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Trade liberalisation and economic geography in CEE countries: the role of FDI in the adjustment pattern of regional wages

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  • Joze Damijan
  • Crt Kostevc

Abstract

This article studies the within-country regional effects of trade liberalisation in Central and Eastern European countries. CEE countries liberalised their trade with the European Union from the mid-1990s, while also receiving substantial foreign investment in the process. The first part of the period witnessed strong agglomeration effects in all of the countries, leading progressively to core-periphery type specialisation, and increasing regional wage differentials. In the second part of the period, however, there is notable evidence of a reversal in the relative regional specialisation, pointing to a U-shaped pattern of relative regional wages. Using the regional data for five CEE countries in 1990-2004 we argue that FDI inflows can be an important factor accelerating the observed regional adjustment process in the host country. First, we show that in four out of five CEE countries there is a significant U-shaped adjustment pattern of regional wages after they opened up to foreign trade. Second, we find robust econometric confirmation that in three of the five countries FDI has contributed significantly to faster adjustment of relative regional wages.

Suggested Citation

  • Joze Damijan & Crt Kostevc, 2011. "Trade liberalisation and economic geography in CEE countries: the role of FDI in the adjustment pattern of regional wages," Post-Communist Economies, Taylor & Francis Journals, vol. 23(2), pages 163-189.
  • Handle: RePEc:taf:pocoec:v:23:y:2011:i:2:p:163-189
    DOI: 10.1080/14631377.2011.570041
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    References listed on IDEAS

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    1. Brülhart, Marius, 1996. "Regional Integration, Scale Economies and Industry Location in the European Union," CEPR Discussion Papers 1435, C.E.P.R. Discussion Papers.
    2. Richard Baldwin & Rikard Forslid & Philippe Martin & Gianmarco Ottaviano & Frederic Robert-Nicoud, 2005. "Economic Geography and Public Policy," Economics Books, Princeton University Press, edition 1, number 7524.
    3. Joze P. Damijan & Crt Kostevc, 2008. "Trade liberalization and economic geography in transition countries: Can FDI explain the adjustment patterns of regional wages?," LICOS Discussion Papers 22208, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
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    Cited by:

    1. Andrzej Cieślik & Bartłomiej Rokicki, 2016. "European Integration and Spatial Wage Structure in Poland," Tijdschrift voor Economische en Sociale Geografie, Royal Dutch Geographical Society KNAG, vol. 107(4), pages 435-453, September.
    2. Curran, Louise & Zignago, Soledad, 2012. "EU enlargement and the evolution of European production networks," Research in International Business and Finance, Elsevier, vol. 26(2), pages 240-257.

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