The Relationship Between Exchange Rate Movements And Foreign Direct Investment

With the world economy's transition from traditional market economy to open market economy and foreign direct investment's (FDI's) more than one century's evolution, foreign direct investment's scale, structure and destination changed rapidly, which had profound effect on enterprise international competitiveness, industry structure adjustment, balance of payments and economic stable and sustainable growth of countries all over the world. Foreign direct investment, which resulted from the individual goal, has aggregated and become macro topic. Foreign direct investment has become indispensable part on keeping macroeconomic internal and external equilibrium.Based on the preview about the present investigation of the relation between variable exchange rate and foreign direct investment, applying uncertainty theory and information asymmetry theory, this paper established models to analysis the mechanism of which the exchange rate's change influenced FDI, and drew the conclusion that the currency's devaluation didn't result into large scale FDI inflows necessarily. Only under the premise of the host country economy's good expectation, the currency's depreciation would promote FDI's inflows. Based on above, this paper studied China's and USA's determination force of exchange rate, interest rate differentials and investor's national income on FDI inflows, introduced FDI into general equilibrium model and analysis the adjustment path to the equilibrium under particular condition and particular exchange rate regime. Finally, this paper investigated how China's FDI affected balance of payments and believed that there are two ways under which foreign direct investment had impact on balance of payments at stage of normal development, and at the crisis stage foreign direct investment enterprises could change export allocation to influence balance of payments.