ABSTRACT
In the beginning of the 1990s, transition countries opened up and reoriented their trade flows towards the European Union (EU). According to the New Economic Geography (EG) theory, extensive trade liberalization with the EU should lead to the inter-regional relocation of manufacturing activities towards border regions close to EU markets. The aim of the present chapter is to analyse the pattern of regional relocation of manufacturing in Slovenia after trade liberalization with the EU. We first provide an in-depth analysis of the regional structure of manufacturing in Slovenia and its relocation pattern after trade with the EU had been opened up. In addition, we test some of the predictions of EG theory for Slovenia. The econometric tests follow the reasoning of the Damijan and Kostevc (2002) model. We assume the following inter-regional adjustment mechanism after trade liberalization has begun to take place. The relocation of factors of production might be, for reasons besides those of market access, driven by extensive FDI inflows from EU countries directed either to existing economic centers or to EU border regions (western and northern regions). Depending on the size of existing economic centers and on inter-regional trade costs, trade liberalization aggravated by FDI inflows may, therefore, either enhance or dampen existing agglomeration effects. Increasing or decreasing differences in relative regional wages may then reverse the agglomeration/deglomeration processes. As a consequence, an (inverted) U-shaped curve of relative regional wages and manufacturing output with respect to the inter-regional trade costs (distance) in the home country might occur in the long run. More specifically, in the first stage of trade liberalization, a divergence (convergence) in relative wages and output is probable, but afterwards this might turn into convergence (divergence). In any case, a non-monotonic relationship between the reduction of foreign trade costs and relative regional wages is expected in the long run. In this
chapter, therefore, we analyse the effects of trade liberalization on the regional pattern of FDI inflows, the relocation of manufacturing and the inter-regional adjustment of relative wages in Slovenia.
