Innovation, competitiveness and growth: the case of Central and Eastern European Countries

In the chapter we address the issue of competitiveness in trade for technologically lagging-behind countries, in light of the recent contributions of the literature on innovation and growth in open economies. We first address the issue from a theoretical point of view, following the new-Schumpeterian perspective that countries compete not so much by varying prices and quantities as by innovating; in fact when trade occurs largely in differentiated goods, non-price factors such as quality differences are of the outmost importance for a country’s performance in exports. Since the quality content of the goods reflects the stock of knowledge capital available in each country and its efficiency in converting that capital into innovation, it follows that technologically backward countries may become competitive in international markets if they are able to absorb foreign knowledge and to improve upon technologies conceived abroad. As emphasized in the theoretical and empirical literature, the process of international knowledge diffusion is fostered by the economic integration of markets. We thus present some empirical evidence by considering the case of five Central and Eastern European countries (CEEC-5), that have undergone a process of deep economic integration with the European Union Member States since the start of their systemic transition. The empirical investigation shows that the structural adjustments that occurred in the CEEC-5, following their integration into the EU, have led to an increasing role of trade in quality-dominated markets, where the CEEC-5 have gained market shares also thanks to a successful quality competition.