What patterns does Hungary's real integration into the EU show - A Heckscher-Ohlin model and some time-series analyses

Exports from Hungary to Germany are sensitive to the trend of industrial output there, in a way contrary to the explanation projected. However, this is not the case with exports to Austria. It should also be noted that Hungarian exports are insensitive to short-term variation of industrial output abroad, but interestingly, short-term variation of the real exchange rate and FDI affect them. Hungary can be said to show strong real integration with some EU countries. The findings relating to Germany are important, since Germany is commonly seen as the driving force behind the demand condition of the EU core, against which real integration can be judged. It has been shown that there is a long-term structural link between Hungary and two of the three countries analysed: Germany and Austria. However, the short-term variation of foreign demand, unlike real exchange rates and FDI, does not have any explanatory power over the cyclical variation of Hungary’s exports. This suggests that more direct measures may yield more ‘optimistic’ results, in terms of the real integration of CEE countries, than simple industrial output. Unfortunately, the authors of this study lacked data to carry out the same investigation for other pre-accession countries. Although the results are promisingly clear for Hungary, but they need to be qualified by international comparisons. An interesting side product of the empirical exercise is that it suggests that FDI inflow is probably associated with good times in the foreign countries. This makes it more probable that foreign investment flows in Hungary are complementary rather than substitutes with investments taking place abroad. This has the implication FDI inflows to Hungary are not replacing capacities abroad, rather they are set up jointly with those.