The Effect Of Real Exchange Rate On Foreign Direct Investment

Foreign direct investment increasingly plays prominent role in Chinese economic development, as the main form of foreign investment, foreign direct investment not only increases jobs and capitals and brings advanced management experience、science and technology. They are the important source of economic which promotes China’s economic growth. Since reform and opening policies in China, multinational corporations and other foreign investors on China’s investment grows year on year. According to2007UN "World Investment Report", in2006the actual total of foreign direct investment reached69.498billion dollars, China become the world’s largest country as inflow of foreign direct investment, about200countries and regions around the world and over80%of world’s largest500multinational corporations came to our country for direct investment. With the inflow of foreign direct investment growing more and more in China, and it gives an important contribution to our country’s economic growth, the reasons which affect the inflow of foreign direct investment have become a academic research issue. Exchange rate is one of important factor in a lot of kinds of reasons. Therefore, the study of exchange rate influents on foreign direct investment is very significant. The relation betweens exchange rate and a different country’s direct investment, and the way of exchange rate on different kinds of FDI which are how to do will be addressed in this article.In this paper, we studied the way of real exchange rate on china’s foreign direct investment during1984-2008. The paper selected United States and Japan as a representation, on the one hand, U.S. direct investment and Japan’s direct investment occupies a pivotal position in Chinese FDI; on the other hand, Japanese direct investment in China is mainly cost-oriented FDI. while the U.S. direct investment in China is mainly marked-oriented FDI. Specific research steps:first, the theory of the way of exchange rate on FDI and the review of relevant literature about the relationship betweens exchange rate and FDI; Secondly, the analysis of the Japan’s, U.S. direct investment’s position in China’s foreign direct investment and two country’s investment characteristics; Third, theoretical models derivation, and according to the relevant theories and empirical research literatures established the article’s measurement model. With the unit root tests, EG two-step co-integration test, error correction model and Granger causality test, studied the relationship between the bilateral real exchange rate and Japan’s, U.S. FDI in China, and the relative wealth, relative wage and demands effects are the main way of exchange rate on FDI, the paper will find out which one is the main fact affect the Japan’s, U.S. FDI inflowing. Empirical results are as follows:Japan’s FDI in China has a strongly reaction on the China and Japan’s bilateral real exchange rate, RMB devaluation has a positive influent on Japanese direct investment,5%significance level; U.S. FDI in China has a weakly response on bilateral real exchange rate,10%significance level. Real exchange rate’s change impacts on Japanese FDI in China, mainly through relative wage and demands effect, while the impact of U.S. FDI in China, mainly through demands effect.