Econometric Analysis of the Relationship Between Innovation and Foreign Trade Distance in Central and Eastern Europe Countries

Abstract Research background: Posner’s technology gap theories and Vernon’s product life cycle assume that differences in innovation and technology levels are the cause of foreign trade. These theories are subject to empirical verification. To date, however, the analysis of the impact of innovation distance on a country’s export competitiveness is omitted. This article tries to fill this research gap. The author attempts to examine the relationship between the innovation gap and export competitiveness in industries with varying levels of technological advancement. Purpose: The aim of the article is to research the direction and strength of the impact of the innovation gap on export competitiveness in 10 different industries in Central and Eastern Europe countries (CEECs). Research methodology: Dynamic panel models were used in the research, which describe the impact of the technological gap on the export competitiveness of countries. To measure innovation, the indicator of innovative comparative advantage was constructed and based on the number of patents used. The technological gap in individual countries was calculated as the Euclidean distance indicators of the innovative advantage in a given country from other countries. Results: In light of the presented results of the study, it can be concluded that innovation generally has a significant and positive impact on the competitiveness of exports in the high and medium-high technology industries of the CEECs, while it does not significantly affect the competitiveness of trade in low technology industries. In addition, the Visegrad countries in the high and medium-high technology industries generally have a low technological gap and a smaller distance in export competitiveness using the dynamic panel data model. Novelty: The added value of this article is an innovative study on the impact of the technological gap on export competitiveness with the example of the CEECs using the dynamic panel data model.


Introduction
Innovation and a knowledge-based economy are one of the most important drivers of economic development. The implementation of the newest technical solutions by enterprises, continuous improvement of the existing production and management organization is often one of the prerequisites for their effective competition and staying on the market. The new innovative solutions often give companies many opportunities to increase market share, increase economies of scale and acquire new market niches. The implementation of a completely new or modified product, service, production process, marketing tools or public relations often opens new opportunities for a company on the local and international market. In practice, innovations can therefore have a product character (introduced product is different from existing products in terms of purpose or having completely new features and functions) or process character (improvement of production methods, organization, distribution, and logistics, etc.) (GUS, 2019). In particular, innovation in the sphere of organization and production techniques often referred to as technological innovations determine the level of technological development in the economy. The level of technological advancement of a country influences the shape of the economy by being one of the key elements of the network of multidirectional relationships with many macroeconomic variables. One of them is the relationship between the level of innovation in the economy and foreign trade. Since the export competitiveness of goods is the easiest way to increase market share, from the point of view of the technological gap theory, it seems interesting and reasonable to examine whether the technological distance between countries is reflected in the distance in a country's export competitiveness. While the impact of technological distance on foreign trade has been the subject of research, there is no more extensive research on the impact of technological distance on distance in foreign trade competitiveness has not been carried out so far. This article attempts to fill this research gap. The author set the goal of empirical verification of the relationship between the technological gap and the distance in export competitiveness on the example of the CEECs. For its implementation, a technological and trade gap measure and panel dynamic models were constructed. The research hypothesis is as follows: the impact of the innovation gap on the competitiveness of exports depends on the degree of technological advancement of the industry. The study was conducted in relation to branches of industry of various technological advancement, which allowed assessing them in terms of the sensitivity of the impact of innovation on foreign trade. Such knowledge will make it possible to identify the branches in which investments in innovation will increase the competitiveness of foreign trade to the greatest extent.

Literature review
The issue of the impact of technology and innovation on foreign trade is present in economic theory and empirical research. Some of the economic theories assume that the reason for trade is differences in the technological development of countries. These include the Posner technology gap theory (Posner, 1961), which assumes that differences in technological potential between innovator countries and lagging countries shape their international exchange. The innovator country -net exporter initially has a technological and comparative advantage, but over time the technological gap decreases and foreign producers imitate imported products, which cause the loss of a privileged position in trade by the innovator country. In a sense, the development of Posner's theory is the product life cycle theory (Vernon, 1966), according to which the innovator country (with sufficiently advanced production techniques) exports products to countries that originally did not have the ability to manufacture these products. Over time, these countries become "imitators" and themselves produce and export products. Research in this area is conducted using data from individual countries as well as panel data. L. Soete (1981) and G. Dosi, K. Pavitt and L. Soete (1990) showed a strong relationship between competitiveness in trade and technological advantage for OECD economies. For the economies of the Far East (South Korea, Singapore, Hong Kong) similar relations were presented by P. Uchida and Y. Cook (2004). More complex feedback relationships between trade and technology were shown by S. Lall (1992). The research on the relationship between the technological advancement of a country, foreign trade and other macroeconomic variables was also conducted by L. Soete, B. Verspagen (1994), K. Wakelin (1998), S. Barcenilla, C. Lopez-Pueyo (2000), W. Milberg, E. Houston (2005). At the microeconomic level (enterprise research), the relationships in question were studied by S. Clerides, S. Lach and J. Tybout (1998). To analyze the relationship between the market power of an enterprise and innovation, econometric models are usually used, taking into account variables such as expenditure on research and development, number of patents, labor costs, investments, export, and GDP. Empirical research taking into account the technological gap was carried out by G. Dosi, L. Soete (1983) and W. Milberg, E. Houston (2005), I. Granda, A. Fonfría 2009. According to Posner's technology gap theory, differences in the level of technological development of countries' generate trade; therefore a possible distance in the export position of countries at least at the beginning is relatively large. According to Posner's theory, this distance changes over time, because the imitator country will be able to produce the imported product by itself due to the reduction of the output and imitation gap. Due Many studies show that, the value of exports per capita or as the share of exports in GDP or in the total value of exports of reference countries is taken into account to determine a country's trade position (Baracenilla, Montavez, 2000;Milberg, Houston, 2005;Granda, Fonfría, 2009).
Since the export competitiveness of goods is the easiest way to increase exports, increase market share, from the point of view of the technological gap theory, it seems interesting and reasonable to examine whether the technological distance between countries is reflected in the distance in a country's export competitiveness. This article will study the competitiveness of foreign trade, which most often determines the international economic position of the entire country.

Research methodology
The essence of this article is to assess the impact of the technological gap on the distance in export competitiveness of goods. One of the most frequently used measures of export competitiveness is the Revealed Comparative Advantage Index (RCA index) proposed by B. Balassa (1965). It expresses the ratio of the export value of the analyzed commodity group of a given country in the total export value of that country to the share of the export value of the given commodity group in reference countries in the total value of exports in these countries. It can be expressed as follows: where: Ex ij -the value of exports in the i-th sector in the j-th country, Ex j -the value of exports in the j-th country,

R i
Ex -the value of exports from the i-th sector in reference countries, R Ex -total value of exports in reference countries.
The index (1) values are non-negative and can be arbitrarily high. The lack of normalization of this indicator results in its undesirable properties leading to a complete lack of comparability of its value in time and space (Salamaga, 2013), therefore in this article the indicator has been normalized to the range [-1; 1) using the following rational function with the parameter a = 1: The distance in export competitiveness in T-periods for the l-th country relative to the group of n reference countries in the i-th industrial sector was calculated as the Euclidean distance of the indicator (2) for a given country from the rest of the countries: The technological gap is most often defined as a delay in the technological development of one country's economy relative to a selected country or group of reference economies. The technology gap measures in their construction should therefore basically be based on absolute or relative differences between economies in the levels of indicators used to assess the level of innovation development. Therefore, these measures can be created using expenditure on R&D, employment in innovative sectors, the number of patents granted, trademarks, industrial designs, etc. In this study, the number of patents was used to construct the technology gap measure. The indicator of the innovative comparative advantage was constructed in an analogous way as the indicator (1): where: P ij -the number of patents in the i-th sector in the j-th country, P j -the total number of patents in the j-th country, R i P -the number of patents in the i-th sector in reference countries, P R -the total number of patents in reference countries.
The higher the indicator value (3), the higher the relative innovation advantage of the country. For the purposes of this study, the index (3) values have been normalized in the range [-1; 1) by applying a transformation using a rational function analogous to that in the index (2). The technological gap occurring over the T-years in the i-th sector for the l-th country was calculated as the Euclidean distance of the corrected index SICA a c (assumed a =1) for that country from other countries forming the reference group: In the study of the relationship between the d_SRCA and d_SICA indicators, a dynamic where:

Results of the empirical research
According to neotechnological theories of economics, differences in endowments with production factors intensify foreign trade flows. It seems that they should also affect the very competitiveness of foreign trade. Is this really the case and what is the relationship like in Central and Eastern Europe? This will be the subject of the study in this section. In the first stage of the study, the nature of the relationship between the technological gap and the distance in trade competitiveness for countries of Central and Eastern Europe in bilateral terms was examined.
The analysis was carried out for various industries. This study will present the results of this analysis for the transport, fuel and energy, and agri-food industries. They represent high, medium and low technology industries, respectively. Figure 1 shows curves representing the technological gap and distance in trade competitiveness of agri-food industry goods for pairs of the CEECs.    In the agri-food industry it is difficult to indicate the clear relationship between the innovation gap and the distance in foreign trade competitiveness. The growing technological gap is accompanied by changes in technological distance similar to random walk. It can be assumed that in most of the countries surveyed the technological gap does not affect the competitiveness of foreign trade in agri-food products. Table 1 shows the results of the correlation coefficients calculated for the ten industries between the technological gap and the distance in foreign trade in the CEECs.
Based on Table 1 it can be concluded that a positive and statistically significant correlation between the technological gap and the distance in foreign trade competitiveness was found in the following industries: vehicle manufacturing, electrical, electronic and precision, chemical, metallurgical and metal. In other industries, no statistically significant correlation was found between the figures in question. Statistically significant relationships relate mainly to industries belonging to high and medium high-tech and medium high-tech industries. The reason for this may be the particular sensitivity of these industries to the progress of innovation and strong dependence on the latest technological solutions. It is indisputable that technological advantage and innovation are reflected in the competitiveness of exports of technologically advanced goods. In industries that are less technologically advanced, export competitiveness may be more determined by factor costs or raw material resources than innovation. To estimate the cause and effect relationship between the distance in foreign trade competitiveness and the technological gap, a dynamic panel data model was used (1).
The model was estimated separately for a group of industrial branches of various technological advancement. This allowed assessing whether the direction of the technological gap impact on the country's foreign trade competitiveness depends on the degree of technological advancement of the economic sector. The final model was based on Sargan and Wald test results. Table 2 presents the assessment of model parameters for highly technologically advanced industries, which include industries: chemical, pharmaceutical, transport, electronic and precision industries. The results indicate that in technologically advanced branches the technological gap has a positive and statistically significant impact on the distance in foreign trade. Historical values of the distance of the disclosed comparative advantage in the previous year (two years back) positively (negatively) and significantly affect the current gap in foreign trade. Table 3 presents the estimation results of the model for medium technological advancement industries (fuel and energy, metal, machinery, electromechanical, and other products). Based on the results of (Table 3), it can be concluded that in medium-high-tech industries the technology gap has a positive and statistically significant impact on the distance in foreign trade, but this impact is weaker than in the case of the high-tech industry. The historical values of the trade competitiveness distance in the previous year also significantly affect the current gap in foreign trade, while the values of the distance in trade competitiveness lagged by 2 years do not have a significant impact on current competitiveness in foreign trade. Table 4 presents the estimation results of model parameters for low-tech industries (mineral, agri-food, wood and paper, light). Based on the results of Table 3, it can be concluded that in low technology branches the technological gap has no statistically significant impact on the distance in foreign trade. Only the historical values of the trade competitiveness distance in the previous year positively and significantly affect the current gap in foreign trade.

Conclusions
In the light of the presented results of the study, it can be concluded that innovation generally has a significant and positive impact on the competitiveness of exports in high-and medium-high-tech sectors of CEECs, while it does not significantly affect the competitiveness of trade in low-tech branches. In addition, the technology gap has the strongest impact on the foreign trade distance in high-tech industries. At the level of individual industrial branches of the countries studied, the nature of the relationship between technological and foreign trade distance varies depending on the ability of countries to inter-sectoral technological rivalry. The obtained results are similar to those of other authors (Granda, Fonfría, 2009;Wakelin, 1998), but it should be emphasized that other authors study the impact of technological distance on inequalities in foreign trade (and not on export competitiveness). These results confirm the strong and positive impact of technological distance on inequalities in foreign trade mainly in the high tech industry. The results presented in the work allow indicating those industrial branches in which the increase of innovativeness will contribute to increasing the competitiveness of foreign trade. Such knowledge can be valuable for both investors and decision-makers responsible for measures supporting innovation. Summing up the obtained results, it should be noted that the issues taken up in the article require further research, including other variables used to assess innovation (e.g. R&D expenditure, the number of scientific articles per 1 million inhabitants, and employment in high-tech industries).