The Changing Economic Geography of Ukraine: Firm Relocation and Policy Issues

The war represents a major shock to the industrial capabilities of Ukraine. While there has been extensive disruption, many firms have implemented strategies 1  to adapt to the new context (UNIDO 2024; UNIDO enterprise survey, 20232). One such strategy is partial or total firm relocation, which may fundamentally change the economic geography of the country. New territorial disparities are rising fast, with regions bordering Russia suffering most from direct damage, loss of human capital and a deep cut in cross-border economic relations. Industrial recovery efforts should explicitly avoid perpetuating these regional imbalances. This article looks at the main characteristics of firms that became “footloose” and the key determinants behind their adaptation strategy to identify policy support schemes to tackle spatial inequalities.3 We then look at the relative performance of these firms and assess whether spatial mobility can boost the overall resilience of the Ukrainian economy.

Which firms move?4 The key characteristics

In a survey of over 500 firms, a substantial number (13.4%) have relocated, either partially (9.27%) or completely (4.2%), as a result of the war. This strategy was adopted by more than a third of firms in light manufacturing industries such as apparel, textiles, beverages and other non-metallic mineral products. Relocation was also undertaken by a non negligible share of firms in repair and installation of machinery and equipment, electrical equipment, wood products and other manufacturing (about one fifth of firms). It was less common in industries where relocation would be more costly, such as capital-intensive industries.

The propensity to relocate does not seem to be related to firm size. Interestingly, however, firms that exported their products more intensively before the war are substantially more likely to relocate. In fact, relocating firms were 14.7% more likely to be exporters before the war, expanding to 17.5% after the outbreak of hostilities. Because exporting firms are generally more productive and dynamic than those serving only the domestic market, this might suggest that only the most resourceful firms have the capability to adopt this complex and costly strategy (Bernard et al. 2007). Although export propensity has declined for all firms since the start of the war, those that relocated show a higher degree of resilience.

The table below reports origin and destination localities.5 Not surprisingly the regions bordering Russia are experiencing the largest net outflows – in particular Kharkiv, Donetsk, Zaporizhzhia, Mykolaiv. The western oblasts are net recipient – in particular Vinnytsia and Lviv regions.

Why do firms move? The key drivers

Firm relocation in the present context is more of a survival strategy than a voluntary adaptation to more favourable business conditions in the destination area. Nevertheless, not all businesses have taken this decision. Understanding the key drivers of relocation is therefore crucial to understanding whether and how the conflict is likely to shift production capabilities across regions, and which policy interventions might mitigate this effect.

As shown in the table below, relocation choices were mainly driven by safety concerns related to the conflict. Of the firms that relocated, 85.4% indicated security as a very serious or major determinant of their choice. The availability of skilled workers and the destruction of energy infrastructure played a fundamental role for more than two-thirds of relocating firms. Furthermore, the loss of strategic infrastructure has stripped the most affected regions of their “market potential”. This applies to current logistical difficulties as well as future loss of growth potential. Other factors, such as infrastructure and housing for employees, lack of financial assistance or market demand were also relevant, but less salient. Finally, the availability of unskilled workers and industrial land were not seen as major push-factors in the relocation decision.

Relocation and firm performance

Firm performance is crucial for the overall economic and social resilience of the Ukrainian economy. It is therefore important to compare the average performance of (partially or totally) relocating firms with non-relocating firms.6 It is important to note, however, that non-relocating firms include those that experience little or no effects of the war, and those that do not have the resources to implement an “exit strategy”.

As the figure above reveals, profits decreased for most Ukrainian firms in 2022 compared to 2021. The differences between relocating and non-relocating firms were minor, although a slightly higher share of relocating firms saw an increase in their profits over this time frame. Relocating firms did exhibit better profit dynamics in 2023 compared to 2022, however. This is an interesting result considering that a larger share of relocating firms also faced higher costs that year. This improvement is thus likely driven by an increase in sales – including better export performance compared to other firms.

This may be related to the fact that the majority of relocating firms (82.4%) also made other war-induced innovations: introducing new products, improving product designs, implementing circular economy processes, or adapting organizational practices and business models. In comparison, only 59.8% of non-relocating firms implemented other war-induced innovations.

On the other hand, relocating firms were more likely to lay workers off, although the majority increased or kept wage levels constant.

Policy considerations

The Russian invasion of Ukraine has severely reduced the country’s industrial capability and re-shaped its spatial distribution. This article sheds some light on this relocation trend: the firm characteristics, the geographic patterns and the key drivers behind this rather extreme and often costly adaptation strategy. The most resourceful firms – mostly in light manufacturing – had a higher propensity to relocate, and their performance tended to be better than those who stayed put in the last financial year.

The key drivers are all related to the war: insecurity, damage to infrastructure and interrupted logistics. It is therefore likely that the end of the conflict will – at least in part – diminish the locational disadvantages of some affected areas. The eventual reconstruction effort will need to consider this east-to-west displacement and ensure short-term opportunities in the most affected areas, while promoting production capabilities to ensure a more spatially balanced recovery of the Ukrainian economy.