The effect of foreign direct investment on agricultural products trade: An empirical study
Date
2014
Authors
Simposya, Mulolwa
Journal Title
Journal ISSN
Volume Title
Publisher
University of Zambia
Abstract
This study determines the effects of FDI from SA on agricultural products traded between Zambia and SA. FDI is defined as the sum of equity capital, reinvestment of earnings, on both long-term capital, and short-term capital. In this study, we look at trade in terms of net export traded and not total trade. To understand the effects of FDI, we determine the relationship that exists between FDI and trade in the agriculture sector. Panel data of 20years was collected from various government institutions to be used in the analysis. To determine the relationship, we use FDI as well as exchange rate, RD, and GDP to be our independent variables and net exports our dependant. A 2SLS regression model was constructed and used because FDI is an endogenous variable and its level is determined by domestic economic variables such as the level of GDP in the host country. The results from the analysis showed a negative relationship between FDI and trade such that an increase in FDI leads to a decrease in net exports. This negative relationship is called a substitute relationship, and is attributed to the low RD in the agriculture sector which is just sufficient to attract some FDI but not enough to boost the sector. As such, the sector produces products that are of lesser quality to those in SA and hence cannot be exported due to failure to compete on the SA market. The effect of this kind of relationship is a loss on producers' income which translates to increased unemployment levels in the economy. In view of these findings, an improvement in the quality of RD budgeted for the agriculture sector may improve the quality of products produced by the sector, which may increase the level of FDI received into the sector. This may ultimately change the relationship between FDI and trade from a substitute relationship to a complementary relationship as more products will be exported due to improved quality. This is important for the economy as net trade will change from negative to positive net trade.
Description
Student Project Report
Keywords
Investment, Foreign-Zambia , Zambia-Economic conditions , Capital Movements