Central and Eastern European States from an International Perspective: Economic Potential and Paths of Participation in Global Value Chains

ABSTRACT

This article presents the Central and Eastern European (CCE) countries and their role in global value chains (GVCs). The analysis consists of two steps. Firstly, we evaluated the economic potential of CEE countries. Secondly, we assessed the role of CEE states in international production linkages. We tested the hypothesis that the higher economic potential expressed in a more business-friendly economy is found in a country most involved in GVC in the context of foreign trade exchange. Results confirm that the relation between economic potential and the involvement of GVCs is not obvious and depends on many factors.

KEY WORDS:

• Central and Eastern Europe
• foreign trade
• global value chains

JEL:

• F14
• F15.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website

Notes

1. It is calculated as the number of countries to which the reporter exports a particular product divided by the number of countries that report importing the product that year.

2. The 2014 data for Latvia were incomplete so the country was omitted from the analysis.

3. What is noteworthy about Romania and Lithuania is that in recent years a considerable proportion of the manufacturing industry output was delivered by non-domestic companies, meaning that a large part of IVA was generated by the affiliates of foreign corporations (Eurostat, 2018).

4. According to a number of international rankings, e.g. the ICT Development Index (International Telecommunication Union 2015), the Global Innovation Index (Boston Consulting Group 2016), or the Innovation Union Scoreboard (UNU-MERIT 2016), the CEE states hold lower positions than Western European countries. It means that the field of technological development still needs improvements. A study of the position of CEE states in GVCs shows that the region is still perceived as a supplier of low- and middle-processed products rather than a high-tech manufacturer. We observe the above-mentioned phenomenon in the CEE states that have taken advantage of FDI flowing to more advanced sectors (e.g. automobile). We can attempt to explain the lower technological advancement of CEE countries by their low share of expenses on research and development. By comparison, the average for the EU in this regard was 2.04% of GDP in 2014; for Poland, it was only 0.94% of GDP. The lowest level of R&D in 2014 spending was in Romania (0.38% of GDP) and Latvia (0.69% of GDP). Only Slovenia (2.38% of GDP) exceeded the EU average. The CEE countries rank far behind Western Europe in terms of patents, total R&D personnel, and R&D personnel per capita (Eurostat 2016).

5. The automotive industry is the major driver of the Czech Republic and Hungarian exports and is also highly integrated into GVCs. Unfortunately, the backward linkages (value-added from trade partners embodied in total gross exports) has played a predominant role, for example, the Czech Republic’s participation in GVCs, especially backward participation, is among the highest in the world in 2014.

6. Only the Czech Republic noted higher foreign investment returns.

7. The highest share in gross exports among all CEE countries.

Additional information

Funding

The article is the result of the research project “Chinese New Silk Road Strategy: Implications for Production Linkages Between China and Central and Eastern Europe” financed by the National Science Centre, Poland (UMO-2016/23/D/HS4/02748).