Impact of Exchange Volatility on Foreign Direct Investment in China: An Empirical Analysis

Abstract

China has become more significant in international commerce as the global economy and globalization have advanced. China's economy has risen to become the worlds second biggest since the "reform and openness " and "five-yearplan " were implemented. Foreign Direct Investment (FDI) became a key element o f developing market socialism in China throughout the era ofeconomic growth. The goal o f this research is to evaluate the effect o f exchange rate volatility on FDI flows. In global business, FDI plays a unique and increasing role. For the selection o f the model's lag duration, the Akaike Information Criterion (AIC) is employed. The Auto Regressive Distributed Lag (ARDL) model is used to investigate the effect o f the Chinese exchange rate on FDI. As a whole, thefindings o f the estimations are compatible with theoretical predictions. The findings reveal that the exchange rate has a statistically significant negative influence on foreign direct investment. In other words exchange rate volatility has anunfavourable effect on foreign direct investment. In short the currency volatility o f the host country leads to decrease the FDI flows into that country.