Formerly socialist countries and developing countries have rapidly moved toward open and free enterprise economic systems. Direct foreign investment is now very welcome in all these countries. Such investments are greatly advantageous to these countries with respite to income, employment, technological progress, productivity and ~work ethics. However, the effect of such investment on the foreign exchange reserves of the country may not he positive in all eases. The paper develops a procedure to make a rough assessment of the effect of direct foreign investment on the foreign exchange situation of the developing country.