestions for suitable policy implementation for problems arising from the terrorism in the light of finding of the study. Both primary and secondary data have been used to achieve the desired objectives of the study. Furthermore, For checking stationarity, Unit Root Analysis (Augmented Dickey Fuller test) was used, the Autoregressive Distributed Lag approach to cointegration was used to detect the existence of long run relationship among the variables, and for short run relationship, an Error Correction Mechanism (ECM) was estimated. Vector Auto Regression (VAR) was used to summarized the causality among terrorism, economic growth and foreign direct investment. The Impulse Response Function (IRF) and the variance decomposition was used to analyze the dynamic impact of the random errors on the variable’s system. The main findings of the study are; all the variables except foreign direct investment, terrorist attacks and economic growth are non-stationary at level but at first difference they became stationary. The Autoregressive Distributed Lag approach to cointegration estimation reveals a long term relationship amongst the (i) economic growth and Independent Variables i.e. terrorist attacks, foreign direct investment, human capital, inflation rate, capital domestic investment, population growth rate, trade openness and unemployment rate (ii) foreign direct investment and Independent Variables i.e. terrorist attacks, economic growth, human capital, inflation rate, capital domestic investment, trade openness and exchange rate; for the time period of 1980-2014. Error Correction Mechanism (ECM) models validates that there exists a short run equilibrium relationship among the variables. And the sign of coefficients of terrorist attacks and human capital are in negative which means variables are having negative relationship in short run and are significant in explaining GDP. Foreign direct investment have negative relationship with terrorist attacks, Economic growth, exchange rate, human capital, inflation rate, capital domestic investment and trade openness which is indicated by the negative sign of coefficients of these variables. The coefficient of error correction term is negative and highly significant in both the model. The R-square value is less than Durbin Watson statistics therefore models are not spurious and the models are acceptable. There is no serial correlation and no heteroskedasticity in the both models and the residuals are also normally distributed in both models. It is found from the Impulse Response Function analyses that when one positive standard deviation shock or innovation is given to terrorist attack, it will take approximately 20 years to absorb the shock. Similarly, foreign direct investment will took almost 27 years for absorption of innovation or shock and economic growth will take almost 18 to 20 years to absorb the shock or innovation. The results of Variance decomposition analysis showed that the response of terrorist attack, economic growth and foreign direct investment to the impluses or innovation introduced mostly explained by itself. The negative impact of terrorism on the economy is proved beyond doubt from the findings of the present study and countless other studies, hence it is of the most importance that scourge of terrorism be rooted out from our society. The efforts are required to develop the terrorism affected areas by establishing some useful incentive systems, for-instance, tax free zones to encourage the businessmen and investors to set up their businesses in the terrorism affected regions. Attempts are required to establish various departments or organizations in the terrorism affected areas to provide the local population different job opportunities, quick deliverance of aid, standard school meetings, hospitals with all facilities and the social associations should be developed, in order to build friendliness and trust linkage between the population and government. Emphasis should be given to the children and youth education especially in these affected areas or various kind of creative, Technical and skill trainings should be given to the youth so that they can’t be easily hired by these terrorist groups. Attempts are required to support the crisis‐affected farmers in the shape of agricultural & farming inputs (for instance, fertilizers and seeds) the microcredit and fixing, repairing, availability of quality seeds and improving of irrigation systems.