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Renminbi exchange rate and Chinese firms’ outward direct investment: from the perspective of distribution ODI

TIAN Wei1 YU Miaojie2

(1.School of Economics, Peking University)
(2.National School of Development, Peking University)

【Abstract】Outward direct investment (ODI) is usually found to be hampered by home currency depreciation in most countries while export is encouraged. This article shows the opposite findings concerning China that ODI increases in responses to renminbi depreciation. Distribution ODI helps reduce cross-border communication costs and other variable costs that incur in export and lower fixed costs compared with non-distribution (production) ODI. Thus, only the most productive firms opt to engage in production ODI whereas less productive firms, such as many Chinese enterprises, opt to engage in distribution ODI. In this regard, distribution ODI is an auxiliary rather than a substitute to export. The article enriches our understanding of the nexus among ODI, export, and exchange rate movement.

【Keywords】 renminbi exchange rate; distribution ODI; outward direct investment; enterprise productivity;


【Funds】 The National Science Fund for Distinguished Young Scholars (71625007) The National Social Science Fund of China (16AZD003) The Ministry of Education of China (15JJD780001)

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    [1]. [1] Including but not limited to Interim Measures for the Administration of Examination and Approval of the Overseas Investment Projects promulgated by the National Development and Reform Commission in October 2004. [^Back]

    [2]. [1] Data come from Statistical Bulletin of China’s Outward Foreign Direct Investment from 2003 to 2013. [^Back]

    [3]. [1] Exchange rate risk comes partly from host country’s exchange rate risk, and partly from home country’s exchange rate risk. In the former case, the upward fluctuation of host country’s exchange rate will increase the risk of ODI and have adverse effect on investment. In the latter case, home country’s increased exchange rate risk will heighten the risk of exports and then encourage firms to transfer their assets abroad and build factories overseas to replace exports. [^Back]

    [4]. [2] It is anticipated that host country’s exchange rate depreciation would lead to further drop in firms’ expected future investment costs; in this way their investment behavior will be delayed and the ODI will be lowered. [^Back]

    [5]. [1] For detailed explanation, please refer to 2013 Statistical Bulletin of China’s Outward Foreign Direct Investment. [^Back]

    [6]. [1] This includes Mainland and Hong Kong Closer Economic Partnership Arrangement signed by the central government and the Hong Kong SAR government, Mainland and Macao Closer Economic Partnership Arrangement signed by the central government and the Macao SAR government, which aims to facilitate trade and investment. [^Back]

    [7]. [2] Tian and Yu found that when firms’ real effective exchange rate rose by 0.01, the average probability of investment would lift by 0.419%, while the probability of distribution ODI would grow by 0.423%. Tian, W. & Yu, M. The Journal of World Economy(世界经济), (11): 23–46 (2017). [^Back]

    [8]. [1] Chen Wenjie and Heiwai Tang, “The Dragon is Flying West: Micro-level Evidence of Chinese Outward Direct Investment,” ADB Working Paper, 2014. [^Back]

    [9]. [2] Chen Cheng, Wei Tian and Miaojie Yu, “Outward FDI and Domestic Input Distortions: Evidence from Chinese Firms,” The Economic Journal, forthcoming: DOI:10.1093/ej/uez034, 2019. [^Back]

    [10]. [3] Helpman E., M. J. Melitz and S. R. Yeaple, “Export Versus FDI With Heterogeneous Firms,” American Economic Review, 94 (1): 300–316, 2004. [^Back]

    [11]. [1] For detailed discussion, please refer to Oldenski L., “Export Versus FDI and the Communication of Complex Information,” Journal of International Economics, 87: 312–322, 2012. [^Back]

    [12]. [1] Tian and Yu built a theoretical model and discussed the presentation of specific theory related to the above mechanism. Tian Wei and Miaojie Yu, 2019, “Distribution, Outward FDI, and Productivity Heterogeneity: Evidence from Chinese Firms,” Journal of International Financial Markets Institution & Money, forthcoming. [^Back]

    [13]. [2] Bernard Andrew and Jensen J., “Exceptional Exporter Performance: Cause, Effect, Or Both?” Journal of International Economics, 47 (1):1–25, 1997. [^Back]

    [14]. [1] Chen Wenjie and Heiwai Tang, “The Dragon is Flying West: Micro-level Evidence of Chinese Outward Direct Investment,” ADB Working Paper, 2014. [^Back]

This Article


CN: 11-3799/F

Vol , No. 05, Pages 44-56+5

September 2019


Article Outline



  • 1 Channels of exchange rate affecting ODI
  • 2 Renminbi exchange rate and ODI
  • 3 Why is there a large amount of distribution ODI in China?
  • 4 Conclusion
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