Spatial and sectoral imbalances in the economic development of Ukrainian regions: the impact of business relocation

Abstract

The relocation of businesses (production facilities) from regions where active hostilities were taking place and from frontline areas to relatively safer regions, which was actively carried out starting in late March 2022, helped revive economic activity in the face of the war shock. The article shows that the relocation of business in the context of a full-scale war has led to the deindustrialization of the eastern regions and the strengthening of the industrialization of the western regions. The article reveals that the relocation of business, which was accompanied by a change in the spatial structure of the economy, was also characterized by the migration of economic, financial, investment, and innovation capital from the east to the west of the country. On the other hand, the relocation of a large number of enterprises to regions far from the combat zone was accompanied by tensions between relocated and local companies due to the difference in organizational and behavioral models of doing business. As a result, there was a low level of integration of relocated businesses into the local economy and little cooperation with local governments. The authors identify the main problems most often encountered by enterprises during relocation (first of all, the mismatch of engineering, transport infrastructure and industrial sites in the host regions with the needs of large industrial enterprises; the need to train specialists with appropriate qualifications at the relocation sites; high cost and legal and technical complexity of relocation procedures; loss of resources, goods, and fixed assets during relocation; restrictions on mobility for certain types of business due to their territorial “tying” (primarily agribusiness and large manufacturing and logistics companies)). The article identifies that the change in the spatial structure of the economy is also associated with a decrease in the business activity of agricultural enterprises whose business is tied to a specific territory. The authors emphasize that the temporal and spatial uncertainty of the hostilities, as well as the relocation of business, have led to the processes of reorientation of transport and logistics routes of business entities. This includes the destruction of critical and production infrastructure; logistical problems due to the limited capacity of Ukrzaliznytsya and the closure of Black Sea ports (primarily for industrial enterprises); increased production and export losses due to military disruption of normal supply chains; and a lack of orders and demand for goods (works and services). The article reveals that in the context of the reorientation of transport and logistics routes of business entities, the regions of southern Ukraine suffered the most, where sea transportation became impossible in the first months of the war. In general, the regions of Western Ukraine and Poltavska oblast demonstrated faster adaptation and post-shock recovery of the business environment. The main factors that impeded the resilience of the business sector in the Central and Eastern regions included geographic location (proximity to the front line), as well as logistical and energy challenges.