The Relationship Between Exchange Rate And Foreign Direct Investment Of China

Many governments, especially in industrialized and developed nations, pay very close attention to foreign direct investment because the investment flows into and out of their economies can and does have a significant impact.

The Foreign Direct Investment is stimulated by diverse macroeconomic factors such as the GDP, GDP per capita and also by the political stability of a country. The US is the country, which receives the more FDI in the world; even tough some other countries recently have increased their FDI considerably in term of growth. The overall quality of the infrastructure in the US

I found this article "Foreign direct investment: Companies rush in with the cash" on the financial times website (www.FT.com) published December 11, 2002 written by John Thornhill. The reason for choosing this article is my personal interest in the Chinese economy and its attractiveness to the foreign investors. Apart from the foreign direct investment this topic has also helped me in understanding the impact of Chinese economy on the global market.

Miao Wang (2010), “Foreign direct investment and domestic investment in the host country: evidence from panel study”, Applied Economics, 42, pp. 3711-3721 [Online] Available at: http://ehis.ebscohost.com.ezproxy.liv.ac.uk/eds/detail?vid=4&hid=3&sid=d270c6f2-d2fd-483c-8224-564af5d207e7%40sessionmgr110&bdata=JnNpdGU9ZWRzLWxpdmUmc2NvcGU9c2l0ZQ%3d%3d# (Accessed on 13 November 2012)

Exchange rate has given both positive and negative impact towards foreign direct investment (FDI). If foreign direct investment (FDI) in that country is export substituting, the increase in exchange rate volatility between headquarters and the country that allow foreign direct investment (FDI) induce a multinational to serve the host country via a local production facility rather than exports, thereby insulating against currency risk. According to Osinubi (2009), direct investment in a country with a high degree of exchange rate volatility will have more risky of profits which indicates negative impact of exchange rate towards foreign direct investment

〖FDI〗_. represents the foreign direct investment inflow into partner countries (in current USD). An inflow of cash will lead to a temporary financial solvency in recipient countries, which enables the consumers of those countries to buy more differentiated products. However, because it is a temporary cash inflow, the FDI inflow might have an inverse effect as well and therefore the predicted sign for this variable was indeterminate. The results of regression analysis indicate that the FDI coefficient is -0.03 which indicates a negative relationship with the logistic transformation of IIT, but the parameter estimate is statistically insignificant.

After opening of the trade barriers in 1991, the foreign investment inflows have increased enormously. Foreign capital, which actually plays an important role in increasing productivity of labor and accumulation of foreign reserve in developing countries to meet the current account deficit , is consist of foreign direct investment (FDI) and foreign portfolio investment(FPI). Both have worked as an instrument of global economic integration and stimulation. Apart of providing access to the foreign capital FDI also offers modern era technology, tools of creativity, desired skill sets and other complementary skills. In addition of producing additional economic activity and generating employment, foreign investment facilitates in flow of sophisticated technology.

Trade and investment are highly connected that could be illustrated as two sides of the same coin. Companies conduct cross-border trade to supply their foreign investment, and they invest abroad to bolster their trade. Moreover, in the liberalisation era, while investors produce and consume both goods and services, an open trading system will provide a bright investment climate. Equally important, international trade and foreign investment have similar dominant actors through the presence of multinational enterprises.

The correlation between foreign direct investment (FDI) and economic growth is well documented see (Borensztein, De Gregorio, J-W. Lee 98). Even though there has been an extensive amount of research, which includes both FDI and economic growth, there still seems to be a substantial divide between the results; which are concluded within these papers. To begin in this research paper we will define foreign direct

Kolstad and Villanger (2008) showed that the relationship between FDI and GDP is always positive. When the GDP increases, it means the economy of a country is growing, when the condition of the country is stable, it will attract more foreign investors to invest in the country and thus result in the increasing of FDI. The positive relationship also supported by Oyatoye,Arogundade, Adebisi and Oluwakayode (2011).

Yousaf (2008) Analyses of more than 3 decades reveal that FDI has positive relation with imports in short & long-run where as relationship with exports is negative in short & positive in the long-run. FDI is an economic influencer of economy of a country specially developing countries experience accelerated GDP when successful in attracting FDI as in case of Pakistan.

In general the purpose of conducting this study is to make awareness that how Foreign Direct Investment can influence the economy of any country. This discussion can be held by investigating the following questions:

The decision to invest in china, for example, has been heavily influenced by the prevailing low wages rate. However, when the cost of labour is relatively insignificant (when wage rate vary little from country to country), the skills of labour force are expected to have an impact on decisions about FDI location. Productivity levels in sub-Saharan Africa are generally lower than in low-income Asian countries, and the lack of engineers and technical staff in these countries is reported as holding back potential foreign investment, especially in manufacturing; it lessens the attractiveness of investing in productive sectors.

This chapter presents the results of the investigation concerning the position impact of the Foreign Direct Investment in the country . The section deals with the distribution of the impact by sector of Foreign direct investment as following : manufacture of textiles and clothing item , agriculture and mining. According to the research made by the INSTAT, the number of industrial enterprises to foreign direct investment activity is estimated at 50 to mid of 2014 against 45 in the previous year, an increase of 10%.

Adam and Tweneboah (2008) analyzed the impact of Foreign Direct Investment (FDI) on stock market development in Ghana. Market capitalization, FDI, stock market development and exchange rate variable are considered and found long-run relationship between FDI and stock market development in Ghana. Raza and Jawaid (2012) investigated the effects of foreign capital inflows and economic growth on stock market capitalization in 18 Asian countries by using the panel data from the period of 2000–2010 and found that foreign direct investment has significant negative and economic growth has significant positive relationship with the stock market capitalization, whereas, the results of workers’ remittances is found insignificant in long run. However, no causal relationship is found in between workers’ remittances and stock market capitalization. They suggested that investor should not idealize the inflow of workers’ remittances to