Regional Growth in a Dual Economy : Marshall-Arrow-Romer Externalities and Firm-Ownership in Hungary

Using census-type data of Hungarian firms, we test the Marshall-Arrow-Romer (MAR) hypothesis on the impact of agglomeration economies on regional economic growth. The results suggest that MAR type of local knowledge externalities have a significant positive impact on TFP growth. However, initial and dynamic levels of foreign- and domestic capital had adverse effect on productivity growth. Moreover, slower employment growth was observed in locations with a higher level of initial regional specialization. We argue that regional growth was driven during the transition from the socialist structure into market economy by low-cost motivations of foreign-owned firms; but due to the gap between MNEs and domestic companies – the so-called dual economy – local knowledge externalities hardly exist between the two spheres