Vertical Innovation and Catching-up: Implications of EU Integration for Ceecs-5 (European Union, Central and Eastern European Countries) (Report‪)‬

Abstract We analyze the role of vertical innovation in trade patterns for developing economies trading with technologically advanced countries. A model is presented where the international diffusion of knowledge, promoted by economic integration, is the source of a technological catching up and leads to a convergence in the quality of traded goods, with a positive effect on exports. We then turn our attention on the evolution of trade between the Central and Eastern European countries (CEECs-5) and their European Union partner countries, assessing whether economic integration has increase the quality of the goods produced. For the period 1995-2005, we find evidence of the increasing role of intra-industry trade and vertical differentiation and a process of specialization in higher quality products, especially in the medium-and high-skill sectors. Keywords Vertical innovation. Technological catching up Quality upgrading and trade Economic integration