The threshold effect of exchange rate volatility on FDI determinant nexus-A panel smooth transition regression approach

This paper adopts a panel smooth transition model (PSTR) with lagged exchange rate risk (exchange rate volatility) as the transition variable to estimate the nonlinear process of China's FDI inflows and the threshold effect of exchange rate risk on the FDI inflows. Empirically, we use the data set of China's top ten FDI investment countries during 2000Q1–2011Q4. Empirical results show that China's FDI inflows displays a nonlinear process, depending on exchange rate risk in different regimes. China's FDI inflows are nonlinearly affected by GDP, exchange rate, openness and trade-weighted distance. If government's intervention policy or quantitative easing policy is to lead global currencies depreciation for improving a country's terms of trade, the related stable of RMB exchange rate will continuously attract FDI inflow to China.