Export performance of Central and Eastern European Countries: Macro and Micro Fundamentals

Abstract

This paper analyses the evolution of exports' value and sophistication during 2004, using Hausmann, Hwang & Rodrik (2007 methodology. Focusing on Central and Eastern Europe, it is underlined that these states have to intensify efforts to support innovation-led growth through higher investments into technology intensive and sophisticated sectors. Export performance indicators are heterogeneous across countries, but also within the same country. We use panel fixed-effects models in order to investigate regional disparities of external results at county level in the case of Romania. The empirical results show that counties' trade volumes and sophistication are explained by region specific factors (value added and foreign direct investment) and, more importantly, by micro-level behaviour. Based on Total Factor Productivity, computed by Wooldridge (2009) GMM method, we find that heterogeneity of firm-level technology and efficiency is the key for explaining the differences in aggregate trade outcomes. The performance of high percentiles firms drives external results: more sophisticated and higher volumes of exports are recorded in regions where the productivity distributions have fatter right tails. This evidence brings into question the efficiency of policy measures targeting external competitiveness, highlighting the importance of taking into account the entire firm-level performance distributions, rather than just the average.