Geographic Reorganization of the European Automobile Sector: What Role for the Central and East European Countries in an Enlarged European Union? An Empirical Approach

Abstract

A massive surge in foreign investment, beginning with the transition to an enlarged European Union, has contributed strongly to the automobile sector's reorganization in Central and East European countries (CEECs). In an attempt to complement the essentially qualitative literature on the subject, this paper proposes an original empirical approach to evaluate the maturity of the CEEC automobile sector and its integration into the European automobile production network. Relying on six-digit-level disaggregated data on the CEEC automobile sector's trade within Europe for the period 1993-2003, the paper analyzes the composition of trade as well as the evolution of the CEECs' intraindustry trade (IIT). First, the results demonstrate that core CEECs no longer show any sign of a technological deficit or maturity gap vis-à-vis their partners from the ex-EU-15, with whom they reached high levels of IIT, whereas peripheral CEECs continue to accommodate infant industries that generate little IIT. Second, the econometric analysis confirms that the high levels of IIT between core CEECs and their neighboring countries in the ex-EU-15 are a consequence of the production process's decomposition within the central basin, initiated by important foreign direct investment relocation flows. These results, based on the largest available data set over the transition period, confirm that the heart of the sector, previously centered on Germany, has extended to the CEECs of Central Europe, whereas Baltic and Southern CEECs remain hardly integrated. In the long run, the successful integration of core CEECs should reinforce the German pole in the European Union and have a major effect on the European automobile sector's geography.