In Discussion Paper No. 1377, Research Fellow Bernard Hoekman and Simeon Djankov explore what trade data suggest about East European exports: economic restructuring and changes in the composition of trade or simply a 'redirection' of traditional exports to the West. A strong relationship is found between export performance and growth in vertical intra-industry trade with the EU. The latter reflects the sourcing of inputs from EU firms, with associated transfers of technology and marketing-related services. Inflows of foreign direct investment are found to be highly correlated with the volume of intra-industry trade.

The Czech and Slovak Republics register the highest growth in exports and the greatest reorientation in the pattern of trade. They also have the highest levels and growth rates of intra-industry trade with the EU and seem to have undergone the least change in the overall composition of total exports although substantial changes occur within traditional export categories. Simple redirection of goods traditionally exported to Eastern bloc countries does not appear to have played an important role in the growth of exports to Western Europe. Foreign direct investment inflows are highly correlated with intra-industry trade levels. Nevertheless, they are unlikely to have been a major driving force of intra-industry trade, particularly if large investments in the automobile sector are excluded from the sample.

Intra-industry Trade, Foreign Direct Investment and the Reorientation of East European Exports
Bernard Hoekman and Simeon Djankov