What makes regions in Eastern Europe catching up?

This paper analyses regional growth in eastern Europe in the second half of the 1990s, when regional disparities sharply increased. It aims to identify the factors behind growth and to investigate in particular the role of (foreign) investment, education and innovation as well as geographical factors in a model of economic growth. The key relationships are estimated with spatial econometric tools on empirical data for the period 1995-2000. The paper concludes that it was foreign direct investment and not capital accumulation as such, which was the main driving factor behind regional growth in eastern Europe. Second, there are clear agglomeration advantages and better resources (human capital, research, FDI) in capital areas, which make those regions growth leaders. In addition, EU border regions, where a large share of FDI is registered and intensive cross border relations have established, generally could enjoy higher growth. The location advantage of proximity to EU markets benefits these regions and puts others at a disadvantage. Third, one can observe regional clustering of growth: regions surrounded by high growth areas showed a high growth performance. Evidently, own innovation activity played an insignificant role for regional growth. By contrast technology transfer was the main source of productivity growth in Eastern European regions. Testing the technology gap model with human capital as a conditioning factor, the paper finds that this was a likely way of technology transfer. Above all, however, FDI has to be considered as a main channel of technology spillovers, the more so, if combined with human capital of higher level education.