Exchange Rate Fluctuation,Firm Heterogeneity And China Overseas Direct Investment

In recent years,the pace of “going global” for Chinese enterprises has accelerated noticeably.Overseas direct investment(ODI)by Chinese enterprises has gradually drawn attention of the society.As Chinese enterprises move towards the world,the position of Chinese enterprises in global value chains continues moving up.The outward investment flows in the high-end fields such as the financial sectors and advanced manufacturing sectors have risen sharply.The overseas investment of Chinese enterprises has become an important means to upgrade the industrial structure and enhance Chinese firms' competitiveness.The rapid growth of China ODI is accompanied by the changes in the RMB exchange rate regime.In 2005,RMB was renounced a single peg to the U.S.dollar and started to implement a managed floating exchange rate system which based on the market supply and demand with reference to a basket of currencies.With the marketization of RMB exchange rate formation mechanism,the exchange rate of RMB has been deeply affected by domestic and global economy.As a result,the fluctuation and uncertainty of RMB exchange rate have also risen sharply.ODI as an important form of international capital flows,the investment costs affected by the changes of real exchange rate.More and more concern about the fluctuation of exchange rate was raised by policy makers and investors.UNCTAD's survey of multinational corporations during the global financial crisis showed that most multinational corporations believe exchange rate fluctuations will have a greater negative impact on their overseas investment.As a whole,changes and fluctuations in the RMB exchange rate have markedly increased in recent years.And its impact of the “going global" of Chinese enterprises has also increased.The increasing of global cross-border investment and the changes of exchange rate system have led to the academic circle's research on the influencing of exchange rate to cross-border flow,enterprise's global allocation of resources and organization of production strategy.However,empirical studies by different scholars have given radically different answers to the question whether RMB has promoted Chinese enterprises' ODI.From the perspective of the heterogeneity of firms,the new-new trade theory provides us with a brand-new perspective on the relationship between RMB appreciation and ODI.Therefore,based on the study of enterprise heterogeneity,this paper focuses on the impact of RMB appreciation on different scale enterprises and different overseas investment types.Based on the research of other scholars in academia,this paper constructs a theoretical model of exchange rate affecting ODI.The deduction of the theoretical model shows that the appreciation of the domestic currency reduces the fixed costs of ODI and decreases the productivity threshold.Traditional exchange rate and investment theory generally believe that exchange rate appreciation has “export substitution effect” and “cost-saving effect”.The implication is that the appreciation of the domestic currency reduces the competitiveness of export products and reduces the fixed costs of exports,thus increasing the motivation of the enterprises to make direct investment abroad.This paper attempts to explain the traditional theory of exchange rate investment through the theory of heterogeneous firms.This study finds that the size of “export substitution effect” is related to the substitution elasticity of export products.When the substitution elasticity of export products is large,the impact of exchange rate fluctuation on export earnings of enterprises is more obvious.Therefore,motivation of enterprises to mitigate the negative effect of exchange rate on exports through outward investment is even greater.From the point of view of “cost-saving effect”,one of the major obstacles to investment overseas is the investment fixed cost.The appreciation of the domestic currency generally reduces the investment fixed cost of the enterprise,thereby helping enterprises to cross the productivity threshold of outward direct investment.Based on the research of academia,this paper uses the data of China's industrial enterprises from 2003 to 2013,the data of import and export database of the customs,ODI data of the Ministry of Commerce and Financial Times.This paper uses the real effective exchange rate at the firm level calculated by the simple average method as the independent variable of the main regression.Then we construct the real effective exchange rate at the firm level calculated by the geometric mean method and the real effective exchange rate at the industry level calculated by the global value chain division of labor as the robustness inspection index.The results shows that the appreciation of the RMB increases the probability of ODI and reduces the financing constraints of the ODI firms.However,due to incomplete information,one possible internationalization route is that enterprises export in the target market before its ODI.The increase of eigenvalues,such as total productivity,capital intensity and the time of establishment of enterprises,also promoted ODI.In terms of the research on enterprise heterogeneity,the main conclusions of this paper are as follows:First,the appreciation of RMB has a greater impact on the odds of ODI for relatively low-productivity firms.The possible reason is that the “cost effect” of exchange rate appreciation reduces the investment threshold of ODI.So that a group of enterprises with relatively low productivity can cross the productivity threshold of ODI.For high-productivity enterprises,their productivity have already met productivity threshold before the local currency appreciates.Therefore,changes in exchange rates will have a much lower impact on high-productivity enterprises.Although the appreciation of the domestic currency reduces the competitiveness of export products,the more productive enterprises have more pricing power in the market that can bear the hidden burden brought by the appreciation.Therefore,the cost pressure caused by the appreciation on the enterprises with low productivity could be more obvious.Second,the role of RMB appreciation in service trade ODI is not significant.ODI in services closely related to export,such as trade agents,market development and trade offices.The main objective of service trade ODI is to promoting firms export.Therefore,there is a clear complementary relationship between export and service investment.The appreciation of the exchange rate has led to a relative decrease in exports,which in turn has reduced the incentive for enterprises to set up overseas representative offices.Third,from the perspective of the heterogeneity of corporate finance constraints,the appreciation of the renminbi will play a greater role in promoting corporate ODI with higher financing constraints.The main reason is that ODI firms are also facing the threshold of financing constraints.For companies that do not meet the threshold of financing constraints of ODI,the appreciation of their currencies will exert a “cost effect” to enhance the financing capacity of enterprises,and in turn make some companies cross the threshold of ODI.For companies that have already reached the threshold of financing constraints or have already invested in overseas,the appreciation of local currency to enhance corporate financing capabilities to promote the effect of corporate ODI is even lower.This study confirms the positive role that RMB appreciation plays in the "going global" of Chinese enterprises.It also analyzes the heterogeneity of the firms with RMB exchange rate fluctuations,which is of certain reference value for understanding RMB appreciation and micro-enterprise investment.More attention needs to be paid to fluctuations in investment caused by changes in the RMB exchange rate.In the medium term,the RMB is still a managed floating exchange rate system.When the RMB depreciates,we should pay attention to whether there will be a rapid decline in the ODI scale of enterprises.So that we could moderately adjust the foreign exchange market,guide the two-way fluctuation of the RMB and ease the impact of ODI decline.When the RMB exchange rate rises rapidly,it should pay attention to the expansion of irrational investment by enterprises and the crowding out effect of domestic investment and credit.We should step up support for the overseas investment of SMEs,further promote the reform of state-owned enterprises,improve the support system for outward investment by state-owned enterprises,and improve the preferential financial policies for overseas investment.They will be of great help in promoting the “going global” strategy of Chinese enterprises and enhancing their overseas competitiveness Has important practical significance.