Central And Eastern European Economies Research Articles

Economic upgrading of Central and Eastern European economies through global value chain participation and foreign direct investment

ABSTRACT This paper links global value chain (GVC) integration and operations of multinational enterprises (MNEs) in the context of host economies upgrading. Economic upgrading is referred to as higher exported value added that has been generated in the domestic economy as a result of foreign direct investment (FDI). Particular attention is paid to the impact of GVC on selected Central and Eastern European (CEE) economies. An econometric model is estimated using panel data of 44 sectors for four CEE economies over the period 1995–2018. A primary source of data is the latest edition of the TiVA (Trade in Value Added). The most important variable in explaining domestic contribution to GVC was the flow of foreign inputs. Backward linkages are crucial for building the GVC presence of the economies. The variables of interest – FDI stocks and flows – have in general a negative impact on the level of domestic content in analysed economies.

Political Effects on FDI in the CEE Region: Two Cases of Connectivity and Decoupling from the West

The article studies two cases of political impacts on FDI in the Central and Eastern European (CEE) region. The first case covered 15 CEE countries focusing on FDI sensitivity to democracy and elections during their connectivity with the West from 1991–2019. The panel data multi-factor linear regression method gives some arguable results that show that the fall of democracy increases FDI in CEE economies. It is explained by the FDI’s priority of economic scale and growth over the level and direction of democratic development. At the same time, Western connectivity provides an environment for economic growth in the CEE economies. The second case describes the political effects of decoupling from the West on the China–Belarus Industrial Park (CBIP) in 2020–2022. Based on the event study methodology and field survey of 21 residents of the CBIP, the findings show the negative effects of decoupling on the volume of Chinese capital, the number of registered residents, their profit, payback period, and reliance on government support. Both the cases also demonstrate the drop in FDI during election years. JEL Classification F21, P16, O52

Driving industrial and economic growth in Central and Eastern Europe: The role of electricity infrastructure and renewable energy

Balancing environmental objectives with energy security poses a significant challenge for Central and Eastern European (CEE) economies undergoing substantial energy sector reforms, particularly in the electricity sector. Apart from implementing market principles, improving electricity infrastructure and increasing the use of renewable energy sources (RES) are crucial for fostering industrial and overall economic growth. This study analyzes a panel of 15 Central and Eastern European economies (CEE) from 1995 to 2021. It employs various analytical techniques such as cross-sectional dependency testing, unit root testing, cointegration analysis, and the Augmented Mean Group (AMG) estimator. The results indicate that inefficient electricity infrastructure negatively impacts GDP and industry value-added (IVA) growth rates, regardless of control variables. Conversely, electricity generated from RES positively affects GDP and IVA growth rates in fully developed models. However, increased RES-generated electricity in models without control variables adversely affects IVA growth rates. These findings, coupled with the specific characteristics of CEE economies, lead to policy recommendations for sustainable economic and energy development.

Pandemics uncertainty and informational globalization in CEE countries: The role of innovation diffusion

The Covid-19 pandemic has dramatically changed how information is shared and processed worldwide. The COVID-19 pandemic has profoundly affected the globalization of information, causing shifts in communication, information dissemination, and technology. This paper investigates the impact of pandemics-related uncertainty on the index of de facto informational globalization (the measure based on high-technology exports, international patents, and used internet bandwidth). The paper uses the panel dataset of 18 Central and Eastern European (CEE) countries from 1990 to 2020. The results indicate that pandemics-related uncertainty negatively affects the informational globalization level in the CEE economies. The findings are robust in utilizing different estimation techniques and considering NATO member CEE countries.

Between the Eurozone crisis and the Brexit: the decade of British outward FDI into Europe

This paper investigates the determinants of outward foreign direct investment (OFDI) of British multinational firms in the European Union (EU) and the European Free Trade Association members across 2009–2019 using Bayesian model averaging. We find evidence that supports the existence and dynamic behavior of the East–West structure of FDI between three groups of countries: core-EU, Central and Eastern European economies (CEE), and the Nordics. Further, we document the importance of relative market size, urbanization, the rule of law in attaining horizontal FDI in the core-EU economies. In turn, infrastructure spending and enhanced political stability are the most important drivers for FDI in CEE (post-2000 accession). Finally, our results highlight the negative effects of the Eurozone crisis and Brexit anticipation on British OFDI activity in the region. The findings remain robust when accounting for potential MNE profit shifting to partners such as Ireland, Luxembourg, and alike.

The Factors Behind Bulgaria’s (Non) Convergence

This paper looks at the real convergence of Bulgaria in the period 1999-2018 and tries to identify and describe the factors that have stimulated or impeded the growth and the convergence of the economy. The research is based on the sigma-convergence method for estimation of the disparities in terms of real GDP per capita among the six Central and eastern European (CEE) countries with a derogation and among them and the average euro area income per capita. A comparative analysis is applied when analyzing the factors for convergence and their evolution in the period as Bulgaria is compared to the other CEE economies. The results of the research show the presence of a sigma convergence in the observed period. The convergence has been more pronounces in the first ten years. Although Bulgaria demonstrates one of the highest growth rates, this growth has not been sufficient to close the significant income gap between Bulgaria and the EU and euro area averages. While some factors have played positive role in the convergence process, some weaknesses have not been overcome and continue to play negative role and impede the convergence.

The nexus between financial development, globalization, and environmental degradation: Fresh evidence from Central and Eastern European Countries.

Global warming and greenhouse gas emissions have become a severe threat to our ecosystem. Prior studies on environment posit that ample exhaustion of fossil fuels for energy is one of the fundamental causes of environmental degradation and naturally replenished energy sources are affordable over fossil fuels. This study set out to examine the role of financial sectors and globalization (in the presence of energy and renewable energy consumption) for a sustainable environment in the panel of Central and Eastern European (CEE) countries in One Belt and One Road initiative perspective. The current study uses annual data of 16 CEE countries covering the period of 1980 to 2016. After confirmation of cross-sectional dependency and co-integration among variables, we applied the Dynamic Seemingly Unrelated Regression and Dumitrescu-Hurlin causality approach for long-run estimations and to check the causal relationship, respectively. The empirical findings of the study certify the existence of an environmental Kuznets curve for the selected panel countries. Globalization is enhancing the environmental quality of the CEE economies. It is important to note that energy consumption and renewable energy consumption have a positive and statistically significant whack on carbon emission. In addition, we do not find a significant link between financial development and carbon emission. Granger casualty test confirms a two-way causal relationship between economic growth and carbon emission, globalization and environmental degradation, globalization and renewable energy consumption, economic growth and renewable energy consumption, and between financial development and energy consumption. Moreover, we found one-way causality from energy consumption (renewable and non-renewable) to carbon emissions. Based on the findings, a number of appropriate policy suggestions are presented in the perspective of Central and Eastern European Countries.

An innovation policy framework for upgrading firm absorptive capacities in the context of catching-up economies

The paper addresses the ‘regional innovation paradox’ referring to the lower capacity to absorb public funds earmarked for the promotion of innovation in the peripheral regions. The key aim is thus to propose and test a conceptual framework of tailored innovation policy routes that aim at stimulating absorptive capacities of firms. Literature analysis helps to distill determinants of absorptive capacity at firm and system levels. Analysis of innovation policies applied by the Central and Eastern European (CEE) countries in 2007-2013 is used to determine the gap between mainstream innovation policies and business capacity building needs. The paper presents an integrative conceptual ‘stairway of competence’ framework, mapping four innovator types with alternative policy routes. An assessment of innovation policies in the selected CEE countries is provided. We find that mainstream innovation policies in the selected countries mainly focused on two routes: strengthening the capacities of mature innovators and the uptake of existing technology. There is little evidence that this approach had any clear effects on structural change in the CEE economies. These findings suggest that a more tailor-made approach to innovation capacity building is needed, taking into account the current capacity levels within the target groups. These findings are especially relevant to the use of European Union cohesion policy funds and the implementation of the smart specialization strategies. Although the CEE is the main context for the framework, its implications are applicable to other catching-up and peripheral regions more widely.

Labour Market Conditions and Wage Inflation in CEE Economies

In this paper, we test whether a wage Phillips curve can still be considered a reliable approximation of nominal wage determination in Poland, Hungary and the Czech Republic. The empirical evidence is broadly in favour of the existence of a negative relation between labour market slack and nominal wage inflation in the Central and Eastern European (CEE) economies between 2001 and 2017. However, after 2009 wage inflation was significantly below the value that would have been predicted by an estimated wage Phillips curve. The results of rolling OLS estimations confirm a weakening of the negative relation with the unemployment gap. A closer look at the recent evolution of labour market conditions in Poland, Hungary and the Czech Republic suggests that the composition effects on labour supply, especially those linked to demographic and migration trends, could be particularly relevant. Other possible explanations generally mentioned with reference to advanced economies - such as a large share of long-term unemployment, part-time and temporary workers or workers that are underemployed or marginally attached to the labour market - probably had no role or only a marginal one in the recent weak nominal wage growth in the three countries.

Export competitiveness of Central and Eastern Europe since the enlargement of the EU

We use constant market share (CMS) analysis to decompose changes in the export shares of the Central and Eastern European (CEE) economies in the period since the 5th enlargement of the European Union (EU) and measure changes in export competitiveness. We find that the CEE transition economies have generally increased their world export competitiveness, but gains in market share have been tempered by a poor match between both the commodity and regional export profiles of most of the CEE economies and the changes in the world import profile, and by generally slow adaptation of the region to changes in the latter on both the commodity and regional dimensions. Changes in export competitiveness in the region overall are instead driven largely by expansions of market share within the EU. Using a new method we show that only a small proportion of the change in the trade share is attributable to changes in the extensive margin. We discuss possible policy implications.

Is there a non-linear relationship between trade and growth? A panel threshold analysis for Central and Eastern European countries

It is suggested that international trade has a positive effect on the growth rate of economies. Although a vast literature has illustrated that open or more liberalised economies grow faster, the specific factors that promote this process have only recently begun to be investigated. We belive that there is a non-linear relationship between trade and growth, with the impact depending on a number of macroeconomic factors, i.e. the magnitude and even the direction of the effect of trade on economic performance might depend on other macroeconomic variables. Within this framework, our study aims to investigate the possible non-linearity in the trade-growth relationship, with a special focus on the financial deepening level for the selected Central and Eastern European (CEE) countries. Unlike the existing empirical literature on trade-growth nexus for the CEE economies, we utilise threshold regression techniques, where we allow the size and direction of the impact of trade on growth to differ between regimes, conditioning on the financial deepening level of these countries. Regarding credit growth and investment/credit ratio as thresholds, the countries in the upper regime benefit significantly more from trade.

Technological capabilities in Central and Eastern Europe: an analysis based on priority patents

This contribution studies the technological capabilities of Central and Eastern European (CEE) economies based on priority filings for the period of 1980---2009. From a global perspective, the indicators suggest a division of labour in technological activities among world regions whereby Europe, Latin America and the former USSR are specializing in sectors losing technological dynamism (Chemicals and Mechanical Engineering) while North America, the Middle East (especially Israel) and Asia Pacific are increasingly specializing in Electrical Engineering, a sector with significant technological opportunities. Regarding priority filings, CEE reduced its technological activities drastically after 1990. The recovery of CEE economies regarding technological capabilities is unfolding very slowly. The results speak for the ability of CEE countries in contributing to a limited number of fields with growing technological opportunities. The technological profile of the CEE region will more likely than not complicate the technology upgrading process towards activities at the technological frontier.

Sovereign Wealth Funds in Central and Eastern Europe: Scope and Methods of Financial Penetration

The Central and Eastern European (CEE) capital markets (of Poland, Lithuania, Latvia, Estonia, the Czech Republic, Slovakia, Hungary, Ukraine and, to a limited extent, Belarus) are gradually evolving towards increased breadth (diversity) and depth (liquidity), however, they are still exposed to considerable cross-country volatility and interdependence spill-overs – especially in times of capital flight to more established asset classes (“safe havens”). Sovereign Wealth Funds (SWFs) have widely been censured for their undesirable political interference and chronic operational opacity. This paper demonstrates that in CEE, contrary to widespread perceptions attributable to developed markets, SWFs can act as natural and powerful risk mitigators (contributing to a more stable capital base and reduced systemic volatility). Such a proposition is premised on several factors specific to SWFs oriented to CEE. They comprise: strategic long-termism and patience in overcoming interim pricing deficiencies, commitments to elements of a broadly interpreted infrastructure, and absence of overt conflicts of interest with the CEE host economies. The paper, besides reviewing the utilitarianism of SWFs in the CEE’s risk mitigation context, highlights regulatory and technical barriers to more SWF funding for CEE. It also recommends policy measures to the CEE economies aimed at luring more host-friendly SWF investment into the region.

Management compensation systems in Central and Eastern Europe: a comparative analysis

Drawing upon a large scale comparative data-set we explore the preferred approaches to managerial compensation pursued by organizations operating in the Central and Eastern European (CEE) transition economies of Bulgaria, the Czech Republic, Estonia, Lithuania, Hungary, Slovenia, Slovakia and Serbia. In order to generate insights on the state of management compensation and the extent to which these transition economies are characterized by idiosyncratic elements, relative to their Western European counterparts, we compare management compensation practices in these CEE economies (N = 1147) with approaches pursued in more developed western European economies (N = 2698). Overall, our results suggest that organizations in the CEE region share some similarities with their western counterparts, most especially in terms of the individual level of determination of pay for managers. Within the CEE region, we find that financial participation is less common than performance-related pay in the composition of the overall managerial reward package, though there are some variations between countries. National culture does appear significant as a determinant of variations in the preferred approach to management compensation.

Financial markets in CEE countries and their role in transmission of euro area monetary policy shocks

This paper uses the VAR methodology to analyse stock, bond, and exchange rate markets in six Central and Eastern European (CEE) countries. First, we study the influence of shocks occurring in each market on domestic economic conditions. Next, a counterfactual simulation analysis is carried out to discern the role of financial markets in the transmission of European Central Bank (ECB) monetary policy shocks into CEE economies. The results have implications for both present monetary policy-making and future euro adoptions, as well as for investors concerned with financial assets of CEE countries. While examining the estimated responses of domestic output and inflation to changes in stock, bond, and exchange rate prices, we draw conclusions on the relatively lower importance of the bond market and higher importance of stock and exchange rate markets in the economies. The study of transmission channels also points to stock markets as the main channel of transmission, especially in the case of transmission to the output. Transmission of monetary shocks to inflation takes place mainly through stock and exchange rate markets. There is also strong indication on considerable diversity across CEE countries taking place.

Sovereign Wealth Funds in Central and Eastern Europe: Scope and Methods of Financial Penetration

Abstract The Central and Eastern European (CEE) capital markets (of Poland, Lithuania, Latvia, Estonia, the Czech Republic, Slovakia, Hungary, Ukraine and, to a limited extent, Belarus) are gradually evolving towards increased breadth (diversity) and depth (liquidity), however, they are still exposed to considerable cross-country volatility and interdependence spill-overs - especially in times of capital flight to more established asset classes (“safe havens”). Sovereign Wealth Funds (SWFs) have widely been censured for their undesirable political interference and chronic operational opacity. This paper demonstrates that in CEE, contrary to widespread perceptions attributable to developed markets, SWFs can act as natural and powerful risk mitigators (contributing to a more stable capital base and reduced systemic volatility). Such a proposition is premised on several factors specific to SWFs oriented to CEE. They comprise: strategic long-termism and patience in overcoming interim pricing deficiencies, commitments to elements of a broadly interpreted infrastructure, and absence of overt conflicts of interest with the CEE host economies. The paper, besides reviewing the utilitarianism of SWFs in the CEE’s risk mitigation context, highlights regulatory and technical barriers to more SWF funding for CEE. It also recommends policy measures to the CEE economies aimed at luring more host-friendly SWF investment into the region.

Workers’ Remittances in Central and Eastern Europe (1993-2006): A Comparison to Latin America, and the Middle East

Despite the growing importance of workers’ remittances in total capital flows, the relationship between growth and remittances has not been adequately studied empirically in the context of transitional economies, especially in a comparative framework with other recipient countries. This is surprising because migrants from the Central and Eastern European Economies (CEECs) contribute significantly to their home economies through remittances, influencing investment and consumption patterns. This paper examines the impact of workers’ remittances on growth, investment and consumption in a number of CEECs in comparison to Latin America and the Middle East-North Africa- Turkey (MENAT) in a panel data framework. Using annual data ranging from 1993-2006, it is shown that as compared to Latin America, both investment and consumption are positively affected by the amount of remittances sent by workers’ to their home countries in the CEECs after controlling for several important determinants of growth such as openness to trade, inflation, real interest, credit-GDP ratio as a measure of financial deepening. In the CEECs, as in the Middle East, the workers’ remittances affect growth both through consumption and investment while the latter effect is stronger. By contrast, in Latin America, remittances mainly impact consumption rather than investment, even having a negative impact on growth. To gauge these differential effects, we use fixed and random effects estimation as well as GMM strategy to account for country-specific heterogeneity and to control for possible endogeneity among repressors. Our findings also suggest that workers’ remittances could be a significant impetus for growth, working through the investment channel, and their significance conditional on credit in investment equations suggest that they can help overcome the liquidity constraints by providing an alternative to formal channels of financing.

What Common Factors are Driving Inflation in CEE Countries?

In this paper, we analyse the sources of time variation in consumer inflation across ten Central and Eastern European (CEE) countries and five sectors (durables, semidurables, non-durables, food, and services) in the period 2001-2013. With a multi-level factor model we decompose product-level HICP inflation rates into the following components: CEE region wide, sector, country, country-sector, and idiosyncratic. The outcomes indicate that region-wide and country specific components of inflation are more persistent than sector and product-level components, which is in line with similar studies for core EU countries. Two region-wide factors explain about 17% of variance in monthly price changes, whereas the other common components explain below 10% each. The results are at odds with empirical evidence on the importance of sectoral price shocks in developed economies and the volatility-persistence puzzle. This difference may be related to the conclusion that the first region-wide factor is associated with common disinflationary processes that occurred in CEE economies in 2000s, whereas the second one reveals significant correlations with global factors, especially commodity prices and euro area price developments.

Determinants of economic growth in Central and Eastern Europe: the global crisis perspective

This article presents an empirical analysis of economic growth determinants in the 10 Central and Eastern European (CEE) countries Bulgaria, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovakia and Slovenia. The analysis covers the period 1993–2009. All the calculations are performed on five three-year subperiods and one two-year subperiod: 1993–95, 1996–98, 1999–2001, 2002–04, 2005–07 and 2008–09. The analysis is composed of three steps: data selection, correlation analysis and regression analysis. The correlation analysis is based on the coefficient of partial correlation to exclude the impact of the global crisis. In the regression analysis we build 10 alternative variants of empirical models of economic growth. Our results suggest that the most important economic growth determinants in the CEE countries are investment rate (including FDI), human capital measured by the education level of the labour force, financial sector development, good fiscal stance (low budget deficit and low public debt), economic structure (high services share in GDP), low interest rates and low inflation, population structure (high share of working-age population), development of information technology and communications, high private sector share in GDP and favourable institutional environment (economic freedom, progress in market and structural reforms). Our study indicates that the CEE countries have developed in line with the hypothesis of income level convergence (both in absolute and conditional terms). This means that less developed CEE economies grew on average faster than more developed ones.

Business perceptions of regulative institutions in Central and Eastern Europe

PurposeThe purpose of this paper is to investigate, theoretically and empirically, how entrepreneurial firms' perceptions of formal institutions differ across Central and Eastern European (CEE) economies.Design/methodology/approachThe paper uses data from the World Bank Group's World Business Environment Survey (WBES) compare entrepreneurial firms' perceptions of changes in different components of regulative institutions in Latin and orthodox CEE economies. The data used in this paper capture a decade's progress in the development of regulative institutions in these economies.FindingsIt was found that the state's regulatory, participatory, and supportive roles are more favorable to businesses in the Latin countries than in the orthodox countries. The findings provide support for the notion that informal institutions influence the degree of generalizeability and replicability of Western political and economic institutions' success in driving firms' entrepreneurial behavior in emerging economies.Research limitations/implicationsThe first limitation is that the data used were collected about a decade ago. Another limitation relates to a lack of coverage of many former Soviet republics and some other CEE countries in the WBES.Practical implicationsThe findings point to the need of strategic planning and various degrees of adaptation of business strategies across the CEE economies. Second, businesses may differ in terms of the relative importance of regulatory, participatory, and supportive roles of the government in their operations. Finally, some CEE economies can be influenced more than others by international pressures.Originality/valueThis paper's greatest value stems from the fact that it uses internationally comparable firm‐level data to empirically examine entrepreneurial firms' perceptions of regulative institutions in CEE economies.