The Impact Of Exchange Rate Changes On Chinese Outward Direct Investment

With the development of Chinese economy and investment policy, Chineseoutward direct investment(ODI) would play a bigger role on the internationalstage.Due to the growing trade surplus as well as healthy balance-of-payments andforeign exchange reserve position, China faces pressure to revalue RMB. On the onehand, the RMB’s appreciation would reduce the cost during Chinese investmentactivities,and on the other,the expanded Chinese ODI would push RMB’sappreciation.The RMB’s appreciation and Chinese ODI have a positive interactiverelationship.The research center is Chinese ODI.We first provide a comprehensive literaturereview on the factors that would affect outward direct investment,with specialemphasis on exchange rate level and volatility.Then we look back on the developmentcourse of outward direct investment from China,and we describe the current situationof internal investment activities.We also describe the characteristic which is differentfrom the counterparts from developed countries and analyse the relationship betweenChinese outward direct investment and RMB rate change. In order to fully understandthis phenomenon,my focus here is how the exchange rate level and volatility wouldaffect the outward direct investment from China.Based on existing study,we build atheoretical model to explore the relationship between the exchange rates and ChineseODI from two types of investment.We empirically examine the impact of the change in the exchange rate level(appreciation or depreciation) and volatility on ODI from China to43other countriesfor the period from2003to2010.The result shows that the exchange rate level andvolatility are remarkable factors which would influence the Chinese ODI.What ismore, we find that both appreciation and volatility of the RMB have a positiverelationship with Chinese ODI.In other words,the RMB’s appreciation would lead to alarger sum of Chinese ODI;a volatile exchange rate in RMB would also encourageChinese ODI.We also give the explanations for the empirical findings.