This paper investigates the impact of market integration on regional production structures and regional growth differentials in Hungary over the period 1994-2000. Our analysis indicates a relocation of manufacturing towards border regions, in particular towards regions bordering the European Union. On average, regional manufacturing specialization increased. We find a positive relationship between knowledge spillovers proxyed with a measure of foreign direct investment intensity and regional growth as well as between regional manufacturing specialization and regional growth. The change in regional specialization is also positively related to regional growth. Our empirical results show that on average, other things equal, high growth rates are associated with high initial levels of GDP per capita. This finding shows up even when controlling for regional economic structures, change in manufacturing specialization, the degree of openness and geographical proximity to western markets. Our research suggests that in the first stage of market integration divergence forces tend to prevail leading to relative winners and losers across space. Key words: Economic integration, Location of economic activity, Regional growth JEL Classification: F15, R11, R12
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