An Empirical Study Of Exchange Rate Volatility And Chinese Enterprises' Outward Foreign Direct Investment

Since the implementation of the “going out” strategy of the Chinese government in 2004,Chinese outward foreign direct investment has experienced rapid growth for more than a decade.China has transformed from a net capital importer to a net exporter of capital,and has become the second largest foreign investor in the world.On the other hand,since the exchange rate reform in 2005,the exchange rate flexibility of the Renminbi has been steadily increasing and the exchange rate volatility has also risen significantly.The exchange rate factor has gradually played a more important role in the decision-making of Chinese enterprises' outward foreign direct investment.Therefore,it is necessary to examine the impact of RMB exchange rate volatility on Chinese enterprises' outward foreign direct investment(OFDI).On this basis,this paper also finds that exchange rate volatility has a differentiated impact on OFDI among different industries,different host countries and different kinds of ownership.First of all,this paper summarizes the characteristics of the rapid development of China's outward foreign investment in recent years.In particular,this article selects key areas of the foreign investment industry,the host country,and the ownership of the enterprises,which will be focused on in the empirical part.Then based on previous theoretical studies on exchange rate volatility and OFDI,combined with some unique features of Chinese OFDI,the paper further elaborates the mechanism of the various heterogeneity impacts of RMB exchange rate volatility on Chinese enterprises' OFDI.The analysis provides a theoretical explanation for later empirical research.This paper uses merging micro-data set from the China Global Investment Tracker Database and Ifind database during 2005-2014,to investigate the impact of exchange rate volatility on the binary margins of Chinese enterprises' OFDI(extensive margin and intensive margin).The preliminary regression results of the whole sample show that overall,exchange rate volatility significantly inhibits the Chinese enterprises' outward foreign direct investment.The results of the robustness test are still consistent.Based on the preliminary regression,this paper examines the impact of exchange rate volatility on the binary margins of Chinese enterprises' OFDI among different industries,different host countries and different kinds of ownership.The regression results show that there is indeed a differentiated impact.The detailed results are as follow:(1)Industry heterogeneity shows: due to the high fixed costs and strong asset specificity,once the investment fails,the enterprise will suffer a great loss,therefore,exchange rate volatility has significantly inhibited OFDI in the construction and water supply industries.On the contrary,due to the low fixed costs and weak assets specificity,the OFDI of the service industry shows the characteristics of risk preference.The increase in exchange rate volatility will increase the expected return on its investment,which will significantly promote the OFDI in the service industry.Because of a strong macro strategic intention,exchange rate volatility will have no significant impact on China's mining and manufacturing OFDI.(2)The results of the host-country grouping regression show: OFDI mainly flows to the mining industry and construction industry in low-and middle-income countries.Therefore,exchange rate volatility significantly inhibits the OFDI in low-and middle-income countries.With the advantages of advanced technology and institutional environment,the high-income countries attract Chinese enterprises to engage in service and manufacturing OFDI,so that exchange rate volatility will significantly promote OFDI in high-income countries.(3)Ownership heterogeneity shows: exchange rate volatility significantly inhibits the scale of the central state-owned enterprises' OFDI,but enhances local state-owned enterprise' and private enterprises' OFDI.The central SOEs(state-owned enterprises)have a monopolistic advantage in the country,and their OFDI is more conservative.Exchange rate volatility will significantly inhibit the scale of their OFDI.Private enterprises and local SOEs that are capable of performing OFDI tend to have higher productivity,and invest in high-quality assets of developed countries to further enhance their technology and production capabilities.Thus,the OFDI of private enterprises and local SOEs is more radical.Exchange rate volatility has significantly promoted the scale of private enterprises' OFDI,and has also played a significant role in promoting local SOEs' OFDI.Based on enterprise-level empirical data,the empirical results show that exchange rate volatility will have a differentiated impact on OFDI among different industries,different host countries and different kinds of ownership.This tells us that today,as the RMB exchange rate volatility is increasing,OFDI should be guided and managed in a classified manner.It should not engage in “one size fits all”.