The Research On The Determination Of FDI In Terms Of RMB Exchange Rate

After more than3decades' theoretical and practical exploration, the utilization of foreign directinvestment in China has achieved outstanding accomplishments. This is on the one hand shows thatChina's economic system of market reform has made great achievements which has been recognized bythe rest of the world, on the other hand suggests the necessity of a close relationship between China'seconomic development and worldwide. However, since the negative effect of financial and debt crisiswhich were break out in EU for the first time and spread into the rest of the world rapidly are expectedto continue for a long time, the future development of China's utilization of FDI is still full ofdifficulties and challenges. Therefore, the determinations of FDI, especially the one related to the leveland volatility of exchange rates have become a hot topic among academic area.In this paper, firstly, some of the important literatures both domestic and international will bereviewed in terms of theoretical and empirical aspects in order to understand the latest achievements ofstudy as well as contribute to this paper's empirical model. Secondly, this article will try to describe thehistory and current situation of RMB exchange rate and foreign direct investment as well as the possibletendency of both in the future. The model analysis will follow by the situation description in order toestimate the possible relationship among those variables. Then this paper will try to build aneconometric model which is based on the monthly data of FDI, level and volatility of RMB exchangerate from July2005to December2011. All the variables will be estimated by GARCH method, ADFtest, E-G two steps cointegration test and error correction model in order to the example the long-runand short-term relationship. Finally, the econometric dynamic analysis including impulse response andvariance decomposition will be used to test the contribution of exchange rate's level and volatility to theFDI inflows' fluctuation.Generally speaking, according to Granger Causality test, level and volatility of RMB real effectiveexchange rate do Granger Cause FDI inflows, meanwhile FDI inflows does Granger Cause the level ofRMB real effective exchange rate, however, FDI inflows dose not Granger Cause the volatility of RMBreal effective exchange rate. More specific, there is a long-run negative relationship between RMB realeffective exchange rate and FDI inflows which means the devaluation of RMB will lead to the increaseof FDI inflow. Meanwhile, the more fluctuate of the RMB exchange rate the lower the FDI inflows.Finally, according to the impulse and variance decomposition analysis, although the effects of level andvolatility of RMB real effective exchange rate are significant, they are only the little parts ofdeterminations leading to the FDI inflows' fluctuation.