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European Trade and Foreign Direct Investment. U-Shaping Industrial Output in Central and Eastern Europe: Theory and Evidence

Author

Listed:
  • Alexandre Rekine
  • Patrick Paul Walsh

Abstract

We examine the evolution of industrial output in Bulgaria, Hungary, Poland and Romania over the period 1989-1995 in terms of product trade orientation prior to the transition process, some products traded in a market economy while others traded in the artificial market of the Soviet Bloc. We theoretically and empirically model the growth dynamics of EU oriented output within sectors of industry, ex-post trade and market liberalisation, as Foreign Direct Investment (FDI) induced Schumpeterian (vertical) waves of product innovation. We estimate the growth dynamics of non-EU oriented output within sectors as unobservable deterministic sector and country specific heterogeneity. The results indicate that the evolution of industrial production within sectors that were EU oriented prior to transition grew with increasing convexity over time. This growth was unconstrained by the transition process due to increased access to the European market, foreign capital and foreign expertise. Pre-transition non-EU industrial production is estimated to follow the same pattern as that observed in CIS countries. Hence the faster recovery, or the U-Shape industrial output, observed in CEE as compared with CIS countries is mainly explained by the inherited presence of EU oriented production and its unconstrained growth over the transition period.

Suggested Citation

  • Alexandre Rekine & Patrick Paul Walsh, 1998. "European Trade and Foreign Direct Investment. U-Shaping Industrial Output in Central and Eastern Europe: Theory and Evidence," LICOS Discussion Papers 7398, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    • Handle: RePEc:lic:licosd:7398
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    References listed on IDEAS

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    1. Gérard Roland & Thierry Verdier, 1999. "Transition and the output fall," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 7(1), pages 1-28, March.
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    Cited by:

    1. Fiona Duffy & Patrick Paul Walsh, 2000. "A Regional Analysis of Wage Determination in Poland," LICOS Discussion Papers 8700, LICOS - Centre for Institutions and Economic Performance, KU Leuven.
    2. Henri Bezuidenhout & Wim Naudé, 2008. "Foreign Direct Investment and Trade in the Southern African Development Community," WIDER Working Paper Series RP2008-88, World Institute for Development Economic Research (UNU-WIDER).
    3. Goran Vuksic, 2005. "Impact of foreign direct investment on Croatian manufacturing exports," Financial Theory and Practice, Institute of Public Finance, vol. 29(2), pages 131-158.
    4. Magdalena RĂDULESCU & Luminiţa ŞERBĂNESCU, 2012. "The Impact of FDIs on Exports, and Export Competitiveness in Central and Eastern European Countries," Journal of Knowledge Management, Economics and Information Technology, ScientificPapers.org, vol. 2(1), pages 1-5, February.

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    Keywords

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    JEL classification:

    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • P23 - Political Economy and Comparative Economic Systems - - Socialist and Transition Economies - - - Factor and Product Markets; Industry Studies; Population

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