Analysis of Co-integration on the Relation between Foreign Direct Investment and Interest Rate Parity

In the context of the capital ontrol Foreign direct investment (FDI) is increasingly becoming the main one way of the hot money inflow's. Although FDI for China's development has brought enormous contributions, at the same time the hiding "dark matter" in FDI impact and threat China's economic and financial security. For the perfect gain the relationship between interest rates to FDI, this paper innovatively introduces this interest rate parity. Through utilizing co-integration and error correction model, the paper analyzes the relationship between FDI and the RMB Base Rate against the U.S. Base Rate. The analysis shows between FDI with the interest rate parity exists long-term and short-term stable relationship. Then through the Granger causality test, we find that interest rate is the reason for FDI growth, and conversely, the conclusion isn't true.