Factor Endowment and Market Size in EU-CEE Trade : Would Human Capital Change Actual Quality Trade Patterns?

This paper aims to test several hypotheses on determinants of the quality of trade in cross-country regressions, taking a sample of trade competitors in EU markets. The hypotheses are those underlying two models of vertical intra-industry trade: the so-called neo-Heckscher-Ohlin model, and an economic geography model based on market size and economic integration. The explanatory variables significantly affect the dependent variable, and we conclude that these variables give rise to specialization in different segments of the quality spectrum. Information is drawn from the analysis with respect to Central and Eastern European (CEE) specialization in low-quality exports to EU markets. In particular, the estimates suggest the existence of a process of the "crowding out" of existing human capital due to the process of economic transition. Moreover, the smaller market size of the EU-accession countries could contribute to strengthening the CEE disadvantage in high-quality segments of production.