Exchange Rate Movements and Structural Break on China FDI Inflows

Contemporary Economics (2020), Vol. 14 No. 2, pp. 112-126

15 Pages Posted: 21 Feb 2021

See all articles by Jung Wan Lee

Jung Wan Lee

Anhui University of Finance and Economics; Boston University - Department of Administrative Sciences

Tantatape Brahmasrene

College of Business, Purdue University Northwest

Date Written: June 23, 2020

Abstract

The aim of the study is to explore the short-run and long-run dynamic relationships between exchange rate fluctuations and foreign direct investment (FDI) inflows in China. The justification is that the undertaken topic is preeminent for devising strategies to promote economic development, thus, a course that carries much at stake not only for China but also for other developing countries. Methodology used in the study consists of co-integration tests, vector error correction models, Wald tests and impulse responses. Monthly time series data from the National Bureau of Statistics of the People’s Republic of China are analyzed. The main empirical results indicate that a change in exchange rates negatively affects FDI inflows in the long run while there exists no evidence of short-run dynamics and reciprocal feedback between exchange rate fluctuations and FDI inflows. Furthermore, a structural break occurs during the 2007-2009 global financial crisis shock to FDI inflows in China. In conclusions, this research expands knowledge of factors that affect FDI inflows. To generalize the results obtained from this study, recommendations for future research include studies encompassing different economies where data are available. Such research will contribute towards improving our understanding of exchange rate systems and responses in each market.

Keywords: exchange rates, foreign direct investment, cointegration, vector error correction, impulse responses, China

JEL Classification: F21, F31, G11, G18, O24

Suggested Citation

Lee, Jung Wan and Brahmasrene, Tantatape, Exchange Rate Movements and Structural Break on China FDI Inflows (June 23, 2020). Contemporary Economics (2020), Vol. 14 No. 2, pp. 112-126, Available at SSRN: https://ssrn.com/abstract=3732671

Jung Wan Lee

Anhui University of Finance and Economics ( email )

962 CaoShan Road
Bengbu, Anhui 233030
China
86 166 5525 6962 (Phone)

HOME PAGE: http://www.aufe.edu.cn

Boston University - Department of Administrative Sciences ( email )

808 Commonwealth Avenue
Boston, MA 02215
United States
617 358 5627 (Phone)
617 353 6840 (Fax)

HOME PAGE: http://www.bu.edu/met

Tantatape Brahmasrene (Contact Author)

College of Business, Purdue University Northwest ( email )

Hammond, IN 46323
United States

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