The Analysis Of The Influence On FDI By RMB Real Effective Exchange Rate

Along with China attracts more and more foreign direct investment (FDI), FDI has already became one of the main driving engines that stimulate our country's economic development. Its influences exist in increasing the quantity of employment, introducing advanced technology, pushing the development of import and export industries and so on. On the other hand, with China open-up further, the importance of exchange rate especially real effective exchange rate, as the main regulating and controlling means and economic lever of macro-economy is obvious. After RMB exchange rate reform in July, 2005, RMB exchange rate system becomes more flexible, and RMB faces the great pressure of upvaluation, hence it makes sense to research the influence of RMB real effective exchange rate on FDI.In this dissertation, according to the theory of foreign direct investment, and combining with the practical situation in China, the author establishes the theoretical and econometrics models. In the econometrics models, not only analyze the influence of real effective exchange rate-level change on FDI, but also analyze the influence on FDI caused by the volatility of exchange rate. Meanwhile, this dissertation selects some typical countries (areas) to test how bilateral real exchange rate affects their strategic decisions on investing in China. The dissertation mainly use the methods such as Granger Causality Test, Co-integration test and establishing Error Correction Model, then use the Vector Error Correction model (VEC) do dynamic analyses.The results show there is relativity between RMB real exchange rate and FDI, and there also exists a long-term relationship of cointegration between them. Both the theoretical and econometrics models prove the devaluation of RMB can enhance China's ability to attract FDI, meanwhile the empirical analysis also prove there is a negative correlation between the volatility of exchange rate and FDI. The analyses of some typical countries (areas) show that the effects of bilateral real exchange rate on FDI from different countries or areas are variable according to their different investment motivations. As for trade-oriented FDI, bilateral real exchange rate influences significantly, whereas for market-oriented FDI, it works insignificantly. Additional, the dynamic analyses show that the explanatory ability of real effective exchange rate to FDI only about 30%, therefore, it should not just focus on exchange rate when making strategies for attracting foreign investment. In order to achieve optimization, all of the related factors are needed to consider. Recently, the trend of RMB exchange rate is still upwards. According to the analysis in this dissertation, the influences of real effective exchange rate-level change and volatility on FDI are not significant in the short-term. So both fluctuation and upvaluation will not influence on FDI significantly in short-term, and our government can utilize the exchange rate lever to control macroeconomic better. However, the devaluation and stability of RMB are more favorable to attract FDI in the long time. In conclusion, we must treat the fluctuation and appreciation in exchange rate more and more prudent to prevent unfavorable influences on FDI.