Inter- and intra-industry linkages as a determinant of FDI in Central and Eastern Europe

This paper uses an unpublished dataset on disaggregated foreign direct investment (FDI) in Central and Eastern European countries (CEECs), and is rooted in new economic geography literature. A 10% increase in access to suppliers based in the FDI recipient country or access to the EU15 market for intermediate goods increases FDI by about 2% in Central European countries and by 1% in Eastern European countries. We argue that Central (core) European countries specialise in upstream industries and re-export goods toward FDI-origin countries, while Eastern (periphery) European countries are also involved in this production chain, but to a lesser extent.     

Capital inflows,exchange market pressure,and credit growth in four transition economies with fixed exchange rates

With the transition from planned economic systems to membership in the European Union, capital inflows and domestic credit have expanded tremendously in Central and Eastern Europe. Four of these countries—Estonia, Latvia, Lithuania, and Bulgaria—maintain fixed exchange-rate regimes, which may face pressure because of rapid credit growth or during a slowdown. This study uses a Vector Autoregressive (VAR) approach to assess the contribution of capital inflows to exchange market pressure in these four countries, as well as to the growth of domestic credit. Both FDI and non-FDI flows are shown to feed credit growth in Bulgaria, but not the Baltics. Relatively volatile flows, particularly non-FDI inflows, reduce EMP in three of the four countries.     

From European Union to European Monetary Union: the new member states and accession countries of Central and Eastern Europe in 2004

The 10 new member states and candidate countries from Central and Eastern Europe have made the institutional reforms embodied in the acquis communautaire, including developing institutions of social dialogue which are supposed to ease the path to entry into the European Monetary Union (EMU). This review assesses the challenges facing the Central and Eastern European countries in achieving the targets set for EMU entry and questions whether the existing institutions of social dialogue will be able to bear the strain of achieving those targets.     

Outward FDI from Central and Eastern European Countries

In Central and Eastern Europe, outward foreign direct investment (FDI) has not yet become as a prominent factor in the regions reintegration into the world economy as trade liberalisation used to be in the early 1990s or inward foreign direct investment is currently. In the terminology of the investment–development path, with the notable exception of the Russian Federation, the region is in stage 2, whereby inward flows are still growing faster than outward flows. This article argues that a combination of the latecomer status of the regions transnational corporations and the transition shock can explain most of that laggard situation. It hypothesises that the enlargement of the European Union (EU) would give a major push to the outward foreign direct investment flows of Central and Eastern Europe (CEE), on condition that adequate government policies to promote those investments are put in place. The impact on the investment–development path, however, is uncertain, because accession to the EU is often accompanied by a surge in foreign direct investment inflows, too. Finally, the article also looks at the options available to deal with the specific problems of the Russian Federation in relation to capital flight, including ways of regularisation and potential return to the home economy.     

Foreign and domestic growth drivers in Eastern Europe

This paper analyses the growth effects of capital formation, exports and FDI as major, drivers of economic development in Eastern Europe. The fundamental innovations are, identified by empirically and theoretically motivated short- and long-run restrictions in, structural cointegrated vector autoregressions. Impulse responses and variance, decompositions reveal quite different growth effects in various Eastern European countries. Generally, a strong reliance on exports goes along with higher GDP, and FDI bears, substantial potential for fostering economic growth. It is shown that the recent worldwide, recession clearly hit Eastern Europe through the export channel, whereas the recovery is, mainly supported by positive demand shocks.     

Book Reviews

The main purpose of this exploratory research was to study the strategic importance of Central and Eastern Europe (CEE) as an emerging source of professional talent for European and American multinational corporations (MNCs) operating in Western Europe. The findings, based on in-depth interviews with 34 human resource leaders and consultants from 16 firms in the European Union and Switzerland, suggest that the new member states currently hold little strategic importance in the context of recruiting knowledge workers to Western Europe, and that MNCs' global staffing strategies may be excluding a strong and untapped source of professional talent. The less obvious and perhaps most important findings about why most of these MNCs do not systematically recruit from CEE countries lead to perceptions about CEE cultures and the communist legacy that still linger today.     

International stock market integration: Central and South Eastern Europe compared

We examine the international stock market comovements between Western Europe vis-à-vis Central (Czech Republic, Hungary and Poland) and South Eastern Europe (Croatia, Macedonia and Serbia) using multivariate GARCH models in the period 2006–2011. Comparing these two groups, we find that the degree of comovements is much higher for Central Europe. The correlation of South Eastern European stock markets with developed markets is essentially zero. An exemption to this regularity is Croatia, with its stock market displaying a greater degree of integration toward Western Europe recently, but still below the levels typical for Central Europe. All stock markets fall strongly at the beginning of the global financial crisis and we do not find that the crisis altered the degree of stock market integration between these groups of countries.     

Consolidating segmentation: post‐Socialist employment relations in Central and Eastern Europe

The article argues that, of the four major potential mechanisms for integration—the state, tripartite social partnerships, employer and employee organisations and shared values—in Central and Eastern Europe only the trade unions are contributing significantly towards national employment relations convergence. Against a background of imminent European Union accession, incorporation into global production systems, economic growth and gradual improvement in real incomes, four divergent employment relations systems are thus emerging: the state budget, privatised or about to be privatised, private and multinational.     

MNCs in Central,Southern and Central Europe and the former Soviet Union: investment decisions and the regulation of employment

This article explores the relationship between the regulation of employment and the decisions of multinational corporations (MNCs) to invest in Central, Southern and Central Europe and the former Soviet Union. Building on La Porta et al.'s work on legal origin, and its assumptions as to the incompatibility of owner and worker rights, the World Bank's Doing Business reports held that countries with stronger protection for worker rights represented poor destinations for investors. However, is it the case that investors are really deterred by employee rights? Our study investigates actual trends in foreign direct investment (FDI) through an analysis of UNCTAD World Investment Reports. We find that the level of individual and collective rights and social security legislation is not significantly associated with FDI.     

Conclusion: A new learning curve and new economic relations

The European Union has a strong interest in fostering sustainable growth in the central Asian economies, one dimension being to underpin its future energy security. This means supporting reforms that can further strengthen economic institutions, catalyze higher levels of FDI outside the energy sector, promote more broadly based economic growth, and promote financial stability. The EU thus needs to encourage policies that facilitate trade, including notably WTO membership; support institution-building, with a special emphasis on the financial sector; and foster greater regional co-operation (but not preferential regional trade). These are indeed areas in which the EU has developed a strong capacity for assistance during its engagement in Eastern Europe. The EU's policy agenda for central Asia suggests a shift of focus consistent with economic priorities along these lines.     

Income convergence prospects in Europe: Assessing the role of human capital dynamics

We employ income projection models based on human capital dynamics in order to assess quantitatively the role that educational improvements are expected to play as a driver of future income convergence in Europe. We concentrate on income convergence dynamics between emerging economies in Central and Eastern Europe and Western European countries during the next 50 years. Our results indicate that improvements in human capital contribute significantly to the income convergence potential of European emerging economies. Using realistic scenarios, we quantify the effect that future human capital investment paths are expected to have in terms of speeding up the income convergence process in the region. The income projection exercise shows that the returns to education in terms of income convergence in Europe could be sizeable, although it may take relatively long for the poorer economies of the region to rip the growth benefits.     

The rise and fall of social partnership in postsocialist Europe: the Commonwealth of Independent States

Traditional trade unions throughout the postsocialist world embraced ‘social partnership’ as a means to secure their institutional survival in a radically changed economic and political environment. The commitment of national governments to social partnership ebbed and flowed through the 1990s, but it was confirmed, at least rhetorically, in Central and Eastern Europe by the prospect and requirements of accession to the European Union. This article explores the fate of social partnership in the ‘other half’ of Europe, the countries of the Commonwealth of Independent States, where social dialogue has largely been abandoned and trade unions alternatively marginalised or subordinated to the state apparatus.     

Financial contagion vulnerability and resistance: A comparison of European stock markets

This paper investigates contagion to European stock markets associated with seven big financial shocks between 1997 and 2002. We apply methods using heteroscedasticity-adjusted correlation coefficients to discriminate between contagion, interdependence and breaks in stock markets relationships. The analysis focuses on a comparison between developed Western European markets and emerging stock markets in Central and Eastern Europe. We find modest evidence of significant instabilities in cross-market linkages after the crises. The Central and Eastern European stock markets are not more vulnerable to contagion than Western European markets.     

The impact of value added components of GDP and FDI on economic freedom in Europe

This paper investigates the possibility of a long-run relationship between the Economic Freedom Index (EFI), Foreign Direct Investment (FDI) and value added components of GDP in thirty Eastern, Central and Western European countries. The study further examines whether the FDI and sector-specific components of GDP have any significant impact on economic freedom for these countries. We use annual data and employ Pedroni and KAO panel cointegration analyses to assess the long-run relationships. The results indicate that there is a significant long-run relationship between the variables under study. Moreover, the evidence shows that the service and industry value added components positively affect EFI, while the agriculture value added component has a negative effect on EFI. However, contrary to the prior literature, we observe a marginally significant and negative relationship between EFI and FDI in the random effects model.     

Fiscal policies and business cycles in an enlarged euro area

This paper compares the cyclical properties of fiscal policies across the 12 original eurozone countries and the future members from Central and Eastern Europe. For the sample period 1995–2005, the fiscal balance exhibits less inertia and is more counter-cyclical in Central and Eastern European countries than in members of the eurozone. The main differences arise from the revenue side. Differences in the formation of fiscal policy between current and future eurozone countries decrease over time. Both autonomous and counter-cyclical fiscal policies have little or no effect on cyclical variability in the eurozone countries, while such policies appear to be effective in Central and Eastern European countries.     

Inequality and reforms in transition countries

Distributional patterns evolved quite differently and stabilized at diversified levels across the Central–Eastern European and former Soviet Union countries which underwent transition. In this paper we provide an overview of income inequality dynamics for 22 transition countries from 1989 to 2008 and of the explanations and interpretations proposed by the main literature. We then highlight that while the effects of different transition approaches on output dynamics and other macroeconomic aggregates have been largely analysed, scarce attention has been devoted so far to their impact on distributive patterns. However, this kind of analysis might usefully contribute to complete the complex picture of the many social, economic and structural factors affected by transition and provide useful policy insights for those countries still experiencing deep institutional change.     

Interdependence between Eastern and Western European stock markets: Evidence from intraday data

We analyze comovements among three stock markets in Central and Eastern Europe and, in addition, interdependence which may exist between Western European (DAX, CAC, UKX) and Central and Eastern European (BUX, PX-50, WIG-20) stock markets. The novelty of our paper rests mainly on the use of 5-min tick intraday price data from mid-2003 to early 2005 for stock indices and on the wide range of econometric techniques employed. We find no robust cointegration relationship for any of the stock index pairs or for any of the extended specifications. There are signs of short-term spillover effects both in terms of stock returns and stock price volatility. Granger causality tests show the presence of bidirectional causality for returns as well as volatility series. The results based on a VAR framework indicate a more limited number of short-term relationships among the stock markets.     

Catching-up and inflation in Europe: Balassa–Samuelson, Engel's Law and other culprits

This study analyses the impact of economic catching-up on annual inflation rates in the European Union with a special focus on the new member countries of Central and Eastern Europe. Using an array of estimation methods, we show that the Balassa-Samuelson effect is not an important driver of inflation rates. By contrast, we find that the initial price level and regulated prices strongly affect inflation outcomes in a nonlinear manner and that the extension of Engel's Law may hold during periods of very fast growth. We interpret these results as a sign that price level convergence comes from goods, market and non-market service prices. Furthermore, we find that the Phillips curve flattens with a decline in the inflation rate, that inflation is more persistent and that commodity prices have a stronger effect on inflation in a higher inflation environment.     

Work models in the Central Eastern European car industry: towards the high road?

The integration of the Central Eastern European (CEE) countries into the European Union (EU) has provoked debates about the danger of a ‘race to the bottom’ in Europe caused by the low wages and weak labour regulation and labour standards in CEE. This article examines the evolution of work models in the CEE automotive industry. It argues that the work models in CEE did not take the low‐road trajectory. Rather, a limited high‐road model emerged in the 1990s, which combined skilled labour and secure employment for the core workforce with a broad margin of precarious employment, low wages and limited employee voice. In the context of labour shortages after the accession to the EU of the CEEs, companies faced recruitment problems and labour conflicts, which threatened to destabilise this model. The first reactions of firms pointed towards the strengthening of the high‐road orientation, but the development remains unstable, not least of all because of the economic crisis beginning in 2009.     

East European prospective members of the European Union under globalisation pressure

Central Eastern European countries will have to find their place in the EU confronted to globalisation challenge. Up to now, except Hungary, becoming an important EU partner in technology intensive industries, they are relying on their labour cost advantage and exchanging lower for higher quality goods. Accession to the EU, changing trading conditions and implying FDI concentration, will be a heavy challenge.