Production disintegration and integration of Central Europe into global markets

Abstract

Central Europe, which includes countries that either already joined the EU or are to accede the EU in the near future, offers an interesting case to examine network trade. The accession process has been crucial to the emergence of conditions friendly to production fragmentation, i.e., well-functioning services blocs indispensable to linking production blocs and duty-free access to a Single Market. Has Central Europe become part of production and distribution networks? In order to examine this trade, we develop an eclectic approach. Using the Standard International Trade Classification, Rev. 2, we identify parts and final products falling into three networks (automotive, information technology and furniture) and calculate various indices assessing the extent to which trade is two-way and involves processing and assembly operations. The analysis provides strong empirical support to the conclusion that Central Europe has become integrated into global, mostly EU-based networks of production and distribution. Network-related trade has experienced a very strong growth and undergone three important changes: processing and increased specialization in production of parts have increasingly replaced simple assembly operations; the CEEC-10 network firms, operating through mostly EU-based networks of production and distribution, have begun expanding beyond EU markets; and by 1999 CEEC-10 has moved from the status of a net importer to that of a net exporter of network products and parts. But not all countries have moved at the same pace. The largest recipients of FDI in the 1990s–Hungary, the Czech Republic and most recently Slovakia–have also experienced the fastest growth in network trade.