Regional Economic Growth in Hungary 1998-2005: What Does Really Matter in Clusters?

Abstract

Although industry clusters are major targets of regional economic development in less developed regions as well, we still need a deeper understanding on how spatial clustering of firms generates dynamics in lagging regions. These latter environments may differ too much from those typical cluster policy examples that are usually very specialized global centres of dynamically growing industries. Using census-type data of Hungarian firms, we test the effect of major cluster indicators – regional specialization and spatial concentration of industries – and the effect of FDI on regional productivity and employment growth in Hungary. Our results suggest that regional specialization does not affect regional growth but spatial concentration of industries is found to influence productivity and employment growth with an overwhelmingly negative effect. Furthermore, regional employment growth is associated negatively with the initial level of regional specialization. We argue that Hungary has evolved into a dual economy; in which previously specialized regions and geographically concentrated industries have lost their pace. The main factor that favoured regional economic growth was the presence of large foreign companies. Therefore, economic policies fostering regional specialization and spatial concentration of industries – such as cluster policy – may have minor effects only if the interaction of foreign-owned and domestic companies is not fostered.