Journal of International Relations and Development

Volume 3, No. 2 (2000)

 

Changes in Specialisation and Intra-Industry Trade and the Effects of Foreign Direct Investment: The Cases of Hungary and Spain
by Andrea Élteto _*

 

Introduction

THE ARTICLE ANALYSES THE FOREIGN TRADE STRUCTURES OF HUNGARY AND SPAIN IN THE NINETIES WITH A SPECIAL FOCUS ON THEIR TECHNOLOGICAL COMPOSITION. Specialisation and intra-industry trade indices are calculated by applying the same highly detailed database. In order to examine the process of upgrading product quality, intra-industry trade is separated into horizontal and vertical types using the unit-value calculation method. Results show that in the nineties the Hungarian export-structure towards the European Union (EU) changed considerably regarding the rapid improvement of its technological composition. The same is not true for Spanish exports in this period. Different specialisation patterns seem to have formed in Spanish and Hungarian foreign trade. However, intra-industry trade increased considerably in both countries, which has taken place together with the upgrading of product quality. Based on the high concentration of foreign trade in certain products and companies, it can be stated that in the case of Hungary these phenomena are due to the effects of foreign direct investment (FDI). In the case of Spain, these effects are much less apparent.

Hungary has often been compared to Spain, mainly because of their lower development levels in relation to core EU members, but also because of the experiences of accession. In this respect, it is interesting to compare the changes (induced partly by accession) in Spanish foreign trade to the trends seen in the Hungarian case. In Spain – as in Hungary – liberalisation and the customs union have caused a rapid increase in imports and a deterioration of the foreign trade balance. During the same period, the Iberian country as a newly opened market has been very successful in attracting FDI, and FDI has gained an important role in the economy, somewhat similar to the Hungarian experiences. As to the main difference, it should be emphasised, however, that the bulk of the Spanish liberalisation process took place after its accession to the EU and was supported with significant financial transfers from the Union, while Hungary’s liberalisation has taken place much more rapidly and well before EU membership.

During the nineties Hungary’s foreign trade structure changed considerably. At the end of the decade, the overwhelming majority of exports and imports involved the EU. In 1999, the EU absorbed 76.2 percent of Hungarian exports and 64.4 percent of the imports stemming from there. In Spanish exports the EU’s share was 72.5 percent and in imports it was 67.2 percent in 1999. Given that the geographical relationship also influences the foreign trade of both countries, this is also the focus of our analysis. ₁

In the following article structural changes in Spanish and Hungarian exports are examined through the development of the technology-intensity of products between 1990 and 1998. Based on theoretical and empirical experience, changes in the foreign trade structure are then connected to the effects of FDI, to the activity of foreign investment companies. STRUCTURAL CHANGES IN MANUFACTURING’S FOREIGN TRADE IN HUNGARY AND SPAIN

AT THE END OF THE NINETIES, THE FOREIGN TRADE OF HUNGARY AND SPAIN WAS TIED TO THE EU AND THE GEOGRAPHICAL COMPOSITION OF EXPORTS AND IMPORTS MODIFIED IN FAVOUR OF THE EU. Apart from the geographical factor, there have been important changes in the product composition of foreign trade. These changes in manufacturing’s product structure are in the focus of the following analysis.

The industry classification is based on the OECD (Organisation for Economic Co-operation and Development) method (1993) set out in the ISIC (International Standard Industrial Classification of all Economic Activities) classification. ₂ Three groups have been created: high-technology, medium-technology and low-technology intensive products. ₃ All calculations referring to foreign trade are made at the SITC (Standard International Trade Classification) 5-digit product level (3,464 items) given by the Eurostat Comext database. ₄ This is a level detailed enough to avoid all biases stemming from the aggregation of products. Data were later converted to the ISIC Rev3 classification in order to apply the above mentioned technology groups.

Focusing on the technology-intensity of traded products, first of all the high-tech group is the most interesting. According to the OECD’s definition, pharmaceuticals, telecommunications equipment, office machinery, aircraft-spacecraft, precision instruments and electrical machinery belong to this group. It can be seen from Table 1 that the share of these products in Hungarian manufacturing’s exports to the EU increased radically between 1990 and 1998, reaching 34 percent at the end of the period, which is a high share in an international comparison. ₅

Table 1: SHARE OF INDUSTRIES IN SPANISH AND HUNGARIAN MANUFACTURING FOREIGN TRADE WITH THE EU (percentage)

Industries	Hungary		Spain
	1990	1998	1990	1998
High-tech	9.73	34.54	11.25	13.50
Med-tech	23.52	37.12	50.86	54.36
Low-Tech	66.75	28.34	37.89	32.14
Manufacturing	100	100	100	100

Note: see details in Table A1 in the annex. Source: own calculations based on the Eurostat Comext database

Three subsectors mainly increased their shares, electrical machinery, telecommunications equipment and office machinery. Observing the product level, it emerges that within these subsectors this increase has been due to four products: in the case of telecommunications equipment this product is video recording apparatuses, ₆ in electrical machinery it is ignition and other wiring sets used in vehicles, ₇ while in office machinery it is computer storage units and magnetic or optical readers. ₈ Regarding imports from the EU, it is interesting to note that since 1996 the share of high-tech products has already been smaller than in exports. In this respect, the technological structure of Hungarian exports can be said to be more developed than Hungarian imports in the EU relation.

Medium-technology sectors also increased their share (although to a much smaller extent) for which the motor vehicle branch is entirely responsible. Here the main product – the most important Hungarian export product in 1998 – is the reciprocating piston engines for cars of a cylinder capacity exceeding 1000 cubic centimetres. ₉ The medium-technology group dominates in imports, due to machines and motor vehicles.

Along with the increase of the high- and medium-technology groups, the share of low-technology sectors has rapidly decreased. This has been mainly due to the food and beverage, textiles-clothing and basic metal branches as being traditionally labour-intensive sectors. Regarding textiles-clothing products, between 1990-93 a temporary upswing was observed due to outward processing trade. In imports, the share of the low-tech group dropped to a certain extent.

In Spanish exports to the EU, the weight of high-technology sectors in exports did not change significantly between 1990-98. The share of telecommunications equipment, office and electrical machinery remained relatively small. High-tech products are more represented in imports than in exports during the whole period. The share of medium-technology sectors increased between 1990-98, which was first of all due to the transport equipment branch (this branch alone made up 35.7 percent of total Spanish manufacturing exports to the EU in 1998).

The share of low-technology sectors decreased to a certain extent – but not as drastically as in Hungary – for which the main areas responsible were the textiles-clothing, iron and steel and food branches. These products had been traditionally important in Spanish exports, but after accession they lost some of their importance. However, in recent years these traditional branches, mainly the food and textiles branches, have strengthened their roles again. In our analysis, we concentrate on the nineties, although studies have shown that the technological structure of Spanish foreign trade was also similar in the second half of the eighties (Martín 2000)

The changes in the product structure of foreign trade hint to changes in trade specialisation patterns. In this respect, the index we calculate is a type of revealed comparative advantage index, also called a ‘specialisation index’ (Török 1986:77) or ‘net export index’ (Balassa and Noland 1987:78) and its definition is:

SI = 100*(Xi-Mi)/(Xi+ Mi),

where Xi are the exports of sector i and Mi are its imports. We can speak about advantages, or specialisation if the value of the index is positive.

Table 2 shows the results of the calculations in the cases of Hungary and Spain.

TABLE 2. SPECIALISATION INDICES, SPAIN, HUNGARY-EU RELATION

Industries	Hungary		Spain
	1990	1998	1990	1998
High-tech	-23.82	8.57	-40.81	-35.19
Med-tech	-36.80	-17.82	-19.81	-12.00
Low-Tech	28.52	-2.91	-2.53	-8.04
Manufacturing	-1.89	-5.81	-17.56	-14.93

Note: see details in Table A2 in the annex. Source: own calculations based on the Eurostat Comext database

It can be seen that those – mainly low-tech – branches where Hungarian specialisation had traditionally been high (textiles, food, wooden products, coke and petroleum, etc.) still show positive indices, but a radical falling or stagnating trend can be observed during the nineties. At the same time, mainly between 1996-98 new specialisation patterns appeared within high-tech products, in office machinery and telecommunications equipment. In electrical machinery, specialisation remained throughout the whole period. Considering the high-tech group as such, the value of the SI index was already positive in 1998. Thus, in these branches exports increased more than imports.

Regarding Spain, specialisation indices generally deteriorated even between 1985-1989 (Martín 2000). This was most drastic in those sectors in which the country had been traditionally specialised such as textiles/clothing, food, beverages, rubber products, etc. According to our calculations, between 1990-1998 this tendency was partly and slowly reversed, and the textiles and food branches started to again show positive indices. In the medium-technology group, Spanish exports have always been influenced by the motor vehicle branch. In the field of high-technology goods, no new specialisation patterns are appearing. It therefore seems that, after a period of "shock" caused by the liberalisation measures and import boom, Spain has to a certain extent re-specialised itself in those traditional branches where it had comparative advantages before EU membership.

In summary, we can state that in both countries the role of "traditional", labour- and low-technology-intensive products in foreign trade decreased in the nineties (or even before in Spain). At the end of the decade, this tendency was counterbalanced in Hungary by the rapid gain in importance of high-tech products, but not in Spain, where some traditional products are instead reinforcing their role. In both countries, an important share of the motor vehicle sector is held within the medium-technology group.

INTRA-INDUSTRY TRADE

INTRA-INDUSTRY TRADE (IIT) IS CHARACTERISTIC OF SOPHISTICATED MANUFACTURED PRODUCTS. Monopolies, increasing returns to scale, and homogeneous consumer preferences in partner-countries can explain this type of trade, which could involve the exchange of the same goods on the basis of different packaging or seasonal effects, the exchange of differentiated or substitutive goods or the inducement of intra-industrial co-operation. In general, the more alike are the factor endowments of the partner-countries, the greater is the extent of IIT.

The main indicator used to measure intra-industry trade is the Grubel-Lloyd index based on the work of Grubel and Lloyd (1975). The definition of the index for a given product group i is the following:

Bi = [1-((Xi-Mi)/(Xi+ Mi))]*100,

where Xi and Mi are the exports and imports of the product groups, respectively. The index for the whole economy (or a sector group) is the weighted average of the product group indices according to the weight of the product groups in foreign trade (Wi):

Biw = S Wi Bi where Wi = (Xi+Mi)/ S(Xi+Mi)

The value of the index can move between 0 and 100, a higher index means a higher level of IIT. Note that the less detailed aggregation used, the higher is the value of the index, IIT should therefore be calculated at a very detailed level of classification. ₁₀

Since the work of Greenaway and Milner (1994), two types of intra-industry trade are distinguished. The first is called vertical IIT (VIIT), when the products traded are of the same type but different in quality, the other is horizontal IIT (HIIT), when the quality of products is also very similar. The separation of VIIT and HIIT is based on unit value calculation, which proxies for quality differences of export and imports. ₁₁ If the export and import unit values differ by less than 15 percent, then IIT is horizontal (the traded goods are of the same quality). If the difference is bigger in such a way that export unit values are higher, then IIT is a high quality vertical, otherwise IIT is low quality vertical. ₁₂

Separating vertical and horizontal IIT is important for several points of view (Éltet_ 1998). Regarding the effect of integration, in the case of countries of different development levels, integration can enhance vertical IIT. In this case, the products of a less-developed country which are of lower quality can be crowded out by the better quality imports of more-developed countries, accordingly the costs of adjustment can be high. ₁₃

Regarding Hungary, the domestic literature on intra-industry trade development remains small. Three studies can be mentioned here. The first is by Kovács (1996) who used both Hungarian and Eurostat data and calculated IIT and marginal IIT indices for 1991 and 1994 using the SITC 3-digit level (269 products). The second were done by Gáspár and Kacsirek (1997), where intra-industry trade indices were calculated for the machinery industry, in which a detailed level of classification (CN ₁₄

4-digit level) was applied only to selected product groups. The principle of selection was turnover and a dominant foreign partner. As to the third, the most recent, is the study of Pula (1999) who has also used Eurostat Comext data and calculated IIT indices for 1988-1996. Here, the NACE ₁₅

3-digit classification is used (108 products) and Grubel-Lloyd and marginal IIT indices are also calculated, although a further division of intra-industry trade (into vertical and horizontal types) is not applied. An analysis of quality upgrading is however performed according to the price/quality-gap method (Landesmann and Burgstaller 1995), which consists of the calculation of product prices and then the comparing of these to the average price for a given product in total EU imports. Our methodology differs to those used in the studies mentioned because a far more detailed classification (SITC 5-digit level) is applied and, in addition, the separation of vertical and horizontal IIT is carried out. The results are then grouped according to the technology-intensity levels used in this article.

Table 3 shows the results that confirm that in almost every branch, intra-industry trade increased between 1990-98. Regarding the whole manufacturing sector in 1998, 38 percent of its trade was already intra-industry trade. Mainly horizontal and vertical high quality IIT grew. In line with international experiences, in Hungary the vertical type also dominates within intra-industry trade. ₁₆

TABLE 3A. INTRA-INDUSTRY TRADE BETWEEN HUNGARY AND THE EU, 1990 AND 1998

Sectors	IIT		Horizontal		Vert. low		Vert. high
High-technology	1990	1998	1990	1998	1990	1998	1990	1998
Pharmaceuticals	43.0	28.8	0.5	1.1	27.6	12.9	14.9	14.8
Office machinery	13.1	46.5	0.9	33.9	10.1	11.4	2.1	1.2
Radio, TV sets	32.6	34.8	1.3	12.9	26.8	16.6	4.5	5.3
Electrical machinery and appliances	38.4	53.3	8.0	17.4	28.0	26.3	2.4	9.6
Aircraft, spacecraft	60.0	13.0	0.0	0.2	3.5	12.5	56.5	0.3
Medical, precision, opt. instruments	25.1	44.9	0.9	2.7	18.3	35.7	5.9	6.5
Medium-technology
Organic, inorganic basic chemicals	20.6	27.8	2.5	3.6	11.2	19.0	6.9	5.2
Manufacture of rubber products	34.1	55.8	2.6	3.3	31.1	41.7	0.4	10.8
Manufacture of plastic products	51.4	52.8	0.0	11.4	50.6	39.1	0.8	2.3
Non-ferrous metals, aluminium	19.5	39.3	3.8	13.9	12.7	25.3	3.0	0.1
Machinery and equipment	32.1	37.8	0.7	6.2	30.6	25.7	0.8	6.0
Railway and tramway locomotives	36.5	57.6	1.2	15.7	35.3	41.8	0.0	0.1
Motor vehicles, trailers	17.9	30.5	2.7	0.1	13.5	12.7	1.7	17.7
Manufacture of bicycles and motorcycles	19.4	47.7	0.0	6.0	14.7	14.4	4.7	27.3
Manufacture of transport equipment n.e.c.	5.5	91.4	5.5	0.0	0	0.0	0	91.4
Other manufacturing industries	33.4	23.6	0.2	4.3	30.9	13.8	2.3	6.5
Chemical products except pharmaceuticals	11.4	12.7	0.3	2.7	9.8	6.3	1.3	3.7
Low-technology
Food, beverages, tobacco	9.1	21.8	1.3	2.9	3.9	7.3	3.9	11.6
Textiles, clothing, leather	33.7	38.1	11.6	10.4	13.5	8.1	8.6	19.6
Wood and wood products	23.3	52.9	0.5	3.6	22.5	46.0	0.3	3.3
Paper and printing	22.2	26.1	1.6	3.0	19.6	14.6	1.0	8.5
Manufacture of refined petroleum products	1.8	40.3	0.0	26.9	1.8	13.2	0.0	0.2
Coal and petroleum products	11.5	9.1	0.0	0.0	11.5	9.1	0.0	0.0
Other non-metallic minerals	39.1	49.4	1.9	8.0	30.6	27.7	6.6	13.7
Manufacture of basic metals	17.2	31.8	0.5	2.2	16.2	27.7	0.5	1.9
Fabricated metals	47.0	54.7	2.2	3.0	44.1	47.2	0.7	4.3
Building and repairing of pleasure and sporting boats	4.3	40.8	0.2	21.9	3.8	16.8	0.3	2.1
Total manufacturing	26.8	38.2	4.0	8.9	18.9	19.2	3.9	10.1

Source: own calculations from the Eurostat Comext data

TABLE 3B. INTRA-INDUSTRY TRADE BETWEEN SPAIN AND THE EU, 1990 AND 1998

Sectors	IIT		Horizontal		Vert. low		Vert. high
High-technology	1990	1998	1990	1998	1990	1998	1990	1998
Pharmaceuticals	55.4	49.0	0.2	22.2	17.1	25.2	37.1	1.6
Office machinery	53.1	48.7	20.5	2.7	25.1	4.7	7.5	41.3
Radio, TV sets	47.6	43.1	31.2	1.8	12.4	30.2	4.0	11.1
Electrical machinery and appliances	65.6	63.9	28.4	29.6	28.2	29.2	9.0	5.1
Aircraft, spacecraft	42.9	66.0	0.0	24.6	11.6	35.4	31.3	6.0
Medical, precision, opt. instruments	36.1	46.9	6.9	18.9	22.4	19.1	6.8	8.9
Medium-technology
Organic, inorganic basic chemicals	38.5	45.1	11.1	10.5	19.0	25.1	8.4	9.5
Manufacture of rubber products	77.1	79.3	54.5	48.1	19.8	24.1	2.8	7.1
Manufacture of plastic products	73.1	67.7	55.4	26.7	17.7	36.8	0.0	4.2
Non-ferrous metals, aluminium	40.7	61.4	21.9	27.3	15.9	30.9	2.9	3.2
Machinery and equipment	44.8	45.1	13.3	10.7	25.4	27.7	6.1	6.7
Railway and tramway locomotives	56.4	60.3	3.0	58.6	50.1	0.3	3.3	1.4
Motor vehicles, trailers	76.8	73.4	12.8	62.4	62.1	4.2	1.9	6.8
Manufacture of bicycles and motorcycles	30.7	87.8	16.1	53.6	14.0	21.0	0.6	13.2
Manufacture of transport equipment n.e.c.	46.8	28.0	0.0	28.0	46.8	0.0	0.0	0.0
Other manufacturing industries	44.7	50.5	11.9	15.3	16.4	26.8	16.4	8.4
Chemical products except pharmaceuticals	51.3	55.9	16.8	20.6	23.9	22.4	10.6	12.9
Low-technology
Food, beverages, tobacco	26.9	39.3	5.7	13.2	10.9	14.2	10.3	11.9
Textiles, clothing, leather	44.7	58.7	12.9	20.6	19.7	24.6	12.1	13.5
Wood and wood products	62.5	70.8	33.6	29.1	17.8	26.1	11.1	15.6
Paper and printing	51.9	52.2	22.2	23.9	24.7	23.7	5.0	4.6
Manufacture of refined petroleum products	55.2	58.3	22.8	34.1	3.2	0.0	29.2	24.2
Coal and petroleum products	32.1	53.9	27.4	30.9	4.0	20.6	0.7	2.4
Other non-metallic minerals	47.2	50.7	12.3	12.8	22.2	25.3	12.7	12.6
Manufacture of basic metals	52.2	50.3	39.1	39.5	8.6	13.9	4.5	3.1
Fabricated metals	64.0	68.4	27.5	23.5	30.7	30.7	5.8	14.2
Building and repairing of pleasure and sporting boats	31.2	21.9	4.2	11.9	26.8	7.1	0.2	2.9
Total manufacturing	55.5	58.8	17.6	31.3	31.0	18.0	6.9	9.5

Source: own calculations from the Eurostat Comext data

Among the high-technology groups, in the case of pharmaceuticals a decrease in (mostly vertical low quality) IIT can be observed, yet for telecommunications equipment and electronic machinery a significant increase is manifested in horizontal IIT. Outstandingly high is the share of IIT in the office machinery branch (33.9 percent). In the case of medical and precision instruments, low quality vertical IIT increased.

In the case of low-technology sectors, an increase in intra-industry trade (although at a low level) is general and in several cases it means an increase in horizontal or vertical high quality IIT (textiles, paper, metals), which suggests quality upgrading. Regarding medium-technology sectors, the situation is the same. The increase in vertical high quality IIT is especially spectacular in the case of transport equipment (except for railway locomotives).

Regarding Spain, intra-industry trade increased after accession to the EU. In 1985, the index was 43.6, in 1992 it was 57.5 and in 1998 it was 58.8 for the total manufacturing industry. In the second half of the eighties, vertical IIT in all areas was higher than horizontal IIT and within vertical IIT, low quality generally dominated (Carrera 1997; Martín 2000). ₁₇

This also remained a characteristic later on. In the 1990-98 period, intra-industry trade grew in total manufacturing and in several sectors. Exceptions here are the plastics, basic metal sector, pharmaceuticals, production of boats, motor vehicles, transport equipment, electrical machinery and radio/TV sets, where IIT decreased. Horizontal IIT increased considerably in general, which means an improvement in manufacturing’s export quality. Among the high-technology sectors, horizontal IIT grew radically in aircraft, spacecraft, pharmaceuticals, medical instruments, while it dropped radically in the office machinery and telecommunications equipment groups. Regarding medium-technology branches, a significant horizontal IIT increase can also be seen in chemicals, manufacture of transport equipment, motor vehicles, bicycles, motorcycles, and railways. In the low-quality group, horizontal IIT grew except for wood products, fabricated metals. In many cases, vertical high IIT increased which also shows an export-quality improvement.

The cases of the textiles/clothing, food/beverage sectors are especially interesting. We recall these are the branches where traditional comparative advantages decreased after accession but were reinforced again in 1996-98. The increase in horizontal or vertical high-quality IIT in these fields means that quality upgrading has followed this reinforcement.

Analysing the increase of IIT, it is important to know the "technical" composition of this increase. Stemming from the properties of the IIT index, an increase in intra-industry trade can be observed in certain cases if the trade balance improves but also if the trade balance worsens. The IIT indicator can increase if imports grow from a lower level than exports but exports remain similar. Therefore, we consider it important to analyse what caused the increase in intra-industry trade. As we have seen, developments in the trade balance of a sector are manifested in the previously used specialisation indicator. As a result, with the help of the SI indicator combined with IIT indicator we can create four groups of industries. These four groups differ regarding their "trade adjustment" processes.

TABLE 4.A. POSITIVE AND NEGATIVE ADJUSTMENTS IN SPANISH MANUFACTURING’S TRADE WITH THE EU

1990-1998	IIT increased	IIT decreased
SI increased	aircraft-spacecraft, chemical products, precision instruments, machinery, ferrous and non ferrous metals, railway, motorcycles, food, other non-metallic minerals	electrical goods, motor vehicles, radio, TV sets
SI decreased	wood products, textiles/clothing, paper and printing, refined petroleum, minerals	pharmaceuticals, office machinery, rubber, plastic, other transport equipment, boats

TABLE 4.B. POSITIVE AND NEGATIVE ADJUSTMENTS IN HUNGARIAN MANUFACTURING¹S TRADE WITH THE EU

1990-1998	IIT increased	IIT decreased
SI increased	office machinery, radio, TV sets, electrical machinery, precision instruments, chemicals, plastic products, transport equipment, machinery	-
SI decreased	rubber products, food, textiles/clothing, wood, paper and printing, petroleum, minerals, non-metallic minerals, basic and fabricated metals, boats	pharmaceuticals, aircraft, coke, furniture, other manufacturing

It emerges from Table 4 that trade adjustment in Hungary has been very successful in almost all high- and medium-technology sectors, meaning that increased IIT happened together with an increased foreign trade balance. Both indices worsened in the cases of pharmaceuticals and aircraft/spacecraft, furniture and coke. In all low-technology sectors, increases in IIT came from the worsening of the trade balance. It should be again reiterated that this analysis only takes trade with the EU into consideration. Specialisation and IIT patterns are significantly different in the Central European or other non-EU relations. ₁₈

In the Spanish case, there are more sectors where trade adjustment can be said to have been negative. Among high-tech products, office machinery and pharmaceuticals belong here. In electrical machinery, telecommunications equipment and motor vehicles, IIT decreased but exports increased more than imports so the trade balance ultimately improved. In wood products, textiles and paper printing, the increase in IIT derives from the deterioration of the trade balance. In the cases of certain medium-tech and low-tech products, the value of both indices increased.

FOREIGN DIRECT INVESTMENT AND FOREIGN TRADE

WE HAVE SEEN THAT IN THE FOREIGN TRADE STRUCTURE OF BOTH COUNTRIES CHANGES OCCURRED AFTER THE LIBERALISATION PROCESS. These changes coincided with substantial amounts of FDI inflow, therefore we can examine to what extent FDI contributed to these changes.

As far as theoretical evidence is concerned, for a detailed overview see the article by Cantwell and Bellak in this issue. Within the early theories of FDI and multinational firms, FDI and foreign trade were considered to be substitutes. First, Mundell (1957) built a model where both FDI and foreign trade is based on the price differences of products and production factors determined by the different factor endowments of the countries involved. The product-cycle theory of Vernon (1966) was also based on this substitution principal. FDI replaces the export as the product matures.

Still based on the traditional comparative advantage theory, Kojima (1975) introduced the concept of trade-oriented (pro-trade) and anti-trade-oriented FDI based on the theory of comparative advantages. According to this, we can speak about trade creating, or pro-trade FDI if an investment is undertaken by the home country’s comparatively disadvantaged industries and channelled into the host country’s comparatively advantaged industries. Both countries gain from the ensuing trade creation. In the case of anti-trade FDI, however, investment is undertaken by a firm of the home country’s comparative advantage industry and put into the host country’s comparative disadvantage industry. In this way, the home country has excess demand for importable goods and an excess supply of exportable goods. The two countries are competing in their importing and exporting capacities, whereby FDI can even destroy trade.

At the end of the seventies, "new international trade" theories emphasised however the complementary relationship between FDI and foreign trade (Krugman 1990; Krugman 1991; Venables 1996) This is the result of introducing new aspects in the models like increasing returns to scale, product differentiation, technology differences among nations. Allowing for these factors and assuming identical relative factor endowments, Markusen (1983) proved that factor (capital) movements between two economies lead to an increase in the volume of trade.

Thus, depending on the circumstances, FDI can have trade-substituting or trade-creating effects. Regarding the strategies of investors, two main distinct investor types can be basically differentiated. One is the export-oriented investor and the other is the market-oriented type. (The subtypes of these two groups are described by Dunning 1993 ₁₉

). The export-oriented investor aims to exploit the low-cost resources, relative factor abundance, institutional structure, economic policy etc. of the local market, and to provide export markets by concentrating production in a few locations.

Market-oriented investors are those that invest in a country or region in order to supply those markets with their goods or services. An expansion of the market or economic policy changes in the target country can encourage a foreign company to invest. The aim of the investment is to preserve or gain market shares. The products made by the affiliate are sold in the local or regional market.

The effect on foreign trade depends on whether the investment is oriented towards exports (trade-creating effect) or towards the domestic market (trade-creating or substitutive). These two kinds of investment have different effects on the host country’s balance of trade. Export-oriented investments may improve the trade balance, even if case studies show that many firms initially tend to import most of their inputs. Market-oriented firms, on the other hand, may worsen the trade balance, if their exports are negligible and many of their inputs are imported. In principle, the size of the host country is likely to influence the trade strategy of foreign investors. Thus, big countries tend to be more suitable for market-oriented companies, whereas small host countries appear to better suited for export-oriented FDI because, apart from having a small domestic market, they are used to having a higher degree of openness (ratio of trade to Gross Domestic Product – GDP) than large countries.

In the first half of the nineties, Hungary was the most attractive Central European country for foreign investors. Yearly FDI inflows took up in general 4 percent of GDP and 22 percent of GFCF (Gross Fixed Capital Formation). Thus, at the end of 1999 FDI stock per capita in Hungary was around USD 2,000, the highest in the region. The stock of FDI is very high in relation to GDP, being 40 percent in 1999. ₂₀

During the eighties, Spain attracted a considerable amount of FDI. Since its accession to the EU, annual FDI inflows have amounted to an average 2 percent of GDP and they were also significant when expressed as a percentage of gross fixed capital formation, fluctuating between 6 percent and 11 percent. Concerning FDI stock in Spain, it made up 23 percent of GDP in 1999. ₂₁

In both countries, one of the most common recipient of FDI has been the manufacturing sector. Distribution within the manufacturing branches has been quite similar in Spain and Hungary: the food, vehicle, electrical machinery and chemical sectors have been the main target branches for investors. This phenomenon (which does not depend on country size) can be explained by the fact that these are the sort of "globalised" sectors generally attractive to foreign investors. However, there are still certain differences in the distribution of FDI; for example the share of the food and electrical machinery sectors is greater in Hungary, while in Spain the share of chemicals and motor vehicles is higher.

Data on the weight of foreign investment enterprises (FIEs) in manufacturing sectors (foreign penetration) is potentially particularly interesting. Foreign penetration (defined as the pure foreign share in the total nominal capital of the sector) in the Hungarian manufacturing industry increased rapidly in the nineties. In manufacturing as a whole, the share of foreign capital was 59.7 percent in 1998. If we take the total capital of foreign investment enterprises into consideration, their share in the sectoral nominal capital is even higher: in 1998 it was 72.7 percent. Regarding the gross value-added of the manufacturing industry, 69 percent of it was given by foreign investment firms in 1998. FIEs also have an influential role in manufacturing’s net sales revenue (70 percent), and the export revenue of the branches (85.8 percent). ₂₂

In the Spanish case, any information on sectoral foreign penetration is only available for the end of the eighties and the beginning of the nineties. This data was obtained from estimates made by studies. The latest estimate elaborated by Martín and Velázquez (1996:165) for 1993 showed that 44.5 percent of manufacturing’s social capital was in foreign hands.

In accordance with international experience, in both economies the propensity of foreign investment enterprises to export and import is higher than that of domestic firms. If we define export intensity as the share of export sales in total sales, in almost every Hungarian manufacturing sector FIEs are more export-intensive than domestic companies. On the import side, surveys and case studies show that FIEs are also more import-intensive than domestic firms. Regarding the whole economy, the export-intensity of FIEs was 33.7 percent in 1998, while that of Hungarian companies was 9.1 percent. Import-intensity was 36.2 percent for FIEs and 11.6 percent for domestic companies. ₂₃

These figures show that import-intensity is higher than export-intensity at the same extent, in both the cases of FIEs and domestic companies.

Regarding Spain, according to Bajo and López (1996), enterprises with foreign capital record a larger ratio of exports and imports to total sales than domestic ones. What is more important, their import propensity is even higher than their export propensity, mainly for those companies with majority foreign ownership. Their results are further confirmed by Moreno and Rodríguez (1998) who found a significant effect of foreign participation on the probability to export and import. Apart from that, the foreign trade balance of FIEs is worse than that of domestic companies. Export and import propensity are in any event much higher in the strong demand sectors (which attracted more FDI) than elsewhere.

The activity of foreign investment enterprises has also influenced the foreign trade balances of the countries. The foreign trade balance in Hungary deteriorated significantly until the mid-nineties (in GDP terms, this deterioration was more serious than in Spain during the liberalisation period). This trend reversed after 1995 and the balance improved to a certain extent. The contribution of foreign investment firms in manufacturing has differed over time. In the first half of the nineties, imports of foreign participation (mainly green-field) firms were very high. This was mostly necessary because of the building up of production capacities. Later on, however, the exports of these firms became so significant that they exerted a positive effect on the foreign trade balance. Best examples of this phenomenon are the so-called customs-free zones, ₂₄

in which majority or completely foreign-owned firms and multinational affiliates function. These firms produced a US $ 2,091 million surplus in 1999, providing 43 percent of Hungarian exports and 30 percent of imports. The main direction of exports is the EU (Central Europe’s share is very small but has recently been increasing).

Multinational firms’ exports from industrial customs-free zones have influenced those sectors whose the share and specialisation increased in the nineties. As we have seen, the most important and radical change has been the gaining of high-tech products in exports, which can be directly connected to FDI. This is obvious if we recall the single high-tech products traded (computer parts and motor vehicle parts, etc.). All of these products are produced in customs-free zones by green-field investing multinational affiliates (see Table A3 in the Annex). A considerable part of this trade consists of deliveries to other affiliates or to the mother company in EU countries (mainly Germany). At the product level, there is high and increasing concentration, which is also present at the company level, 74 percent of all high-tech exports of Hungary originated from three companies (Philips, IBM, General Electric) in 1997, while 61 percent was the respective figure for 1998. ₂₅

Regarding Spain, the weight of FDI in GDP and manufacturing branches is smaller than in Hungary despite the fact that foreign investors have been active for a longer time and the annual amount of FDI is approximately three times bigger than in Hungary. Regarding foreign trade, it is not easy to detect such a dominant role of foreign investment enterprises as in Hungary. (However, the motor vehicle branch is an exception, which is entirely in foreign hands and has strong export positions.) This could be due to the possible lower level of FDI penetration in Spain and the higher number of inward-oriented foreign investment firms (meanwhile in the small Hungarian market, even domestic-market-oriented FDI has in several cases involved strong export activity in neighbouring regions).

Our calculations show that intra-industry trade has increased in both countries. Based on Balassa (1986), we can enumerate the factors affecting IIT and its increase. Intra-industry trade is positively correlated with the level of economic development, market size, common borders, and negatively correlated with distance and trade barriers. Presumably in both Spain and Hungary economic development and liberalisation promoted the increase of intra-industry trade. Apart from this, as we have seen structural changes in foreign trade have been caused to a great extent by FDI, so one may assume that FDI does play an important role in the increasing intra-industry trade between Hungary and the EU and, to a certain extent, between Spain and the EU.

Regarding international literature, there have been some attempts to prove the relationship between FDI and IIT. The study of Djankov and Hoekman (1996) found a positive correlation between the level of FDI and increasing IIT in the trade of Central and Eastern European countries and the EU. The conclusions of Aturupane et al. (1997) are similar. On the basis of an econometric analysis of trade between the EU and Central-Eastern European Countries, after controlling for country-specific factors, they found a positive and significant relationship between FDI and both vertical and horizontal intra-industry trade. The growth of IIT has made mutual trade patterns more similar to EU member-states’ intra-trade (where high levels of intra-industry trade are characteristic). Regarding Spain, Blanes and Martín (1998) built a model to explore the determinants of Spanish intra-industry trade. They included the variable of foreign capital also as an explanatory variable, represented by the proportion of a foreign shareholding in the sector’s total share capital. They found that the determinants of vertical and horizontal IIT are not the same, that the industry-specific variables (technological intensity, scale economies, product differentiation, etc.) behave differently. Technological intensity for example had a significant positive effect on vertical IIT and a negative effect on horizontal IIT. According to expectation, it turned out that vertical IIT seems to be greater in industries that are more intensive in technology and in industries where this feature interacts with the existence of scale economies. As far as the effect of FDI is concerned, foreign capital penetration had a significant positive effect on both vertical and horizontal IIT. This means that the activity of foreign investment companies influences the development of intra-industry trade between Spain and its partners.

A considerable part of the effect of FDI on intra-industry trade is realised by intra-firm trade of multinational companies. The importance and effects of intra-firm trade depend on specific factors. ₂₆

In general, intra-firm trade can be of an intra-industry type, but not necessarily. Regarding the Hungarian case, in those sectors where the foreign trade activity of multinational firms is influential (high-tech and some medium-tech branches) we can observe increased intra-industry trade. As the product-level analysis suggests, this phenomenon is due to a few products being traded by and among a few multinational affiliates, so we can state that this increase relates to intra-firm trade.

 

Conclusion

WE HAVE ANALYSED THE CHANGES IN THE FOREIGN TRADE STRUCTURES OF HUNGARY AND SPAIN FROM THREE INTERRELATED ASPECTS. First, the changes in share of the product groups showed a strong increase in high-tech goods together with a decrease in low-tech goods in Hungary. Changes in Spanish foreign trade were less drastic, the share of technology groups remained similar, with a high concentration in the motor vehicle branch.

Secondly, these phenomena were confirmed by the calculation of the specialisation index based on the foreign trade balance of products. In the Hungarian case, the specialisation in low-tech products decreased but remained. At the same time, a new, increasing specialisation can be pointed to in high-tech products. Regarding Spain, specialisation weakened in almost all areas after its accession to the EU, but mostly in the case of traditionally strong, low-tech branches. At the same time, no new specialisation areas appeared, although recently the index has again increased in the case of some low-tech products.

Thirdly, we examined inter-industry specialisation patterns. The results showed that the general level of IIT in Spanish manufacturing sectors is higher than in the Hungarian ones. The level of intra-industry trade increased in both Spain and Hungary during the period examined. In order to judge whether product quality upgrading has also taken place or not, intra-industry trade was separated into horizontal (trade of the same quality products) and vertical (trade of different quality products) types by applying the unit value calculation method. It turned out that, while in both countries vertical IIT dominates, the level of horizontal IIT in Spain is everywhere higher than in Hungary. Regarding vertical IIT in Hungary, within this group the share of the low-quality type vertical IIT is generally higher, but the high-quality type has increased. This increase, which hints at product quality upgrading, happened mainly in those product groups where trade is dominated by multinational companies, presumably by intra-firm trade. The combination of IIT and SI indices suggests a successful foreign trade adjustment for the majority of high-tech products in Hungary and for several medium-tech and low-tech products in Spain. Based on the calculations, the technological structure of Hungarian foreign trade can be considered more modern or developed than the Spanish one. As we have seen, a small number of foreign participation firms are responsible for these structural changes, while in Spain such a strong role could not be detected.

The present technological structure of Hungarian exports to the EU characterised by the high share of high-tech products is very promising in an international comparison. If the maintenance or improvement of this "modern" structure of exports is desirable, then one way of this is to promote the investments of foreign companies specialised in high-tech products. Regarding promotion, the use of individual incentives can only be effective in the short run. In the long run, however, the improvement of domestic technological capacity and the links between domestic and foreign companies is more important. Technological capacity means not only R&D (research and development) expenditure but also the development of human capital. The development of these factors increases the attractiveness of a country in the future, enabling it to maintain and improve its competitive positions both internationally and within the EU.

 

References

ANTALÓCZY, Katalin (1998) "A magyarországi vámszabadterületek fejlesztéspolitikája" [Development Policy of Industrial Customs-free Zones]. Budapest: Pénzügykutató Rt. Research Report.

ATURUPANE, Chonira, Simeon DJANKOV and Bernard HOEKMAN (1997) "Determinants of Intra-Industry Trade between East and West Europe". Washington, DC: World Bank Working Paper No. 1850.

BAJO, Oscar and Carmen LÓPEZ (1996) La inversión extranjera directa en la industria manufacturera espa_ola. Papeles de Economía Espa_ola 66, 176-91.

BALASSA, Béla (1986) Intra-Industry Specialisation: A Cross Country Analysis. European Economic Review 30, 27-42.

BALASSA, Béla and Marcus NOLAND (1987) The Changing Comparative Advantage of Japan and the United States. In Béla BALASSA (ed.) Nemzetközi kereskedelem és gazdasági növekedés, 78-102. Budapest: KJK.

BLANES, Vicente and Carmela MARTÍN (1998) "The Nature and Causes of Intra-Industry Trade: Back to the Comparative Advantage Explanation? The Case of Spain". Madrid: Fundación de las Cajas de Ahorros Confederadas, Documentos de Trabajo No.144.

CARRERA, Miguel (1997) Comercio intraindustrial en Espa_a: determinantes nacionales. ICE Revista de Economía (765), 95-114.

DAVIS, Donald R. (1995) Intra-Industry Trade: A Heckscher-Ohlin-Ricardo Approach. Journal of International Economics 39, 201-26.

DJANKOV, Simeon and Bernard HOEKMAN (1996) "Intra-Industry Trade, Foreign Direct Investment and the Reorientation of East-European Exports". London: CEPR Discussion Paper No. 7377

DUNNING, John H. (1993) Multinational Enterprises and the Global Europe. London: Addison-Wesley.

ÉLTET_, Andrea (1998) Az iparágon belüli kereskedelem alakulása az Európai Unióban [Intra-Industry Trade in the European Union]. Külgazdaság XLII(May), 41-56.

FALVEY, Rodney (1981) Commercial Policy and Intra-Industry Trade. Journal of International Economics 11, 495-511.

FDI in Hungary 1997-1998 (2000). Budapest: Central Statistical Office.

FONTAGNÉ, Lionel and Michael FREUDENBERG (1997) Intra-Industry Trade Methodological Issues Reconsidered. Paris: CEPII Document de Travail No. 97-01.

GÁSPÁR, Tamás and László KACSIREK (1997) "Az iparágon belüli kereskedelem – elméleti keretek és a magyar külkereskedelem szerkezetének jellemz_i. Egy konkrét példa: a gépipar" [Intra-Industry Trade, Theoretical Framework and the Characteristics of Hungarian Foreign Trade: The Example of the Machinery Industry]. Budapest: University of Economics, Versenyben a világgal M_helytanulmányok, No.22.

GORDO, Esther and Carmela MARTÍN (1996) "Spain in the EU: Adjustments in Trade and Direct Investment and Their Implications for Real Convergence. Madrid: Fundación de las Cajas de Ahorros Confederadas, Documento de Trabajo, No.127.

GREENAWAY, David and Chris MILNER (1994) Country Specific Factors and the Pattern of Horizontal and Vertical Intra-Industry Trade in the UK. Weltwirtschaftliches Archiv 130(1), 76-97.

GRUBEL, Herbert G. and P. J. Lloyd (1975) Intra-Industry Trade: The Theory and Measurement of International Trade in Differentiated Products. London: Macmillan .

HATZICHRONOGLOU, Thomas (1997) "Revision of the High-Technology Sector and Product Classification". Paris: OECD, STI Working Papers, No.2.

KOJIMA, Kiyoshi (1975) International Trade and Foreign Investment: Substitutes or Complements? Hitotsubashi Journal of Economics 16(1), 1-12.

KOVÁCS, Zoltán Ákos (1996) Iparágon belüli kereskedelem Magyarország valamint néhány más közép- és kelet-európai ország és az Európai Unió között [Intra-Industry Trade Between Hungary, Certain other CEE Countries and the EU]. Budapest, Kopint Datorg.

KRUGMAN, Paul (1990) Rethinking the Causes of International Trade. Cambridge, MA: MIT Press.

KRUGMAN, Paul (1991) Geography and Trade. Cambridge, MA: MIT Press.

LANDESMANN, Michael and Johann BURGSTALLER (1995) "Vertical Product Differentiation in EU Markets: The Relative Position of East-European Producers". Vienna: WIIW Research Report, No. 234.

MARKUSEN, James R. (1983) Factor Movements and Commodity Trade as Complements. Journal of International Economics 13(14), 341-56.

MARTÍN, Carmela (2000) The Spanish Economy in the New Europe. London, Macmillan; New York: St. Martin’s Press.

MARTÍN, Carmela and Javier VELÁZQUEZ (1996) Una estimación de la presencia de capital extranjero en la economía Espa_ola y de algunas de sus consecuencias. Papeles de Economía Espa_ola 66, 160-75.

MORENO, Luis and Diego RODRÍGUEZ (1998) Efectos de la inversión extranjera directa en los flujos comerciales de las empresas. Investigaciones económicas XXII, 170-99.

MUNDELL, Robert A. (1957) International Trade and Factor Mobility. American Economic Review 47(No.?), 321-35.

OECD (1993) Industrial Policy in OECD Countries. Annual Review. Paris: OECD.

PULA, Gábor (1999) Modernizáció és deficit [Modernization and Deficit]. Külgazdaság XLIII(4), 4-37.

Statistical bulletin (1999), various issues. Madrid: Bank of Spain.

TÖRÖK, Ádám (1986) Komparatív el_nyök [Comparative Advantages]. Budapest: KJK.

UNCTAD (1999) World Investment Report 1999. New York and Geneva: United Nations.

VENABLES, Anthony J. (1996) Equilibrium Locations of Vertically Linked Industries. International Economic Review 37(2), 341-59.

VERNON, Raymond (1966) International Investment and International Trade in the Product Cycle. Quarterly Journal of Economics 80(2), 190-210.

VONA, Stefano (1991) On the Measurement of Intra-Industry Trade: Some Further Thoughts. Weltwirtschaftliches Archiv 127(4), 678-700.

 

Appendix: Estimated Equations

The following two dynamic equations for exports and FDI have been estimated

DXijt = a0 + a1 DXij(t-1) + a2 DFij(t-1) + a3 DGDTijt + a4 DSIMIijt + a5
DRKLijt + a6 DRHSLSijt + a7 DRLTAXijt + a8 DTCFijt + d1t + u1ijt
DFijt = b0 + b1 DXij(t-1) + b2 DFij(t-1) + b3 DGDTijt + b4 DSIMIijt + b5
DRKLijt + b6 DRHSLSijt + b7 DRLTAXijt + b8 DTCFijt + d2t + u2ijt

where D indicates first differences in logs (hence, growth rates). X are exports, F are stocks of FDI, GDT is the bilateral combined sum of GDPs, SIMI is an index which measures relative country size, RKL measures the distance between two countries’ capital-low-skilled-labour ratios, RHSLS is the distance between two countries’ endowments with high-skilled in relation to low-skilled people. RLTAX measures the relationship between an exporter’s and an importer’s corporate tax rate, TCF is a transport cost factor reflecting the difference between c.i.f. and f.o.b. values from trade statistics, and dt is a time trend. Only real data (base year 1995) were used in the regressions which were run on bilateral export and FDI relations between EU member-countries using data over the period 1988-1996. The reader is referred to Egger (2000) for more details of the construction of variables. As usual, the estimated coefficients were then applied for the relationships between the EU and the CEECs.

ANNEX

TABLE A1. SHARE OF INDUSTRIES IN SPANISH AND HUNGARIAN MANUFACTURINGS’ FOREIGN TRADE WITH THE EU ( PERCENTAGE)

		Hungary					Spain
ISIC	Branch	1990		1998			1990			1998
		Export	Import		Export	Import		Export	Import		Export	Import
	High-technology	9.73	15.23		34.54	25.88		11.25	18.76		13.50	20.85
2423	Pharmaceuticals	0.37	0.68		0.08	0.35		0.55	0.68		0.51	0.57
30	Office machinery	0.18	2.16		9.22	6.20		2.41	4.62		1.89	4.08
32	Radio, TV sets	1.47	3.96		10.97	7.42		1.82	3.89		3.06	5.20
31	Electrical machinery and appliances	7.05	4.75		13.01	9.03		4.73	5.70		4.75	5.99
353	Aircraft, spacecraft	0.04	3.64		0.03	0.32		0.82	1.01		2.05	2.15
33	Medical, precision, opt. instruments	0.62	0.03		1.23	2.56		0.93	2.87		1.24	2.86
	Medium-technology	23.52	49.03		37.12	47.38		50.86	53.29		54.36	51.21
241	Organic, inorganic basic chemicals	7.55	8.72		2.65	3.96		4.62	6.53		4.04	6.38
251	Manufacture of rubber products	1.42	1.09		1.20	1.07		2.12	1.34		2.45	1.76
252	Manufacture of plastic products	0.45	0.93		0.81	1.76		0.94	0.79		1.10	1.35
272-73	Non-ferrous metals, aluminium	3.74	0.77		2.00	1.28		1.62	2.07		1.76	1.79
29	Machinery and equipment	7.94	023.79		5.26	13.06		7.15	14.43		5.19	11.72
352	Railway and tramway locomotives	0.02	0.04		0.37	0.14		0.06	0.06		0.21	0.11
34	Motor vehicles, trailers	1.25	7.08		23.71	21.39		31.38	22.95		35.75	22.77
354	Manufacture of bicycles and motorcycles	0.01	0.08		0.05	0.10		0.18	0.68		0.70	0.52
355	Manufacture of transport equipment n.e.c.	0.00	0.04		0.01	0.01		0.01	0.03		0.01	0.02
36-37	Other manufacturing industries	0.69	2.08		0.52	1.73		1.09	1.82		0.97	1.54
242-2423	Chemical products except pharm.	0.44	4.41		0.54	2.88		1.69	2.60		2.18	3.24
	Low-technology	66.75	35.74		28.34	26.74		37.89	27.95		32.14	27.94
15-16	Food, beverages, tobacco	19.94	3.53		4.77	2.35		9.00	5.99		9.79	6.53
17-19	Textiles, clothing, leather	24.79	19.32		11.68	9.76		8.45	5.98		7.26	6.14
20	Wood and wood products	4.83	0.87		3.22	1.71		2.12	1.59		1.96	1.73
21-22	Paper and printing	1.26	2.80		0.96	3.59		3.52	3.10		2.66	3.71
231	Manufacture of refined petroleum	2.53	0.15		1.16	0.40		2.27	1.10		0.75	0.83
232	Coal and petroleum products	0.51	0.03		0.03	0.08		0.45	0.09		0.11	0.06
26	Other non-metallic minerals	2.37	2.48		1.40	2.17		3.36	1.86		2.90	1.61
271	Manufacture of basic metals	6.88	3.08		2.04	2.20		5.28	4.35		3.63	3.79
28	Fabricated metals	3.48	3.43		3.07	4.44		3.13	3.54		3.04	3.37
351	Building and repairing of boats	0.16	0.03		0.01	0.04		0.30	0.35		0.04	0.18
D	Manufacturing	100	100		100	100		100	100		100	100

Source: own calculations from the Eurostat Comext data

TABLE A2. SPECIALISATION INDICES, SPAIN-, HUNGARY-EU RELATIONS

		Hungary		Spain
ISIC rev3	Branch	1990	1998	1990	1998
	High-technology	-23.82	8.57	-40.81	-35.19
2423	Pharmaceuticals	-31.49	-64.58	-27.89	-20.15
30	Office machinery	-85.07	13.94	-46.38	-48.90
32	Radio, TV sets	-47.24	13.62	-50.62	-39.37
31	Electrical machinery and app.	17.62	12.34	-26.40	-26.01
353	Aircraft, spacecraft	7.44	-86.13	-27.82	-17.21
33	Medical, precision, opt. instruments	-71.73	-40.14	-63.04	-51.40
	Medium-technology	-36.80	-17.82	-19.81	-12.00
241	Organic, inorganic basic chemicals	-9.06	-25.40	-33.67	-36.17
251	Manufacture of rubber products	11.34	-0.13	5.35	1.31
252	Manufacture of plastic products	-36.31	-41.95	-8.71	-24.67
272,273	Non-ferrous metals, aluminium	64.88	16.26	-29.25	-15.84
29	Machinery and equipment	-51.35	-47.19	-48.45	-50.60
352	Railway and tramway locomotives	-46.55	41.47	-17.24	17.11
34	Motor vehicles, trailers	-70.85	-0.67	-2.10	7.49
354	Manufacture of bicycles and motorcycles	-78.51	-36.09	-69.21	-0.35
355	Manufacture of transport equipment n.e.c.	-94.48	-8.56	-53.16	-71.97
36,37	Other manufacturing industries	-51.45	-57.73	-40.63	-36.49
242-2423	Chemical products except pharm.	-82.42	-71.42	-37.34	-33.49
	Low-technology	28.52	-2.91	-2.53	-8.04
15,16	Food, beverages, tobacco	68.90	28.82	2.59	5.22
17,18,19	Textiles, clothing, leather	10.53	3.18	-0.52	-6.66
20	Wood and wood products	68.34	24.86	-3.18	-8.82
21,22	Paper and printing	-39.61	-61.52	-11.37	-30.76
231	Manufacture of refined petroleum	88.13	44.23	18.52	-19.99
232	Coal and petroleum products	88.53	-47.50	54.65	20.54
26	Other non-metallic minerals	-4.14	-27.01	11.84	14.35
271	Manufacture of basic metals	36.52	-9.51	-7.99	-17.04
28	Fabricated metals	-1.23	-23.84	-23.43	-19.94
351	Building and repairing of boats	66.11	-54.80	-25.06	-71.05
D	Manufacturing	-1.89	-5.81	-17.56	-14.93

Source: own calculations from the Eurostat Comext database

 

TABLE A3 MAIN HUNGARIAN EXPORT PRODUCTS TO THE EU (1998)

SITC	Product	Percent-age of exports to the EU	Exporting company in industrial customs-free zone
71322	Reciprocating piston engines	12.89	Yes
75270	Storage units (computers)	4.37	Yes
76381	Video recording or reproducing apparatuses	3.48	Yes
78120	Motor vehicles for the transport of persons	2.96	Yes
75997	Parts, access. for automatic data processing machines	2.53	Yes
77313	Ignition and other wiring sets	2.49	Yes
76110	Television receivers	2.24	Partly
78439	Parts and accessories for motor vehicles	1.80	Partly
75260	Input or output units in data processing	1.45	Yes
71323	Compression-ignition engines	1.42	Yes
	TOTAL	35.63

Source: Own calculations from the Eurostat Comext data and Antalóczy (1998)

TABLE A4: MAIN FOREIGN INVESTMENTS IN HUNGARIAN MANUFACTURING:

IBM	Parts for automatic data processing, storage units
ERICCSON, SIEMENS	Phone systems, mobile telecommunications systems
PHILIPS, SONY	Video and audio recording apparatuses
SAMSUNG	Television sets
NOKIA	Monitors, R&D laboratory
SCI	Computer assembly
BOSCH	CD players
TDK	Electronic appliances
ELEKTROLUX	Refrigerators
GENERAL ELECTRIC	Light bulbs, tubes
GENERAL MOTORS, SUZUKI, FORD, AUDI	Car assembly and components production
VAW	Aluminium automotive parts
KNORR BREMSE	Brake systems

 

---

Endnotes

Note *: Andrea Élteto, is Research Fellow at the European Integration Research Centre, Institute for World Economics of the Hungarian Academy of Science, Budapest.

The article is based partly on the research undertaken in the framework of Phare ACE project, No. P97-8112-R: Impact of Foreign Direct Investment on the International Competitiveness of CEEC Manufacturing and EU Enlargement.

Note 1: EU means here the 12 countries before 1995 and the 15 countries thereafter. Back.

Note 2: The indicator of technological intensity (weighted according to sectors and countries) is the share of R&D (research and development) expenditures in production or value-added. Back.

Note 3: At the end of the nineties based on experience, the OECD revised the grouping (Hatzichronoglou 1997) and divided the medium-tech group into two. Medium-high and medium-low groups were created, with precision instruments and electrical machinery being put into the former. However, the application of the old grouping is still more frequent. Back.

Note 4: In this database, the EU is the reporter country, so ‘Hungarian exports to the EU’ means the EU’s imports from Hungary. Back.

Note 5: According to our calculations, this share was 13.4 percent in the Polish, 16.2 percent in the Portuguese and 31.4 percent in the Dutch exports to the EU in 1998. The Hungarian data can be compared to the Irish share, which was 37.9 percent. Back.

Note 6: SITC 76381, making 3.5 percent of manufacturing exports to the EU. Back.

Note 7: SITC 77313, making 2.5 percent. Back.

Note 8: SITC 75270 and SITC 75997, making 4.3 percent and 2.5 percent, respectively. Back.

Note 9: SITC 71322, making 12.8 percent. Back.

Note 10: For more on the problems of the Grubel-Lloyd indicator and other types of measures, see Vona (1991). Back.

Note 11: The principle of "higher price, higher quality" can be criticised (for example, products may be overpriced), however there is no better method found out for signalling quality differences. Back.

Note 12: If 0.85£ UVx/UVm £1.15, then the IIT is horizontal. UVx means the unit value of exports and UVm means the unit value of imports. Back.

Note 13: Calculations show that a generally vertical IIT is much more significant than a horizontal IIT, therefore interest has grown in analysing and explaining vertical IIT. Falvey (1981) pointed out that difference in quality among similar goods (that is vertical IIT) on the supply side is caused by the differing capital/labour ratio of their production. High-quality products require more capital-intensive production techniques. On the demand side, there is an aggregate demand for a variety of differentiated products, low-income consumers will buy lower quality products, high-income consumers high quality products. A relatively labour abundant country will export the lower quality/labour-intensive version of the product (aiming at low-income consumers abroad) and will import the higher quality product (for high-income consumers in the domestic market). Thus, IIT is explained by comparative advantages. From another aspect, Davis (1995) also shows that IIT can take place without increasing returns and imperfect competition. Here the emphasis is on technical differences between the countries, which determine specialisation on one or other type of an intra-industry product. Back.

Note 14: Combined Nomenclature. Back.

Note 15: Nomenclature statistique des activites economique dans la Commnauté européenne. Back.

Note 16: Of course, if we regard the Hungarian trade with the EU-members separately, we get a heterogeneous picture. Therefore, the level of intra-industry trade depends not only on the aggregate level but also on the country group we use. This phenomenon is called ‘geographical bias’ by Fontagné and Freudenberg (1997:22) who argue that when different partner-countries are put together, the sign of the trade balance for a given product may change from one partner to another and will show up as a ‘multilateral’ intra-industry flow, which is a pure artefact. Though conscious of this fact, in the calculations the EU is assumed to be one geographical unit. Back.

Note 17: Developments of intra-industry trade between Spain and the EU cover different patterns with the member-states. Gordo and Martín (1996) observes that Spain’s trade with Germany exhibits a high proportion of vertical low quality IIT while in the bilateral trade with Portugal high quality vertical IIT dominates. Regarding product classification, Carrera (1997:110) found that IIT values for Spain vary between 25 percent and 63 percent depending on the classification details used. Back.

Note 18: Pharmaceuticals, for example, underwent important restructuring and regained positions in the Eastern market by the end of the nineties. Back.

Note 19: He calls these groups efficiency-seekers, resource-seekers, market-seekers and strategic-asset-seekers (Dunning 1993:56). Back.

Note 20: Calculations based on Ministry of Economy data. Back.

Note 21: Calculations based on UNCTAD (1999) and Statistical bulletin (1999) data. Back.

Note 22: Calculations based on Central Statistical Office data (FDI in Hungary 1997-1998 2000). Back.

Note 23: Calculations based on Central Statistical Office data (FDI in Hungary 1997-1998 2000). Back.

Note 24: Based on the XXIV/1988 Law on Foreign Investment, companies with foreign participation may establish their own customs-free zones under the control of the customs authorities, within which they are regarded as foreigners for the purposes of exchange control and foreign trade. There are around 100 industrial customs-free zones spread throughout Hungary, the majority of which belong to the machinery industry. The regulation of these zones will have to be changed after it joins the EU.Back.

Note 25: Calculations based on the economic weekly Figyelõ Top 200 database, Budapest, 1999. Back.

Note 26: Referring to studies, Dunning (1993:408) enumerates four factors that generate intra-firm trade. The first is the technological intensity of the products, the second is the size of the FDI involved, the third is the divisibility of the production process and the fourth is the need to control after-sales service and maintenance. The role of regional or country-specific L-advantages (location-specific advantages) is also important, a good example of this is the deepening of EU-integration. Back.

May 2000