FDI And The Potential Balance Of Payment Crisis

Under the circumstances of open economy, FDI became the main method for international capital flow and it is nearly a commen sense all over the world that FDI is propitious to transfer new technology, to upgrade the industry structure and to develop the economy in the host country. For the developing countries especially, FDI will meet the domestic capital gap or technological gap and to adjust domestic economic structure to develop economy. However, it does not mean FDI is free from risks. FDI inflows, profits reinvestment and the import substitution give positive impacts on the balance of payment, while FDI round-tripping, profits remittance, the payments of patent fee and license fee as well as the import of equipments and raw materials by MNCs give negative pressures on the balance of payment. Further more, FDI and exchange rate will interact on each other in a complicated way, which therefore influence the equilibrium status of the balance of payment for the host country. So, FDI has two sides of effects to the balance of payment.Foreign direct investment (FDI), as the main form of capital inflows to china, plays an important role in China's economic development. China has been one of the largest FDI recipient countries among the world since we joint in the WTO. From a medium and long terms of view, potential risks concomitant with FDI inflows may arouse uncertainties to our finacial safety, even economic safety, so the purpose of this paper is to ascertain wether the large amount of FDI will trigger balance of payment crisis(BOP crisis) in China.The fist charpter of this paper reviews the existed literatures about impacts that FDI plays on the BOP of the host country so as to make use of excellent researching measures and angle of views. The second charpter analyzes the probability that FDI will induce the BOP cisis in theory. The third charpter studies on wether FDI will become a trigger for the BOP crisis in China after analysis of three BOP crisis bearing countries, Italy, Argentina and Malaysia. The fourth charpter makes conclusions and suggestions for China's use of FDI.Relying on not only theoretic studies but also empirical analysis on the state of current account, capital and financial account, foreign reserves, exchange rate and capital flight, this paper draws the conclusion that in general FDI inflows to China is positive to our balance of payment, but it may bring potential risks in the medium and long term.This paper aims only at wether FDI will make the BOP crisis, however, under an open economy framework, the analysis of BOP crisis contagion between countries should be included. In addition, for the restriction of data collection, more meticulous analyses on this proposition from the MNCs' point view are left for the further study.