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[IWS] CRS: Foreign Direct Investment: Effects of a "Cheap" Dollar [11 May 2007]

IWS Documented News Service
_______________________________
Institute for Workplace Studies----------------- Professor Samuel B. Bacharach
School of Industrial & Labor Relations
-------- Director, Institute for Workplace Studies
Cornell University
16 East 34th Street, 4th floor
---------------------- Stuart Basefsky
New York, NY 10016
-------------------------------Director, IWS News Bureau
________________________________________________________________________

Congressional Research Service (CRS)
Order Code RL34000

Foreign Direct Investment: Effects of a "Cheap" Dollar
May 11, 2007
James K. Jackson, Specialist in International Trade and Finance, Foreign Affairs, Defense, and Trade Division
http://opencrs.cdt.org/rpts/RL34000_20070511.pdf
[full-text, 18 pages]

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. In the 110th Congress,
Members are considering H.R. 556, the National Security Foreign Investment
Reform and Strengthened Transparency Act of 2007, which was adopted by the full
House on February 28, 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.

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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Dollar-Pound . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Dollar-Yen . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Foreign Direct Investment and Capital Markets . . . . . . . . . . . . . . . . . . . . . . . . . 10
Sources of Direct Investment Funds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
International Role of the Dollar and Derivatives . . . . . . . . . . . . . . . . . . . . . 12
Conclusions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

List of Figures
Figure 1. Foreign Direct Investment in the United States and U.S. Direct Investment Abroad, Annual Flows, 1990-2006 . . .. . . . . . . 2
Figure 2. Foreign Direct Investment in the United States, the Dollar Price of Foreign Currency, and U.S. GDP Growth Rate .. . . . . 7
Figure 3. Foreign Direct Investment in the United States by Euro-Area Countries and the Dollar/Euro Exchange Rate Index . . . . . 8
Figure 4. British Direct Investment in the United States, Dollar/Pound Exchange Rate Index . . . . . .. . . . . . . . . . . 9
Figure 5. Japanese Direct Investment in the United States, Dollar/Yen Exchange Rate Index . . . .. . . . . . . . . . . . . 10

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. Selected Indicators of the Size of Various Capital Markets, 2005 . . . 14


______________________________
This information is provided to subscribers, friends, faculty, students and alumni of the School of Industrial & Labor Relations (ILR). It is a service of the Institute for Workplace Studies (IWS) in New York City. Stuart Basefsky is responsible for the selection of the contents which is intended to keep researchers, companies, workers, and governments aware of the latest information related to ILR disciplines as it becomes available for the purposes of research, understanding and debate. The content does not reflect the opinions or positions of Cornell University, the School of Industrial & Labor Relations, or that of Mr. Basefsky and should not be construed as such. The service is unique in that it provides the original source documentation, via links, behind the news and research of the day. Use of the information provided is unrestricted. However, it is requested that users acknowledge that the information was found via the IWS Documented News Service.

****************************************
Stuart Basefsky                   
Director, IWS News Bureau                
Institute for Workplace Studies 
Cornell/ILR School                        
16 E. 34th Street, 4th Floor             
New York, NY 10016                        
                                   
Telephone: (607) 255-2703                
Fax: (607) 255-9641                       
E-mail: smb6@cornell.edu                  
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