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PhD Research Proposal: Analysis of China's Trade and FDI in eight African Economic Development

Doctoral Research Proposal:

Director: Professor Lan Yisheng

The Shanghai University of Finance and Economy

 

Trade analysis and investment China FDI in eight African Economic Development

 

I-Introduction

 

China's new interest in trade and investment with African countries, home to 300 million people poorest in the world and the world's most formidable development challenge presents a significant opportunity for growth and integration of sub-Saharan Africa in the economy world.

These emerging economic "giants" of Asia is at the center of the explosion of African-Asian trade and investment, a striking hallmark of the new trend in South-South trade relations. Both nations have centuries-long history of international trade, which dates back at least the days of the Silk Road, where merchants of layers of goods across continents, reaching the most challenging and relatively untouched markets of the day.

Chinese trade and investment with Africa actually dates back several decades, with most of the first investments made in infrastructure sectors such as railways, at the beginning of post-colonial Africa.

rapidly growing economic ties with Africa are attracting considerable attention from China. The relationship came into the spotlight during the summit of the Forum on China-Africa Cooperation

Cooperation (FOCAC) held in Beijing in November 2006 and the annual meetings of the African

Inter-American Development Bank (ADB) in Shanghai in May 2007. While the expansion of trade and investment between Africa and China has been generally positive, concerns have been expressed about the growing presence of China could affect African development (These concerns range from debt sustainability and governance reform environmental impact, watch the news in Les Echos, 24 October 2006 (in French), Financial Times, November 28, 2006, and The Edge News, May17, 2007).

Today the scale and pace of China's trade and investment flows with Africa, however, are entirely without precedent. The volume of African exports to Asia is accelerating. With growth of 15% between 1990 and 1995 has increased by 20% over the past five years (2000-2005) (Harry G. Broadman, "Africa's Silk Road" China and India's New Economic Frontier.)

Trade between Africa and China began to accelerate in about 2000. Between 2001 and 2006,

Exports Africa to China increased at an annual rate of over 40 per cent from U.S. $ 4,800,000,000 to reach U.S. $ 28,800,000,000 in 2006 (Figure 1 and Table 1). During the same period,

African imports from China quadrupled to U.S. $ 26,700,000,000. In 2006 sub-Saharan Africa

(SSA) accounted for the bulk of trade between Africa and China, the region's exports to China amounted to U.S. $ 25,000,000,000, about 85 percent of all African exports to China that year.

According to statistics compiled by China, 2004-2006 Africa had a trade surplus small, about U.S. $ 2 billion each year (see Working Paper (2007) "What lies behind China's growing role in Africa?" Wang Jian-Ye).

The acceleration of South-South trade and investment is one of the most significant recent developments global economy.

Trade between China and Africa is also expanding rapidly. Priced at only about $ 3 billion in 1995, total trade grew to an estimated 40 billion U.S. dollars in 2005. Prime minister Wen Jiabao of China said during the summit between China and Africa Forum Cooperation that China hopes to increase that amount to $ 100 million in 2010.

Table 1: Imports and Exports of China, from Africa (million U.S. $)

  

Figure 1: Africa-China Trade Statistics 1995-2005

Source: Data from World Trade Atlas, Analysis Tralac (Center for Chinese Studies, University of Stellenbosch (South Africa))

China began providing aid to Africa by 1956. In May 2006, contributed a total of 44.4 million yuan (U.S. $ 5,700,000,000) for projects of more than 800 aid, according to a researcher at the Chinese Academy of Social Sciences (I, 2006). Flows were officially notified last time in 2002, when the Chinese government reported that forever (U.S. $ 1,800,000,000) to support Africa.

China also has been providing Debt Relief to African countries in their own terms. In the first Forum of China-Africa Cooperation in October 2000 in Beijing, the Chinese government agreed to cancel two years overdue obligations in 156 loans owed by African countries, which equaled 10.5 million yuan (U.S. $ 1,300,000,000). The promise was fulfilled ahead of schedule (He, 2007).

Chinese capital flows in Africa form of foreign direct investment (FDI) are growing. While in the past many of these investments are limited to the commodity sector, the current wave of many companies countries and sectors involved than ever before. This foreign investment also has many implications and development patterns of bilateral trade and integration. Many of African exports are channeled through multinational corporations, helping to integrate African countries, both among themselves and with the global economy.

 

Table 2: capital flows from China to Africa

 

Figure 2: China's FDI flows to Africa

Source: Jonathan Holslag "China's FDI in sub-Saharan Africa Brussels Institute of Contemporary China Studies.

So far, the nature of these flows has been quite similar to those between Africa and its traditional trading partners mentioned in the OECD study (2005-2006) (OECD study, the rise of China and India: What's in it for Africa?). In this context, there is great interest by policymakers and businesses, both in Africa and Asia, as well as international development partners to understand better the evolution and development, commercial, and political implications of African-Asian trade relations and investment. This interest is reflected, perhaps especially in South-South discussions held during the Afro-Asian summit in Jakarta in April 2005 celebrating the fiftieth anniversary of the Declaration Bandung, where the dramatic increase in international trade between the two regions figured prominently, and in July 2005 (G-8 summit in Gleneagles G8 Summit took place at the Gleneagles Hotel, Perthshire, Scotland on 6-8 July 2005), where leaders of North underscored the increasing importance of South-South trade and investment flows, especially as it relates to the prospects for growth and poverty reduction in Africa.

The importance of South-South trade has been recognized for some time, however, there has been no in-depth study conducted specifically in trade relations between Africa and China so far.

The objective of this study is to build a basic understanding of the potential of Africa-China trade relations and investment.

A review literature was performed for the first time follow the evolution of theories of economic growth since Adam Smith so far on the impact of the commercial aspects and technology, international trade resulting in the accumulation of physical and quality inputs.

Then, using historical data of selected African countries, multiple regression analysis was performed to determine the relationship between specific determinants and real per capita economic (GDP) over a period of twelve years. Using the results, conclusions will be drawn on the relationship between the determining factors in their effects on the long-term economic growth. Several other trials were carried out to determine the most nuanced and test the reliability growth model endogenous theory.

Data were collected according to the International Standard Classification (ISIC).

 

II-Statement of the Problem and motivation

II-1.Overview

China is not a new player in Africa. But economic and political presence on the continent and its impact in Africa have grown exponentially in recent years. This has huge implications for Africa but also has important implications for Western policy towards the continent.

In thinking through how the Africans and the international community should address the new challenges posed by China's role on the continent, a key starting point is to better understand the various impacts of China in Africa.

As other parts of the world, Africa is being affected indirectly by the phenomenal growth of the Chinese economy.

It is clear that Africa must not loss her drive and determination to meet their development challenges and achieve the renewed vision of a vibrant, prosperous region. In this sense, the establishment of China-Africa Forum was held at a critical time, offering unconditional support to the AU (African Union) and its various instruments including NEPAD, which is integrating sub-regional and national development strategies.

Put another way, the big question is how to implement poor African countries out of a cycle poverty throughout their business relationship with China.

So what is so important about economic growth? Economic growth leads to greater economic prosperity. The increase in general prosperity improves the lives of those who can participate in the system. People are better able to meet their needs and fulfill their desires, without the use of force. This growing prosperity is empirically linked to higher overall level of human happiness and betterment.

Recent developments in growth theory have considered various sources of long-term growth, each of them involves an externality associated with some activity. Examples include human capital accumulation through learning either in practice or education and technological progress through R & D activities.

In addition, many policymakers and academics argue that foreign direct investment (FDI) can have significant positive effects on the development effort a host country, but that the empirical evidence for FDI generates positive effects for recipient countries is ambiguous, both micro and macro. In a recent survey literature, Hanson (2001) argues that the evidence that FDI generates positive effects for recipient countries is weak. But Balasubramanayam et al. (1996) found that developing countries in implementing trade policies aimed outward FDI flows were associated with faster growth in countries developing that followed inward-oriented trade policies (Laura Alfaro. "Foreign Direct Investment and Growth: Does the sector.")

A question immediately arises concerning our study and we want to answer is:

– What role does trade between China and Africa play relationship in the African economic growth?

"What is the contribution of outward FDI from China to host countries African economic growth?

 

2.The objective-II and Objectives

The need for baseline studies to assess the impact of changing the future of China in Africa and to the extent that trade links are an accurate reflection of the wider impact China in Africa.

The main objective of this research is to understand China's role in the economic growth process African countries through its business relationship with these countries.

To achieve this, key objectives are:

African-View Position in international trade.

"Present statistics (data) on the Chinese net exports to Africa.

-Measure and analyze the volume and composition of trade between China and Africa.

"Measuring the impact of trade relations with African countries trade balance.

-To study the contribution of FDI in China as countries with economies in Africa.

-To determine whether FDI and ICT has different effects on African countries economic growth.

II-3.Expected discovery

Since imports and FDI bring greater competition and variety to domestic markets for the benefit of consumers and expand export markets for domestic production, benefiting businesses. Trade exposed domestic firms to best practices of foreign companies and the demands of discerning customers, encouraging greater efficiency. Trade gives firms access to improved capital inputs such as machine tools, boosting productivity and provide new growth opportunities for developing countries.

It expected to observe greater indirect effect through China's trade relations with Africa in Africa's economic growth. We also hope that ordinary Chinese FDI to Africa tend to have a positive effect on African countries in economic growth.

 

III-The literature and issues of context:

China participated for the first time in Africa during the Cold War, when he befriended and worked in some parts of the world dominated by the West and the Soviet Union. Their investment is paying off now oil and imports of raw materials and markets for manufactured goods.

Since the 1960s, China has been fairly consistent in providing assistance to African countries in agriculture, heavy industries, and infrastructure development. In recent years, Sino-African trade has grown particularly fast. As Paul Mooney reports, many leaders Africa, with China as a trusted friend who has suffered similar imperialist aggression by the Western powers, investment and welcome the teams development of Beijing. On the other hand, the Chinese have used their economic power to pressure on African political place. Skepticism, however, does not exist. Some African intellectuals think China is simply to pass the torch European colonial raw material purchasing the continent and the sale of new aggregate value, creating an unfavorable balance of trade for Africa.

But "The Chinese are much more likely to do business in a way that Europeans today and Americans do not accept bribes and bonuses under the table. The researcher believes it will be much easier for some African countries to work with companies Chinese rather than American and European companies, which are becoming more and more restricted by the publication of what you pay for the initiative and invite others to improve transparency "(Www. Catholicrelief.org).

While acknowledging such drawbacks, other Africans have welcomed the opportunity to diversify continent's external partnerships. We also appreciate the absence of explicit policy or economic policy conditions on the part of China, in contrast to the approach heavy-handed at times of certain Western powers.

As if to illustrate the landscape Gaither Macharia, the managing editor of the Nation every day Kenya, said: "While China is so willing to invest in Africa, we must not lose the reward," "But we must commit to the eyes open. "Because: The charity and international aid will not solve the problems of Africa, but economic reform and growth can. (Allafrica.com)

China's burgeoning relationship with Africa is alarming, not only because it has allowed China's energy and arms deals, but also because it competing with trade between the U.S. and Africa. China-Africa Cooperation Forum (CAFC) was founded in 2000 to promote increased trade and investment between China and Africa countries, both public and private sector.

In recent years, Beijing has identified the African continent as an area of significant economic and strategic interest. United States and its allies and friends find that their vision of a prosperous Africa governed by democracies that respect the rights human rights and the rule of law and embrace the free market is threatened by the growing influence of China in Africa.

The love affair with China, however, may be bitter and sweet. For countries that do not feel the oil or mineral deposits, higher commodity prices make life more difficult. Even there are risks for producers. A recent World Bank report argues that new African trade with China and India will open the way for it to become a processor products commodities and a competitive supplier of cheap goods and services to Chinese and Indian consumers. But another report, prepared by the OECD (2005-2006), a club of industrialized countries argues that China's appetite for commodities can stifle the efforts of producers to diversify their economies. Oil rigs and mines create few jobs, but points, and tends to suck resources from other sectors. And if Africa is to escape from their vulnerability to the capricious movements of world commodity prices Essentially, you start to export more manufactured products. In this the World Bank added its own warning: China and India must stop its escalation of tariffs on Africa's main exports.

China is also carrying irresistible "some say unfair" competition to Africa. Throughout Africa Chinese traders can see now selling cheap goods from the country, not only of plastic electronics, but goods and clothing.

The Chinese government has also actively promoted its own brand of economic development and reform model to African countries, encouraging government counterparts in several countries to visit China and learn from their experience. China's efforts to encourage African governments to fashion their economic systems after their own is an important indication of soft power that China hopes to project the ultimate in Africa.

gambit China's soft power can also be seen in their large investments in systems African education, both by sending teachers to Africa and providing scholarships to African students from across the continent to study at Chinese universities. From the beginning of educational exchanges in the mid-1950s and 2000, 5582 African students were enrolled in Chinese universities. These students typically spend two years learning Chinese, then study technical subjects, particularly engineering disciplines. Currently, about half the students are African conducting advanced degrees. This support for education improves China's image in many countries, builds grassroots support in local communities and a better understanding of China among the educated elite.

IV-Methodology and Hypothesis

 

Performance conditions of each country tends to be a good indicator of economic performance and conduct from countries tend to have higher rates of GDP growth. The majority of developing countries joined the World Trade Organization (WTO) and have taken initiatives to open up their economies.

But the net effect of trade openness on economic growth has been and remains a subject of controversy.

Two issues are at the heart of the debate: the development theoretical and empirical research.

On the theoretical side, since the time of Adam Smith through Ricardo and Solow, trade has shown that for a country to achieve a higher level of income, allowing a better allocation of resources.

The additional imports and encourage the competitive range national markets for the benefit of consumers and expand markets for exports of domestic production, benefiting businesses.

But the benefits international trade for economic growth and development are difficult to underestimate.

In endogenous growth models, trade can have an impact on growth, allowing access to innovative products from other countries. Since most LDCs do little or no innovation, is mainly through trade with developed countries that benefit from higher levels of technological development. Also FDI seen as an important stimulus to economic growth

developing countries.

We predict the imports of manufactures from China to African countries show more than 12-years period (1995-2007). To predict such imports we will use a variety of measures of trade, foreign investment China Direct, GDP and GDP per capita of the importer and exporter.

With computer programs such as SPSS, Eviews, Matlab and SAS will study the analysis quantitative secondary education. The exhibition will consist of some African countries. This particular sample was chosen is based on the availability of data for each of variables in the project need for the countries concerned

In order to analyze the Chinese role in Africa's economic growth in the first analysis applies numerical measures to assess the development of trade performance index of each country and the index of total after adopting the empirical studies on intra-industry trade (IIT), the level of IIT in an industry is generally measured by the index of Grubel and Lloyd (1975). We follow the same way in this study. The index of IIT in an industry is generally defined as:

In the equation, referred to the unit value exports, while   referred to the unit value of imports at time t.

IV-1. Time Series Data Analysis

 

So there are several preliminary steps the use of time series data in econometric analysis.

In many cases, particularly in macroeconomic data, it is reasonable to conclude, on the basis of theoretical considerations and looking at a plot of data from the time a variable is or is not growth. Such growth could take place at a time trend deterministic, or it could be because the annual increase in the variable is equal to a constant.

Initially it is essential to determine how data can be used for any subsequent calculation in many cases using macroeconomic data on their levels leads to serious econometric problems. Time series data usually contain a trend, which must be removed prior to undertaking any assessment. The traditional procedure to remove the trend between the tendency of the cyclical component of the series. This procedure is appropriate for trend stationary (TS) time series. However, many macroeconomic time series is difference stationary (DS). ED type time series are not stationary and contain unit roots. DS type sequences should be differentiated before any meaningful econometric estimation. If the minimum regular squares (OLS) estimation techniques are applied to such sequences undifferenced DS, resulting error terms are serially correlated. This makes reliable follow-up testing hypotheses.

Technical 2.Econometric-IV:

To test the hypothesis, appropriate econometric models are needed.

Since the objective of this research is to test the Granger causality of several variables, the test should be based in the multivariate analysis of time series (may be VAR? VAR? or VECM? vector error correction model?).

The examination procedures conducted in this work is that, first, unit root test in levels and first differences are carried out to determine whether each variable is stationary or not stationary. Second, tests of Engle-Granger test residual based on the existence of cointegration among the variables for each country. Third, if a relationship cointegration does not exist, first difference VAR analysis applies, however, if the variables are cointegrated, the analysis continues in a cointegration framework. Finally, the Granger causality test is carried out based on the analysis framework chosen.

 

Figure 3: describes the heuristic methodology.

Therefore, the general methodology is as follows:

– Test whether the system is stable, using unit root tests

– If the unit root tests in the series of variables, apply cointegration tests

– If cointegration is found, then obtain the VECM representation of the system and apply tests of causality in this representation

– If there is cointegration only have to differentiate to get the Vard variables (vector autoregressive representation of the differences) representation and apply tests of causality representation Vard

– If the system is stable, the use of mere representation, initial VAR causality tests.

Some methodological problems have yet to be resolved. This refers to the way they should collect and represent data, which should be the order autoregressive system, which the model variables Stochastic be included.

3.Aggregate IV-Production Function

Observation of growth theory possible to promote the functions of both FDI and trade, our analysis of the data is modeled in an aggregate production function (APF) frame. The standard model The APF has been used extensively in econometric studies to estimate the impacts of FDI inflows and trade on growth in many developing countries. The APF is assumed that, along with "conventional inputs" of labor and capital used in the neoclassical production function, "unconventional inputs" as FDI and trade can be included in the model to capture its contribution to economic growth. The model of the APF has been used by Feder (1983), Fosu (1990); Ukpolo (1994); Kohpaiboon (2004), Mansouri (2005), and Herzer et al (2006) among others.

Following Herzer et al (2006), the general model of the APF to be estimated is derived:

1

Where   denotes the total production economy (real GDP per capita) at time t, and   are the total factor productivity (TFP), social capital, and work flow, respectively. According to Lipsey (2001), the impact of FDI on economic growth, possibly operating through TFP (A). Moreover, since the hypothesis of Bhagwati (Bhagwati, 1985), any increase in FDI on TFP probably depend on the volume of trade in a particular host country. Given we want to investigate the impacts of FDI inflows (FDI) and trade variables on growth through changes in TFP, it is assumed therefore that TFP is a function of FDI, M, X and other exogenous factors. Therefore:

2

Combining equations (2) with (1) obtain:

3

where and are constant coefficients of elasticity of output with respect to and from equation (3), an estimable function explicitly specified, after taking the natural logarithms of both sides, as follows:

4

  where all coefficients and variables are as defined, c is a constant parameter, and is the white noise error term. The sign of the constant elasticity coefficient and? They are all expected to be positive. Equation (4) only represents the ratio of long-run equilibrium and can form a cointegration together provide all variables are integrated of order one, ie I (1).

 

From Equation (4) Y is defined as real GDP per capita is the value of FDI flows of foreign direct investment, X is the value of the country's current exports to China and M is the value of the country's current import to China, L is measured as the volume of the total workforce, as a series on capital stock not directly available for African countries, K is proxy for the real value of gross fixed capital formation (GFCF). This indicator Social capital has been used in many previous studies. See Balasubramanyam et al., (1996), Kohpaiboon (2004), Mansouri (2005) among others.

IV-4.ARDL Model Specification

In this section, the Autoregressive Distributed Lag (ARDL) approach limits testing proposed by Pesaran, et al. (2001) is used to examine the dynamic relationship between FDI, import and export of the eight African countries. As said Narayan and Narayan (2005), the test limits based on the estimation of an error correction model without restrictions (UECM) has several advantages on conventional cointegration techniques. First, the rule or the Wald F-statistics used in the test has a distribution limits non-standard under the null hypothesis of no cointegration relationship between the variables examined, regardless of the underlying variables are I (0), I (1) or fractionally integrated. Therefore, testing the limits to avoid the uncertainty associated with pre-test to the roots of unity, it does not require the information to the order of integration of variables. Otherwise, the ARDL approach can be applied whether the regressors are I (1) and / or I (0). This means that the ARDL approach avoids the problems associated the pre-standard cointegration test, which requires that the variables which was classified in I (1) or I (0) (Pesaran et al, 2001). If we are not sure about the unit root properties of the data, then apply the ARDL procedure is the most appropriate model for empirical work. Secondly, it is more robust approach is most significant for determining the cointegration relationship when applied to a small sample study in comparison with Engle and Granger (1987) or Johansen cointegation such methods require large data sample size for validity. Third, the short and long term parameters model can be estimated simultaneously. Fourth, once the orders of the lags in the ARDL model have been carefully selected, we can calculate the cointegration using a simple least square ordinary (OLS) method. The UECM used in this study has the following form as expressed in the following equations.

At the base, the conditional VECM of interest can be specified as:

5

Where? multipliers are long term   is the drift, and   are white noise errors.

 

IV-5.Bounds Test Procedure

The first step in the approach to testing the limits is estimated ARDL equation (5) Ordinary least squares (OLS) to verify the existence of a long-term relationship between variables by performing an F test for significance joint of the coefficients of the lagged levels of variables, ie? against the alternative

. Denote proof that normalize Y by

. Two asymptotic critical value bounds provide a test for

cointegration when the independent variables are I (d) (where): a value lower assuming the regressors are I (0), and assuming a higher value purely I (1) regressors. If the F statistic is higher than the critical value, the hypothesis void of any long-term relationship can be rejected regardless of the orders of integration of the series. On the contrary, if the test statistic falls below the lower critical value the null hypothesis can not be rejected.

Finally, if the statistic falls between the upper and lower critical values, the result is not conclusive. Approximate critical values for the F test were obtained from Pesaran and Pesaran, 1997, p.478).

In the second step, once you cointegration model established long-term conditional   can be estimated as:

6

Where in all the variables defined above. This involves selecting the model orders in the six variables based on Akaike information criteria (AIC).

In the third and final step, we obtain the short-term dynamic parameters by estimating an error correction model associated with long-term estimates. This is specified as follows:

7

Here? And are the dynamic coefficients of short-term convergence toward equilibrium model, and? The speed of adjustment.

IV-6.Growth model

 

The purpose of the empirical analysis is to determine whether FDI has effects different on the growth of a country. Following Borensztein et al. (1998), Carkovic and Levine (2002) and Alfaro et al. (2003), we see the direct effect of FDI on growth economic growth through cross-sectional regressions with eight sub-Saharan African countries for the period 1995-2006.

At first, as a reference point estimated the total impact of FDI inflows on economic growth based on the following equations:

8

We pursue this analysis and proof of the direct effects of FDI growth was in two different countries in the sample divided in importing countries and exporting countries.

The growth here is the growth of GDP.

Hypothesis:

1 – are positive.

2-Correlation between GDP and ICT is high.

3-The correlation between GDP and FDI is low.

4-There is no correlation between ICT and FDI.

  

Reference

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111: 202-226.

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" Down Barrel: Africa's oil boom and the poor ", Catholicrelief.org.

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Links

– (Xinhua He, Yongfu Cao, "Analysis and Forecasting World Economic Situation (2005-2006))

– (Xinhua He, Yongfu Cao, "Analysis and Forecast of the world economy in 2006-2007 ")

"The main difference between these two types of time series variables is the fact that the TS rate of return to the deterministic trend function variables, while no such trend with the DS type of time series variables. Nelson and Plosser (1982) and McCallum (1993) provide a more detailed explanation of this point.

– A variable time series is weakly stationary if its mean, variance and covariance are finite, and if they are all independent of time. If increases variance in time, then time series becomes explosive. Given this fact, variables such time series should not be used for hypothesis testing. For an explanation more detailed discussion of this point see Stock and Watson (1988), among others.

– Most of the variation in the data is across the country, reflecting slowly changing conditions.

About the Author

Simon DJERI-WAKE
Shanghai University of Finance and Economics
369 Zhong Shan Beiyi Road Shanghai P.R.China
Zip code: 200083
Tel: 0086-21-65617358
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