Research Article The Dynamic Effects of Foreign Direct Investment to Food Processing Industry in Emerging Markets

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1 Advance Journal of Food Scence and Technology 7(8): , 205 DOI:0.9026/ajfs ISSN: ; e-issn: Maxwell Scenfc Publcaon Corp. Submed: Sepember 8, 204 Acceped: Ocober 2, 204 Publshed: March 5, 205 Research Arcle The Dynamc Effecs of Foregn Drec Invesmen o Food Processng Indusry n Emergng Mares Hu Song and 2 Nng Zhang School of Managemen Engneerng, Suzhou Unversy, Suzhou Cy, Anhu Provnce, , Chna 2 School of Busness, Renmn Unversy of Chna, Bejng 00872, Chna Absrac: In hs sudy, we use he real exchange rae volaly o refer o he nsably of fnancal mares; wh he food processng companes oupu value flucuaon refers o he nsably of macroeconomc. We consruc a panel daa model whch ncludng 80 companes for quanave analyss, he model analyss he nfluence of oupu value growh n food processng ndusry ha open FDI caused. We also have esmae and es o explan he real conac beween he FDI openng and economc nsably. The resul shows ha: Open FDI has sgnfcan nfluence o flucuaon of oupu value n food processng ndusry, he coeffcen s However, FDI does no have a sable effec on ndusral oupu value. Insead, he flucuaons of FDI wll deepen flucuaon of he counry, cause ndusral oupu value nsably and may cause economc crss. Keywords: Economc sably, food processng ndusry, ndusral oupu value, open FDI sraegy, panel daa INTRODUCTION Some developng counres ae he pracce of he openng capal accoun parly, hey hn n hs way hey can ge he benefs of open capal accoun and avod he negave consequences (Zhao, 2006). As Chnese food processng ndusry has huge exernal demand boh n echnology and raw maerals, so ha FDI has sgnfcan nfluence o Chnese food processng ndusry. FDI open and non-fdi sll eep conrol sae s one of he mos common forms n he possble combnaons of he openng Sraegy of he capal accoun. Developng counres usually have a good aude o FDI (Blanchard and Quah, 989); he reason s ha hey generally hn ha FDI wll no appear sudden reversal. So can cause macroeconomc and ndusral oupu value nsably (Zhu, 204). However, open capal accoun s nherenly unsable, hough may be possble o promoe macroeconomc growh, bu can also lead o volaly of economc growh. Therefore, FDI can' play a "sablzer" role o macroeconomc. AgnÈs e al. (200) research he choce of an exchange-rae regme by negrang he deermnans of mulnaonal frms' locaons. The resuls show ha exchange-rae volaly s dermenal o Foregn Drec Invesmen (FDI) and ha s mpac compares wh ha of msalgnmens. Kyoa and Uraa (2004) examnes he mpac of he changes n he real exchange rae and s volaly on FDI and fnd ou ha he deprecaon of he currency of he hos counry araced FDI, whle he hgh volaly of he exchange rae dscouraged FDI. Bong and Byung (20) examned he role of boh he volaly and levels of exchange raes n he deermnaon of mulnaonal enerprses (MNEs), he resul shows ha he effec of exchange rae volaly on FDI s perssen, whereas ha of msalgnmen of level s only emporary, suggesng ha MNEs regard volaly as a more generc deermnan of foregn nvesmen han msalgnmen of he exchange rae level. L e al. (203) and Wang (2006) presens and ess wo proposons on he role of FDI n economc growh from a newly ndusralzng economy's perspecve. Frs, FDI s a mover of producon effcency because helps reduce he gap beween he acual level of producon and a seady sae producon froner. Second, FDI beng embedded wh advanced echnologes and nowledge s a shfer of he hos counry's producon froner. Also, here are some researches manly abou how exchange rae polcy wll effec on FDI, especally n some emergng counres as Chna. Yu (2006) poned ou ha Chna's exchange rae polcy played a crcal role n s FDI boom. Kaheryn (2007) demonsrae ha a mulnaonal frm's response o exchange rae volaly wll dffer dependng on wheher he volaly arses from shocs n he frm's nave or hos counry. Olga e al. (20) analyzes he relaon beween nomnal exchange rae volaly and several macroeconomc varables, namely real oupu growh Correspondng Auhor: Hu Song, School of Managemen Engneerng, Suzhou Unversy, Suzhou Cy, Anhu Provnce, , Chna Ths wor s lcensed under a Creave Commons Arbuon 4.0 Inernaonal Lcense (URL: hp://creavecommons.org/lcenses/by/4.0/). 602

2 and poned ou ha followng he global fnancal crss, hard peg counres may have experenced a more severe adjusmen process han floaers. Chyau and Lnd (2003) poned ou ha he open door polcy of Chna s economc reform snce he 980s has araced heavy Foregn Drec Invesmen (FDI) flows no Chna and use emprcal analyss o fnd ou he agglomeraon effecs generaed by a Core-Perphery (CP) relaon. Ths sudy exends and develops he dynamc open economc model based on he Aghon e al. (998) o analyss he macroeconomc and fnancal nsably problems whch he open capal accouns FDI brngs. In hs sudy, we use he real exchange rae volaly o refer o he nsably of fnancal mares; wh he food processng ndusry oupu value flucuaon refers o he nsably of macroeconomc. We consruc a panel daa model whch ncludng 30 food processng ndusry for quanave analyss, he model analyss he nfluence of food processng ndusry oupu value growh ha open FDI caused. We also have esmae and es o explan he real conac beween he FDI openng and economc nsably. MATERIALS AND METHODS The basc economc model: In dynamc and open model esablshed by Agllon and Zhou (200, 2004), he basc assumpon s one counry only one rade produc; producon facors are capal and a domesc specfc endowmen elemen. Defne P s he prce of he specfc elemen of he endowmen; P s he relave prce of non-rade produc and rade produc. Based on he macro economc heory, P s he real exchange rae. The larges supply consrans for domesc endowmen elemens s Z, one counry savngs s (-a) of he fnal wealh, he oal amoun of economc ndvduals n dfferen ypes s. In Leonef economes, formula of GDP Y s: y = Mn( K a, z) () In hs formula: /a>r Model desgn: Ths research manly adops he measuremen of he cross-seconal daa model, for cross-seconal daa model, he mporan hng s her esmae resuls could pass he es of heeroscedascy, es hs sudy used ncludng. HCSE es: Ths es gves heeroscedascy conssen sandard errors and he resul of -sascs (Kyoa and Uraa, 2004; Png, 998). HACSE es: Ths es gves relaed sandard devaon and -sasc, he resul can be used o analyze heeroscedascy of Cross-seconal daa and selfcorrelaon of model resdual (Rober and Julo, 990). JHCSE es: The correspondng sandard devaon of hs es called Jacnfe revsed sandard devaon (MacKnnon and Whe, 985). Ths Sascs es s based on HCSE es. Esablsh he cross-secon daa model abou FDI open nfluence he macroeconomc; he panel dae ncludes 30 Chnese bopharmaceucal companes as samples: REER VOL = β0 + βfdi + β2χ + ε (3) BoIOV VOL = β0 + βfdi + β2χ + ε REER s real effecve exchange rae; REER-VOL s he flucuaon n he sample ( ) REER of counry, FIOV-VOL Is he flucuaon of food processng companes ndusral oupu value growh afer elmnang me rend of sample perod. FDI s drec nvesmen amoun of GDP of counry ; specfc daa s he average from 2000 o 200. X Includes oher explanaory varables as: IMEXGDP = SUM of Expor and mpor dvded by GDP GSGDP = Governmen consumpon dvded by GDP GDPcap = GDP formed by un capal M2GDP = Broad money supply dvded by GDP CPI = Consumer prce ndex -dff = Balance of neres raes (one-year perod) r K z = Inernaonal neres raes = The curren capal = Domesc endowmen elemens Because here has cred consrans n developng counres, he counry whch nal wealh accumulaon s W B mos can lendng µw B, cred mulpler µ>0. Defne L as borrowng amoun, so one counry can nves for I = W B + L. If here has cred consrans I = ( + µ) W B, K = I-pz, he maxmzaon of Y demands z = K/α, we can ge: I pz = az (2) 603 The orgnal daa are from nernaonal fnancal sascs IFS daabase of he Inernaonal Moneary Fund (IMF). In addon, he nerpreaon of he model also nclude vrual varable DEX refer o exchange rae sysem: 0, use he floang exchange rae sysem DEX = (4), use he fxed exchange rae sysem Daa collecon and analyss: In order o analyze how he money supply effec on he food prce, we use STATA 2.0 sofware and mae a sascal analyss of

3 FDI, GDP, food processng companes ndusral oupu value and he real effecve exchange rae from he year of 2000 o 203. All daa was colleced from Chna sascal yearboo 203, Chnese prce nformaon newor and Caxn daabase. In order o elmnae he effec of heeroscedascy, we performed logarhmc processng of daa and named hem as LnM2, LnGDP and LnFP. RESULTS AND DISCUSSION ADF un roo es: The un roo es was frs pu forward by Davd Dcey and Wayne Fuller, so s also called DF es. DF es s a basc mehod n saonary es, f we have a model as: Y = ρ + µ (5) Y DF es s he sgnfcance es o he coeffcen. If ρ<, when T, ρ T 0, ha means he mpulse wll be reduced when he me s ncreased. However, f ρ, he mpulse wll no be reduced wh he me, so ha hs me-seres daa s no sable. The basc DF es model can be wren as: ( + δ ) Y = β + β 2 + Y + µ (6) If we add he lagged varable of Υ n formula 0, hen wll be called he augmened Dcey-Fuller es, so ha ADF es model can be wren as: Y = β + β + δy + α Y + ε 2 m = (7) Daa sable s he premse of esablshng VAR model, an Augmened Dcey-Fuller es (ADF) s a es for a un roo n a me seres sample. We use ADF un roo es o nspec all he daa, he resul as s shown n Table. Through he es resuls we can ge ha all daa are saonary a 5% crcal value. Regresson analyss: Accordng o daa sample, we analyze wheher he open FDI nfluence he flucuaon of real exchange rae, he resul such as Table 2. From Table 2, we fnd ha open FDI of capal accoun does no produce sgnfcan nfluence o real effecve exchange rae, hs resul s conssen wh he model. In addon, DEX n 0% sgnfcan level wll nfluence exchange rae flucuaons. In general, effecve exchange rae flucuae less n he fxed exchange rae sysem. Accordng o he daa, we analyze wheher FDI nfluence flucuaon of food processng companes growh, he resul shows n Table 3. Based on he resul of coeffcen and resdue es, model can hrough he es of heeroscedascy n 95% confdence level. Open FDI has sgnfcan nfluence o flucuaon of food Table : Augmened Dcey-Fuller es (ADF) Varable Tes sasc 5% crcal value 0% crcal value Resul FDI Sable IMEXGDP Sable GDPCap Sable CPI Sable DEX Sable GSGDP Sable Table 2: Effec of FDI on real exchange rae Coeffcen S.E. HACES (Sd.) HCES JHCES FDI IMEXGDP GDPCap CPI DEX Coeffcen -sasc HACES (-sasc) HCES JHCES FDI IMEXGDP GDPCap CPI DEX Dependen varable: REER-VOL; S.E. of regresson: 4.087; Sum squared resd.: 50.2; Durbn-Wason sa: 2.34; Included observaon: 30; Numbers of parameer: 5; S.E.: Sandard devaon Table 3: Effec of FDI on food processng ndusry growh Coeffcen S.E. HACES (Sd.) HCES JHCES FDI IMEXGDP GSGDP Consan Coeffcen -sasc HACES (-sasc) HCES JHCES FDI IMEXGDP GSGDP Consan S.E.: Sandard devaon; Dependen varable: FIOV-VOL; Overall model es: F (3, 53) = 4.7 [0.005]**; Included observaon: 30; Numbers of parameer: 4 604

4 Table 4: Granger causaly es Equaon Excluded ch 2 df Prob.>ch 2 LnFPI LnFDI LnFDI LnFPI LnFPI LnREER LnREER LnFPI processng companes growh, coeffcen s However, FDI does no have a sable effec on food processng ndusry. Insead, he flucuaons of FDI wll deepen flucuaon of he counry, cause food processng ndusry nsably and cause economc crss. Granger causaly es: Granger es s pu forward by Granger and Sms, The Granger causaly es s a sascal hypohess es for deermnng wheher one me seres s useful n forecasng anoher, A me seres X s sad o Granger-cause Y f can be shown, usually hrough a seres of -ess and F-ess on lagged values of X (and wh lagged values of Y also ncluded), ha hose X values provde sascally sgnfcan nformaon abou fuure values of Y, we assume a VAR model as: = a y + x = = y β + u (8) So he null hypohess wll be: H 0 : = 2 = β β = = β 0 (9) processng ndusry wll also be nfluenced by he real effecve exchange rae of RMB. CONCLUSION In hs sudy, he resul shows ha: FDI has he mporan nfluence o he food processng ndusry growh; a he same me, open FDI may lead nsable consequences o food processng ndusry. In emprcal secon, we use model show ha FDI wll no cause real exchange rae flucuaons n he long-erm, mxed ems (WB+FDI) wll eep sable, bu WB may flucuae wh he volaly of he FDI, so food processng ndusry growh wll be unsable. In addon, governmen nervenon canno elmnae he macro economc nsably phenomena. Because FDI decded by exogenous facors, domesc polcy maers canno calculae he rgh FDI value, so he polcy maers n fac neher now, also can' mae all nds of capal flow acheve he rgh level and hus hey can' avod macroeconomc nsably. Pracce proves ha macro-conrol s no easy, successful macroeconomc regulaon and conrol only mae domesc economc parameer flucuaed followng nenon of foregn capal nvesmen. Bu f he polcy maers fal o conrol effecvely, he counry wll face economc bubble and nflaon wh he rapd ncrease of he foregn capal; f foregn sudden fall, bubble wll burs and deflaon appeared. Therefore, open FDI s no a "sablzer". ACKNOWLEDGMENT If all he parameer esmaes of x are no sgnfcan, hen he null hypohess wll no be rejeced. In oher words, f here s any parameer esmae of x sgnfcan, ha means x s he granger reason o y. Ths es can be shown by F sascs: ( SSEr SSEu ) SSE ( T N ) F = (0) u In hs formula, SSEr represens he resdual sum of squares when null hypoheses was passed and SSEu represens he resdual sum of squares when null hypoheses was no passed, represens he lag lengh, N represens he number of varables. In order o examne causal relaonshp beween he LnREER, LnFDI and LnFPI, we performed he Granger causaly es for he model and he resuls are shown n Table 4. Accordng o he es resuls, he real effecve exchange rae of RMB s Granger reason o food processng ndusry growh and foregn drec nvesmen s also he Granger reason o he food processng ndusry growh. In fac, he rsng of exchange rae s also he reason for he declne of manufacurng ndusry, so can prove ha he food 605 The wor of hs sudy s suppored by Naonal Socal Scence Youh Fund Projec Research on Rural Toursm Susanable Developmen Sraegy based on Urban-rural Inegraon (No: 3CJY06). REFERENCES Aghon, P., P. Bachea and A. Banerjee, 998. Fnancal Lberalzaon and Volaly n Emergng Mare Economes. Worng Papers, Sudy Cener Gersemee, Swss Naonal Ban, 8: Agllon, N. and L. Zhou, 200. Tme seres model for foregn drec nvesmen spllover. In. J. Appl. Mah. Sa., 49: Agllon, N. and L. Zhou, Effcency of fnance developmen on mprovng echnologcal nnovaon: Ineracons wh carbon mares. J. Appl. Sc., 24: AgnÈs, B.Q., F. Lonel and L. Amna, 200. Exchangerae sraeges n he compeon for aracng foregn drec nvesmen. J. Jpn. In. Econ., 5: Blanchard, O.J. and D. Quah, 989. The dynamc effecs of aggregae demand and supply dsurbances. Am. Econ. Rev., 4:

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