Study On The Impact Of RMB Appreciation On China’s Outward Foreign Direct Investment

Since the1990’s, the wave of the Economic Globalization and the Regional EconomicIntegration have swept the world. With the rapid development of modern informationtechnology, the International Trade、the International Investment and the InternationalFinance got rapid development. World economy presents a trend of unprecedented closelylinked together. As an emerging market economy and a developing great power, China hasdeeply participated in the Economic Globalization. China’s rapid economic growth and theincreasingly close interdependence of the global economy has became an indisputable fact.The close links between China and the world economy lies mainly in the two aspects of largescale of international trade and the resulting but independent operation of huge internationalcapital flows. The International Direct Investment plays a more and more important role. Thestrategy of "going out" was put forward in2002. The Chinese government encouraged allkinds of enterprises with comparative advantage to go out. Accordingly China’s OutwardForeign Direct Investment began to grow rapidly. By the end of2010, China’s OutwardForeign Direct Investment has stock to$317.21billion which is the same index of5.5times inthe2005. The net flow of Outward Foreign Direct Investment hit a historic high of$68.81billion in2010which is2.3times of the total amount of China’s Foreign Direct Investmentduring "the tenth five years plan". From the perspective of development prospects, China willgradually usher in the climax of Outward Foreign Direct Investment after a long period ofgreat Inward Foreign Direct Investment peak.Since July21of2005, China implements the new exchange rate system, the flexibility ofthe RMB exchange rate which fluctuates up and down is significantly enhanced and the trendof the RMB appreciation becomes more clear: From2006to2011, the annual cumulativeappreciation of RMB were6.804%,6.882%,3.349%,6.882%,3%and5.11%. Althoughfrom July2008, the size of the RMB appreciation was decreased, however, for variousreasons, the pressure on the RMB appreciation is long-standing. In open economy, as thecomparison between the two currencies, exchange rate determines the relative prices of goodsand production factors at home and abroad, thus it determines the flow and scale ofInternational Direct Investment. Exchange rate becomes the important factor affecting theInternational Direct Investment. While the traditional theory of International Investmentresearch rarely from the perspective of finance. Throughout the domestic and foreign research,some scholars investigated to multinational companies from the microscopic view of outwardexpansion reason、the investment location and the form of investment(Such as MonopolisticAdvantage Theory, Internalization Theory, theory of International Production Compromiseand Oligopolistic Reaction Theory)；Some scholars researched from the medium level of theindustrial shift effect、 upgrading of industrial structure resulting from Foreign DirectInvestment (for example: Product Life Cycle Theory, Marginal Industry DiffusionTheory),While macro research involved the Porter’s National Competitive Advantage Theory.These theories mostly study situations of the developed capitalist countries in a certain historical period. While the research about the impact of exchange rate changes on theInternational Direct Investment has not formed the systematic conclusions and completetheoretical system. For developing countries, the specific international political position andspecial internal politics, economy system determine its exchange rate formation mechanismand the impact of its change on a country’s Foreign Direct Investment are different fromdeveloped countries. The theoretical research on this issue in papers are few.In this particular background, the research on the China’s Foreign Direct Investmentassociated with the appreciation and volatility of the RMB is to be carried out urgently. Theconclusions of these studies will enrich the theory of Foreign Direct Investment aboutdeveloping country and promote the continuous development of the International DirectInvestment Theory. In the process, building a unified theoretical framework to form the effectof International Direct Investment associated with exchange rate change and exchange ratevolatility into a systematic conclusion will be a new task of International Direct InvestmentTheory in next stage. What effect will be on the size and structure of the different types ofChina’s Outward Foreign Direct Investment associated with the long-term gradualappreciation and short-term periodic depreciation of RMB? What is the macro transmissionmechanism about the influence of the China’s Outward Foreign Direct Investment associatedwith the RMB appreciation? How exchange rate fluctuations affect the Chinese enterprise’sOutward Foreign Direct Investment decisions? Can a wide range of Outward Foreign DirectInvestment alleviate the pressure of the long-term RMB appreciation? How can Chineseenterprises understand the advantages and disadvantages of RMB appreciation exactly? Allthese issues are to be deeply researched in this paper.In this paper, we focus on the impact of RMB Appreciation on the scales and structure ofChina’s Outward Foreign Direct Investment, using the integrated methods of model analysis,empirical analysis and normative analysis, mainly based on the International Finance,International Investment and Western Economics. The full text is divided into six partsmainly: The first part is general theoretical basis of the impact of exchange rate changes onInternational Direct Investment. We first introduce the basic theory of exchange ratemovements-exchange rate determination and fluctuation theory system in the first chapter.Next we introduce the main theory about impact of exchange rate changes and volatility onInternational Direct Investment including the Relative Cost Theory、Relative Wealth Theory、Risk Aversion Theory and the Theory of real options. The four theories lay the importantthinking foundation of the mathematical model in paper. The second part is the researchliterature review of the impact of exchange rate changes and volatility on the InternationalDirect Investment.In the second chapter, according to the evolution of the study about theimpact of exchange rate changes on the international direct investment, we summarize thevarious methods and theories, while criticizing the related theories and literatures. For thedomestic research,We review the work about impact of the RMB Appreciation on China’sOutward Foreign Direct Investment in detail and point out the future research direction of thisissue. In the third part, we introduce the history of RMB appreciation and China’s OutwardForeign Direct Investment. The third chapter firstly introduces the development of the RMBappreciation, then we further analyzes the specific reasons and persistence of the RMB appreciation. Next, we reviewed the history、present situation and the features of China’sOutward Foreign Direct Investment activities. The fourth part is the theoretical analysis of theimpact of RMB Appreciation on China’s Outward Foreign Direct Investment. In themicroscopic model analysis section, by constructing the optimal investment decision model ofmultinational corporations under exchange rate uncertainty, we discussed in detail the impactof the home country expected currency appreciation on the scale and structure of a country’soutward foreign direct investment and it’s mechanism. In the analysis of macroeconomictransmission mechanism, we focus on the interest rate transmission mechanism and pricetransmission mechanism of impact of RMB Appreciation on China’s Outward Foreign DirectInvestment. At last, we analyze the beneficial effects and adverse effects of the China’sOutward Foreign Direct Investment associated with the RMB Appreciation. The fifth part isthe empirical analysis of the impact of RMB appreciation on China’s Outward Foreign DirectInvestment. Using the fixed effects model of the panel data, we analyze the impact of theRMB Appreciation on the scales of China’s Outward Foreign Direct Investment. Then Westudy the experience of the impact of RMB Appreciation on structure of China’s OutwardForeign Direct Investment focusing on the industrial structure, regional structure andinvestment main body structure. The sixth part: the research on policy and suggestions ofChina’s Outward Foreign Direct Investment under the background of RMB appreciation. Wegives some suggestions from the government level and the enterprise level in the sixthchapter.In my paper, the model shows that the expected currency appreciation of home countryis conducive to carry out Cost-oriented Foreign Direct Investment and against to carry outMarket-oriented Foreign Direct Investment. The influence of the expected currencyappreciation of home country in labor-intensive outward direct investment is larger, while incapital-intensive outward direct investment is smaller. Expected currency appreciation ofhome country affect the structure of the country’s Foreign Direct Investment, while exchangerate volatility of the home country can not influent the structure of Foreign Direct Investment.With the currency volatility of home country increasing, the scales of Cost-oriented OutwardDirect Investment and Market-oriented Outward Direct Investment are reducing. Whilecurrency appreciation of home country affect a country’s outward foreign direct investment byinterest rate transmission mechanism and price transmission mechanism. In this paper,empirical research shows that the expected appreciation and fluctuations of RMB have asignificant impact on the scales of China’s Outward Foreign Direct Investment. Expectedappreciation of RMB is conducive to the scales of China’s Outward Foreign DirectInvestment. While the increase of the RMB exchange rate volatility reduces the size ofChina’s Outward Foreign Direct Investment. The impact of RMB Appreciation on scales ofChina’s Outward Foreign Direct Investment is not significant now. China’s current OutwardForeign Direct Investment is given priority to cost-oriented，while the proportion of Costoriented-direct investment and Market-oriented Direct investment is close. RMB appreciationmakes the scales of China’s Outward Foreign Direct Investment to Asia and Africa increaseyear by year. RMB appreciation makes the total amount of mining and transport in foreign direct investment increase significantly. Expected RMB appreciation makes the proportion ofstate-owned enterprises in foreign direct investment fall, the proportion of limited liabilitycompany foreign direct investment rise.My paper puts forward the following suggestions on the basis of the research. Thegovernment should develop the RMB exchange rate system reform and the "going out"strategy coordinated. We should use the low-cost advantage and the relative-wealth advantagecoming from RMB appreciation to select the industry and location layout of the OutwardForeign Direct Investment rationally. We should implement financial preferential policies topromote foreign direct investment. The core competitiveness of Chinese enterprises need tobe strengthened. We should be prudent and steady to develop Chinese enterprises’ overseasmergers and acquisitions with the relative-wealth advantage coming form the appreciation ofthe RMB rationally. We should encourage private enterprises、 small and medium-sizedenterprises to develop the outward foreign direct investment with the industrial clusterpattern under the opportunity of RMB appreciation.