The Effect Of RMB Exchange Rate And Its Volatility On FDI Inflow Of Shandong

Under the background of the RMB exchange rate formation mechanism beingmore perfect and exchange rate trendency of marketization being enhanced, the RMBexchange rate as a bridge of communication between China and foreign currency, ismore able to reflect the real state of supply and demand in the RMB market andChina’s economic development status in the world. This phenomenon obliges scholarsand investors to more concern about the exchange rate trends and policy orientation.On the other hand,"deleveraging" economic policies of central leadership of2013adopted the new term investments to stimulate internal hard to make happen. In theaspect of promote economic growth, make up for the lack of construction funds,promote industrial structure upgrading, accelerate the development of an openeconomy, accelerate technological progress and the creation of employmentopportunities, foreign direct investment is playing a more and more prominent role.RMB exchange rate as a measure of the value of the foreign asset, whose changes andvolatility is bound to affect the attraction of the foreign direct investment in Shando ngProvince. To examine the relationship and specific size between these two sides, thispaper will do some empirical analysis from the perspective of the total size and thestructure of Funded Sources of Shandong province respectively in order to provide abasis and reference for the authorities to make policies in attracting foreign directinvestment.Firstly, this paper summarizes the related literature of the impact of exchangerate changes FDI and its volatility on FDI inflows at home and abroad. Previouslyresearches indicated different results, but the host country currency devaluation andexchange rate fluctuation within a narrow range can promote FDI inflows is themainstream viewpoint. Then the author sums up the specific pathways of the exchange rates and its volatility of one country affect the inflow of FDI, including theexchange rate changes’ wealth effect, the relative cost effect, the demand effect,industry effect, the expected effects and risk effects of exchange rate volatility, whichlaid the theoretical foundation of the subsequent research.Secondly, in view of the Shandong province economy status and thegeographical advantages of adjacent to Japan and South Korea, this paper analyzesthe development situation and characteristics of FDI inflows in Shandong province.Analysis found that the scale of foreign capital of Shandong Province is in theforefront, at the same time the growth in the overall size of the foreign-investedenterprises and forms of organization as well as the industrial structure are constantlyoptimizing, the form of the investment tilt to the sole direction, the third industry’sgrowth is outstanding, but the source of foreign capital structure is relatively single,labor-intensive non-prime capital is prevailing and more concentrated in the easternregion.Finally, this paper measures the sequence of exchange rate volatility by theGRACH model, then the author adopts two-step E-G cointegration test, errorcorrection model and vector auto regression model to analyze the effect of the RMBreal effective exchange rate changes and its volatility on FDI inflows in Shandongprovince from two aspects of static and dynamic, the study found that both in the longterm and short term, the real effective exchange rate appreciation will restrain FDIinflows in Shandong, and the inhibition lasts for seven years; Multiple linearregression model analysis found that the RMB exchange rate volatility on FDI inflowshave inhibition but not statistically significant.In this paper, we use the panel data model to study the specific effect ofexchange rate movements affect the different source of FDI in Shandong province t,which is the main innovation of this paper. The results found that the USA’s FDI isobviously affected by the wealth effect of the exchange rate changes, Japanese FDI isdistinguished affected by the wealth effect, cost effect and risk effect, Hong Kong andTaiwan investment’s cost and risk effect is significantly, while South Koreainvestment flow in Shandong is affected by all effect.