This paper investigates the relationship between exchange rate # uctuations and the investment decisions of a sample of Italian manufacturing " rms. The results support the view that a depreciation of the exchange rate has a positive e ! ect on investment through the revenue channel, and a negative e ! ect through the cost channel. The magnitude of these e ! ects varies over time with changes in the " rm ’ s external orientation, as measured by the share of foreign sales over total sales and the reliance on imported inputs. Consistent with the predictions of our theoretical framework, the e ! ect of exchange rate # uctuations on investment is stronger for " rms with low monopoly power, facing a high degree of import penetration in the domestic market, and of a small size. We also provide evidence that the degree of substitutability between domestically produced and imported inputs in # uences the e ! ect through the expenditure side.