Analysis Of The Effect Of G-3 Exchange Rate Volatility On FDI Inflows Of China

Since the collapse of Bretton woods system, G-3 exchange rate volatility has become one of the important reasons of the world economy instability. G-3 exchange rate volatility may affect developing countries on such variables as follows: trade flows, foreign direct investment, currency crisis, debt servicing and so on. However, all of these influences seem to be indirect and indefinite, which is doomed to bring more inconveniences to the researches. Therefore, whether preventing G-3 exchange rate volatility would benefit the development of world economy has become a hot issue.However, recent researches on the very subject mainly concerned about the establishment of target zones. While there're studies in which some of the researchers has done empirical works to measure the influence of G-3 exchange rate volatility on the FDI inflows of developing countries, the final results merely depend on specific analyzes. Theoretically speaking, the G-3 exchange rate volatility may possibly affect FDI inflows of China, things may not be the same when the variables are broken down into separate sectors. Therefore, it is of significance to do researches on how G-3 exchange rate volatility affects Chinese FDI inflows and the whole economy.Firstly, this paper gives a comprehensive review of the experiences of G-3 exchange rate volatility since the collapse of Bretton Woods system. Then in chapter two we study the theoretical influences of the exchange rate volatility on the FDI inflows. In chapter three, we will do empirical works to examine the effect of G-3 exchange rate volatility on the aggregate FDI inflows as well as the export oriented and market oriented FDI inflows of our country based on the forecast of the real option theoretical model. The result shows that, the volatility of G-3 exchange rate has negative effect on our country's FDI inflows. Finally, this paper gives suggestions on how to ameliorate the effect of G-3 exchange rate volatility on China's FDI inflows by establishing exchange rate target zones and making some alternation to the relative monetary policies, as well as the propulsion of industrial structure rearrangement of FDI inflows.