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Trade liberalization and economic geography in transition countries: Can FDI explain the adjustment patterns of regional wages?


  • Joze P. Damijan
  • Crt Kostevc


Present paper studies the within-country regional effects of trade liberalization in transition countries. We argue that FDI inflows can be an important factor to accelerate the regional adjustment process in the home country. In order to underspin this theoretically, we first augment the new economic geography models by breaking the implied regional symmetry and by introducing capital as a second factor of production. Major contribution of our approach is that it allows for inter-regional as well as international capital mobility while labor is assumed to be immobile. Numerical simulations of our model indicate that this should contribute to faster convergence of relative regional wages in the smaller region. In addition, we examine the exact adjustment pattern of relative regional wages in five transition countries in the period 1990-2004 after they have liberalized their trade with the EU. First, we show that in four out of five transition countries there is a significant u-shaped adjustment pattern of regional wages after they opened up to foreign trade. And 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 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.
  • Handle: RePEc:lic:licosd:22208

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    References listed on IDEAS

    1. Jan Fidrmuc, 2005. "Labor Mobility during Transition: Evidence from the Czech Republic," William Davidson Institute Working Papers Series wp767, William Davidson Institute at the University of Michigan.
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    8. Joze P. Damijan & Mark Knell & Boris Majcen & Matija Rojec, 2003. "Technology Transfer through FDI in Top-10 Transition Countries: How Important are Direct Effects, Horizontal and Vertical Spillovers?," William Davidson Institute Working Papers Series 549, William Davidson Institute at the University of Michigan.
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    More about this item


    economic geography; trade costs; wages; transition countries; foreign direct investment;

    JEL classification:

    • F16 - International Economics - - Trade - - - Trade and Labor Market Interactions
    • P23 - Economic Systems - - Socialist Systems and Transition Economies - - - Factor and Product Markets; Industry Studies; Population
    • R13 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General Regional Economics - - - General Equilibrium and Welfare Economic Analysis of Regional Economies

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