CHAPTER I

INTRODUCTION

Introduction

The current study focuses on the role played by exchange rates, GDP, and foreign direct
investment in the determination of the export in Zimbabwe for the period 1980 to 2008.
Multiple regression model is then used to empirically test the function and devise the
relationship between the dependent and independent variables.

International trade is widely acknowledged as an essential element in broadening the

prospects for economic growth and development. To this extend exports and imports are
components of trade that had been described as an engine for economic expansion,
ultimately leading to greater levels of global output. Undoubtedly, the process of global
expansion critically depends on trade activities. There is need for provision of extra
resources to supplement economic growth and development, thus extra resources cannot
be sustained out of domestic supply alone, implying that imports of foreign resources are
necessary to fill the gap between a growing domestic demand and a limited supply.
Imports are therefore introduced as a vital component in international trade and economic
development.

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The vital role-played by exports in foreign trade and economic development is perhaps
what generated the interest in explaining the determinants of export function in
Zimbabwe.

1.1 Background of study

In 1980, Zimbabwe enjoyed brisk economic growth and the real gross domestic product
growth for 1980 to 1981 exceeded 20 percent. The depressed foreign demand for the
country’s mineral exports and onset of the drought cut sharply into the growth rate. In
1982, 1983 and 1984, then in 1985 the economy rebounded strongly due to a 30% jump
in agricultural production. However it slumped in 1986 to zero growth rate and we
registered a negative of about minus 3 percent in1987 primarily because of drought and
foreign exchange crises faced by the country. Zimbabwe’s GDP grew on average of about
4.5 percent between 1980 and 1990.

Zimbabwe manufacturing exports have been subject to large policy changes (Hans
Hoogeveen and Takawira Mumvuma 1999). Under UDI foreign exchange controls and
trade restrictions created a large import substituting manufacturing sector while exports
were restricted to those few countries that defied the UN sanctions. After independence
most controls were kept until, in 1991, the country embarked upon trade and exchange
rate liberalization. The easing of bias against exporting, the opening up the country for
imports and the realignment of the exchange rate was expected to lead to important
changes in the way trade place in Zimbabwe. However, trade liberalization was partly
reversed in the late 1990s.

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The justification for the trade and exchange rate liberalization reflects the expected
efficiency gains that follow from the improved functioning of markets and is based on
traditional trade theory. Traditional trade theory and it’s modern versions emphasize
relative factor endowments, Ohlin (1933), on skill development, learning and
technological competence and other authors like Nurkse (1953) revealed sunk cost, scale
economies and agglomeration advantages while Krugman (1992) emphasized transport
costs and concentrating advantages and Brainnard (1993) as important source of and
agent’s international competitive advantage. goods that fell under the open general import
licence (OGIL).

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The ERS arrangement proved to be a very effective trade liberalization policy instrument
Gunning, (1996). Under ERS, exporters where initially allowed to retain 5 to 7.5 percent
of their earned foreign exchange. Later this was increased to 25%, 50%and 100%in 1992,
1993and 1994 respectively. Starting in January 1992 exporters were free to use to use
their ERS allocations to those, which were found on the negative list. During this period
the Zimbabwean dollar was devalued twice, in November 1991 by 56% and January 1993
by 28%.

Individual’s foreign currency accounts were denominated introduced in June 1993.on 1

January 1994,foreign currency accounts were introduced and two –tier or a dual exchange
rate system was introduced and OGIL, ERS and EIS arrangements were then abolished.
Exporters could retain 60% of their earnings from export earnings in their corporate
FCAs or sell it on the inter-bank market. They were required to sell the other 40% to the
reserve bank of Zimbabwe at an official exchange rate Mlambo et al (1998). This implied
that during this period Zimbabwe was effectively operating a dual exchange rate system.
According to Gunning (1996) the mandatory selling of ERS funds constituted an implicit
tax to the exporter since the central bank acquired these funds at the official exchange
rate, which was much lower than the going market rate.

This has lowered Export performance, which is key to the Zimbabwe economy. This is
because trade is a substantial share of the GDP and exports are the main source of foreign
exchange for the economy .In particular agricultural exports, which declined dramatically
in the recent years, have traditionally been an important driver of economic growth in
Zimbabwean economy, given the sector `s extension backward and forward linkages.
Hence, fostering competitiveness is important for Zimbabwe’s long-term growth and
external viability.

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The growth rate of total exports was high in the second half of the 1990s, but then turned
negatively since the early of 2000s.Zimbabwe`s export performance was well above the
average of African countries in 1990s and according to the CIA World fact book
Zimbabwe due to it’s comparative advantage in agriculture which was dominated large
commercial farms, and manufacturing.

However following the increasing overvaluation of the currency, export performance

dropped off significantly in 2001-2004,including relative to the average of developing
economies and neighbouring nations with the official exchange rate, fixed rate fixed from
October 2000 first at Z$55-US$1 and later at Z$824-US$1 until end 2003,the currency
became increasingly overvalued, and the monetary authorities responded with a series of
ad hoc measures, including, the creation of special regimes for tobacco and gold
exporters, The introduction of a managed foreign exchange tender system early 2004 and
gradual relaxation of official exchange rate from Z$824-US$1 to Z$5700-US$1 by end
of 2004.However the currency became overvalued again since the demand for foreign
exchange continued to pick up. As a consequence the parallel market premium rose from
13 percent in January 2004 to 53 percent by end 2004.

In context, Zimbabwe is said to have initiated a fast track land reform program to
redistribute land. About 9000 farms were listed for acquisition by end 2004,but few
farmers were compensated and many farms remain unallocated to new settlers. This
execution of land reform was accompanied by significant losses in production.
Agricultural output declined by 30 percent and this promoted imports to meet the local
demand. This situation of decline in national output imposes downward pressure on the
commodities available for exporting.

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1.2 Statement of the problem

The relevant authorities tried to implement policies that facilitate structural change in the
economy and to correct imbalances of the macro economic objectives in the country. The
effectiveness of these policies on the macro economic objectives is perhaps marginal
judging from the persistent problems that the economy faces and has faced. This suggests
that there has been an information gap with respect to evidence guided policy design.
With the problem of an existing information gap in mind, a study of the export function is
worth pursuing considering that the Zimbabwean economy is fairly open and heavily
export dependent to generate foreign currency, the demand for exports has strong
implications on our macroeconomic objectives.

This study therefore aims at adequately explain the major determinant of our exports the
period 1980 to 2008, explicitly showing the role of exchange rates, foreign direct
investment, national income, industry capacity utilisation in influencing export function.

Empirically modelling the export function as well as the associated policy implications
are important steps in providing a foundation of rational, evidence guided decision
making, partially filling the information gap and aiding policy makers to estimate the
response of import demand to macroeconomic variable shocks.

1.3 Purpose of the study

 To find out to the extent of foreign direct investments influence on

Zimbabwean exports.
 To demonstrate the effect of exchange rate influence on exports in Zimbabwe.
 To find the extent for which national income impacted on the Zimbabwean
export function.

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1.4 Research Questions

 Does foreign direct investment has any role on the determination of the exports
function of Zimbabwe.
 How the exchange rate does affected export function demand during the period
1980 to 2008 in the country?
 Did national income influence the export function demand for Zimbabwe during
the period 1994 to 2008?

1.5 Statement of the Hypothesis

 Test the null hypothesis that exchange rate depreciation gives rise to an
increased export.
 Test the null hypothesis that foreign direct investment encourages increased
exports in Zimbabwe.
 Test the null hypothesis that national income increase affect positively on the
export function of Zimbabwe during the period 1980 to 2008.

1.6 Significance of study

This study helps in policy implementation and formulation because this study explain the
determinants of export function considering vital role of export as a component of
foreign trade and development, Explanation on export function behaviour contribute to
empirical literature on Zimbabwe. This analysis then helps in policy design and
implementation by stakeholders and economic planners.

Additionally given that exchange rate, foreign direct investment, national income,
exchange rate and policies linked to these variables were primarily pursued to improve

7
the BOP position, thus exports fall within the export revenue buffer. Therefore the
effectiveness of these policies is worth considering. The policy implications drawn from
the study are therefore significant in terms of their contribution to informal decision-
making.

The behaviour of exports is an important aspect in economics because it is used for

applied work. This means that it is central to basic tasks such as GDP forecasts and the
impact of exchange rate variations on the current account. These questions arise daily in
the work of central bank, investment analysis and multilateral organisations such as the
IMF.

1.7 Scope of study

The study will focus on the Zimbabwean export function. It will be geographically
limited to Zimbabwean economy. The research will be conducted during the researcher’s
period of attachment. The researcher will make use of published statistics and other
approved documents and the research has been restricted to period of twenty-eight years
from 1980 to 2008.furthermore the research will utilize the econometric models and does
not use other research methods like questionnaires and interviews.

1.8 Delimitation of the study

This part will outline the core or central area of focus of the research. These include the
topic and the parameters which act as guidelines to what the research actually looked at.
These include:
 The researcher’s focus will be on the Zimbabwean export function from year 1980
to 2008 only and this period was and inflationary period and the researcher
decided to abandon other years.
 Research will be limited to Zimbabwean export function only.
 The study will utilize secondary data only.

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  The study will be done between January 1980 and December 2011.

1.9 Limitations

 The research is capital intensive such that other sources of data will not be vested
due to scarcity of resources.
 The research can take long as the as data is different depending on the source.
 Due to work commitments the researcher might not exhaust the libraries despite
the internet and other internal sources.

1.10 Definition of terms

Policy A deliberate course of action undertaken by managers or national government to

influence organizational or national goals (en.wikipedia.org)

Export function I s an idea used in economic theories to measure exports. The total
amount of exports in a nation is mainly affected by two variables the total foreign
absorption and the real exchange rate.(en.wikipedia.org)

Real exchange rate Is the nominal exchange rate that takes the inflation differentials
among the countries into account. Its importance stems from the fact that it can be used as
an indicator of the competitiveness in the foreign trade of a country (Ankra, 1997).

Exchange rate volatility is a measure of the fluctuations in an exchange rate .it can be
measured hourly, daily or on annual basis (maxizip.com). Also Steven
M.Suranovic(2007) defined it as the degree to which exchange rate change over and went
to emphasize that we cannot expect exchange rate volatility when utilizing a fixed
exchange rate because it does not vary
Inflation Is the overall upward price movement of goods and services in an economy
often caused by an increase the supply of money, usually measured by the consumer price
index and the producer price index (investorwords.com

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 Comparative advantage Countries have comparative advantage in those goods, which
they can, the required factors of production are relatively abundant locally. This is
because profitability of goods is determined by the inputs costs. (En.wikipedia.org)

1.11 Summary
This chapter looked at what motivated the researcher to carry out a study on the
Zimbabwean export function. The objectives and the questions behind the problem were
also highlighted including the importance of carrying this research. Furthermore the
chapter looked at the hypothesis used to test the variables, limitations and delimitations of
the study. The next chapter is a critical review of literature.

CHAPTER TWO

LITERATURE REVIEW

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2.0 Introduction

White (2005, 52) defines literature review as an account of what has been published on a
topic by accredited researchers or scholars. This chapter reviews literature and other
findings related to the export function, with a case of the Zimbabwean economy.

2.1 Purpose of Literature review

The review of literature accomplishes several important things. Sharp et al (2002)

identifies two reasons for literature review. The first is that the preliminary search helps
you to generate and refine your research ideas. Literature review also enables you to
make a critical review of the literature and identify gaps (Saunders et al 2009). Literature
review shares with the reader the results of other studies that are closely related to the
study being reported (Fraenkel & Wallen, 1990). It relates the study to the larger, ongoing
dialogue in the literature about a topic, filling in gaps and extending prior studies
(Marshall & Rossman, 1989). Saunders et al (2000) further adds on that literature review
provides a framework for establishing the importance of the study, as well as a
benchmark for comparing the results of a study with other findings. It frames the problem
earlier identified.

The review of literature provides the background and context for the research problem. It
should establish the need for the research and indicate that the researcher is
knowledgeable about the area under research (Wireman, 1995,406). Busha and Harter
(1980; 55) observe that literature review identifies gaps and potential pitfalls in
knowledge and it helps avoid unnecessary replication by showing what has been
previously covered. The practicability and integrity of the research is also determined
which provides a foundation and justification for further research challenging the
researcher to think about how the work extends, modifies and supports or even challenges
that of others.

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Literature review also seeks to present a basis for a study by providing a theoretical and
conceptual basis upon which the research is undertaken. Dooley (1995;23) acknowledges
that reviewing related literature is of great importance as it serves in the enquiry of
previous work that acquaints the researcher with what has been already done in the field
thereby minimizing the possibility of unpremeditated duplication. Furthermore, the
review can be highly beneficial to the researcher in the attainment of relevant theory and
pointing out to the strategies, procedures and instruments that may be fruitful in pursuing
the problem.

However, White (2005:61) points that some literature may contain errors, which mean
that the researcher may also use this erroneous data that automatically affects the results.
In addition, the literature may be outdated and thus prove irrelevant to the topic under
study.

2.2 Theoretical Literature

2.2.1 Export determinants

The proposition of FDI led exports growth is controversial in empirical literature. But the
role of domestic investment is believed to be much important for export expansion
strategies. In any case, the importance of FDI, if any, cannot diminish the role of
productive investment from the domestic economy. While private domestic investment
can be regarded as a permanent and reliable channel to enhance production capacity,
investment in public sector has been considered important, for example in roads,
communication and other public goods and services that are essential to stimulate private
investment. Furthermore, government has a decisive role through support for research and
contract with foreign buyers as well as in facilitating access to credit to both directly and
indirectly exporting terms. Funke and Holly (1992) argue that the majority of the previous

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approaches have emphasized demand factors. Such models have generally been rather
unsuccessful in explaining long run trends in export performance.

Togan (1993) finds that during the 1980s the level of the economy-wide subsidy rates and
that of inter-industry dispersion of incentives has substantially been lowered. The study
also finds that the Turkish export- and import-competing industries have benefited from
the export incentives more than the other sectors.

Also Riedel, Hall and Grawe (1984) used quantitative methods of research to identify the
determinants of export performance in India on the basis of time-series analysis over the
period 1968-1978. The study analyses the effects of relative price of exports, relative
domestic demand and domestic profitability on export performance. The dependent
variable used is the ratio of indexes of constant price exports to industrial production.
Exports are expressed as a ratio to output in order to account for the effect of expansion
of production capacity. The results support the view that domestic market conditions
strongly influence export behaviour. The variable measuring domestic profitability or
relatively domestic demand is found to be statistically significant in explaining export
behaviour in 23 of 30 sectors. Relative price, incorporating export policy incentives and
the exchange rate turn out to be statistically significant in only 10 of the 30 sectors.
However, relative prices tended to be significant in those sectors where comparative
advantage is presumed to be strongest, for example, ready-made garments, carpet
weaving, handicrafts and metal products. The study has the loophole of using short
period. It requires a long period for better estimates.

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A more recent study of Sharma (2001) investigates exports determinant in India using
annual data for 1970-98. The study uses simultaneous equation framework. The results of
study suggest that demand for Indian exports increase when its export price falls in
relation to world prices. Furthermore, the real appreciation of the rupee adversely affects
Indian exports. Exports supply is positively related to the domestic relative price of
exports and higher domestic demand reduces export supply. Foreign investors appear to
have statistically no significant impact on export performance, although the coefficient
Of FDI has a positive sign. Hoekman and Djankov (1998) which data are available,
Poland is the only one with a significant positive association between FDI and exports
structure.

2.2.2 The relationship between exchange rate and exports

Since the breakdown of the Bretton-Wood agreement, the trading nations have embraced
a regime of floating exchange rate determination. This is said to have brought up the issue
of exchange rate volatility in general and its impact on foreign trade in particular, and it
has been the subject of numerous studies. In addition, the experience of currency crash in
Thailand and the Asian financial crisis have led to explosive research on the causes and
impacts on temporal exchange rate volatility. Previous literature studies have been
inconclusive; most hold the notion that exchange rate uncertainty has either positive or
negative effects on trade volume.

According to them, trade could be considered as an option held by firms, and the value of
trade rises with volatility (Sercu and Vanhulle 1992).While Franke (1991) develops a
model in which a firm evaluated the exit costs associated with leaving a foreign market
against losses created by exports, and vice versa. Under a variety of behavioural
assumptions, it was possible that any given firm would, on average, enter sooner and exit
later when there is a rise in exchange rate volatility, thus increasing the average number
of trading firms. This was supported by IMF (1984). In line with this finding, Viaene and

14
de Vries (1992) illustrate, in the context of theoretical models or empirical models, that
exchange rate volatility might benefit trade.

In contrast, according to McKenzie (1999), most of the previous studies appear to favour
the negative hypothesis, in that real exchange rate volatility is detrimental to exports.
Ibrahim (2003) found that depreciation of domestic currency increases the costs of
imported inputs and eventually induces contractionary effects on the economy. Some
theoretical studies Arize (1995) have provided evidence to support the hypothesis that an
increase in exchange rate volatility might adversely affect trade; since risk-averse
exporters face greater risk and uncertainty with regard to profit earned, they therefore
reduce the supply of traded goods.

A number of empirical studies have found cases where a rise in exchange rate volatility
may have both positive and negative implications on exports and imports, depending on
the products and countries Chou (2000), for example, argued that the variability of an
exchange rate might either deter or stimulate bilateral trade. Sauer and Bohara (2001) also
found that volatility has significant negative effects on exports from the developing
countries, especially in Latin America and Africa, but not on exports from the less
developing or industrialized countries in Asia.

These conclusions, however, cannot be seen as definitive. There are also a few studies,
which conclude that exchange rate volatility played no significant role in explaining trade
volume (Aristotelous 2001).

2.2.3 Export, inflation and economic growth.

It needs to be emphasized at the outset the overvaluation of national currencies is not the
sole possible source of the hypothesized links between inflation, exports and growth.

15
High inflation may also distort production by driving a wedge between the returns to real
and financial capital. It may, moreover, reduce saving and quality of investment by
reducing real interest rate, often far below zero. Thus, the net depreciation of capital stock
accelerates. Further, high inflation may be a symptom of economic mismanagement for
example persistent government budget deficits, imperfect institutions for example fragile
banks and financial markets and other factors like political upheaval and social strife that
together help undermine export performance and economic growth.

Rapid inflation can retard exports and growth one or all of these channels, (Gylfasion,
1998). Even so, the experience of Hong Kong and Korea shows that moderate inflation
9percent and 7percent per annum on average in 1985-1994 does not preclude vigorous
exports and rapid, sustainable economic growth. The causation may run in both
directions: for example, rapid growth may contribute to price stability by strengthening
the tax base and thus diminishing the need for printing money to finance government
budget deficits and also by reducing the risk that competing claims for shares in the
national income by different social groups lead to price increases and cost inflation.
A high level of gross domestic product pushes export volume upwards indicates (Oguledo
and MacPhee 1994).

2.2.4 Specialization, efficiency and exports

In response, recent years have witnessed a rapidly growing empirical literature examining
the determinants of exporting, and especially the role of productivity, at the firm level.
From a policy perspective, this line of research appears to be highly relevant as the two
theoretical frameworks (trade theory and firm-level theory) have quite different
implications.

If there are substantial entry costs, for instance, policies, which are successful in
facilitating enough firms to enter the foreign market, will have effects on exports

16
extending over several time periods. , Mexico, and Morocco, and Bigsten et al for
Cameroon, Ghana, Kenya and Zimbabwe (2000) There are two main reasons why this
might be so. Firstly, efficient firms may select themselves into the export market.

This seems to be the case in the US Bernard and Jensen (1999) and in most sectors in
Colombia, Mexico and Morocco Clerides et al, (1998) Secondly, firms may become
efficient through exporting, the so-called learning-y exporting effect.(Kraay 1997) finds
some evidence of this in China Bigstenetl (2000) find both effects present for Cameroon,
Ghana, Kenya and Zimbabwe. We attempt to determine whether manufacturing firms in
South Africa are more efficient too. We find that this is indeed so, although it is
dependent on where they export to. Unfortunately, because we have only cross-sectional
data we cannot get an idea of whether this is because of self-selection, learning-by-
exporting or both. We also find, in common with Bigsten et al (1999), that very few
South African firms are specialist exporters.

Although, many firms export – 71% of our sample – these firms do not export very much
– about 18% of their output. Less than half the firms in the sample export more than 10%
of their sales, and only 10% of firms export half or more than half of output. In light of
the popularity in the literature of sunk costs as an important factor the affecting the export
decision this seems to be a puzzle.

2.2.5 Exports and foreign market access

Redding and Venables (2004a) consider a production possibility frontier between exports
and other goods. In that context the model predicts the negative relationship between
foreign market access and the supply capacity. High levels of foreign market access are
expected to be associated with a less than proportional increase in exports and a lower
level of supply capacity. An expansion of the export sector increases the cost of factors by
increasing demand pressure and thus leads to higher producer prices, which are

17
negatively related to supply capacity. However, the sign of the relationship could be
arguable. Better foreign market access could also draw production resources from abroad
via foreign direct investment or labour migration.

In that case, factor demand pressure could be eased and the sign of the relationship could
become uncertain at least to a certain extent Empirically, if the first effect (factor prices)
dominates the second (factors supply) an estimate of the elasticity of export performance
with respect to foreign market access, which is less than one would be obtained. In other
words, export performance would be expected to grow less than proportionally than
foreign market access. On the contrary, if the elasticity of export performance with
respect to foreign market access is greater than one, then exports would growth
proportionally more than foreign market access.

2.3 Empirical literature

2.3.1 Exchange rate misalignment and economic growth

Real exchange rate misalignment is negatively related to economic growth, (Edwards
1988).In particular, Ghura and Grennes (1993) found that different measures of real
exchange rate misalignment and its instability have negative effects on the growth rate of
real per capita income, export, and agricultural output as well as on investment for sample
of 33 sub-Saharan African countries including Zimbabwe. Misalignment exchange rate
means lower profitability in the sectors whose output prices are lowered relative to prices
in other sectors. Very often, misalignment takes the form of domestic currency
overvaluation, which hurts tradable activities. This affects growth performance adversely
since productivity improvements tend to be concentrated in exports or import-competing
industries. Moreover, distorted exchange rate have negative indirect effects usually
referred to as smuggling activities that cause the supply of goods to legal or official
markets to fall.

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The increasing incidence of ethnic conflicts and much-publicized consequences of these
conflicts have led economist to make a connection between ethnic diversity and economic
phenomena like growth and investment, Eastery and Levine (1997) found empirical
evidence to support their claim that high level of ethnic diversity of countries in Africa is
an important contributor to their poor economic performance .LaPorta et al(1999) pointed
out that ethnic diversity leads to corruption and low efficiency in governments that
expropriate from disadvantage

The diagram of the international monetary fund (2004) below illustrates the annual
average rate of exports growth from 1995 to 2004 of the different sub-Saharan countries,
which include Zimbabwe, Kenya, Uganda, South Africa and Tanzania. It shows that
Zimbabwe experienced a negative export growth from 2001 to 2004.

2.3.2 Export, foreign direct investment and productivity

This empirical literature inspired a number of theoretical papers that drop the assumption
of a representative firm and investigate the behaviour of heterogeneous firms in general
equilibrium models of open economies. These theoretical models in turn generate testable
hypothesis, and serve as a catalyst for a new generation of micro econometric studies of
international activities of firms. A case in point is the multi-country, multi-sector general
equilibrium model of Helpman, Melitz and Yeaple (2004) (henceforth, HMY) that
explains the decision of heterogeneous firms to serve foreign markets either trough
exports or foreign direct investment (FDI).They show that, in equilibrium, only the more
productive firms choose to serve the foreign markets, and the most productive among this
group will further choose to serve these markets via FDI.

These empirical papers take the HMY-model as a point of departure. Head and
Ries(2003)use data for Japanese firms ;they find that firms that only serve the domestic
market tend to be smaller than firms that only export and firms that do FDI .Investors

19
who also export are generally larger than exporters who do not have overseas investment.
Production function residuals yield much weaker

2.3.3 What drives manufacturing exports in Africa?

It has been suggested that sub-Saharan Africa will not be a significant exporter of
manufactured goods because it lacks the necessary skills. Wood 1994 argue that Africa
can only export unskilled labour intensive manufactures, as unskilled labour is relatively
abundant. Elsewhere it has been argued that natural resource intensive goods will
dominate African exports, and that manufacturing exports therefore will be marginal,
even in the labour intensive sectors (Wood and Mayer 1998). In contrast to this line of
thought, which is based on comparative advantage theory, is the view that firm-level
factors are more important determinants of exports than factors related to industry
(Krugman 1989). In particular, emphasizing that entry into exporting is associated with
significant fixed costs, this theory predicts that only relatively productive firms with
relatively high returns to exporting will choose to incur the costs and enter the
international market.

In response, recent years have witnessed a rapidly growing empirical literature examining
the determinants of exporting, and especially the role of productivity, at the firm level.
From a policy perspective, this line of research appears to be highly relevant as the two
theoretical frameworks (trade theory and firm-level theory) have quite different
implications. If there are substantial entry costs, for instance, policies, which are
successful in facilitating enough firms to enter the foreign market, will have effects on
exports extending over several time periods Due to a shortage of micro data, there is not
much empirical evidence on the current topic for Africa.

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2.4 Knowledge gap

The absence of a research on the impact of exchange rate volatility on the Zimbabwean
exports and the debates on how the two variables affect each other has motivated the
researcher to undertake this research.

2.5 Chapter summary

This chapter review literature gap on the export function and other various determinants
of exports and their applicability to the Zimbabwean case. The major issues discussed are
the effects of exchange rate misalignment and the impact of exchange rate volatility on
the export function. The next chapter is research methodology

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 CHAPTER 3

RESEARCH METHODOLOGY

Introduction

In this chapter, the researcher gives a description of how the research was carried out in
order to meet objectives of the study that is to model the Zimbabwean export
function.The research attempts to establish the relationship between exchange rates,
foreign direct investment, gross domestic product and exports in Zimbabwe. Research
design is the plan of the study that provides the general plan of how to go about
answering research questions.

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3.1 Research design

According to Bryman (2003), a research design provides a framework for collection and
analysis of data. Leedy (1994) also propounds that a research design is all the procedures
selected by the researcher to answer a particular set of questions of the hypothesis.
Jankomicz (1995) defines a research design as a systematic and orderly approach taken
towards the collection of data so that information can be obtained from those data. The
main objective of the research design is to provide results, which are judged to credible
and should resemble reality and are taken to be true and reasonable. The research design
to be used is the correlation research design. Waters (1997) defines correlation research
design as a method of study in which two or more quantitative variables from the same
group of subjects in which one is trying to determine if there is a relationship or co-
variation between the two variables. It attempts to explore relationships to make
predictions. It explores and test relation between variables, rules out alternative variables
that could play a role in relations between variables (Bruce 1994). The design has an
advantage of being reliable although major criticism has been found on its failure to bring
out the causality effect (Creswell 2003). Correlation research design is appropriate to this
study since there is need to find the nature of relationship, regression and co-variation
between exports and exchange rate volatility.

3.2 Research instruments

Walliman (2000) defines research instruments as tools used for collecting information
and data need to find solutions to a problem under investigation. The researcher however
used desk research. Desk research involves gathering data that already exists either from
internal sources of the client, publications of governmental and non-governmental
institutions and in professional newspapers.

3.3 Data collection and procedures

23
There are basically two types of data that may be used in empirical analysis, namely,
primary data and secondary data. Primary data or field research involves original data
gathering on the targeted variable. The researcher however did not use primary data
because the data required is difficult to consolidate by individuals.

According to Zikmud (1991), secondary data is historical, already assembled and do not
require access to respondents. This form of data comprises of information that has been
collected for other purposes and not the research under review. For the purpose of this
research secondary data was gathered from various sources such as textbooks, journals
and ZIMSTAT. According to Ghauri and Gronhaugh (2002), it is less expensive to use
secondary data to collect data. It enables the researcher to spend more time and effort
analyzing and interpreting data. Secondary data can be collected quickly Neuman (2002).
Secondary data provides a source of data that is permanent and available in the form that
may be checked relatively easy by others Deuscombe (1998).

3.4 Regression model

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This paper suggests that in modelling the export function Multiple Regression Model is
preferable thus devise relationship between several independent variables and a
dependent / criterion variable. Regression analysis refers to the techniques for the
modelling and analysis of numerical data consisting of values of a dependent variable
(export function) and one or more independent variables (gross domestic product, foreign
direct investments and exchange rate).

X = β0 + β1ER + β2GDP + β3FDI + μ

Where:
X = total amount of goods and services exported,
β0 = constant term or the intercept,
β1 = partial regression coefficients for ( ),
ER = real exchange rate
GDP = gross domestic product
FDI = foreign direct investment
μ = random error term.

Regression is appropriate to my study as it is used for hypothesis testing and modelling of

casual relationships. A dummy variable has been included in the model to capture the
effect of export control policies, export regulation policies coerces a certain trend of
export demand resulting in the decline in the export demand or an export liberalization
policy which easy out access to export thereby resulting in a larger aggregate import
demand in the economy. Thus our linear model will be as follows

25
The portion β0 + β1ER + β2GDP + β3FDI called the deterministic portion while the μ is
called the stochastic portion of the model. The random error term is included in the model
to represent variations in the dependent variable not explained by the independent
variables being used in the model. This is rational since there are a number of factors that
have been left out.

0, 1, 2, 3 these are partial regression co-efficients which explains the rate of change of
the dependent variable when independent variable changes by 100%.

3.5 Justification of the Model and Variables

Variables used in this research are considered due to their volatility during the 28years.
These variables were the most active during our economy’s melt down. Variables
included in the model are quantified on yearly basis.
Exchange rates – A fall in the relative domestic prices due to exchange rate depreciation
makes exports cheaper in international markets resulting in increased demand for exports,
therefore we expect the positive impact of real exchange rate on export growth. Exchange
rate being the determinant of import prices has a role to play on international trade.
During the period under review exchange rates fluctuated in accordance with economic
decline in the country therefore its fluctuations impacted somehow on international trade.
Consideration of this variable enables to test the actual effect of exchange rate on export
function.

26
National income – Growth of the GDP is an indicator of future potential and
sustainability of production level. Growth is more valid determinant of exports as
compare to GDP because it measures the sustainability of output levels. So we expect
positive impact of GDP growth on exports expansion. . Therefore fluctuations in national
income during the period had some impact on export function as there is a positive
relationship of income and imports thus the relationship have to be tested.
Foreign direct investment –In empirical literature the role of FDI in exports promotion
is controversial. Many studies for example Pfaffermayr (1996) find positive effect of FDI
on exports. The main reason underlying is the export oriented MNCs. Since government
provides facilities for export promotion, such facilities also attract foreign investors. In
order to promote exports government can adopt FDI-led export growth strategies with
twin objectives of capturing the benefits of both FDI inflow and exports growth. On the
other hand, many studies find insignificant or weak impact of FDI on exports [see
Hoekman and Djankov (1997). Such studies point out that the role of FDI in export
promotion in developing countries remains controversial and depends crucially on the
motive for such investment. It may not contribute to export growth. On the other hand, if
the motive is top tap exports markets by taking advantage of the country’s comparative
advantage, then FDI may contributes to export growth.

3:6 Durbin Watson test

This test is used to find out if two or more time series data are co integrated. This
suggests that two or more time series may have a relationship. DW test for
autocorrelation so as to ascertain that the error term is not correlated. Whenever there is
autocorrelation the p values tend to be different from zero showing dependency between
the error term and its lagged values. If the DW test figure is greater than the F-statistic
therefore error terms are correlated.

3.7 Expected signs

27
Allowing all these variables to interact with exchange rate will reveal more information
of how exchange rate interacts with other facets of the economy. That is the relationship
revealed by the literature is expected to be results of this research. They are also room for
different results due to different economic cycles, policies and other factors.

3.8 Significance of the error term

The error term represents the magnitude of other factors than exchange rate, gross
domestic product and net foreign domestic product that influence the dependant variable.
The significance of these factors maybe to small that statistical representative may be
challenging such that data on these variables will be difficult to quantify such that their
influence cannot be statistically determined.

3.9 Eviews software

EViews provides a broad introduction to quantitative economic methods, for

example how models arise, their underlying assumptions and how estimates of parameters
or other economic quantities are computed. To model the statistics l will use Eviews
software, EViews (Econometric Views) is a statistical package for Windows, used mainly
for time-series oriented econometric analysis.

3.10 Chapter Summary

This chapter elaborated the research methodology and research design. Statistical tests to
be used also outlined in this chapter, justification of the model and variables was also
outlined in this chapter. The next chapter, findings will be presented and analysis and
interpretation of the results is done in the next chapter

28
 CHAPTER FOUR

DATA PRESENTATION, ANALYSIS AND DISCUSSION

4.0 Introduction
In this chapter data findings are presented, analysed and interpreted as they relate to
theory that underlies the study. Findings were analyzed to come up with reasonable
conclusion of the Zimbabwean export function.

4:1 Expected signs

According to the theoretical the exchange rate, real gross domestic product and net
foreign direct investment are said to be positively related to the exports. An exchange rate
appreciation will lead to an increase in exports .while and increase in gross domestic

29
product will push up the surplus available for exports and an increase in FDI will increase
our output available for exports.

4:2 Regression results

Table 1
E = β + β1ER + β2GDP + β3FDI
E = 0.242935 + β16.14E-06 + β2-0.002577 + β30.4388033
Se = 0.012264 1.34E-06 0.893300 0.000604
t-statistic = 19.80879 4.572055 0.490354 -4.268568
Prob = 0.0000 0.0001 0.6282 0.0002
R2 = 0.577264
Durbin Watson = 0.952575
F-Statistic = 0.000068

4.3 Diagnostic test

Diagnostic test examines the correlation, normality and functional aspect of the data and
it is carried out in this study and the model was correctly fitted since it was closer to
1.from the estimated model ,R2=0.577264,this means that about 58% of the exports are
exogenously explained and 42% is explained outside the model. On the other hand the
adjusted R2 of 0.526536 shows that the model explains about 53% of the variation of
export function taking into account the degrees of freedom and the remaining 47% is
explained outside the model the remaining 47% also shows the significance of the error
term.

30
4.4 Durbin-Watson statistics
Durbin-Watson statistic test value of 0.952573 reveals that the values of the variables do
not suffer autocorrelation since it is not closer to two. This value of Durbin-Watson
indicates that the model does suffer serial correlation. This is because the value is not
closer to two.

4:5 Variable relationships

DW test for autocorrelation so as to ascertain that the error term is not correlated.
Whenever there is autocorrelation, the p values tend to be different from zero showing
dependency between the error term and its lagged values. If the DW test figure is greater
than the F-statistic, therefore error terms are correlated. In addition, an F Statistic of
0.000068 shows that the model is properly specified since the F Statistic is significant at
1% level of significance.

The relationship between FDI and the Zimbabwean export volume during the
period 1980 to 2008.
From the literature there is a positive relationship between exports and the net foreign
direct investment, a one unit change in the FDI will translate to a 0.438033 increase in
exports. The fact that the co efficient is not so significant means that an increase in net
FDI increases the volume of exports. With the relationship postulated the case to
Zimbabwe especially to the years under consideration, Zimbabwe has experienced steep
increases in FDI yet in the current account has improved. The results of a probability of
0.6282 have shown that foreign direct investment is not very significant when modelling
the Zimbabwean export function. This is in line with the findings of Sharma (2001),he
revealed that FDI appear to have no statistical impact on export performance although the
coefficient of FDI had a positive sign, the same with Hoekman and Djankov(1998) who
found a found a positive association between FDI and export. Their insignificance might
be due to the fact that they are very little.

The relationship between exchange rate and the Zimbabwean export volume during
the period 1980 to 2008?

31
There is a positive relationship between the exports and the exchange rate. If the
exchange rate appreciates, it increases the volume of exports. A one unit change in the
exchange rate will result in a0.614 increase in exports. However it has to be noted that the
exchange rate coefficient offers some useful lessons; it means that the trade balance does
improve in response to exchange rate appreciation.

The probability of 0.0001 has shown that exchange rate is significant when modelling the
Zimbabwean export function. For instance in the past years the Zimbabwean dollar was
indeed overvalued against major currencies hence that on its own gave an unrealistic
situation which situation became significantly different when efforts were made to rectify
the situation. When the Zimbabwean dollar was obviously overvalued a large number of
transactions on foreign currency were done in the illegal parallel market, emergency of
parallel markets is indicative to controls. The insignificant of exchange rates coefficient
means that any devaluation or depreciation will have an significant impact on
exports.Arinze (1995) provided evidence to support hypothesis that an increase in
exchange rate might adversely affect trade, but my results do not comply with the
theoretical literature available and this might have been due to unreliable data produced
during the hyperinflationary environment were the responsible offices was not well
financed to gather correct data.

Relationship between GDP and export volume.

Real national income followed a downward trend during the period under review, a unit
change in the real gross domestic product will result in –0.002577 decrease in exports.
This is not in line with the theoretical literature which emphasized on positive
relationship between exports and gross domestic product. This is the opposite the results
of Oguledo and MacPhee(1994) who revealed a positive relationship between exports and
gross domestic product. The differences might have been caused by the unreliable data
that was being produced to public by the responsible offices during the hyperinflationary
environment in order to create a good image for the country to the donors.

32
4.6 Summary

From the results obtained, foreign direct investment and exchange rate have a positive
relationship with the dependant variable which is the exports while the gross domestic
product have a positive relationship with the exports .the probabilities revealed that
foreign direct invest is not very significant in this model.

33
 CHAPTER 5

CONCLUSION AND POLICY RECOMMENDATIONS

5.0 Introduction

The main thrust of the study was to try and establish the main causes of the followed
trend of import demand in Zimbabwe with the objective of finding out the relationship of
economic variables inflation, RGDP, exchange rate, inflation and commodity shortage in
explaining import demand. This chapter therefore focuses on policy recommendations
based on the results discussed in the previous chapter. It discuses some policy options that
can be pursued countrywide and world over.

5.1 Summary of findings

According to the empirical and theoretical findings from the previous research, foreign
direct investment, real gross domestic product and exchange rate are positively related to
the national exports. This research was based on the how exchange rate, real gross
domestic product and foreign direct investment affect the Zimbabwean export function.

This research project has revealed that the national income is negatively related to the
Zimbabwean export function, while both the foreign direct investment and the exchange
rate are positively related to the Zimbabwean export function and this is in line with the
theoretical background. The results of this research revealed that FDI and exchange rate
are positively affecting the Zimbabwean export function.

34
The results from the data analysis of this research project has also revealed that this
model is properly specified ,this is shown by the F Statistic of 0.000068 which is
significant at one percent level of significant. Moreover a one unit change in foreign
direct investment will translate to a 0.438033 increase in exports, a unit change in
exchange rate will result in a 0.614 increase in exports and a unit change in gross
domestic product will result in a 0.002577 decrease in the Zimbabwean exports. Such that
the final equation becomes E=0.012264+β16.14E-06+β2-0.022577+β30.438033

Furthermore, exchange rate, foreign direct investment and gross domestic product have
managed to explain 0.577264 of the Zimbabwean export function while 0.422736 is
explained outside the model. This is shown by an R 2 of 0.577264 which is above 0.5.also
the data does not suffer from auto correlation, this is revealed by the DW test which is of
0.952572 which is below two.

According to the probabilities the gross domestic product and exchange rate have proved
to be strong determinants of the Zimbabwean export function while foreign directly has
proved to be less effective in determining the Zimbabwean export function. This is shown
by the probabilities of 0.0002, 0.0001 and 0.6282 respectively revealed by the regression
results.

5.2 Conclusion

This research presented an empirical analysis of the Zimbabwean export function from
1980 to 2008.to situate this study within the context of the existing ones and against the
background of the main object of this paper, a detailed review of theoretical and empirical
literature was carried out. The data utilised produced the results that have been presented
and analysed and recommendation were also made.

The data seem to be producing results that are different from the theoretical background,
the positive relationship between exchange rate and exports does not comply with the
theoretical literature, and unreliable data might have been the cause and I recommend the

35
responsible authority to fully fund the offices the conduct researches for them to acquire
the correct data.

On the other hand foreign direct investment results do comply with the theory, but FDI is
not heavily significant to this model. The research suggest that more must be done
improve FDI in order to increase our export cash inflow.

5:3 Policy Recommendations

 Economic activity in Zimbabwe will remain suppressed up to such a time that

there is enough space for the authorities to design and implement policies that are
desirable with long-term benefits.
 There is need in other words to look at the possibility of re engaging the IMF
which should in one way or the other result in unlocking other international
financiers who regard the IMF as a standard bearer in international finance.
 The fact that the country is not in a position to boost its production capacity thus
should engage the World Bank for finance to boost its production capacity.
 Investor confidence should be restored so as to attract investment and encourage
savings to boost production and gross domestic product.
 Zimbabwe embarked on the justified land reform program, this saw the country
facing acute shortage of food, therefore the country should engage in loan
schemes for farmers accompanied with collateral as prerequisite to get a loan so
that beneficiaries use acquired funds for intended use, this helps to curb farmers
from the immoral usage of farming funds and equipment.
 At the moment, due to the declining balance of payment support there is limited
latitude that can be excised by the relevant authorities to normalize the situation.
In particular, there is limited space for fiscal, monetary and exchange rate policies.

36
5:4 Areas for further study

For further studies the researcher suggests that there is need to incorporate more
variables in the exports function model. These variables include technology,
international relations and gross domestic product of the trading partner .This would
increase the credibility of the model since these also affect the export function in
developing countries. Other functional forms of the model have to be tested also
assess the significance of the determinants of the export function in developing
countries.

The researcher also suggests the application of the model in different periods of fixed
and flexible exchange rate so as to effectively assess the effect of the exchange rate on
export function.

5:5 Conclusions

Relationship of export function and economic variables, which are the exchange rate;
foreign direct investment and gross domestic product, the relationship, had been
theoretically and empirical explored. It is from the empirical test carried out that there is
significant relationship between exports and the aforesaid economic variables for the
period 1980 to 2008. However, export function determinants cannot be restricted since
social and political factors have significant impact on export function

37
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Albeit Mokochekanwa (2008);Zimbabwe`s Black market for foreign exchange; University of

Pretoria; Department of Economics; South Africa.

Bryman, A. and Bell, E., (2006), Business Research Methods, Oxford University Press, Oxford

Central Statistics Office(2008);National income and expenditure growth;Government

printing office

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Easterby-Smith et al (2008), Management Research: An Introduction, 5th Edition, London, Sage

Ghauri P and Gronhang K, (2005), Research Methods in Business Studies: A Practical Guide,
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Hussey and Hussey, (1997), Business Research, A practical Guide for undergraduate and
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Janckowics, A.D, (2005), ‘Business Research Projects’, 4th Edition, Thompson Learning, London.

Monetary policy review statement for the fourth quarter of 2005; Reserve Bank of Zimbabwe (RBZ),

24 January 2006.

Paul R Krugman and Richard Baldwin (1986); persistent Trade effects of large exchange rate shocks;

National Bureau of economic research.

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Robson C, (2002), Real World Research, A resource for Social Scientists and Practitioner

researchers 2nd Edition, Oxford, Blackwell.

Van Dalen (1978), Understanding Educational Research, An Introduction, McGraw Hill, New York.

Wegner (1993), Applied Business Statistics Methods and Applications, Creda Press, South Africa.

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Saunders M, et al, (2009), Research Methods for Business Students, 5th Edition, India,
Pearson Education limited.

Todaro,M.O (1979);Economic development.sixth edition New York: Longman

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Yin, R .K, (1990), Case Study Research: Design and Methods, Sage Publications,
Newbury Park, CA.

39
APPENDIX

Table 2

X ER GDP FDI CPI xg erg fdig gdpgrth

1980 1987 0.6306 8963 9.56 7 0.221689 7.03559E-05 0.001067 0.234589
1981 1983 0.7172 8976 5.6 14 0.220922 7.9902E-05 0.000624 0.145041
1982 1653 0.9614 8756 8.9 15 0.188785 0.000109799 0.001016 -2.45098
1983 1654 1.1442 8563 4.5 19 0.193157 0.000133621 0.000526 -2.2042
1984 1783 1.5024 8631 1.5 10 0.206581 0.00017407 0.000174 0.794114
1985 1791 1.6412 8625 -2.66 10 0.207652 0.000190284 -0.00031 -0.06952
1986 1847 1.6781 8688 -5.6 15 0.212592 0.000193151 -0.00064 0.730435
1987 1853 1.6631 8721 -10.66 10 0.212476 0.000190701 -0.00122 0.379834
1988 1780 1.9429 8850 -12.63 8 0.20113 0.000219537 -0.00143 1.479188
1989 1759 2.2701 8848 -13 14 0.198802 0.000256566 -0.00147 -0.0226
1990 1753 2.6364 8784 -12 17 0.199567 0.000300137 -0.00137 -0.72333
1991 1785 3.7522 8611 3 48 0.207293 0.000435745 0.000348 -1.96949
1992 1530 5.1121 6744 15 40 0.226868 0.000758022 0.002224 -21.6816
1993 1594 6.935 6446 32 20 0.247285 0.001075861 0.004964 -4.41874
1994 1729 8.3871 6838 30 25 0.252852 0.001226543 0.004387 6.081291
1995 2217 9.3109 7153 98 28 0.30994 0.001301678 0.013701 4.60661
1996 2417 10.8389 8706 35 16 0.277625 0.001244992 0.00402 21.71117
1997 2432 18.6081 8956 107 20 0.27155 0.002077724 0.011947 2.871583
1998 1703 37.3692 6274 436 48 0.271438 0.0059562 0.069493 -29.9464
1999 1904 38.1388 5964 50 56.22 0.319249 0.006394836 0.008384 -4.94103
2000 1913 44 5873 15.66 55.22 0.325728 0.007491912 0.002666 -1.52582
2001 2183 55 6105 0.29 112.1 0.357576 0.009009009 4.75E-05 3.950281
2002 1787 55 6705 22.63 198.98 0.266518 0.008202834 0.003375 9.82801
2003 1655 648 6254 3.52 598.75 0.264631 0.103613687 0.000563 -6.72632
2004 1665 5132 4489 8.696 132.75 0.370907 1.143239029 0.001937 -28.2219
2005 1583 18796 2918 101.65 585.85 0.542495 6.441398218 0.034836 -34.9967
2006 1721 58045 6645 40 1281.11 0.258992 8.735139202 0.00602 127.7245
2007 1819 9671 4000 65.846 66212.3 0.45475 2.41775 0.016462 -39.8044
2008 1613 30000 4416 51.6 150889 0.365263 6.793478261 0.011685 10.4

40
APPENDIX 1

Dependent Variable: XG
Method: Least Squares
Date: 10/08/11 Time: 04:18
Sample: 1980 2008
Included observations: 29
Variable Coefficien Std. Error t-Statistic Prob.
t
C 0.242935 0.012264 19.80879 0.0000
ER 6.14E-06 1.34E-06 4.572055 0.0001
FDIG 0.438033 0.893300 0.490354 0.6282
GDPGRTH -0.002577 0.000604 -4.268568 0.0002
R-squared 0.577264 Mean dependent var 0.270838
Adjusted R-squared 0.526536 S.D. dependent var 0.083618
S.E. of regression 0.057537 Akaike info criterion -
2.745349
Sum squared resid 0.082762 Schwarz criterion -
2.556756

41
Log likelihood 43.80756 F-statistic 11.37954
Durbin-Watson stat 0.952573 Prob(F-statistic) 0.000068

42
43
44
45
46
Dependent Variable: XG
Method: Least Squares
Date: 10/08/11 Time: 04:18
Sample: 1980 2008
Included observations: 29
Variable Coefficien Std. Error t-Statistic Prob.
t
C 0.242935 0.012264 19.80879 0.0000
ER 6.14E-06 1.34E-06 4.572055 0.0001
FDIG 0.438033 0.893300 0.490354 0.6282
GDPGRTH -0.002577 0.000604 -4.268568 0.0002
R-squared 0.577264 Mean dependent var 0.270838
Adjusted R-squared 0.526536 S.D. dependent var 0.083618
S.E. of regression 0.057537 Akaike info criterion -
2.745349
Sum squared resid 0.082762 Schwarz criterion -
2.556756
Log likelihood 43.80756 F-statistic 11.37954
Durbin-Watson stat 0.952573 Prob(F-statistic) 0.000068

47