Empirical Study Of The Effect And Transmission Mechanism Of RMB Exchange Rate On FDI

Since the Reform and Opening Up, China implemented a series of open-door policy and the economy developed rapidly. With the exchange rate system reform in1994,2005and2010, the flexibility of the RMB exchange rate regime increased gradually, and the inflows of Foreign Direct Investment (FDI) has shown a significant growth. In the context of the reform in the RMB exchange rate regime ever, the relationship between changes in the RMB exchange rate and FDI inflows caused scholars more and more attention.Firstly, we review the literature on exchange rate and foreign direct investment inflows and find that there isn’t a unified conclusion on the relationship between exchange rate and FDI inflows. Secondly, we describe the development process of RMB Exchange Rate Regime(REER) and China’s FDI, and analysis theoretically the five transmission mechanism of the exchange rate on FDI. Then, using the quarterly data of FDI, REER, GDP and Per Capita Disposable Income of Urban Residents(PDI) in2003-2012, we conduct an empirical analysis of the relationship between REER and FDI. By introducing wealth variable (GDP) and cost variable (PDI), we establish co-integration equations and VEC model, and give Co-integration test, Granger causality test, Impulse Response Functions analysis and Variance analysis. We reveal that, In the long term, both REER and GDP have a positive correlation with FDI, and PDI and FDI is a negative correlation. In the short term, the increase of REER can inhibit FDI. GDP can promote FDI. PDI has a negative impact on FDI in the previous three terms, but the impact is positive from the third term. We verify the transmission mechanism between REER and FDI is "REER-GDP-PDI-FDI". Finally, the paper put forward some policy recommendations to promote Foreign Direct Investment inflows in our country.