The Simulation Analysis Of China’s FDI Inflow Impact Based On The Establishment Of China-japan-south Korea FTA

Since the end of last century, China, Japan and Korea are actively pushing regionaleconomic integration. As three biggest economic entities in East Asia, the establishmentof China-Japan-Korea FTA is a symbol of globalization with the pursuit of commoninterest. The goal of this free trade area is to achieve global specialization and reasonableresources allocation motivated by marketing mechanism, in this way ending withincreasing welfare and international competitive power of FTA members.Free trade area could eliminate the trade barriers between member countries,realizing free trade, improving economic contact between member countries,fulfills thegoal of coordinated development within the FTA region. FTA produces enormouseconomic impact, including impact on trade, investment and industry, while in the paper,we focus on the foreign direct investment part, in other words, the changes of FDI inflow.The regional trade volume increase from over130billion dollars in1999to morethan690billion in2011, while Japan ranks second and China fifth in global FDI. But theregional FDI occupied less than6%comparing to the total investment, insufficientregional investment restricts the development of Asian countries. FDI could be seen askey hub of the Asian production networks, it improves the cooperation of production area,and at the same time, helps Asian countries get rid of their high dependency on theWestern countries. While for China, FDI inflow is part of our country’s economicstrategies, it could improve resource allocation and free flow of international capital. Asan important part of economic impact, FDI impact could massively helps us tounderstand how China will play in the FTA of China, Japan and Korea, and in this way,providing guidance for the government.This paper first introduces the regional economic integration theory, followed by thebackground, development and characteristics of FTA of China, Japan and Korea. Then, itanalyzes the factors influencing the development of FTA, including the intimacyinfluence, political impact and America’s role. Afterwards, based on the regionaleconomic integration theory and investment theory, presuming FTA of China, Japan andKorea will establish in2020, this paper takes account of the decisive factors to forecastthe foreign direct investment impact of establishment of China-Japan-Korea FTA by the use of Gravity model. Based on the results, some advice and suggestions are given.