14
CENTRAL EUROPEAN COUNTRIES AND
THE SMOOTH ADJUSTMENT HYPOTHESIS
Srednjeevropske države in hipoteza gladkega 
prilagajanja
Stanislav Černoša
Založba Aristej
cernosa@aristej.si
Abstract
This paper analyses bilateral trade between the Czech Republic, Poland, and Slovenia 
as Central European Countries (CEC-3) and the 15 European member states (EU-15). 
The study briefly presents a modified theory of customs unions; discusses results of the 
measurement of vertical intra-industry trade between the Czech Republic, Poland and 
Slovenia in trade with the EU-15; and identifies other important factors that define 
vertical intra-industry trade between the CEC-3 and EU-15 members. The aim of this 
paper is to test the smooth adjustment hypothesis (SAH), which predicts that a high level 
of total intra-industry trade is positively related to low adjustment costs.
The traditional theory of customs unions supposes that members of customs unions or 
other regional trading arrangements have different relative factor endowments, which—
under free trade conditions—results in inter-industry specialisation. Consequently costs 
of adjustments are smaller in the case of more developed member countries and 
greater in the case of less developed member countries. The modified theory of customs 
unions predicts that reduced trade barriers within the union will lead countries to intra-
industry specialisation, which will have important implications for the short-run costs 
of adjustment—namely, the costs of adjustment will be smaller for all members of the 
customs union irrespective of their stage of development. Although the modified version 
of customs unions theory assumes that the SAH is valid, this paper confirms the view of 
many other authors that this hypothesis is doubtful. 
Keywords: Intra-industry trade; Czech Republic, Poland; Slovenia; European Union.
Izvleček
Ta prispevek obravnava bilateralno trgovino med Češko Republiko, Poljsko in Slovenijo 
kot srednjeevropskimi državami (CEC-3) in petnajstimi državami članicami Evropske 
unije (EU-15). Članek na kratko predstavi modificirano teorijo carinske unije, predstavi 
rezultate merjenja vertikalne znotrajpanožne trgovine med Češko, Poljsko in Slovenijo v 
bilateralni trgovini s članicami EU-15 in predstavi še nekatere druge pomembne dejavnike, 
ki določajo vertikalno znotrajpanožno trgovino med CEC-3 in EU-15. Temeljni namen 
prispevka je preverjanje hipoteze gladkega prilagajanja, ki predpostavlja, da je višja 
raven skupne znotrajpanožne trgovine pozitivno povezana z nizkimi stroški prilagajanj.
Tradicionalna teorija carinske unije domneva, da imajo članice carinskih unij ali drugih 
regionalnih združenj različno razmerje med proizvodnimi dejavniki, ki v pogojih svobodne 
trgovine pripelje do medpanožne specializacije. Na ta način predpostavlja manjše 
stroške prilagajanj za razvitejše države in večje stroške prilagajanj v primeru manj razvitih 
držav članic unije. Modificirana različica teorije carinske unije pa predpostavlja, da bo 
liberalizacija trgovine med članicami pripeljala do znotrajpanožne specializacije, ki bo 
imela pomembne implikacije na kratkoročne stroške prilagajanj: nižje stroške prilagajanj 
za vse članice carinske unije ne glede na njihovo raven razvitosti. Če torej modificirana 
različica teorije carinske unije domneva veljavnost hipoteze gladkega prilagajanja, pa ta 
prispevek potrjuje mnenje mnogih drugih avtorjev, ki dvomijo v njeno veljavnost.
Ključne besede: znotrajpanožna trgovina; Češka, Poljska; Slovenija; Evropska unija
Prejeto/Received: 
Maj 2012
Popravljeno/Revised:
September 2012
Sprejeto/Accepted:
Oktober 2012
2
IZVIRNI ZNANSTVENI ČLANEK – ORIGINAL SCIENTIFIC PAPER
Naše gospodarstvo / Our Economy
Vol. 58, No. 5-6, 2012
pp. 14-22
DOI: 10.7549/ourecon.2012.5-6.02
UDK: 339.3/.5:339.16/.18(497 .4:437 .3:438)
JEL: M10, M14, O43

s t a N I s l a v če r N O š a : ce N t r a l eu r O p e a N cO u N t r I e s a N d t h e sM O O t h ad j u s t M e N t hy p O t h e s I s
15
1 Theory of Customs Unions and the Smooth 
Adjustment Hypothesis (SAH)
In the 1960s and 1970s the first empirical studies were 
conducted to examine the increase of intra-industry trade be-
tween member states of customs unions. Among early empir-
ical studies dealing with the measurement of intra-industry 
trade, it is worth mentioning Verdoorn (1960), who studied 
the change in trade flows between Belgium and Luxembourg 
(Benelux), and Balassa (1966), who studied the trade in 
goods of six founding members of the European Economic 
Community. The authors of these studies assumed that trade 
liberalisation between the customs unions will lead to intra-
industry trade specialisation and, over a short period, to rela-
tively low adjustment costs.
The traditional theory of customs unions proposed that 
the welfare of the union as a whole—and of the world—is 
greater the more competitive or similar the member coun-
tries are in terms of the lists of tradable commodities pro-
duced before the union and the more complementary or dis-
similar they are in terms of spread production costs of these 
commodities among member countries. On the other hand, 
this theory supposed that members of the customs unions 
or other regional trading arrangements have different rela-
tive factor endowments, which under free trade conditions 
results in inter-industry specialisation. The traditional theory 
of customs unions predicts that liberalisation of trade among 
member countries increased pressures on the governments 
to concentrate production on a narrow range of industries 
according to its comparative advantage. Consequently, costs 
of adjustment are smaller in the case of more developed 
member countries and greater in the case of less developed 
member countries.
Grubel and Lloyd (1975) suggested the following modifi-
cation to the customs union theory: The welfare of the union 
is greater the more competitive or similar the lists are from 
the member countries’ tradable differentiated goods pro-
duced before the union and the more that production of these 
countries’ differentiated goods is subject to the economy of 
scale. Reduced trade barriers within the union will lead firms 
to intra-industry specialisation in the production of lines for 
which they have a cost advantage. At the least, intra-industry 
trade among member states will have important implications 
for the short-run costs of adjustment. Although the traditional 
theory of customs unions expected inter-industry specialisa-
tion after the removal of tariff barriers and also emphasised 
relatively greater costs of adjustment in the case of less de-
veloped member countries, Grubel and Lloyd’s modification 
predicted intra-industry specialisation as well as emphasised 
the relatively smaller costs of adjustment for all members of 
customs unions.
Yet Grubel and Lloyd’s (1975) approach to this theory 
has several shortcomings. Their modification is based on the 
observation of pairs of relatively developed countries (i.e., 
Belgium and Luxemburg for the Benelux Union, French and 
Germany for the EEC, and the United States and Canada for 
NAFTA). Their approach excludes the possibility that there 
also exist less developed customs union member countries. 
Other authors have argued that an increase in intra-indus-
try trade (IIT) or two-way trade does not necessarily entail 
changes in the production structure of the observed country 
(Greenaway & Milner, 1986). In short, although the standard 
Grubel and Lloyd index per se shows the share of intra-in-
dustry trade of the particular industry in the total trade of the 
same industry, only in combination with the unit value (UV) 
index does it represent a useful methodology for measuring 
IIT specialisation.
1
Brülhart (1994) presented a similar index measuring 
marginal intra-industry trade (MA
i
) based completely on the 
standard Grubel and Lloyd index. Brülhart supposed that his 
index for measurement of marginal intra-industry trade re-
veals the structure of the change in import and export flows. 
Thus, Brülhart’s work involved the so-called smooth adjust-
ment hypothesis (SAH), which assumed that high levels of 
marginal intra-industry trade were positively related to low 
adjustment costs. Although Brülhart supposed that the SAH 
is valid, many other authors have voiced doubts about the 
hypothesis; meanwhile, whereas Brülhart supposed that the 
MA
i
 index reveals the intra-industry specialisation, other au-
thors assumed that this index is similar to the standard Gru-
bel and Lloyd index, making it of limited use for the meas-
urement of intra-industry trade specialisation. 
2 Greenaway, Hine, and Milner’s methodology 
One of the tasks of this analysis is also to measure hori-
zontal and vertical intra-industry trade for each of the manu-
facturing industries at the five-digit level of SITC by using 
Greenaway, Hine, & Milner’s (1994, 1995) methodology. 
This methodology supposes a calculation of the Grubel and 
Lloyd (1975) index:
(1) 
( ) *100
( )
i i i i
i
i i
X MX M
B
X M
  + − −
 
=
+
 ,
 ( ) 0 100
i
B≤ ≤
where B
i
 represents the Grubel and Lloyd index for a 
particular industry i at the five-digit level of SITC, X
i
 rep-
resents exports of that particular industry, and M
i
 represents 
imports of that particular industry. The intra-industry trade at 
the aggregate level
2
 is measured by using the similar index 
i
B (Grubel & Lloyd, 1975) for the weighted average.
The methodology introduced by Greenaway et al. (1994, 
1995) also supposes the separation of total IIT (
i
B ) into the 
corresponding shares of horizontal IIT (HB
i
) and vertical IIT 
(
i
VB ):
(2)  
i i i
B HB VB= +
1 See the next section: Greenaway, Hine, and Milner’s methodology. 
2 Total intra-industry trade at the level of the economy.
(0 ≤ B
i
 ≤ 100)

NG, š t . 5-6/2012 Iz v I r N I z N a N s t v e N I č l a N k I /Or I G I N a l s c I e N t I f I c p a p e r s
16
Following this methodology, the unit value index (UV) is 
calculated for exports and imports of each of the manufac-
turing industries at the five-digit level of SITC.
3
 Horizontal 
IIT is defined as a ratio between the unit value of exports 
( )
x
i
UV and the unit value of imports ( )
m
i
UV for a particular 
industry i—or, 
( )
/
x m
i i
UV UV . More specifically, horizontal 
IIT is defined (HB
i
) when the unit value index (UV) is inside 
the range of ± 15%:
(3) 0,85 1.15
x
i
m
i
UV
UV
≤ ≤                                       
When the unit value index (UV) is outside the ± 15% range, 
vertical IIT (
i
VB ) is defined for the particular industry at the 
five-digit level of SITC. It is also possible to introduce a sup-
position that horizontal IIT (HB
i
) is widely defined or, more 
precisely, that the unit value index (UV) is defined inside the 
range of ± 25%. It is obvious that widely defined horizon-
tal IIT simultaneously introduced narrowly defined vertical 
intra-industry trade. Therefore, in Table 1, the first option is 
included ( ± 15). 
Thus, the share of vertical IIT (
i
VB ) is separated into the 
dependent shares of VBI
i
 and VBII
i 
using the following two 
options:
(4) VB1
i
: 1.15(1.25)
x
i
m
i
UV
UV
> and 
 VB2
i
: 0.85(0.75)
x
i
m
i
UV
UV
< ,
where VBI
i
 represents the share of vertical IIT when the ratio 
between the unit value of exports 
( )
x
i
UV and the unit value 
of imports 
( )
m
i
UV is greater than 1.15 (or 1.25), and VBII
i 
represents the share of vertical IIT when the ratio between 
the unit value of exports 
( )
x
i
UV and the unit value of im-
ports 
( )
m
i
UV
 is smaller than 0.85 (or 0.75). It is assumed 
that the relative quality of each product at the five-digit level 
of SITC is best defined by the achieved relative price for the 
same product; that the relative share of VB1
i
 represents trade 
in vertically differentiated products of higher quality, which 
are sold at a higher average price; and that VB2
i
 represents 
trade in vertically differentiated products of lower quality, 
which are sold at a lower average price.
In this way the methodology presented by Greenaway 
et al. (1994, 1995) introduces important distinctions be-
tween horizontal and vertical product differentiation. Hori-
3 Unit value index (UV) is defined as a ratio of the values (in national 
currency) and the quantities (in kilograms or tonnes) of the particular 
industry i.
zontal differentiation arises when different varieties of a 
product are of similar quality; vertical product differentia-
tion arises when varieties of a product are differentiated by 
quality. Accordingly, vertical product differentiation is re-
lated more to the traditional theory
4
 of international trade 
whereas horizontal product differentiation is related to new 
theories of international trade that suppose horizontal prod-
uct differentiation. 
3 The results of the measurements of vertical 
intra-industry trade
Table 1 shows the results of measurements of vertical intra-
industry trade (VB) and the average level of intra-industry 
trade at the aggregate level (
i
B ) for the Czech Republic, 
Poland, and Slovenia from 1999 to 2011. The results for 
the Czech Republic and Slovenia are in line with expecta-
tions. From the very beginning (i.e., since 1993, following 
the secession of Slovakia), the Czech Republic has shown a 
relatively higher average level of intra-industry trade com-
pared with all other Central European countries. Slovenia 
has generally maintained second place. Surprising results 
are shown for Poland, which in 2008 revealed an average 
level of intra-industry trade similar to Slovenia.
These results reaffirm the supposition that the average 
level of intra-industry trade is a consequence of trade liber-
alisation between the CEC-3 and EU-15 and of the integra-
tion of the CEC-3 in bilateral trade with more developed 
countries of the EU-15, rather than the result of economic 
development of the CEC-3. If the level of development of 
the observed countries (measured by GDP per capita) had 
influenced intra-industry trade most strongly, then the or-
der of these countries would be slightly different. Country 
size differences also play a role. The Czech Republic is five 
times the size of Slovenia (measured by population), and 
Poland is the largest Central European country. 
Industrial tradition is the next important factor that 
influenced the level of intra-industry trade of the CEC-3. The 
Czech Republic was included in the industrial revolution 
earlier and more intensively than Slovenia and Poland. 
Hence, the Czech Republic was more developed compared 
to Austria in the interwar period.
5
 However, the socialist 
period had a great impact on economic development.
6
 
4 The Heckscher-Ohlin model is a typical representative of the traditional 
theory of comparative advantage.
5 Measured by GDP per capita.
6 During the socialist period, the Czech Republic was a supplier of 
machinery and industrial equipment in trade with the much larger Soviet 
Union.

s t a N I s l a v če r N O š a : ce N t r a l eu r O p e a N cO u N t r I e s a N d t h e sM O O t h ad j u s t M e N t hy p O t h e s I s
17
Table 1: Intra-industry Trade of the Central European Countries at the Aggregate Level
Czech Republic
 HB VB VB1 VB2
1999 29,50 3,38 26,13 9,18 16,95
2003 28,92 3,89 25,03 9,35 15,68
2004 31,97 4,06 27,91 11,51 16,40
2008 34,17 4,38 29,78 13,65 16,13
2011 31,72 4,39 27,33 12,21 15,12
Poland
i
B HB VB VB1 VB2
1999 22,33 2,65 19,67 6,61 13,07
2003 24,40 3,31 21,09 7,57 13,52
2004 29,89 4,05 25,84 9,82 16,02
2008 30,62 4,18 26,44 10,9 15,55
2011 26,73 4,11 22,62 9,83 12,78
Slovenia
 HB VB VB1 VB2
1999 25,38 3,34 22,03 8,90 13,13
2003 28,49 4,09 24,41 9,63 14,78
2004 28,14 4,52 23,62 9,30 14,31
2008 31,55 4,66 26,89 10,18 16,71
2011 30,86 4,62 26,25 10,59 15,66
Source: EUROSTAT (2012) and author’s own calculations.
Note: 
i
B — share of total intra-industry trade, HB—share of horizontal intra-industry trade, VB—share of vertical intra-industry trade, VB1—share of verti-
cally differentiated products of higher quality; VB2—share of vertically differentiated products of lower quality.
Austria is now one of the most advanced countries in 
the EU-15, while the Czech Republic is less developed in 
comparison with Slovenia. Nevertheless, the Czech Republic 
was in a better situation in the early 1990s than Slovenia 
due to its long industrial tradition and clear definition of 
national economic interest.
7
 Thus, the industrial tradition of 
the Czech Republic, clearly defined economic interest, and 
intensive domestic and foreign investments are the factors 
that contributed to the increased involvement in trade of 
vertically differentiated products with the EU-15 in the 
1990s. 
It is also important to focus on the vertical intra-industry 
trade of the Czech Republic compared to Slovenia. In 
this respect the ratio between VB1, which represents the 
production and export of vertically differentiated products of 
higher quality, and VB2, which represents the production and 
export of vertically differentiated products of lower quality, 
7 After 1992, the Czech Republic completely shifted to bilateral trade with 
the EU-15 in a relatively short time.
is important. The Czech Republic in the observed period 
achieved a structural shift in the right direction—that is, 
increased production and exports of vertically differentiated 
products of higher quality—while Slovenia in this period 
unfortunately made a structural shift in the opposite 
direction.
Slovenia had a fairly good position in 1999, and had the best 
ratio between exports of vertically differentiated products of 
higher quality and exports of vertically differentiated products 
of lower quality compared to both the Czech Republic and 
Poland. This position is the result of the inherited production 
structure of Slovenia from the pre-1991 period, which at the 
end of the 1990s still had comparative advantages. The absence 
of a coherent industrial policy, the absence of a coherent 
policy for the stimulation of foreign direct investment, and 
the lack of intensive and planned investments primarily in 
industrial production generally caused Slovenia to experience a 
worsened production structure in the period from 1999 to 2008 
in comparison with the Czech Republic and Poland.
i
B
i
B

NG, š t . 5-6/2012 Iz v I r N I z N a N s t v e N I č l a N k I /Or I G I N a l s c I e N t I f I c p a p e r s
18
The Czech Republic and Poland in comparison with 
Slovenia have a clearly defined industrial policy. This policy 
precisely defines which industries will represent a vital interest 
of the country and which industries will be the subject of foreign 
direct investment. The assumption is that the Slovenian political 
elite in the second half of the 1990s and in all subsequent years 
of observation completely trusted the modified version of 
the theory of a customs union, which predicts intra-industry 
specialisation and relatively small costs of adjustment for 
all members of customs unions. In this way, the Slovenian 
government believed in the validity of the smooth adjustment 
hypothesis and did not thoroughly undertake a systematic 
restructuring of its inherited production structure. 
The final result of such efforts is clearly demonstrated in 
2008 and settled in the time of economic recession from 2008 
to 2011. Although the Czech Republic radically changed its 
production structure in the period from 1999 to 2011 in the 
direction of increasing exports of vertically differentiated 
products of higher quality, Slovenia at the same time increased 
exports of vertically differentiated products of lower quality. 
In this way Slovenia in 2008 had a similar ratio between the 
VB1 and VB2 as the Czech Republic in 1999, while the Czech 
Republic in 2008 had a similar proportion between the VB1 
and VB2 as Slovenia in 1999.
If we take a closer look at the Polish production structure 
in 2008, we find that Poland—the largest Central European 
country—also very elegantly overtook Slovenia. Thus, the Polish 
ratio between the share of vertically differentiated products 
of higher quality and the share of vertically differentiated 
products of lower quality is favourable compared to Slovenia.
8
 
However, the real structural shift was achieved by this country 
during the economic recession after 2008, when the financial 
crisis reduced demand in the EU-15. As a result, in 2011 Poland 
had a completely similar production structure as well as ratio 
between the share of vertically differentiated products of higher 
quality and the share of vertically differentiated products of 
lower quality as the Czech Republic.
9
 
In this way, the relatively higher share of horizontally 
differentiated products remains the only advantage of 
Slovenia in bilateral trade with the EU-15 compared with 
the other two Central European countries, while the share of 
vertically differentiated products of higher quality represents 
an advantage in the case of Czech and Polish exports to the 
EU-15. Nevertheless, the Czech Republic and Poland have 
an undoubted advantage in comparison with Slovenia: the 
production of vertically differentiated products in terms of 
economies of scale.
4 Major factors of intra-industry trade of the 
CEC-3
Table 2 shows the differences in the gross capital 
formation per worker, or differences in capital intensity 
between the CEC-3and the EU-15. Specifically, the table 
8 The shares of vertical intra-industry trade (VB) and the average levels of 
total intra-industry for Poland from 1999 to 2008 are taken from Cernosa 
and Moczulski (2010).
9 A decrease in the average level of intra-industry trade as shown in Table 
1 in 2011 is the result of the economic recession, which had a decisive 
impact on bilateral trade between the CEC-3 and EU-15.
shows differences between the capital intensity of the 
CEC-3 and the average capital intensity of the EU-15. The 
traditional theory of comparative advantage assumes that 
the capital intensity of production of each particular country 
also predicts the amount of the adjustment costs of the same 
country after joining the customs union. In this way this table 
predicts substantially different costs of adjustment for each 
particular Central European country: Due to the highest level 
of gross capital investment per worker, Slovenia should have 
a significantly lower cost for structural adjustment than the 
Czech Republic or Poland.
However, since industrial production is not linked 
exclusively to the intensive use of only two factors of 
production (i.e., the capital and labour ratio: c/w), a higher 
ratio between the capital invested and the cost of hired labour 
requires even more intensive involvement of other factors, 
such as the inclusion of new technologies, new patents, 
increased investment in staff education, and professional 
training of other co-workers. Therefore, a large imbalance 
in gross capital investment per worker between Slovenia and 
the other two Central European countries raises an interesting 
question: How is it possible that this country drastically 
deteriorated its production structure by an increased share of 
vertically differentiated products of lower quality in exports 
as shown in Table 1 while simultaneously showing the 
highest gross capital investment per worker in Table 2?
Generally, the gross capital formation by definition consists 
of outlays in addition to the fixed assets of the economy plus 
net changes in the level of inventories. Fixed assets include 
land improvements; plant, machinery, and equipment 
purchases; the construction of roads and railways; and 
investments in facilities including schools, offices, hospitals, 
private residential dwellings, and commercial and industrial 
buildings. Inventories are stocks of goods held by firms to 
meet temporary or unexpected fluctuations in production or 
sales. Therefore the answer to the question presented above 
is linked to the specific Slovenian structure of gross capital 
formation (formerly gross domestic investment). 
As such, Table 2 only reflects the decision of the 
Slovenian ruling political elite to give priority to investments 
in road infrastructure and other forms of gross domestic 
investments. This decision has a marked effect in all the 
years of observation from 1999 to 2011. Due to a lack of 
investments in the fixed assets which directly influence the 
country’s production structure (e.g., plant, machinery, and 
equipment purchases) and the extensive investments in 
road infrastructure and other forms of investments (which 
by definition also represent fixed assets), Slovenia made 
a structural shift in the wrong direction in 2008 and 2011 
compared to the base year of 1999 (see Table 1, the ratio 
between VB1 and VB2).
Table 3 shows the differences in investment in R&D 
expenditures as a percentage of gross domestic product among 
the Central European countries and the EU-15, indicting the 
technological differences between the CEC-3 and EU-15. 
The table shows that, during the observed years, the EU-15 
increased their investments in research and development 
by approximately 20 per cent. Poland is the only Central 
European country that reduced its share of investment 

s t a N I s l a v če r N O š a : ce N t r a l eu r O p e a N cO u N t r I e s a N d t h e sM O O t h ad j u s t M e N t hy p O t h e s I s
19
in research and development in 2008, while Slovenian 
investments in research and development remained at the 
same level until 2008. After 2008, Slovenia increased its 
investments in research and development, while the Czech 
Republic increased its investments in research four years 
earlier. The Czech Republic was aware of how important 
increased investments in research and development were 
after joining the EU.
Table 4 also shows technological differences between Cen-
tral European countries and the EU-15, as indicated by the 
number of researchers per thousand employees. The results 
confirm that the Czech Republic intensively increased the 
number of researchers after 2004, while Slovenia and Poland 
maintained approximately the same number of researchers 
between 2004 and 2008. Tables 3 and 4 thus reflect the seri-
ous efforts of the Czech Republic to reduce the technological 
gap compared to the EU-15 average.
10
 
10   The actual technological gap between the CEC-3 and the most ad-
vanced EU members is larger. For instance, the technological development 
of Germany or Austria shows the actual technological gap between these 
two groups of countries.
Table 3: Research and Development Expenditure Differences between the CEC-3 and EU-15  
R&D expenditure differences
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EU-15 1,81 1,82 1,89 1,91 1,90 1,88 1,90 1,95 1,97 1,97 2,15 2,13 2,13
CZ 1,14 1,21 1,20 1,20 1,25 1,25 1,41 1,54 1,59 1,59 1,53 1,61 1,61
PL 0,69 0,64 0,62 0,56 0,54 0,56 0,57 0,56 0,57 0,57 0,68 0,74 0,74
SI 1,39 1,41 1,52 1,49 1,29 1,42 1,46 1,59 1,48 1,48 1,86 1,92 1,92
Rank
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EU-15 1 1 1 1 1 1 1 1 1 1 1 1 1
CZ 0,63 0,66 0,64 0,63 0,66 0,66 0,75 0,79 0,81 0,81 0,71 0,76 0,76
PL 0,38 0,35 0,33 0,29 0,28 0,30 0,30 0,29 0,29 0,29 0,31 0,35 0,35
SI 0,77 0,77 0,80 0,78 0,68 0,75 0,77 0,82 0,75 0,75 0,86 0,90 0,90
Source: Unesco (2012) and author’s own calculation.
Note: EU-15—average R&D expenditures of the EU-15; CZ—Czech Republic; PL—Poland; SI—Slovenia.
Table 2: Gross Capital Formation per Worker: Differences between the CEC-3 and EU-15  
Gross capital formation per worker (in constant 2000 U.S. dollars)
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EU-15 10809 11165 10891 10628 10804 11107 11353 11778 12047 11871 9108 8163 8408
CZ 2932 3262 3497 3651 3596 3951 3875 4231 4626 4491 4028 4267 4200
PL 2392 2442 2087 1962 2036 2342 2340 2749 3413 3493 3042 3272 3272
SI 5500 5655 5408 5529 6239 6559 6533 7312 8472 8493 5964 5955 5955
Rank
 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
EU-15 1 1 1 1 1 1 1 1 1 1 1 1 1
CZ 0,27 0,29 0,32 0,34 0,33 0,36 0,34 0,36 0,38 0,38 0,44 0,52 0,50
PL 0,22 0,22 0,19 0,18 0,19 0,21 0,21 0,23 0,28 0,29 0,33 0,40 0,39
SI 0,51 0,51 0,50 0,52 0,58 0,59 0,58 0,62 0,70 0,72 0,65 0,73 0,71
Source: World Bank (2012), ILO (2012), and author’s own calculation.
Note: EU-15‒average gross capital formation per worker of the EU-15; CZ‒Czech Republic; PL‒Poland; SI‒Slovenia.

NG, š t . 5-6/2012 Iz v I r N I z N a N s t v e N I č l a N k I /Or I G I N a l s c I e N t I f I c p a p e r s
20
Table 4: Differences in the Number of Researchers per Thousand Employees between the CEC-3 and EU-15 
Number of researchers per thousand employees
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
EU-15 6,2 6,4 6,6 6,7 7,0 7,2 7,4 7,5 7,4 7,4
CZ 2,7 2,8 3,0 3,0 3,2 3,3 4,8 5,2 5,4 5,4
PL 3,5 3,5 3,7 3,8 4,5 4,7 4,7 4,5 4,4 4,4
SI 4,5 4,9 4,7 4,6 4,7 5,2 5,2 5,5 5,7 5,6
Rank
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
EU-15 1 1 1 1 1 1 1 1 1 1
CZ 0,44 0,44 0,45 0,45 0,46 0,46 0,65 0,69 0,73 0,73
PL 0,56 0,55 0,56 0,57 0,64 0,65 0,64 0,60 0,59 0,59
SI 0,73 0,77 0,71 0,69 0,67 0,72 0,70 0,73 0,77 0,76
  Source: OECD Factbook (2009) and author’s own calculation.
  Note: EU-15—average number of researchers per thousand employees of the EU-15; CZ—Czech Republic; PL —Poland;     SI—Slovenia.
Table 5 shows the human capital differences between the 
Central European countries and the EU-15 average. In 2008, 
Slovenia and Poland exceeded the average number of stu-
dents of the EU-15 by half, while the Czech Republic had 
approximately the same number of students per 100,000 in-
habitants as the EU-15. The EU-15 countries invest in train-
ing of personnel in accordance with the existing demand for 
certain occupations in the labour market. By contrast, the 
Central European countries do not take into account the ex-
isting demand for occupations in the labour market and have 
more students per teacher than EU-15 members. More spe-
cifically, Poland and Slovenia explicitly show the structural 
imbalance between the number of academically trained per-
sonnel and the actual demand for them in the labour market.
The upper part of Table 6 shows the foreign direct invest-
ment net inflow differences (in current U.S. dollars per cap-
ita) between the CEC-3 and EU-15. As indicated, the Czech 
Republic attracted foreign investments the most successfully 
after joining the EU in 2004, while Slovenia and Poland are 
entirely comparable regarding the foreign direct investments 
net inflows per capita. The lower part of Table 6 shows the 
influence of the size differences among Poland, the Czech 
Republic, and Slovenia in terms of the amount of foreign di-
rect investment net inflows (in current U.S. dollars). Poland 
as the largest Central European country has definite com-
parative advantages for foreign investors. Despite its smaller 
size compared to Poland, the Czech Republic successfully 
acquired about half the level of the Polish foreign direct in-
vestment net inflows from 2004 to 2010.
All factors summarised in Tables 2 through 6 influenced the 
average level of vertical intra-industry trade of the Central 
European countries in bilateral trade with the EU-15. Al-
though three of the Central European countries still predomi-
nantly specialise in the production of vertically differenti-
ated products of lower quality (see Table 1), although the 
Czech Republic and Poland in comparison with Slovenia 
have more successfully adjusted their production structure to 
Table 5: Differences in Investments in Human Capital between the CEC-3 and EU-15
Number of students per 100,000 inhabitants
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EU-15 3489 3549 3635 3703 3801 3881 3923 3905 3862 3844 3882
CZ 2270 2494 2562 2809 2840 3157 3327 3333 3564 3827 4040
PL 3686 4163 4681 5032 5240 5405 5603 5677 5680 5728 5684
SI 4029 4262 4645 5028 5133 5271 5655 5772 5817 5778 5711
Rank
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
EU-15 1 1 1 1 1 1 1 1 1 1 1
CZ 0,65 0,70 0,70 0,76 0,75 0,81 0,85 0,85 0,92 1,00 1,04
PL 1,06 1,17 1,29 1,36 1,38 1,39 1,43 1,45 1,47 1,49 1,46
SI 1,15 1,20 1,28 1,36 1,35 1,36 1,44 1,48 1,51 1,50 1,47
Source: Unesco (2012) and author’s own calculation.
Note: EU-15—average number of students per 100,000 inhabitants of the EU-15; CZ—Czech Republic; PL—Poland; SI—Slovenia.

s t a N I s l a v če r N O š a : ce N t r a l eu r O p e a N cO u N t r I e s a N d t h e sM O O t h ad j u s t M e N t hy p O t h e s I s
21
the advanced EU members. Specifically, the Czech Republic 
and Poland attracted foreign investors more successfully in 
the observed period from 1999 to 2011.
5   Concluding remarks
This paper rejected the smooth adjustment hypothesis, 
which assumes that the total intra-industry trade as measured 
by the standard Grubel-Lloyd index at the aggregate level 
of the economy is positively associated with low adjust-
ment costs. Specifically, the results of the analysis confirmed 
that the vertical intra-industry trade of the Central European 
Countries reflects the production structure of these countries 
as well as the adjustment costs.
Slovenia was the only Central European country whose 
production structure deteriorated sharply in the observed pe-
riod from 1999 to 2011. The Slovenian political elite pri-
oritised investments in road infrastructure and other forms 
of public investments. By contrast the Czech Republic and 
Poland had a clearly defined industrial policy and gave more 
importance to investments in machinery, new technologies, 
and industrial equipment. Therefore, the Czech Republic and 
Poland increased production and exports of vertically dif-
ferentiated products of higher quality while Slovenia unfor-
tunately made a structural shift in the opposite direction and 
increased production and exports of vertically differentiated 
products of lower quality.
The Czech Republic made a structural shift in the right 
direction in light of its rapid and systematic shift to a market 
economy, industrial tradition, and clearly defined strategic 
goals. In this way, the Czech Republic showed a more fa-
vourable ratio between the vertically differentiated products 
of higher quality and lower quality and displayed technologi-
cal advantages compared to Slovenia and Poland. This coun-
try also showed the most successful advantages of investing 
in human capital and simultaneously attracting foreign direct 
investments.
Although Poland attracted less foreign direct invest-
ment per capita compared with either the Czech Republic or 
Slovenia, the absolute amount of foreign direct investments 
in this country was much higher in comparison with Slov-
enia and the Czech Republic. In this way Poland displayed 
its comparative advantage due to its size and production in 
terms of economies of scale. Despite the fact that Poland less 
successfully invested in human capital, the absolute number 
Table 6:Foreign Direct Investment Differences between the CEC-3 and EU-15
Foreign direct investment net inflows in U.S. $ per capita
2004 2005 2006 2007 2008 2009 2010
EU-15 913 1374 1529 2757 2191 1040 861
CZ 488 1140 533 1013 621 282 654
PL 338 270 513 617 388 338 232
SI 415 293 321 753 963 350 180
Rank
2004 2005 2006 2007 2008 2009 2010
EU-15 1 1 1 1 1 1 1
CZ 0,53 0,83 0,35 0,37 0,28 0,27 0,76
PL 0,37 0,20 0,34 0,22 0,18 0,33 0,27
SI 0,45 0,21 0,21 0,27 0,44 0,34 0,21
        
Foreign direct investment net inflows in U.S. dollars
2004 2005 2006 2007 2008 2009 2010
EU-15 12234 29845 34433 51960 31492 22735 18191
CZ 4975 11654 5465 10446 6449 2929 6788
PL 12898 10299 19599 23582 14833 12936 8861
SI 829 588 644 1515 1944 633 363
Rank
2004 2005 2006 2007 2008 2009 2010
EU-15 1 1 1 1 1 1 1
CZ 0,41 0,39 0,16 0,20 0,20 0,13 0,37
PL 1,05 0,35 0,57 0,45 0,47 0,57 0,49
SI 0,07 0,02 0,02 0,03 0,06 0,03 0,02
Source: OECD Factbook (2011), Unesco (2012), and author’s own calculation.
Note: EU-15—average foreign direct investment net inflows of the EU-15; CZ—Czech Republic; PL—Poland; SI—Slovenia.

NG, š t . 5-6/2012 Iz v I r N I z N a N s t v e N I č l a N k I /Or I G I N a l s c I e N t I f I c p a p e r s
22
In 2003, Stanislav Černoša graduated from the University of Ljubljana, Faculty of 
Economics with a doctorate in international economics. In 2009, he was appointed 
assistant professor in the field of international trade with goods and services at the 
University of Maribor, Faculty of Economics and Business. His research focuses on 
economics, econometrics, economic theory, economic systems, economic policy (S 
180), and international trade (S 186).
Avtor je v letu 2003 doktoriral na Univerzi v Ljubljani, Ekonomski fakulteti z 
doktorsko disertacijo s področja mednarodne ekonomije. V letu 2009 je bil imenovan 
v naziv docenta za področje mednarodne menjave blaga in storitev na Univerzi 
v Mariboru, Ekonomsko-poslovni fakulteti. Osredotočen je na raziskovanje na 
naslednjih področjih: Ekonomija, ekonometrija, ekonomska teorija, ekonomski 
sistemi, ekonomska politika (S 180), in Mednarodna trgovina (S 186). 
of employees represents a Polish advantage for industrial 
production. Nevertheless, between 2008 and 2011, Poland 
also showed a very similar production structure—in other 
words, a comparable share of vertically differentiated prod-
ucts of higher quality—than the slightly more developed 
Czech Republic.
References
Abd-el-Rahman, K. (1991). Firms’ competitive and na- 1. 
tional comparative advantages as joint determinants of 
trade composition. Weltwirtschaftliches Archiv, 127(1), 
83–97.
Balassa, B. (1966). Tariff reduction and trade in manu- 2. 
facturers among the industrial countries. American Eco-
nomic Review, 56(3), 466–473.
Brülhart, M. (1994). Marginal intra-industry trade: Meas- 3. 
urement and relevance for patterns of industrial adjust-
ment. Weltwirtschaftlisches Archiv, 130(3), 600–613. 
Cernosa S., & Moczulski, M. (2011). Intra-industry trade 4. 
inside European Union. The case of Poland and Slov-
enia. In J. Kundera (Ed.), Globalizacja, europejska in-
tegracja a kryzys gospodarczy (pp. 613–638). Wrocław: 
Universytet, Wydział Prawa, Administracji i Ekonomii.   
Greenaway D., Hine, R., & Milner, C. (1994). Country- 5. 
specific factors and the pattern of horizontal and verti-
cal intra-industry trade in the UK. Weltwirtschaftliches 
Archiv, 130(1), 77–100.
Greenaway D., Hine, R., & Milner, C. (1995). Verti- 6. 
cal and horizontal intra-industry trade: A cross-indus-
try analysis for the UK. Economic Journal, 105(431), 
1505–1519.
Greenaway D., & Milner, C. (1986). 7. Economics of intra-
industry trade. Oxford: Basil Blackwell.
Grubel H., & Lloyd, J. P. (1975). 8. Intra-industry trade: 
The theory and measurement of international trade in 
differentiated products. London: The Macmillan Press.
Verdoorn, P. J. (1960). The intra-block trade of Benelux. 9. 
In E. A. G. Robinson (Ed.), Economic consequences of 
the size of nations (pp. 291–329). London: Macmillan. 
Viner, J. (1950). 10. The customs union issue. New York: 
The Carnegie for International Peace.