Determinants of trade balance in Polish and Czech manufacturing sectors

Research background: A strong industrial base is essential for achieving long-term sustainable economic growth and export competitiveness. In that sense, manufacturing remains a significant contributor to exports in the CEE countries. How-ever, its role and its influence vary between CEE economies and change over time. Purpose of the article: The main objective of this paper is to compare the determinants of the international competitiveness, measured by the net exports of the manufacturing sectors in the Czech and Polish economies, by using the database of 13 manufacturing sub-sectors in 1995-2011. The authors research the question of how much foreign and domestic demand, the level of labour costs, the level of sector innovation intensity, the level of sector openness to foreign markets as well as sectoral labour productivity influence the changes in trade balance. Methods: Our approach is based on employing an error correction model and SUR model to disaggregated sectoral manufacturing data. Findings & Value added: The results of the analysis conducted show substantial differences in the roles particular variables play in explaining the net exports in individual sectors. For the majority of Polish and Czech manufacturing sub-sectors, generation of positive trade balance is determined by relative demand growth. An increasing labour productivity influences heavily a positive trade balance of Polish goods in majority of sub-sectors, however, a key factor in Czech sub-sectors is decreasing unit labour costs. The results of the analysis indicate mostly a greater impact of the researched factors on net exports in long rather than short term and the better capacity of the Czech economy to correct deviations from the equilibrium.