Investigation of Gravity Model
Relationship between Exchange rate and Foreign Direct Investment of China
Junshan Chen
Introduction
The report bases on the theories of relative cost of production and the relative wealth effect analyzes the potential impact caused by exchange rate upon foreign direct investment. The target country selected is China; while the research period is identified as 1980 to 2012. In order to undertake the empirical study, the gravity model is referred to when establish the regression model, relying upon the regression results released by Stata. The increase of real exchange rate, i.e. the appreciation of RMB will restrict the inflow of foreign direct investment. Furthermore, the GDP will positively affect the level of foreign direct investment; while the average domestical wage will negatively impact the level of foreign direct investment. In addition, the policy change will generate a dramatic influence upon the level of foreign direct investment and thus has to be taken into deep consideration when the regression analysis is undertook.
Literature review In terms of the relationship between exchange rate and the foreign direct investment, there are mainly two theories which are respectively ‘relative production cost effect’ and ‘effect of relative wealth’. Specifically, on the one hand the relative production cost is put forward by Cushman in 1985. In his perspective, the devaluation of domestic currencies will reduce the relative cost of
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.
There has been a myriad of research investigating the symbiotic relationship between hippocampal volume and major mood disorders (MDD) like depression. Despite being one of the most prevalent illnesses, the underlying pathogenesis and neurobiology of MDD remain unclear. It has been widely documented that patients with a MDD tend to have smaller hippocampal volumes (Sheline et al., 1996, Nordanskog et al., 2014). The hippocampus is known to be closely affiliated with the hypothalamic-pituitary-adrenal axis, which is required to produce glucocorticoids that are involved in stress mechanisms (Chen et al., 2010). Moreover, stressful life events are considered a critical risk factor in the development of depression (Zannas et al., 2013). This, coupled with findings which suggest that depressed patients have difficulty with hippocampal-dependent learning and memory tasks (Gould et al., 1998, Gould et al., 2007), accentuates the relationship between the hippocampus and MDD being mediated through stress. There are various hypotheses regarding what may cause hippocampal volume diminution as a consequence of stress. Major propositions involve hippocampal neurogenesis in the dentate gyrus (Becker and Wojtowicz, 2007), glial numbers, apoptosis (Czeh and Lucassen, 2007) and granule neuron numbers (Boldrini et al., 2013). Other mechanisms that may affect hippocampal volume like neuropil reduction, shifts in fluid balance between the ventricles and brain tissue and changes in
An undervalued currency also increases China’s attractiveness, as a destination for foreign investments especially from the U.S. Foreign investment is a great way to promote technology transfers, which leads to economic development. Furthermore, tourism industry also boomed as overseas tourists find it cheaper to travel to China than other parts of the world.
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.
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
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.
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
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)
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).
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.
In order to meet the objectives of the study to analyses the Impact of Foreign Direct Investment on Indian Economy, annual data have been collected from 2007-2016. However to make analysis between financial performance of FDI based Companies and Non FDI based Companies listed at BSE for 10 years has been considered. This study is based on secondary data. The required data have been collected from CMIE Prowess IQ data base.The tools used in the study are panel data Fixed Effect Model, Random Effect Model, Hausman test and Chow test. The sample size is selected on the basis of FDI definition given by IMF i.e. if foreign shareholding is 10% or more than 10% in the company that company will be considered as FDI based
In the discussion chapter, there will be focus on the key findings that are done through the empirical research so that there could be the analysis so the situations that the foreign market entry should be done for Chinese elderly market or not. There was the focus on the barriers and other issues so that the current research on the industry can be made. However, the recommendations and final-conclusions are made in the discussion chapter through the self-evaluation and through the research that is conducted .
Foreign Direct Investment is the major tool of attracting International Economic Integration in any nation. It serves as a relationship between investment and saving. Many developing countries like India are facing the scarcity of savings. This crisis can be solved with the help of Foreign Direct Investment. In this paper an endeavor has been taken to analyze the trend of FDI in last 11 years and to analyze the relationship between foreign direct investment and macroeconomic factors like GDP, Exports and Foreign Exchange Reserves (FER) in India using data for a period from 2001 to 2012. This study has investigated the twin objectives viz trend of FDI and relation of FDI with macroeconomic factors viz GDP, Exports, Foreign Exchange Reserves (FER).The trend and relation between these variables has been analyzed by percentage analysis, Compound Annual Growth Rate (CAGR), and Correlation Analysis. Findings of the study indicate that FDI can be used as vehicle for growth of macroeconomic indicators of the economy.
〖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.
Foreign Direct Investment can have many problems and benefits, a problem with many FDI’s is that its done in the deveoped countries rather than the countries that need FDI plan such as Nigera, Cameroon and Somalia meanwhile when an FDI project is planned in a country and on a large scale then its very benefecial for the countries economy According to data.worldbank.org Foriegn direct investment means that the invester