This picture of vertical differentiation is supported by the evidence on wage and productivity levels. Landesmann predicts that CEE producers will exert significant pressure on the lower cost, lower quality segments of West European production for some time to come, contributing to pressures toward further industrial and skill upgrading in the West. Evidence on catching-up suggests the emergence of strong heterogeneity across the CEE economies. In Romania and Bulgaria, patterns of inter-industry specialization compatible with differential factor endowment positions between Eastern and Western European economies are further reinforced. Poland occupies a middle position.
Geographical location is an important factor in the catching-up process.
Closing the taps in skills, as well as in organizational and institutional structures, could thus lead to strong, positive externalities. There is some evidence that upgrading does occur in the more advanced of the CEE economies, Hungary in particular, and that quality upgrading correlates with the degree of cross-border corporate involvement by Western firms. Catching-up economies, particularly those with very strong gaps in capability structures, are operating in different technological and organizational environments and are catering largely to different 'quality segments' of international product markets than are the more advanced Western European producers. Evidence on wage rates, labour productivities, and labour unit costs show a dramatic increase in the range of productivity levels, compensation rates per employee and in labour unit costs across the European continent as a result of East-West European economic integration. Second, in those countries and industries in which more dramatic FDI and OPT activities have developed, the presence of foreign enterprises, through FDI, joint ventures, and OPT activities, plays an important role in the upward movement within the vertically differentiated structure of East-West European production and trade relationships.