Does Economic Integration Affect the Structure of Industries? Empirical Evidence from the CEE

Abstract

In this paper we study the impacts of regional integration on the structure of industries in the Central and Eastern European (CEE) transition economies. Our empirical analysis is based on the economic geography framework, which is able to predict not only the industry location after integration, but also to capture other general equilibrium effects, such as transition to market economy, which turn out to be highly significant in the CEE. Our empirical results complement previous findings that industry location is strongly related to economic integration. We also find that CEE integration of the Council on Mutual Economic Assistance (CMEA) has distorted the industry location pattern predicted by the underlying economic geography theory. These distortions are higher in those regions that were more integrated in the CMEA. Our ex-ante simulation results suggest a convergence in regional specialisation after CEE integration with the EU.