Study Of The Exchange Rate Regime Affects FDI’s Spatial Concentration Based On The C—P Expanded Model

With the deepening of economic globalization and integration trends, foreign direct investment is increasingly being one of the main driving forces in emerging market and transition economies that develops economy and increases productivity. In recent years, they act as foreign direct investment recipients or investors; the importance of emerging market countries and transition economies in the worldwide investment stage is increasing. Especially since we have stepped into the21st century, the importance of the role played by emerging market countries and transition economies in the field of international manufacture and consumption is enhancing year after year, in the program of pursing economic profits and seeking new market, worldwide large multinational companies and Groups’ investment in these countries has showed an increasing trend. But as we find the emerging markets and transition economies achieved a breakthrough on total inflows of the absorption of FDI, we should also see the significant difference between these countries and its different areas; the inflows of FDI in some poorest areas are even in the downturn.Why do FDI inflows of some areas turn to grow sustainably while other areas have declined? Why foreign investors tend to be concentrated in a particular country or area? What factors lead to the industrial cluster? How do they transfer from one country to another? These series of questions lead to the study:this paper attempts to find a factor, which can explain the phenomena that FDI tends to gather together rather than uniformly distribute.As we all know, there is always a dilemma in the choice of exchange rate regime for the developing countries. Once a developing country pegs its exchange rate system to another country’s currency, it means that it has given up the independence of its monetary policy. When there is a conflict between the two countries’economy, internal balance of the pegging country has to give way to its external balance. Once a developing country implements a floating exchange rate system, it’s usually easy to be attacked by international capital because it doesn’t have abundant foreign exchange reserve and sound regulations. So an appropriate exchange rate regime should not only be able to serve for the country’s inner economy, but also be an effective way to withstand external shocks.This leads to the reverie of this article:is the exchange rate regime an important factor for inflow of FDI? This paper attempts to explain the relationship between exchange rate regime and the FDI inflow based on the New Economic Geography. Specifically, by modifying the hypothesis of Krugman’s Core—Periphery Model, we finally get the Core—Periphery Expand Model, which is constituted by revenue formulation, price index, wage formulation and profit function. By solving those functions and simulating in the three-dimensional space using Matrix Laboratory, we conclude as follows:First, we can’t say that whether fixed or float exchange rate regime is more attractive to FDI, because the conclusion is not universally applicable. In the three-dimensional space simulation, given the different step of economy, industry model and initial ratio, we get totally different conclusions. This conclusion also explains the viewpoints of scholars, a part of which support the fix exchange rate regime while others support the float exchange rate regime.Second, given the initial ratio of two countries’ industry, different exchange rate regime will cause different profit functions, which leads to the industry transfer from low profit country to high profit country. Finally it will become a high-profit national clustering mode. But on the other hand, this kind of transformation will break the initial ratio of two countries to some extent, so we call the gathering is non-steady. Only when there are no industrial profit margins between two countries, the adjustment process will stop. Then the distribution of the industry between the two countries is steady.At last, we use the GARCH model for the empirical study of the real effective exchange rate of RMB to attract FDI impact on China. In the view of the financial time series often appearing heteroskedasticity, we introduce the variance of the real effective rate of RMB as an independent variable that affects FDI inflows. Our empirical results suggest that both real effective exchange rate and its variance result in a negative impact to FDI inflows in the short run, but in the long run the real effective exchange rate turns to be positive while its variance is still negative. According to the result, we suggest that our government should try to avoid huge fluctuations in the short run to give a stable expect to the market while allows a low speed of appreciation in the long term.