QM formative: Samir Samani Introduction: In this report I will see whether there is a relationship between FDI and world

trade, using data collected from the world bank

[1]

for countries from Europe, Africa, Asia

and America, by finding the FDI, exports and imports and GDP. I shall be using the European counties as the benchmark to compare to validate whether this relationship between total trade and FDI exists. I shall be presenting the data in scatter diagrams, with the use of product-moment correlation coefficients and the mean, which has been collected for the specified 12 countries. A positive correlation is where as one variable increases, the other variable also increases. The formula we have used for each of the countries is
[2]:

[2]

This measurement of correlation is independent of the sample size and therefore best suited for this report.

Also for FDI I have had to convert the FDI inflow as a percentage of GDP to a numerical figure by multiplying by GDP and divided by 100 so total trade can be plotted against FDI to help us see whether there is a relationship present.

[1] www.worldbank.org [2] http://mathworld.wolfram.com/CorrelationCoefficient.html

European Countries data and analysis: Europe Graph 1: UK

Total trade for the UK 1900-2011 in USD

Relationship between the UK'S FDI and total trade(1990-2011)

1400000000000 1200000000000 1000000000000 800000000000 600000000000 400000000000 200000000000 0 0

y = 2.511x + 7E+11 R = 0.3234

100000000000 200000000000 FDI in the UK 1990-2011 In USD

The graph above shows that, there is positive correlation between FDI and total trade. The correlation coefficient is 0.568667422. This is positive does not clearly give a relationship between FDI and total trade. Where total trade has increased during the first ten years FDI has not followed this pattern fully, FDI has increased more after total trade has reached its peak in 2008. I feel therefore from this data we cannot conclusively state a significant relationship is present. Europe Graph 2: France

Total trade for France 1990-2011 in USD

Relationship between France's FDI and total trade

1200000000000 1000000000000 800000000000 600000000000 400000000000 200000000000 0 0 20000000000 40000000000 60000000000 80000000000 FDI in France 1990-2011 in USD y = 7.811x + 5E+11 R = 0.4014

The graph above shows the relationship between FDI and total trade for France, again like the UK there is a positive correlation. For France the correlation coefficient 2

is 0.63357192. This is both positive and higher than the UKs correlation suggesting as total trade increases so does FDI. France does support the claim stated by the international donor community. Europe Graph 3: Germany
Total trade for Germany 1990-2011 in USD

Relationship between Germany's Total y = 1.2534x + 1E+12 trade and FDI

R = 0.0129 2500000000000 2000000000000 1500000000000 1000000000000 500000000000 0 0.00 100000000000.00200000000000.00300000000000.00 FDI in Germany 1990-2011 in USD

-100000000000.00

Germanys graph shows us a very weak relationship between total trade and FDI during this 20-year period. We can see that despite total trade increasing FDI has not increased proportionately. We can see that in the year 2000 (circled point) FDI is at its highest point but trade is mid range and not peaked, so this data from Germany does not support the claim made in the meeting. Germany also has a very low coefficient correlation of 0.223746001 which strongly supports the fact there is not a relationship between FDI and total trade, from this country. Therefore to sum up the Europe data which we use as our benchmark, we have both the UK and France, which to a certain extent supports the fact, there is a relationship between FDI and total trade. They both have positive correlation coefficients however we must look at the data to see that FDI has not increased much, whilst total trade has so there is not a very strong relationship. Germany also does not support the claim made that by increasing FDI automatically world trade amongst countries will increase, with a very low coefficient correlation.

Asian Countries data and analysis: Asia Graph 1: China

This graph representing China shows a very strong relationship between FDI and total trade, apart from the two circled points as total trade increases so does FDI. This is backed up by the coefficient correlation of 0.927416807 this is much higher than any of the correlations out of the European countries and I feel China does support the fact there is a relationship, may be due to the strong economy. Asia Graph to compare China, France and Germany GDP over 20 years:
4000000000000.00 3500000000000.00 3000000000000.00 2500000000000.00 2000000000000.00 1500000000000.00 1000000000000.00 500000000000.00 0.00 1000000000000.00

Mean GDP for China, Germany and France

France FRA GDP (constant 2000 US$) NY.GDP.MKTP.KD Germany DEU GDP (constant 2000 US$) NY.GDP.MKTP.KD China CHN GDP (constant 2000 US$) NY.GDP.MKTP.KD 1500000000000.00 2000000000000.00

Here from the graph, I wanted to see if the high correlation coefficient could be due to something else, I wanted to see how chinas GDP has risen against the benchmark countries. We can see china had the lowest opening GDP but over the 2005-2011 period the GDP has outgrown France and Germany by a clear distance. This could be reason for increased FDI and increased total trade.

Asia Graph 2 Bangladesh:

Total trade for Bangladesh 1990-2011 in USD

Relationship between Bangladesh's FDI and total trade

35000000000 30000000000 25000000000 20000000000 15000000000 10000000000 5000000000 0 0 100000000 200000000 300000000 400000000 500000000 FDI in Bangladesh 1990-2011 in USD y = 37.651x + 8E+09 R = 0.6158

From Bangladeshs graph we can see that there like China is a positive relationship between trade and FDI, we can see that as total trade is rising so does FDI. The correlation coefficient is 0.886548352 and this is not as high as China but nevertheless it shows a very strong positively correlation relationship between the variables backing up the comments made in the global meeting that by increasing FDI total trade shall also increase automatically. For Bangladesh the mean FDI over the time period is 3899922061.01 and the mean GDP is 51980519718.96. When you divide FDI by GDP it gives the highest percentage for our given countries of 7.50266077 % meaning, mean FDI is a bigger proportion of mean GDP for Bangladesh than any other country and this is why like China the correlation coefficient could be high representing a very strong relationship

Asia Graph 3: Kazakhstan

Relationship between Kazakhstan's FDI and total trade

50000000000 45000000000 40000000000 35000000000 30000000000 25000000000 20000000000 15000000000 10000000000 5000000000 0 0 Total trade for Kazakhstan 1990-2011 in USD y = 3E+08x + 2E+10 R = 0.0689

5 10 15 20 25 FDI in Kazakhstan 1990-2011 in 0000000 USD

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The third Asian country we have extracted data for is Kazakhstan, and this represents the total opposite conclusions from the other two Asian countries. We can see from the graph almost a flat line, it also shows that as total trade decreases this is when FDI does increase so is evidence against the statements made in the global meeting. The correlation coefficient for Kazakhstan is 0.018713902; this figure is very low almost zero and does not support the statement made by the international donors. Therefore to sum up the data from the 3 Asian countries I feel that both China and Brazil have very high correlation coefficients and we can see a very clear positive relationship between FDI and total trade. Compared to the European countries they provide a much clearer and stronger relationship between total trade and FDI, which is that as FDI increases the total trade does go up. By using European countries as a benchmark we have to say Asian represents a mirror image of what Germany does, but just a stronger clearer indication of the relationship when compared to UK or Frances data over the time period. I would 6

urge you to see this but also bear in mind Kazakhstan provides evidence there is no relationship, and showing us as FDI increases total trade has fallen.

American Countries data and analysis: Americas Graph 1: US

The graph above being the first of our America countries, the US shows fairly positive relationship between total trade and FDI. The coefficient correlation is 0.698673305, this is similar to Frances coefficient and the conclusions from Europe are echoed by US data. We can see that as total trade increases the general trend is that FDI does go up, this may be because of the power and economic dependence many have countries have on the US during the period before the economic crash. Americas Graph 2: Brazil

The Brazil data we have extracted and plotted seen in the graph above are very similar to the US data; it signifies that there is a relationship between total trade and FDI. The coefficient correlation is 0.63059994 which is similar to those of the European countries our benchmark, Brazil has many natural resources such as wheat, maize and coffee which may have led to increased total trade but during the process FDI has also increased over the 20 year period Americas Graph 3: El Salvador

For El Salvador in Central America the data represents again a similar story about the relationship between FDI and total trade, as the other American and European countries excluding Germany. It has a correlation coefficient of 0.520114422 and whilst I have noted this is not as high as the other American countries but similar to the UK it does give us a sense that there is this relationship between FDI and total trade. Therefore to sum up the American countries they are very similar to the European data, all the European countries are well developed but the countries and compared to the Americas show similar coefficient correlations excluding Germany, and perhaps El Salvador. I would be happy to say American countries do show a relationship between total trade and FDI however not as strongly as Asian countries like China, however the aspect of rising total trade with rising FDI is present for both European and American countries just to a lower extent.

African Countries data and analysis: African Country 1: Ghana (no graph present). For Ghana I have not constructed a graph or a conclusion as there is no Ghana FDI data therefore I cannot see or calculate the correlation coefficient to see whether I can determine a relationship, and I feel the total trade alone is not a respectable aspect to look at as we have calculated correlation coefficients for each country to determine a pattern or relationship. Africa Graph 1: Botswana

The data presented above for Botswana again shows as trade rises FDI also does, however this may be a weak relationship as we can see when FDI is negative, total trade may rise but FDI is still below zero figure. The correlation coefficient for Botswana is 0.54793514; again similar to the UK does not really allow me to take a view on the relationship, as the correlation is midrange. I feel this graph does not support the statement made by the global donors that increasing foreign direct investments will automatically increase world trade among countries, as Botswana actually shows this is not the case from its data.

Africa Graph 2: Egypt

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Relationship between Egypt's FDI and total trade

Total trade for Egypt 1990-2011 in USD 14000000000 12000000000 10000000000 8000000000 6000000000 4000000000 2000000000 0 0 -2000000000 5 10 15 20 25 30 FDI in Egypt 1990-2011 in '0000000 USD

For Egypt the graph above, when compared to the other African countries we can conclusively say it is not similar to Botswana as there is no negative FDI. We have calculated the coefficient correlation as 0.537233142 for Egypt; again similar to the UKs and Frances correlation again this shows there is a relationship between increasing total trade and increasing FDI but not a very strong relationship. I would not be happy to conclude a relationship simply from the data we have collected analysed and plotted for Egypt. Conclusion: Therefore to conclude I would tell the Director General of the WTO that from the data there is a relationship between FDI and total trade. The Asian countries do support the claim that by increasing FDI it will automatically increase world trade among countries. The benchmark European countries and American countries do somewhat support the relationship with the exception of Germany whose mean FDI makes up 1.377440271 of its Mean GDP one of the lowest percentages when comparing countries. The midrange correlation coefficients from these 2 continents means there is a relationship but its not very strong. I also feel the African countries share the same fact, again a relationship does exist however its midrange meaning as FDI increases total trade does not automatically and unquestionably rise, other factors such as infrastructure, political stability, and inflation rates will all affect total trade and FDI as well. 11

References:

[1] www.worldbank.org [2] http://mathworld.wolfram.com/CorrelationCoefficient.html

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