The Impact Of RMB Appreciation On FDI In Sole Ventures In China

In recent years, especially since July 21,2005 when People's Bank of China announced that China began to implement the market-based and managed floating exchange rate regime in reference of a basket of currencies, RMB began to appreciate significantly and sustainably. After the official opening of the second reform on June 19,2010, the RMB exchange rate against U.S. dollar began to re-appreciate and sprinted to 6.5897 Yuan per U.S. dollar at the end of the year, with an annual cumulative appreciation of 3.6%. According to the measure and calculation of Bank for International Settlements, the real effective exchange rate of RMB was basically stable in 2010, but after the restart of the exchange rate reform it declined slightly since U.S. dollar became weaker. It is estimated that the real effective exchange rate of RMB will go upward again moderately in 2011. In the case that U.S. dollar continues to weaken, the RMB exchange rate against U.S. dollar may rise to around 6.35 Yuan per U.S. dollar at the end of the year and the annual appreciation will be about 4%.Since the reform and opening up, China has been one of the biggest countries introducing foreign capital. In 2010, the foreign investment in China was $105.74 billion with an increase of 17.4% year on year. It is worth to mention that the foreign investment in China in 2008 was $92.395 billion, ranking the first place in the world and ranking the first place in developing countries for 17 consecutive years. At the same time, foreign-invested enterprises played increasingly important roles in the economic development of China, which are reflected in making the market economy active, providing capital source, improving business efficiency, expanding exports, increasing the tax revenue for the state, introducing advanced production technology, upgrading human resources and many other aspects.However, the ways of foreign capital coming into China are changing with the increase of introduced foreign investment:form the initial cooperation to joint ventures and finally to sole ventures with the development of the economy of China. Particularly since 2005, multinational companies have been tending to invest directly in China in sole ventures in order to get absolute control for the multinational policies of China have became increasingly loosened and the economic system has been improved and other reasons. So the trend of FDI in sole ventures is becoming increasingly clear. The actual used FDI in sole ventures grew rapidly from $19.139 billion in 2000 to $68.682 billion in 2009, which greatly exceeded that in joint ventures and cooperative enterprises.However, FDI in sole ventures in China has brought some negative impacts on the development of China's economy. For example, at the macro aspect, it caused market and technology monopoly, reduced domestic tax revenue, reduced profits. At the micro aspect, it caused "Crowding out Effect" to domestic enterprises, domestic brand erosion and other issues. Therefore, it is of great practical significance to study the impact of RMB appreciation on FDI in China, particularly FDI in sole ventures, and to make relevant measures for the sustainable and continuous development of China's economy.Beginning with the introduction of the development and reasons of RMB appreciation, this paper tries to analyze the development of FDI in China and gets the conclusion that FDI in sole ventures has been increasing. Then combining with theories of the impact of RMB appreciation on FDI in China, this paper designs a model in order to make empirical analysis of the impact of RMB appreciation on FDI in sole ventures in China. According to the empirical analysis, there exists a cointegration relationship between RMB exchange rate and FDI in sole ventures and the coefficient is -0.989385 which means that RMB exchange rate and FDI in sole ventures in China are negatively correlated and if the exchange rate changes 1%, it will bring 0.989385% changes to FDI in sole ventures. And lastly this paper proposes some appropriate countermeasures for rationally attracting and using foreign investment under the circumstance of RMB appreciation from the point view of micro-economic entities and government.According to the research needs and logical sequence, this paper is divided into six chapters and the contents are summarized as follows:Chapter one is the introduction, briefly explaining the background and significance, literature review of domestic and foreign studies on the relationship between foreign exchange rate and FDI, definitions of the core concepts, contents and structures, researching methods, innovations and limitations of this paper. The most important innovation is that it designs an econometric model to do quantitative empirical analysis of the relationship between RMB exchange rate and FDI in sole ventures in China based on sorting collected data. As for the limitations, this paper uses annual data, but the macro-economic changes do not necessarily occur at the end of the year and may occur during the year, which inevitably has some effects on the accuracy of the quantitative empirical results.Chapter two analyzes the development and causes of RMB appreciation. First, this part describes the evolution of RMB exchange rate and reviews the history of RMB appreciation in three stages. Second, it introduces the short, medium and long term goals of the exchange rate regime reform based on analysis of the influencing factors. The short and medium-term goal of RMB exchange rate reform is to perfect the target-zone exchange rate regime in reference of a basket of currencies. And the long term goal is to implement free-floating exchange rate regime. At last, it introduces the internal and external pressures of RMB appreciation and makes a simple prediction of the trend of RMB exchange rate. The external pressures of RMB appreciation include the rigidity of global economic and Sino-US trade imbalance, inundant U.S. dollar release mechanism, etc. The internal pressures of RMB appreciation include the rigidity of "double surplus" of Chinese international balance of payment, the expectation of RMB appreciation supported by sound economic growth of China and so on.Chapter three introduces the development of FDI in sole ventures in China. This part firstly introduces the development process of FDI in sole ventures in China in three stages and describes the different characteristics of each stage, then introduces ways and means of sole ventures and finally analyzes the reasons why international companies tend to invest directly in sole ventures in China. The means and ways of sole ventures mainly include newly built companies, equity transfer of the Chinese party, mergers and acquisitions, integration of subsidiaries in China and so on. The emergence of the trend of FDI in sole ventures is not an occasional phenomenon, but the realistic choice of international companies who want to maintain dominance and achieve global business strategies. The specific reasons are:firstly, China's investment environment has been improved steadily; secondly, sole ventures are the fundamental guarantees to maintain monopoly advantages; thirdly, sole ventures are effective ways to solve management conflicts; fourthly, sole ventures are important measures to achieve global strategy; lastly, sole ventures are pursuits of high profits and control of returns.Chapter four theoretically analyzes the impact of RMB appreciation on FDI in China. Based on the analysis of impacting factors of RMB appreciation on FDI, this part mainly describes the mechanisms and processes of the impact of RMB appreciation on FDI. There are many factors of the impact of RMB appreciation on FDI in China and different effects may offset each other to some extent, which are reflected in the following ways:(1) increase the cost of FDI in China; (2) decrease the competitiveness of China's exports; (3) reduce the prices of imported goods; (4) increase the expected earnings of foreign-invested enterprises; (5) reduce the economic growth rate of China. The mechanisms of the impact of exchange rate on FDI can be generalized as:wealth effect, relative production cost effect, risk effect, department effect and competitiveness effect.Chapter five empirically analyzes the impact of RMB appreciation on FDI in sole ventures in China. On the basis of design and description of an econometric model, this part firstly presents the empirical analysis method, explains the variables and data and then tests the stationarity of each variable by the software of Eviews, finally tests and verifies the cointegration relationships between the variables and analyzes the results. According to results of the cointegration test, there exists a cointegration relationship between RMB exchange rate and FDI in sole ventures. The coefficient is -0.989385 which means that RMB exchange rate and FDI in sole ventures in China are negatively correlated and if the exchange rate changes 1%, it will bring 0.989385% changes to FDI in sole ventures.Chapter six offers some suggestions of utilizing foreign investment. Based on theoretical and empirical studies of the relationship between RMB exchange rate and FDI in sole ventures in China, this part gives some suggestions of utilizing foreign investment better and more rationally under the background of RMB appreciation from the point view of micro-economic entities and government. On one hand, the micro-economic entities should improve the capability of "Learning by Doing" striving to master core technologies, enhance core competitiveness by technological innovation, strengthen brand awareness and protect well-known brands. On the other hand, the government should change concepts of foreign policies and make adjustments dynamically, prevent monopoly acts of multinational companies, increase intellectual property protection and emphasize on R&D investment of state-owned enterprises.Lastly this chapter makes a simple summary of the paper and puts forward the conclusion that FDI in sole ventures in China has shown an increasing tendency which can't be resisted. On surface, it brings greater threats and challenges to Chinese domestic enterprises, but in the long term it will bring more opportunities. Therefore, the domestic enterprises should be fully aware of this trend, not to avoid the integration with the world economy, but actively make use of the positive impact of FDI in sole ventures to continuously improve technology and management, actively seek opportunities to establish new partnerships. Besides, they should keep continuous learning and innovation to foster core competitiveness, making full use of their advantages and avoid their disadvantages, continuously developing their own core competitive advantages in order to survive and develop better in the competition.