Investment in manufacturing, exchange rates and external exposure

This paper introduces a new measure of external exposure, which emphasizes exposure to external markets both through export sales and imported inputs into production, and uses this measure to explore the linkage between exchange rates and investment in US industry. On average, manufacturing sectors have evolved to being primarily import-exposed by the early 1980s. In low price-over-cost markup sectors, markups are relatively unresponsive to exchange rate changes, whereas sectoral investment patterns are strongly affected. By contrast, high markup industries absorb much of the exchange rate fluctuations in markups and pass relatively little through to real investment.