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E-ISSN : 2288-2766
A Study on the Impact of Real Exchange Rate Volatility of RMB on China's Foreign Direct Investment to Japan
Abstract
Purpose – From establishing China-Japan diplomatic relations in 1972, the relations between two states has improved a lot, from which makes the government and the people reap much benefit. Owing to this background, the purpose of this study is to analyze the impact of exchange rate volatility of RMB on China's foreign direct investment to Japan. Research design, data and methodology – The quarterly time series data from 2003 to 2016 will be employed to conduct an empirical analysis under the vector error correction model. Meanwhile, a menu of estimated methods such the Johansen co-integration test and the Granger Causality test will also used to explore the impact of exchange rate volatility of RMB on China's foreign direct investment to Japan. Results – The empirical analysis results exhibit that the real exchange rate has a positive effect on China's foreign direct investment to Japan in the long run. Conversely, the real exchange rate volatility of RMB, the trade openness and the real GDP have a negative effect on China's foreign direct investment to Japan in the long run. However, in the short run, the China’s foreign direct investment to Japan, the real exchange rate, the trade openness and the real GDP in period have a negative effect on China’s foreign direct investment to Japan in period. Oppositely, the real exchange rate volatility of RMB in period has a positive effect on China’s foreign direct investment to Japan in period. Conclusions – From the empirical evidences this paper provided, it can be concluded that, in the long run, an increase in the exchange rate volatility of RMB can result in a decrease in the China's foreign direct investment to Japan. However, in the short run, an increase in the exchange rate volatility of RMB can lead to an increase in the China's foreign direct investment to Japan. Therefore, the China’s government should have a best control of the real exchange rate volatility of RMB so as to improve China's foreign direct investment to Japan.
- keywords
- Foreign Direct Investment, Real Exchange Rate Volatility of RMB, Vector Error Correction Model.
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