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he Impact of Real Exchange Rates on Japanese Direct Investment in China's Manufacturing: An Empirical Assessment

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Abstract

This paper analyzes the role of real exchange rate in determining Japanese FDI in China. Using the data of Japanese direct investment in China's nine major manufacturing sectors from 1989 to 2000, the paper conducts regression analysis with both time series and panel data. The empirical results show that there exists a significantly positive correlation between the bilateral real exchange rate and the inflows of Japanese direct investment to China. Specifically, the appreciation of Yen generally stimulated the inflows of Japanese direct investment while the depreciation of Yen leading to a decrease of the investment. To a large extent, the rise and fall of Japanese direct investment in China over the period is attributed to the fluctuations of the bilateral real exchange rate. As the sharp devaluation of Yuan in early 1990s was triggered by merging China's official exchange rate with market rates, the policy shift on the exchange rate regime should be credited for the surge of FDI inflows.

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File URL: http://www.iuj.ac.jp/workingpapers/index.cfm?File=EMS_2002_05.pdf
File Function: First version, 2002
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Bibliographic Info

Paper provided by Research Institute, International University of Japan in its series Working Papers with number EMS_2002_05.

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Length: 20 pages
Date of creation: Nov 2002
Date of revision:
Handle: RePEc:iuj:wpaper:ems_2002_05

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Keywords: FDI; Exchange Rate; Manufacturing;

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  1. Kojima, Kiyoshi, 1982. "Macroeconomic versus International Business Approach to Direct Foreign Investment," Hitotsubashi Journal of Economics, Hitotsubashi University, vol. 23(1), pages 1-19, June.
  2. Blonigen, Bruce A, 1997. "Firm-Specific Assets and the Link between Exchange Rates and Foreign Direct Investment," American Economic Review, American Economic Association, vol. 87(3), pages 447-65, June.
  3. Bayoumi, Tamim & Lipworth, Gabrielle, 1998. "Japanese foreign direct investment and regional trade," Journal of Asian Economics, Elsevier, vol. 9(4), pages 581-607.
  4. Dewenter, Kathryn L, 1995. "Do Exchange Rate Changes Drive Foreign Direct Investment?," The Journal of Business, University of Chicago Press, vol. 68(3), pages 405-33, July.
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