Foreign Direct Investment: Effects of a "Cheap" Dollar

Foreign Direct Investment:
Effects of a “Cheap” Dollar
Updated April 24, 2008
James K. Jackson
Specialist in International Trade and Finance
Foreign Affairs, Defense, and Trade Division

Foreign Direct Investment: Effects of a “Cheap” Dollar
Summary
Since 2002, the dollar has depreciated against a broad basket of currencies and
against the euro. This depreciation has prompted some observers to question whether
the “cheap” dollar is leading to a “fire sale” of U.S. firms, especially of those firms
that can be identified as part of the Nation’s defense industrial base. Congress has
displayed a long and continuing interest in foreign direct investment and its impact
on the U.S. economy. Since September 11, 2001, Congress has demonstrated a
heightened level of concern about the impact of foreign direct investment in critical
industries or in sectors that are vital to homeland security. On July 26, 2007, the
110^th Congress passed P.L. 110-49 (H.R. 556), the National Security Foreign
Investment Reform and Strengthened Transparency Act of 2007. The measure
reflects a heightened level of concern about the presence of foreign investors in the
economy by increasing Congressional oversight over federal reviews of foreign direct
investment and by expanding the current areas of review to include homeland
security and critical infrastructure. The continued weakness in the exchange value of
the dollar and its potential effects on direct investment likely will continue to attract
the attention of Members in the second session of the 110^th Congress.
Academic research and analysis has been relatively limited on the topic of the
relationship between a depreciated dollar and any impact on foreign purchases of
U.S. firms. There is also a relatively limited amount of information on this topic.
Nevertheless, direct investment transactions as a whole seem to be tied more directly
to the relative rates of economic growth between economies, as well as expected
long-run rates of return and other economic factors, than to relatively short-term
movements in the exchange rate of the dollar. Actual and expected movements in
the exchange rate may influence the timing and the magnitude of foreign investors’
decisions, but little research has been done on this issue.
Firms also engage in a variety of tactics to nullify or mitigate the effects of
movements in the exchange rate, which would weaken the linkage between
movements in the exchange rate and direct investment transactions. U.S. and foreign
multinational firms have come to raise a significant part of their investment funds in
the capital markets in which they are investing, which also lessens the impact of
movements in the exchange rate. Furthermore, U.S. and foreign multinational firms
have become skilled at using various techniques to hedge the risks of changes in
exchange rates. This report assesses the current state of knowledge concerning the
role of exchange rate movements in direct investment transactions, presents data on
some of the major factors that influence direct investment, and provides an overview
of some of the factors that influence the way in which firms finance their
investments.
This report will be updated as events warrant.

Contents
Overview ........................................................1
Foreign Direct Investment and the Dollar...............................3
Foreign Direct Investment and GDP...............................4
Dollar-Euro ..................................................9
Dollar-Pound ................................................10
Dollar-Yen ..................................................11
Foreign Direct Investment and Capital Markets.........................12
Sources of Direct Investment Funds..............................13
International Role of the Dollar and Derivatives.....................14
Conclusions .....................................................16
List of Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct
Investment Abroad, Annual Flows, 1990-2007.......................2
Figure 2. Foreign Direct Investment in the United States, the Dollar Price of
Foreign Currency, and the U.S. GDP Growth Rate...................7
Figure 3. Foreign Direct Investment in the United States, U.S. Direct
Investment Abroad, the Dollar Exchange Rate Index and U.S. GDP......9
Figure 4. Foreign Direct Investment in the United States by Euro-Area Countries
and the Dollar/Euro Exchange Rate Index..........................10
Figure 5. British Direct Investment in the United States and the Dollar/Pound
Exchange Rate Index.........................................11
Figure 6. Japanese Direct Investment in the United States and the Dollar/Yen
Exchange Rate Index.........................................12
List of Tables
Table 1. U.S. Direct Investment Abroad, Foreign Direct Investment in the
United States, and Indexes of Currencies, 1999-2006.................5
Table 2. U.S. and Foreign Acquisition Activity, 1996-2007................8
Table 3. Selected Indicators of the Size of the Global Capital Markets, 2006..16

Foreign Direct Investment: Effects of a
“Cheap” Dollar
Overview
The United States is unique in that it is the largest foreign direct¹ investor in the
world and also the largest recipient of foreign direct investment. This dual role
means that globalization, or the spread of economic activity by firms across national
borders, has become a prominent feature of the U.S. economy. Through direct
investment the U.S. economy has become highly enmeshed into the broader global
economy. Some observers are concerned that the depreciation in the value of the
dollar relative to a number of major currencies could lead to a “fire sale” of U.S.
firms. Direct investment commonly refers to investment in new or established
businesses and real estate, compared with portfolio investment, which refers to
investment in U.S. government securities and corporate stocks and bonds. This²
report focuses on foreign direct investment.
Foreigners invested $180 billion in U.S. businesses and real estate in 2006 and
more than $200 billion in 2007, according to balance of payments data published by
the Department of Commerce.³ As Figure 1 shows, this represents an increase over
the $104 billion invested in 2005 and compares to the sharp increase in the amount
U.S. firms invested abroad in 2006 relative to the amount they invested abroad in
2005. The increase in U.S. direct investment flows mirrors a turnaround in global
flows. According to the United Nation’s World Investment Report,⁴ global foreign
direct investment flows increased by 29% in 2005 and 38% in 2006, the third year
of strong growth in direct investment flows.

¹ The United States defines direct investment abroad as the ownership or control, directly
or indirectly, by one “legal person” (individual, corporation, branch, partnership,
association, government, etc.) of 10% or more of the voting securities of an incorporated
business enterprise or an equivalent interest in an unincorporated business enterprise. 15
C.F.R § 806.15 (a)(1).
² For information about foreign portfolio investment in the United States, see CRS Report
RL32462, Foreign Investment in U.S. Securities, by James K. Jackson.
³ Bach, Christopher L., “U.S. International Transactions in 2007.” Survey of Current
Business, April 2008, p. 48. Direct investment data reported in the balance of payments
differ from capital flow data reported elsewhere, because the balance of payments data have
not been adjusted for current cost adjustments to earnings.
⁴ United Nations Conference on Trade and Development, World Investment Report 2007,
United Nations, 2007, p. 3.

Figure 1. Foreign Direct Investment in the United States and U.S.
Direct Investment Abroad, Annual Flows, 1990-2007

Billions of dollars
^$350
^$300Foreign Direct Investment in the United States
^$250
^$200
^$150U.S. Direct InvestmentAbroad
^$100
^$50
^$0
^-$50
¹⁹⁹⁰¹⁹⁹²¹⁹⁹⁴¹⁹⁹⁶¹⁹⁹⁸²⁰⁰⁰²⁰⁰²²⁰⁰⁴²⁰⁰⁶
Year
^{Source: CRS f}^r^{om U.S. Department of}^{Commerce data}
Note: the drop in U.S. direct investment abroad in 2005 reflects actions by U.S. parent
companies to take advantage of a one-time tax provision.
The cumulative amount, or stock, of foreign direct investment in the United
States on a historical cost basis⁵ increased by $180 billion in 2006 to over $1.8
trillion. This marked an increase of 8% over the previous year and a significant
change from the decline in foreign investment spending that had occurred since⁶
2000. The rise in the value of foreign direct investment in the United States includes
an upward valuation adjustment of existing investments and increased spending that
was driven by the relatively stronger growth rate of the U.S. economy, the world-
wide resurgence in cross-border merger and acquisition activity, and investment in
the U.S. manufacturing, information and depository institutions as overseas banks
⁵ The position, or stock, is the net book value of foreign direct investors’ equity in, and
outstanding loans to, their affiliates in the United States. A change in the position in a given
year consists of three components: equity and intercompany inflows, reinvested earnings of
incorporated affiliates, and valuation adjustments to account for changes in the value of
financial assets. The Commerce Department also publishes data on the foreign direct
investment position valued on a current-cost and market value bases. These estimates
indicate that foreign direct investment increased by $231 billion and $416 billion in 2006,
respectively, to reach $2.1 and $3.2 trillion.
⁶ Ibarra, Marilyn, and Jennifer Koncz, “Direct Investment Positions for 2006: Country and
Industry Detail,” Survey of Current Business, July 2007, p. 21.

and finance and insurance companies sought access to the profitable U.S. financial
market .⁷
New spending by U.S. firms on businesses and real estate abroad, or U.S. direct
investment abroad, rose sharply in 2006 to $235 billion, up markedly from the $8
billion U.S. firms invested in 2005, according to the Department of Commerce.⁸
New investment in 2007 likely exceeded $330 billion, according to balance of
payments data published by the Department of Commerce.⁹ The drop in U.S. direct
investment abroad in 2005 reflects actions by U.S. parent firms to reduce the amount
of reinvested earnings going to their foreign affiliates for distribution to the U.S.
parent firms in order to take advantage of one-time tax provisions in the American
Jobs Creation Act of 2004 (P.L. 108-357).
Foreign Direct Investment and the Dollar
Since 2002, the dollar has depreciated against a broad basket of currencies and
against the euro. This depreciation has prompted some observers to question whether
the “cheap” nominal dollar is leading to a “fire sale” of U.S. firms, especially of those
firms that can be identified as part of the Nation’s defense industrial base. While
some aspects of foreign investment have been studied extensively by academics and
others, relatively few economic studies have addressed the linkage between direct
investment and movements in the exchange rate and even those studies have
produced mixed results.
In general terms, most economists argue that depreciation in the exchange value
of the dollar is not the key factor that drives the decision by most foreign firms to
invest in the United States, although the corresponding appreciation of foreign
currencies would lower the cost of assets acquired in the United States. The lower
value of the dollar, however, means that the value of returns from U.S. assets are
reduced as well, which would leave the overall rate of return on such investments¹⁰
unchanged. In one study, two economists argue that an appreciation of foreign
currencies relative to the dollar could boost foreign direct investment in the United
States, because the appreciation leads to increased wealth for foreign firms relative
to their U.S. counterparts and greater access to low-cost funds in local markets.¹¹

⁷ McNeil, Lawrence R., “Foreign Direct Investment in the United States: New Investment
in 2006,” Survey of Current Business, June 2007, pp. 44-46.
⁸ Weinberg, Douglas B., Kelly K. Pierce, and Erin M. Whitaker, “U.S. International
Transactions, Second Quarter of 2006,” Survey of Current Business, October 2006, p. 85.
Direct investment data reported in the balance of payments differ from capital flow data
reported elsewhere, because the balance of payments data have not been adjusted for
current cost adjustments to earnings.
⁹ Bach, U.S. International Transactions in 2007, p. 48.
¹⁰ Bloningen, Bruce A., A Review of the Empirical Literature on FDI Determinants, NBER
Working Paper Series #11299, April 2005.
¹¹ Froot, Kenneth A. and Jeremy C. Stein, “Exchange Rates and Foreign Direct Investment:
(continued...)

Another economist argues that appreciation of the yen in the 1980s provided some
impetus for Japanese firms to increase their direct investments in the United States,
because the appreciated yen lowered the price of certain firm-specific assets, such as
technology and managerial skills, but that it did not necessarily improve the nominal
returns to Japanese firms.¹² Actual and expected changes in the exchange rate of the
dollar may well influence the timing and the magnitude of foreign investors’
decisions, but little research has been done on this issue.
Foreign Direct Investment and GDP
Generally, economists argue that relative rates of growth between the U.S. and
foreign economies are indicative of relative rates of return and corporate profitability
and, therefore, are key factors in determining the direction and magnitude of capital
flows, including direct investment flows.¹³ These flows also are affected by relative
rates of inflation, taxes, interest rates, and expectations about the performance of
national economies, which means they can be quite volatile at times. Since the mid-
1990s, a combination of strong growth and low inflation in the U.S. economy likely
were the main factors in attracting foreign investors. The sheer size of the U.S.
economy, the vast number of investment opportunities, and the relative liquidity of
the market likely also enhance the appeal of investments in the United States. From
2002 to 2005, U.S. direct investment abroad was more than twice the amount
foreigners invested in the U.S. economy, reflecting the period of slower growth in the
U.S. economy from 2001-2003. Both U.S. direct investment abroad and foreign
direct investment in the United States increased in 2006 and 2007, reflecting both the
stronger rate of growth of the U.S. economy and growth in corporate earnings.
Table 1 shows annual data from 1999 to 2007 for U.S. and foreign direct
investment. The data show annual inward and outward flows of direct investment
and they provide some detail on the composition of the sources of those funds. The
table also presents index numbers representing the nominal trade-weighted exchange
rate of the dollar relative to a broad basket of currencies with the year 2000 as the
base year and the annual rate of economic growth in percentage terms for the real
gross domestic product (GDP) of the U.S. economy. Similar sets of index numbers
were constructed for the euro, the British pound, and Japanese yen, and for euro-area
countries, British, and Japanese direct investment in the United States.¹⁴ The index

¹¹ (...continued)
An Imperfect Capital Markets Approach.” The Quarterly Journal of Economics, November

1991, pp. 1191-1217.

¹² Bloningen, Bruce A., “Firm-Specific Assets and the Link Between Exchange Rates and
Foreign Direct Investment.” The American Economic Review, June 1997, pp. 447-465.
¹³ Lipsey, Robert E. and Irving B. Kravis, The Competitive Position of U.S. Manufacturing
Firms. Cambridge, Mass., National Bureau of Economic Research, 1985. (Working Paper
No. 1557), p. 2; and Ray, Edward John. The Determinants of Foreign Direct Investment
in the United States: 1979-1985. Cambridge, Mass., National Bureau of Economic
Research, 1988, p. 2
¹⁴ For the purposes of this analysis, Chinese direct investment in the United States is not
(continued...)

numbers that represent the exchange rate between the dollar and various foreign
currencies were constructed such that an increase in the value of the index means that
more dollars are required to buy foreign currency, or that the dollar has depreciated
relative to the value of the foreign currency. Similarly, a decline in the index means
that fewer dollars are required to buy foreign currency, or that the dollar has
appreciated.
Table 1. U.S. Direct Investment Abroad, Foreign Direct
Investment in the United States, and Indexes of Currencies,
1999-2006
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
^{U.S. direct inv}^e^stm^e^{nt a}^b^ro^a^d^{(in $}^b^illio^ns)
^C^a^pi^t^a^l^$224.9^$159.2^$142.3^$154.5^$149.6^$279.1^$^-⁷^.7^$235.4^$335.4
^Equⁱ^t^y^capi^t^a^l^98.9^78.0^60.9^42.7^35.5^110.0^43.4^30.2^93.9
^R^eⁱⁿ^v^e^s^t^{ed earn}ⁱⁿ^g^s^64.2^93.6^69.8^85.3^120.7^165.7^-^20.4^220.1^254.3
^In^t^e^rcom^pan^y^debt^61.8^-^12.4^11.⁶^26.5^-^6.6⁵^.4^-^30.7^-^15.0^-^12.8
^Fo^reigⁿ^{direct inv}^e^stm^e^{nt in th}^{e United Sta}^t^{es (in $}^b^illio^ns)
^C^a^pi^t^a^l^$289.4^$321.3^$167.0^$84.⁴^$63.8^$145.8^$109.0^180.6^204.4
^Equⁱ^t^y^capi^t^a^l^221.6^259.6^140.9^105.3^93.4^92.9^56.6^98.0^142.1
^R^eⁱⁿ^v^e^s^t^{ed earn}ⁱⁿ^g^s^4.1^-^0.3^-^33.9¹^.6^14.5^49.4^47.7^70.6^64.1
^In^t^e^rcom^pan^y^debt^63.8^61.9^60.0^-^22.6^-^44.0³^.5^4.7^12.0^-^1.8
^D^o^l^l^a^{r i}ⁿ^dex⁽^broad,^102.9^100.0^94.8^94.2^100.1^105.2¹⁰⁷⁸⁷^109.9^115.5
^no^mⁱ^na^l⁾
^R^{eal GDP}^{(% ch}^an^g^e⁾⁴^.5^3.7⁰^.8^1.6²^.5^3.6³^.1^2.9²^.2
^Eu^{ro (i}ⁿ^d^ex⁾^115.5^100.0^97.0^102.4^122.6^134.7^134.8^136.5^148.4
^Eu^ro-^c^ouⁿ^t^ry^70.5^100.0^38.8⁶^.7^22.7^20.8^21.6^70.8^26.7
ⁱ^nve^st^m^e^nt⁽ⁱ^nd^e^x⁾
^Pouⁿ^d⁽ⁱⁿ^d^ex⁾^93.7^100.0^105.3^100.9^92.7^82.7^83.3^82.3^75.8
^B^r^itishⁱⁿ^v^e^stm^eⁿ^t^131.4^100.0³^.4^25.7^-^5.3^34.0^41.5^13.9^33.0
⁽ⁱⁿ^d^ex⁾
^Japan^e^s^e^y^eⁿ⁽ⁱⁿ^d^ex⁾^94.8^100.0^88.7^86.1^93.0^99.7^97.9^92.7^91.9
^J^a^p^a^ne^seⁱ^nve^st^m^e^nt^147.8^100.0^-^40.1^83.1^109.3^223.8^177.7^272.3^341.5
⁽ⁱⁿ^d^ex⁾
^Source:^D^e^part^m^eⁿ^t^of^C^o^m^m^e^{rce an}^{d F}^e^deral^R^e^s^e^rv^{e Board.}
^No^te:^T^h^{e n}^o^mⁱⁿ^a^{l broad dollar in}^dex^is^th^{e w}^e^ig^h^t^{ed av}^erag^{e of}^th^e^f^o^reigⁿ^ex^ch^an^g^e^v^a^lu^{e of}^th^e
^U^.^S^.^dol^l^a^{r ag}^aiⁿ^s^t^{a broad g}^r^ou^{p of}^U^.^S^.^t^r^adiⁿ^g^partⁿ^e^rs^dev^e^l^oped^by^t^h^{e Board of}^G^o^v^e^rn^ors^of^t^h^e
^Federal^R^e^s^e^rv^e^Sy^s^t^em^th^{at s}^h^ow^s^th^{e dollar price of}^f^o^reigⁿ^cu^rren^cy^{; th}^{e bas}^e^y^ear^of^th^eⁱⁿ^dex^is
^{2000 w}ⁱ^t^h^{a v}^a^l^u^{e of}^{100. R}^eal^G^D^Pⁱ^s^t^h^e^a^nnua^l^gr^o^w^t^h^r^a^t^eⁱⁿ^r^e^a^l^G^r^o^{ss D}^o^m^e^stⁱ^c^P^r^o^d^u^c^t⁽^G^D^P⁾^.
^Eu^{ro, pou}ⁿ^d^{, an}^{d y}^eⁿⁱⁿ^dex^v^a^lu^es^repres^en^{t th}^{e dollar price of}^th^e^res^p^ectiv^e^cu^rren^c^ies^w^ith^a^bas^e
^v^a^lu^e^of¹⁰⁰^f^o^{r th}^{e y}^{ear 2000. Eu}^ro-^c^ouⁿ^t^ry^{, B}^r^itis^h^,^an^{d J}^a^pan^e^s^e^{direct in}^v^e^s^t^m^eⁿ^tⁱⁿ^th^e^Un^ited
^S^t^a^t^e^s^a^r^e^r^e^pres^en^t^e^{d by}ⁱⁿ^dexⁿ^u^m^bers^wⁱ^t^h^t^h^{e bas}^e^y^{ear of}^{2000 = 100. In}^dex^v^a^l^u^es^w^e^re
^dev^e^l^{oped by}^C^R^S^.

¹⁴ (...continued)
included, since the Chinese yuan is effectively pegged against the value of the dollar.

The index numbers in Table 1 are constructed primarily as a device to facilitate
the comparison of the timing and the direction of changes in the measures, not the
relative magnitudes of the actual values involved. The data also show the similarity
in trends between U.S. direct investment abroad and foreign direct investment in the
United States. Such a similarity seems counterintuitive, since inward and outward
investment flows are thought by some to be substitutes. If they are substitutes, U.S.
direct investment abroad would be expected to be strongest during periods when the
U.S. economy is not performing well relative to foreign economies and foreign direct
investment in the United States would be expected to be weak. Instead, during
periods when U.S. direct investment abroad is strong, foreign direct investment in the
United States is also strong and vice versa.
U.S. direct investment abroad and foreign direct investment in the United States
may follow similar investment trends over time as firms in both the United States and
in foreign markets respond to increases or decreases in demand for goods and
services as the U.S. economy expands or contracts, respectively. For instance, as the
U.S. rate of economic growth rises, U.S. firms would increase their investments at
home in response to improved profitability and stronger sales. In addition, these
firms may well increase their investments abroad as production by foreign firms
increases to meet the higher level of demand in the United States. Although U.S.
foreign affiliates export only about 10% of their worldwide production back to the
United States, increased levels of exports by foreign firms and the correspondingly
higher levels of production abroad may well stimulate production and investment
abroad by the foreign affiliates of U.S. firms.
Overall, the data provide some support for the general conclusion that the
inflows and outflows of direct investment are tied more directly to the overall rate of
growth in the economy than they are to movements in the exchange rate of the dollar.
Nevertheless, movements in the exchange rate of the dollar likely affect flows of
direct investment through common linkages to the rate of growth in the economy and
as firms adjust their payments of remittances in response to movements in the
exchange value of the dollar.
To the extent that the rate of growth of U.S. GDP, movements in the dollar, and
direct investment flows are interrelated, these interrelationships complicate efforts
to separate out cause and effect chains of influence and the relative importance of any
one factor. The data in Table 1 generally tend to support the concept that the rate of
growth in the U.S. economy, as reflected by U.S. GDP, likely has a greater influence
on direct investment flows than does the exchange rate of the dollar. Data from
Table 1 on U.S. GDP, the nominal broad index of the dollar price of a basket of
foreign currencies, and an index of foreign direct investment in the United States are
shown in Figure 2. Again, the index numbers for the dollar are constructed such that
a rise in the value of the index indicates that it takes more dollars per unit of foreign
currency, or that foreign currencies have appreciated relative to the dollar.
If movements in the exchange rate of the dollar were a key factor in driving
inflows and outflows of foreign direct investment, then it would be reasonable to
assume that the index for the dollar and for foreign direct investment in the United
States in Figure 2 would move in similar directions. In other words, a rise in the
exchange rate of the dollar to foreign currencies means that it would take more

dollars to buy foreign currency, or that the dollar had depreciated in value relative to
the foreign currency so that it would be less costly for foreign investors. Then, an
appreciation in the value of foreign currencies, and a corresponding depreciation in
the value of the dollar, would be accompanied by an increase in foreign direct
investment in U.S. businesses because such purchases would be cheaper in foreign
currency. Such a similar movement in the exchange rate of the dollar and foreign
direct investment in the United States is observed from 2005 to 2007, a time during
which the annual rate of growth in the U.S. economy is slowing.
Figure 2. Foreign Direct Investment in the United States, the Dollar
Price of Foreign Currency, and the U.S. GDP Growth Rate

¹⁴⁰^{2000 = 100}
¹²⁰Dollar exchangerate index
¹⁰⁰
⁸⁰
U.S. GDP rate
⁶⁰
⁴⁰
²⁰Foreign direct
investment in the U.S.
⁰
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
Year
^{Source: C}^R^S^f^r^om^U^.^S.^D^e^partm^e^{nt of}^C^o^m^m^{erce data}
Likewise a depreciation in the value of foreign currencies and an appreciation
in the value of the dollar would be expected to be accompanied by a decrease in
foreign direct investment in the United States. During the 2000 to 2002 period, this
type of relationship seemingly held as the dollar appreciated and foreign direct
investment declined. In addition, as the dollar depreciated between 2002 and 2004,
foreign direct investment increased. The relationship, however, did not hold in 2004
as the dollar depreciated and as foreign direct investment declined. The similarities
between the general trend in foreign direct investment in the U.S. economy and the
rate of growth of the U.S. economy, as represented by the index numbers for GDP,
lends some support to the conclusion that the rate of growth in the economy is likely
to be a more important factor influencing the flows of direct investment than is the
exchange rate of the dollar. Direct investment, movements in the exchange rate, and
the relative rate of growth in U.S. GDP likely are interrelated in a number of ways
that significantly complicates efforts to separate out the various chains of influence
to determine direct cause-effect relationships.
In addition to the nominal values for U.S. and foreign direct investment
presented in Table 1, Table 2 displays data on the actual number of investment

transactions from 1996-2007 as published by Mergers & Acquisitions. The data
represent the number and the value of foreign acquisitions of U.S. companies, U.S.
acquisitions of foreign companies, and U.S. acquisitions of U.S. companies. By far,
U.S. firms acquiring other U.S. firms represents the largest group of transactions, but
the share of total U.S. transactions (U.S. acquisitions of U.S. companies plus foreign
acquisitions of U.S. companies) accounted for by purely domestic acquisitions has
fallen from 90% in 1996 to 82.5% in 2007 in terms of the number of transactions.
Similarly, foreign acquisitions of U.S. firms grew from 10% of the total number of
transactions in 1996 to 17.5% in 2007 in terms of the total number of acquisitions.
Table 2. U.S. and Foreign Acquisition Activity, 1996-2007
^Forei^gn^A^c^q^uⁱ^sⁱ^ti^on^s^{U.S. Acquisit}ⁱ^oⁿ^s^{U.S. Acquisit}ⁱ^oⁿ^s
^Yea^r^o^f^{U.S. Co}^m^p^aⁿ^ies^{of Forei}^gn^C^o^m^p^anⁱ^e^s^{of U}^.^S^.^C^o^m^p^anⁱ^e^s^T^otal
^Num^b^er^Num^b^er^Num^b^er^Num^b^er
^o^f^Dea^l^s^B^illio^ns^o^f^Dea^l^s^B^illio^ns^o^f^Dea^l^s^B^illio^ns^o^f^Dea^l^s^B^illio^ns
¹⁹⁹⁶⁶²⁸^$69.6¹^,134^$60.3⁵^,585^$433.1⁷^,347^$563.0
¹⁹⁹⁷⁷⁷⁵^84.9¹^,387^80.3⁶^,317^606.3⁸^,479^771.5
¹⁹⁹⁸⁹⁷¹^227.0¹^,647^127.2⁷^,⁵⁷⁵^1,019.6^10,193^1,373.8
¹⁹⁹⁹^1,148^264.0¹^,576^153.8⁶^,⁴⁴⁹^1,005.1⁹^,173^1,422.9
²⁰⁰⁰^1,264^338.0¹^,557^139.0⁶^,⁰³²^1,304.6⁸^,853^1,781.6
²⁰⁰¹⁹²³^204.3¹^,104^113.2⁴^,269^838.3⁶^,296^1,155.8
²⁰⁰²⁷⁰⁰^85.5⁸⁰⁸^89.1³^,989^450.4⁵^,497^625.0
²⁰⁰³⁷⁵⁰^82.0⁸⁸⁰^90.7⁴^,539^352.8⁶^,169^525.5
²⁰⁰⁴⁸²²^104.1¹^,140^122.6⁵^,140^628.6⁷^,102^855.3
²⁰⁰⁵⁹⁷⁷^112.7¹^,160^150.3⁵^,463^733.9⁷^,600^996.9
²⁰⁰⁶^1,142^200.9¹^,374^218.0⁶^,¹⁰⁵^1,015.5⁸^,621^1,434.4
²⁰⁰⁷^1,343^321.2¹^,481^265.5⁶^,³⁴³^1,151.0⁹^,167^1,737.8
^So^urce^:^Me^rg^e^{rs &}^A^c^q^uⁱ^sitioⁿ^s^{, F}^e^bru^a^ry^{2007. p. 69.}
What stands out as an especially prominent feature of the data in Table 2 is
the nearly parallel movements in the number transactions accounted for by foreign
acquisitions of U.S. firms and the number of transactions involving U.S. firms
acquiring foreign firms. This feature is clearly evident in Figure 3, which shows the
data for the number of transactions involving foreign firms acquiring U.S. firms
(Foreign direct investment in the United States) and U.S. firms acquiring foreign
firms (U.S. direct investment abroad). These two series of data have been converted
into index numbers with the year 2000 as the base year to make their presentation
compatible with the data developed for the exchange rate index of the dollar and for
U.S. GDP. As stated previously, the nearly identical pattern in the data for foreign
investment in the U.S. and for U.S. investment abroad is counterintuitive to most
formulations of the forces that act to influence U.S. and foreign direct investment.

Figure 3. Foreign Direct Investment in the United States, U.S. Direct
Investment Abroad, the Dollar Exchange Rate Index and U.S. GDP

^{2000 = 100}
¹⁴⁰
¹²⁰Dollar exchange
¹⁰⁰rate index
⁸⁰
⁶⁰Foreign direct
investment in the United
US direct
⁴⁰Statesinvestment abroad
U.S. GDP rate
²⁰
⁰
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
Year
^{Source: CRS from}^{data published by}^U.^S.^Departm^e^{nt of Com}^m^erce,^F^e^deral
^R^e^{serve B}^{oard, and}^{Mergers & A}^c^qu^isition^s
Dollar-Euro
Figure 4 shows data for the dollar/euro exchange rate and for direct
investment in the United States by euro-area countries. In this figure, a rise in the
euro/dollar index indicates an appreciation of the euro relative to the dollar. The data
in the figure indicate that direct investment in the United States by euro-area
countries during the 1999-2007 period runs counter to the concept that movements
in the exchange rate determine flows of direct investment. In fact, as the euro
depreciated against the dollar in the 1998-2000 period, direct investment increased
and as the euro appreciated (and the dollar depreciated) between 2000 and 2003,
direct investment fell sharply. Euro-area country direct investment in the United
States has remained fairly flat since 2003, despite the stronger euro.

Figure 4. Foreign Direct Investment in the United States by Euro-
Area Countries and the Dollar/Euro Exchange Rate Index

^{2000 = 100}
¹⁶⁰
¹⁴⁰Dollar/Euro exchangerate index
¹²⁰
¹⁰⁰
⁸⁰
⁶⁰Euro area direct investment in the U.S.
⁴⁰
²⁰
⁰
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
Year
^{Source: C}^R^S^f^r^om^U^.^S.^D^e^partm^e^{nt of}^C^o^m^m^{erce data}
Dollar-Pound
Figure 5 shows data for British direct investment in the United States and the
dollar/pound exchange rate. Over the 1999-2007 period, the pound appreciated
against the dollar until 2001, when it has trended down as the pound depreciated
slightly through 2004. From 2004 through 2007, there has been a slight depreciation
in the value of the pound relative to the dollar. As the pound appreciated against the
dollar between 1999 and 2001, British direct investment tumbled sharply in 1999 and
2000, in concert with the slowdown in the rate of growth of U.S. GDP and the height
of the value of the pound against the dollar. After 2002, British direct investment
dropped again in 2003, before showing some resurgence in 2004 and 2005, and then
again in 2006, even though the pound generally depreciated against the dollar.

Figure 5. British Direct Investment in the United States and the
Dollar/Pound Exchange Rate Index

^{2000 =}¹⁰⁰
¹⁴⁰
¹²⁰
¹⁰⁰Dollar/Pound exchangerate index
⁸⁰
⁶⁰British direct
investment in the U.S.
⁴⁰
²⁰
⁰
^-20
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
Year
^S^o^u^{rce: C}^R^S^f^r^o^m^U^.^S^.^D^e^p^a^rtm^eⁿ^t^o^f^C^o^m^m^{erce d}^a^ta
Dollar-Yen
Different trends are shown in Figure 6, which displays the trend of Japanese
direct investment in the United States and the dollar/yen exchange rate index during
the 1999-2007 period. An increase in the yen/dollar index indicates an appreciation
of the yen relative to the dollar. This figure indicates that Japanese direct investment
in the U.S. economy did indeed follow a trend that is somewhat similar to that for the
dollar/yen exchange rate, although turning points in the yen/dollar exchange rate do
not correlate well with the turning points in direct investment. In fact, the turning
points in Japanese direct investment spending occurred prior to changes in the
dollar/yen exchange rate, which runs contrary to the concept that the exchange rate
is an important factor that determines foreign direct investment. Major turning points
in Japanese direct investment in the United States, however, correlate more closely
with the overall patterns of U.S. GDP performance, except for the period from 2005-
2007, than with changes in the dollar/yen exchange rate, indicating that Japanese
direct investment in the United States over the 1999-2007 period was influenced
more by the relative rate of growth in U.S. GDP than by the dollar/yen exchange rate.

Figure 6. Japanese Direct Investment in the United States and the
Dollar/Yen Exchange Rate Index

⁴⁰⁰^{2000 =}¹⁰⁰
Japanese direct
³⁰⁰investment in the U.S.
²⁰⁰
¹⁰⁰
Dollar/Yen exchange
rate index
⁰
^-100
¹⁹⁹⁹²⁰⁰⁰²⁰⁰¹²⁰⁰²²⁰⁰³²⁰⁰⁴²⁰⁰⁵²⁰⁰⁶²⁰⁰⁷
Year
^S^o^u^{rce: C}^R^S^f^r^o^m^U^.^S^.^D^e^p^a^rtm^eⁿ^t^o^f^C^o^m^m^{erce d}^a^ta
Foreign Direct Investment and Capital Markets
There are a number of factors that complicate efforts to determine a cause-
effect relationship between movements in the exchange rate and direct investment.
First, both direct investment and the exchange rate are closely related to the relative
rate of growth of the domestic economy and it may not be possible to separate out the
individual effects. Second, one characteristic of multinational firms is that they
utilize foreign and international capital markets.¹⁵ To the extent that firms can raise
funds in the market in which they are investing, they can blunt exchange rate effects
and weaken an expected relationship between movements in the exchange rate and
direct investment. Third, multinational firms have become skilled at using
specialized foreign currency markets and foreign currency derivatives that help them
reduce the risk and the economic impact of changes in exchange rates. Such
activities likely would lessen the impact of changes in exchange rates on direct
investment transactions.
Most economists believe that the exchange rate of the dollar generally is
determined by the relative long-term performance of the economy, although the
¹⁵ Desai, Mihir A., C. Fritz Foley, and Kristin J. Forbes, Financial Constraints and Growth:
Multinational and Local Firm Responses to Currency Crises. NBER Working Paper 10545,
June 2004; Desai, Mihir A., C. Fritz Foley, and James R. Hines, Jr., A Multinational
Perspective on Capital Structure Choice and Internal Capital Markets. NBER Working
Paper #9715, May 2003.

exchange rate between any two particular currencies can move abruptly over the short
run as a result of factors specific to individual currencies. Efforts to model and
predict movements in the exchange rate of the dollar have proven to be particularly
vexing because a number of factors can affect the value of the dollar and other
currencies in the short run. One factor complicating efforts to determine a cause-
effect relationship between movements in the exchange rate and direct investment
is the apparent similarity between the inflows and outflows of direct investment, as
mentioned previously.
In most cases, it would seem reasonable to assume that inward and outward
direct investment generally would move in opposite directions in response to
movements in the exchange rate and act somewhat as substitutes for one another. In
fact, inward and outward flows of direct investment have tended to trend in the same
direction over time. One possible explanation for this similarity is that the inward
and outward flows of direct investment are affected by the same underlying forces,
principally the relative rate of growth of the U.S. economy compared to other
economies. The difficulties involved in unraveling the interrelationships between
direct investment flows, the relative rate of growth of various economies, and
movements in the exchange rate significantly complicate any efforts to isolate the
relationship between direct investment and the exchange rate.
During periods when the U.S. economy is growing at a relatively more rapid
pace than are other developed economies, foreign firms are encouraged to invest in
U.S. businesses, since profits in those firms would be expected to be strong. At the
same time, rising corporate earnings associated with a growing economy would
encourage U.S. firms to step up their investment spending both domestically and
abroad since the commanding role of the U.S. economy in the global economy means
that the performance of the U.S. economy would tend to have a positive effect on
economic performance abroad. The advanced development of U.S. and global
financial markets and the rapid pace of globalization in trade and investment
activities likely means that the U.S. and global economies are becoming increasingly
intertwined, which would increase the prospect that economic events would be
transmitted more rapidly between the U.S. and other economies.
Strong performance in the U.S. economy also tends to draw in foreign capital
in various forms that adds to upward pressure on the dollar, so that the exchange rate
of the dollar and the rate of growth in the economy would experience any number of
direct, indirect (second-hand), and cross effects (third-hand). Both the rate of growth
of U.S. GDP and the exchange rate of the dollar increased through the 1998 to 2000
period. As the rate of growth of the economy slowed in the 2000 to 2002 period,
however, the dollar continued to appreciate due in part to the mix of macroeconomic
policies in the United States that attracted inflows of capital. Since 2002, however,
the exchange rate of the dollar has depreciated against the euro and a broad basket
of currencies despite a general improvement in the rate of growth of U.S. GDP.
Sources of Direct Investment Funds
The data in Table 1 also indicate that there are differences between U.S. and
foreign firms in the sources of their funds, which likely lessens the impact of
movements of the dollar on both U.S. and foreign direct investment. Both U.S. and

foreign firms make little use of intercompany debt to finance their investments.
Instead, multinational firms raise the bulk of their funds internally or in the particular
foreign markets in which they are operating, especially if those markets are in
advanced developed economies. As a result, this apparent preference for host-
country sources of financing would reduce the impact of movements in the exchange
rate on cross-border flows of direct investment.¹⁶ Since nearly three-fourths of U.S.
direct investment abroad is in highly developed economies with well-developed
capital and equity markets similar to those in the United States, U.S. firms generally
raise the funds they need in those markets.
In 1998 and 1999 as the U.S. economy was growing at a rapid rate, U.S.
multinational firms financed their investments abroad with a combination of equity
capital, reinvested earnings, and intercompany debt as the U.S. parent companies
loaned funds to their foreign affiliates. Since 1999, intercompany debt has played a
smaller role in financing overseas investments. Instead, equity capital and reinvested
earnings have accounted for over 90% of the source of funds to the foreign affiliates
of U.S. parent companies, with reinvested earnings accounting for about 60% of the
funds the foreign affiliates of U.S. firms invested over the 2000-2007 period.
In contrast, the affiliates of foreign firms operating in the United States relied
heavily on U.S. equity markets to finance over 80% of their investments during the
1999-2007 period. Reinvested earnings played a significant role in financing the
investments of foreign firms only in 2004 and 2005, when the declining value of the
dollar combined with the increased rate of growth of the U.S. economy to encourage
foreign firms to reinvest the profits they raised in the United States back into their
U.S. affiliates. This reliance on domestic sources of capital means that the relative
importance of the exchange rate as a factor that affects the investment decisions of
firms likely varies over time depending on other economic factors, especially the
overall performance of the economy; taxes; and the performance of corporate
earnings.
International Role of the Dollar and Derivatives
Volatility in the exchange value of the dollar has spurred many multinational
firms to act to protect themselves against such fluctuations. As a result, firms and
other enterprises that deal in foreign currencies have become accustomed to
participating in what is termed “over the counter” currency transactions that are
aimed at reducing the risks and mitigating the effects of changes in the exchange
value of the dollar. The growth in the U.S. economy and the growth in the
international role of the dollar means that the dollar is now heavily traded in financial
markets around the globe and, at times, plays the role of a global currency.

¹⁶ Bobillo, Alfredo Martinez, Pablo de Andres Alonso, and Fernando Tejerina Gaite,
“Internal Funds, Corporate Investment and Corporate Governance: International Evidence,”
Multinational Business Review, Fall 2002, pp. 151-162. There are other factors that also
may cause firms to prefer internal sources of funds over external sources, see Hubbard, R.
Glenn, “Capital-Market Imperfections and Investment,” Journal of Economic Literature,
March 1998, pp. 193-225.

The prominent international role of the dollar means that the exchange value
of the dollar often acts as a mechanism for transmitting economic and political news
and events across national borders. While such a role helps facilitate a broad range
of international economic and financial activities, it also means that the dollar’s
exchange value can vary greatly on a daily or weekly basis as it is buffeted by
international events.¹⁷ A triennial survey of the world’s leading central banks
conducted by the Bank for International Settlements in April 2007 indicates that the
daily trading of foreign currencies through traditional foreign exchange markets¹⁸
totals more than $3.2 trillion, up sharply from the $1.9 trillion reported in the
previous survey conducted in 2004. In addition to the traditional foreign exchange¹⁹
market, the over-the-counter (OTC) foreign exchange derivatives market reported
that daily turnover of interest rate and non-traditional foreign exchange derivatives
contracts reached $2.1 trillion in April 2007. The combined amount of $5.3 trillion
for daily foreign exchange trading in the traditional and OTC markets is more than
three times the annual amount of U.S. exports of goods and services. The data also
indicate that 86.3% of the global foreign exchange turnover is in U.S. dollars, slightly
lower than the 88.7% share reported in a similar survey conducted in 2004.²⁰
In the U.S. foreign exchange market, the value of the dollar is followed
closely by multinational firms, international banks, and investors who are attempting
to offset some of the inherent risks involved with foreign exchange trading. On a
daily basis, turnover in the U.S. foreign exchange market²¹ averages $664 billion;
similar transactions in the U.S. foreign exchange derivative markets²² averages $607

¹⁷ Samuelson, Robert J., “Dangers in a Dollar on the Edge,” The Washington Post,
December 8, 2006, p. A39.
¹⁸ Traditional foreign exchange markets are organized exchanges which trade primarily in
foreign exchange futures and options contracts where the terms and condition of the
contracts are standardized.
¹⁹ The over-the-counter foreign exchange derivatives market is an informal market
consisting of dealers who custom-tailor agreements to meet the specific needs regarding
maturity, payments intervals or other terms that allow the contracts to meet specific
requirements for risk.
²⁰ Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in
2007. Bank for International Settlement, September 2007. pp. 1-2. A copy of the report
is available at:[http://www.bis.org/publ/rpfx07.pdf]
²¹ Defined as foreign exchange transactions in the spot and forward exchange markets and
foreign exchange swaps. A spot transaction is defined as a single transaction involving the
exchange of two currencies at a rate agreed upon on the date of the contract; a foreign
exchange swap is a multi-part transaction which involves the exchange of two currencies
on a specified date at a rate agreed upon at the time of the conclusion of the contract and
then a reverse exchange of the same two currencies at a date further in the future at a rate
generally different from the rate applied to the first transaction.
²² Defined as transactions in foreign reserve accounts, interest rate swaps, cross currency
interest rate swaps, and foreign exchange and interest rate options. A currency swap
commits two counterparties to exchange streams of interest payments in different currencies
for an agreed upon period of time and usually to exchange principal amounts in different
currencies as a pre-agreed exchange rate; a currency option conveys the right to buy or sell
(continued...)

billion, nearly double the amount reported in a similar survey conducted in 2004.²³
Foreigners also buy and sell U.S. corporate bonds and stocks and U.S. Treasury
securities. Foreigners now own about 54% of the total amount of outstanding U.S.
Treasury securities that are publicly held and traded.²⁴
The data in Table 3 provide some selected indicators on the relative sizes of
the various capital markets in various countries and regions and the importance of
international foreign exchange markets. In total, these markets amounted to $500
trillion in value in 2006. Worldwide, foreign exchange and interest rate derivatives,
the most widely used hedges against movements in currencies, were valued at $243
trillion in 2006, nearly 60% larger than the combined total of all public and private
bonds, equities, and bank assets. For the United States, such derivatives total twice
as much as all U.S. bonds, equities, and bank assets.
Table 3. Selected Indicators of the Size of the Global Capital
Markets, 2006
in billions of U.S. dollars
^Gross^To^ta^l^B^oⁿ^d^s^,^Eq^uⁱ^ti^es,^an^d^B^aⁿ^k^Assets^Ex^ch^an^g^e^M^a^rk^{et Deri}^vati^v^es
^Dom^e^stic^Officia^l^To^ta^l^S^to^ck^Deb^t^Baⁿ^k^To^ta^l^O^TC^OTC
^P^r^oduc^t^Reserves^M^a^rk^et^S^ecu^ri^ti^es^Assets^F^o^rei^gⁿ^In^terest
^(GDP)^Ca^pⁱ^ta^li-^Ex^ch^aⁿ^g^e^Rate
^zati^on^Deri^v-^Deri^v-
^atⁱ^v^es^atⁱ^v^es
^W^o^r^l^d^48,434.4⁵^,091.5^194,452.7^50,826.6^68,200.9^74,465.2^395,557.⁰^48,620.0^211,970.0
^E^u^ro^p^ean
^Uⁿ^ion^13,658.0^252.7^73,983.7^13,068.⁸^23,192.3^37,736.3^N^.A^.^N^.A^.^N^.A^.
^Eur^o^A^r^e^a^10,586.1^157.5^54,129.5⁸^,419.1^18,761.1^26,719.2^145,903.⁰^18,280.0^81,442.0
^Unite^d
^Sta^t^e^s^13,194.7^54.9^56,822.0^19,569.0^27,^050.1^10,202.9^154,799.⁰^40.488.0^74,441.0
^J^a^paⁿ⁴^,377.1^879.7^20,109.5⁴^,795.8⁸^,^723.7⁶^,590.0^58,329.⁰^10,579.0^25,605.0
^Em^e^r^gⁱ^ng
^Ma^rk^e^t
^C^ountrⁱ^e^s^14,262.9¹^,932.0^30,984.4^11,^692.4⁶^,072.7^13,219.4^N^.A^.^N^.A^.^N^.A^.
^Sou^r^ce:^{Global Financial Stability Repor}^t^,^Iⁿ^t^e^rn^atⁱ^oⁿ^a^l^Mon^e^t^a^ry^F^uⁿ^d^{, A}^p^ri^l^{2008. S}^t^atⁱ^s^tⁱ^cal
^A^ppen^dⁱ^x^{, T}^a^bl^{e 3.}^Quar^ter^l^{y Review}^{, B}^aⁿ^k^f^o^{r In}^tern^ation^a^{l Settlem}^eⁿ^t^s^,^March^{2008, T}^a^bles^20b
^an^{d 21b. T}^o^t^a^l^deri^v^a^tⁱ^v^es^doesⁿ^o^tⁱⁿ^cl^u^d^{e equ}ⁱ^t^y^-^an^{d com}^m^odi^t^y^-^lⁱⁿ^k^e^{d deri}^v^a^tⁱ^v^es^.
Conclusions
The depreciation of the dollar has raised concerns that the lowered value
dollar would lead to a “fire sale” of U.S. firms. Such an increase of foreign direct

²² (...continued)
a currency with another currency as a specified rate during a specified period.
²³ The Foreign Exchange and Interest Rate Derivatives Markets: Turnover in the United
States April 2007. The Federal Reserve Bank of New York, April, 2004. pp. 1-2. A copy
of the report is available at [http://www.newyorkfed.org/markets/triennial/fx_survey.pdf].
²⁴ Treasury Bulletin, March 2007. Table OFS-2. p. 48.

investment would be of concern to Congress, which has shown a heightened level of
interest in the role and presence of foreign-owned firms in the economy since
September 11, 2001. There is little academic research and much still to be learned
about the role of the exchange rate in the decision-making process of U.S. and
foreign multinational firms, but movements in the exchange rate do not appear to be
a major factor in driving those investment decisions. While U.S. and foreign direct
investment were both higher in 2006 than they were in 2005, neither U.S. direct
investment abroad nor foreign direct investment in the United States seems to be tied
too strongly to the depreciation of the dollar. There does appear to be a complex set
of relationships that connect direct investment, the relative rate of growth in the
economy, and movements in the exchange rate, but it is difficult to unwind these
relationships to determine the relative importance of each factor. A cursory
examination of the available data seems to indicate that the relative rates of growth
between the U.S. and foreign economies likely is the most important factor in driving
direct investment transactions.
As U.S. and foreign firms become more adept at utilizing foreign capital
markets and foreign currency derivatives, they likely are reducing the importance of
fluctuations in currencies as a major factor in some of their investment decisions.
Nevertheless, firms likely do consider the movements in currencies and the relative
values of currencies as they determine the disposition of corporate earnings. In some
cases, the depreciation of the dollar relative to the euro caused foreign firms
operating in the United States to retain the earnings from those operations to invest
in the United States rather than to return those profits to the parent company at a
depreciated value. Over the near term, more developing countries are expected to
reduce national restrictions to foreign direct investment and more firms from both
developed and developing countries are expected to engage in the direct investment
process. As a result, these firms likely will participate more extensively in
international capital markets and place added pressure on global and local capital
markets as sources of funds and likely act as agents of reform in the capital markets
of developing countries. In addition, the proliferation of financial techniques,
communications technology, and currency hedging strategies means that it will
become even more challenging to untangle the direct and indirect factors that might
determine specific cause-effect linkages between direct investment and movements
in exchange rates.