Working Paper 98-15

THE CHANGING NATURE OF FIRMS AND GOVERNMENTS 
IN A KNOWLEDGE-BASED GLOBALIZING ECONOMY*

by

John H. Dunning

1. INTRODUCTION

There are signs that the global economy is entering into a new stage of market-based capitalism which may be distinguished from those which preceded it in three main ways.  First, in contrast to the land based capitalism of the pre-industrial era and machine and finance based capitalism of the nineteenth and much of the twentieth century, the capitalism of the 1990s is becoming increasingly knowledge based¹.  It has, for example, been estimated that, whereas in the 1950s, 80% of the value added in US manufacturing industry represented materials and 20% knowledge, by 1995 these proportions had changed to 30% and 70% respectively (Stewart 1997).  No less significant, the book value of the tangible assets of corporations is becoming a decreasing proportion of their market value.  One estimate (Handy 1990) puts this at between 25% and 33%, while Leif Edvinson (1997) has more recently calculated that, for most organizations, the ratio of the value of their intellectual capital to that of their physical and financial capital is between five-to-one and sixteen-to-one.  Finally, capital spending on information technology, which in 1965 was only one-third of that of production technology, now exceeds it (Stewart 1997).  Throughout economic activity, created intangible assets are replacing natural tangible assets as the main source of wealth creation in industrial societies.  Inter alia, this is demonstrated by the rising importance of services, relative to that of goods, in the gross national output of most countries². 

Secondly, the territorial horizons of capitalism - as proxied by the spatial sourcing of inputs and the location of production and the markets served by firms -, have continuously widened from the sub-national to the national and macro-regional and now, increasingly, to the global.  Over the last two decades, for example, the growth of world trade has consistently outpaced that of world output; while in the mid-1990s, the sales of the foreign affiliates of multinational enterprises (MNEs) exceeded that of world trade by 25% (UNCTAD 1997).  Moreover, between one-third and one-half of trade in non-agricultural products, and between one-half and three-fifths of all capital and technology flows are now internalized within MNEs.  At the same time, while the intangible assets of firms have become increasingly mobile across national borders, the location of their creation and use has become increasingly influenced and determined by the presence of spatially immobile clusters of complementary value added activities.  Thus, in the words of Ann Markusen (1994) globalization presents us with a paradox of the presence of `sticky places within slippery space' (Markusen 1994).

Thirdly, the dominant organizational modality of market based activity is evolving from that of hierarchical capitalism to that best described as alliance capitalism³.  While retaining many of the characteristics of hierarchical capitalism, the distinctive feature of its twenty-first century successor is the growing extent to which, in order to achieve their respective economic and social objectives, and to meet the dictates of the international marketplace, the main stake-holders in the wealth-creating process are needing to cooperate more actively and purposefully with each other.  Such cooperation is, perhaps, best demonstrated, first, by the growth of on-going inter-firm cooperative ventures⁴; second, by the emergence of closer and more clearly delineated intra-firm relationships; and third, by the recognition by governments and firms, alike, of the need to work together if societal economic goals, for which the former is ultimately responsible, are to be best achieved. 

These characteristics of contemporary Western based capitalism, which are compared with those of previous stages in Table 1, are having a profound effect on our understanding of the role of firms, markets and non-market institutions - including governments, at all levels; and on the extent and form of the interaction between them.  Each, of course, reflects a series of dramatic and far-reaching world economic and political events which have occurred over the past 20 - 30 years.  In this paper, we will concentrate on one such event, viz the impact of recent knowledge-based advances, which, we believe, alongside the renaissance of market-based economic systems, and the emergence of several new players in the world economy, has been the critical factor affecting both the nature and functions of firms   and particularly large MNEs, and the attitudes and actions of governments.  We now turn to deal with each of these aspects of knowledge-based change in turn.

Click here to down load Table 1 in Adobe Acrobat

2. TOWARDS A NEW PARADIGM OF THE FIRM

The firm has long since been the main unit of production in a market based economy.  But, it is only comparatively recently that economists have considered the firm as a creator of assets, as well as a utilizer of assets.  Most of the neoclassical theory of the firm, for example, was concerned with how, given a certain level of created assets   notably technology - the human, physical and financial resources, which a firm might acquire in the open market, might best be used to produce the output of a particular good or service at the lowest possible cost.

 Today, not least as a result of a series of watershed advances in technology, but also of changing consumer preferences, a firm's commercial success or competitiveness is more likely to be judged by its ability to innovate and market new products and to upgrade the quality of its existing products.  In turn, this ability will be affected by the correctness (or otherwise) of a whole set of strategic decisions, such as those to do with choosing the right portfolio of locations, both to produce or acquire, and to manage rather than exploit wealth creating assets; and how best to coordinate the search for, and deployment of, these assets.  For example, in the international arena, should it be via foreign direct investment (fdi), cooperative ventures or arm's length trade?

It is the combination of technological change and the opening up of regional and global markets which has been the primary cause of the reconfiguration of the kind and range of value added activities undertaken by firms, their spatial dimensions and their organizational forms.  Thus, for example, MNEs are increasingly seeking to both exploit and augment their home based technological assets from foreign locations⁵; and they are doing so both by deepening their value added activities in these locations, and by engaging in synergistic alliances with foreign firms.  It is the growth of these alliances which is extending the `soft' boundaries of firms and fostering alliance capitalism.  At the same time, many MNEs and other large firms are down-sizing the range of their value added activities<sup>6</sup>; however they are not replacing these by arm's length transactions, but by a series of on-going and `hands-on' technological and marketing relationships with their new suppliers, customers and competitors.

In Table 2 we set out some of the main components of the emerging paradigm of the firm in a knowledge based economy, and compare and contrast these with the more traditional paradigm contained in most textbooks on micro-economics.  Clearly, not all firms fit into the new paradigm, but most do in one way or another.

Click here to down load Table 2  in Adobe Acrobat

The facts and ideas set out in Table 2 are largely self-explanatory.  We would, however, make three comments which encapsulate both the main thrust of actual events and the development of scholarly thinking.
1) Since an integral feature of a knowledge based economy is that of change and uncertainty, and the continual upgrading of intellectual capital, it is imperative that any new paradigm of the firm should pay particular attention to these elements.  This is now being increasingly accepted by economists and business strategists, and particularly by those who view the firm as a dynamic institution which is continually reconfiguring its resources and managerial capabilities by innovation and learning experiences⁷. 
2) Second, since the competitive advantages of firms relate as much to their ability to identify, access and harness assets which are complementary to their core competencies, as to these competencies themselves, any new paradigm of the firm must encompass extra-firm value added activities within its purview.  As recently articulated by Professor Lars Engwall at an OECD Conference in Stockholm, the idea of the firm as an `island of conscious power' is giving way to the firm as `a node in a network of intra- and inter-firm relations.'  The conceptual framework for this reconfiguration has been set out in another paper by the author (Dunning 1995 (reprinted in Dunning 1997a)), but, essentially, this gives more attention to the net benefits of alternative organizational options open to firms, as they seek to forge productive intra- and inter-firm collaborations.  The critical question here is:  What are the optimum combinations of these alternative forms, and how far are these combinations dependent on the value of contextual variables (such as industry, country and firm-strategic specific circumstances)?
3) Thirdly, any new paradigm of the firm must pay particular heed to the spatial configuration of economic activity (and, in particular, to that forged by foreign direct investment and cross-border alliances) as a means of exploiting and enhancing its core competencies.  Because of the growing importance of macro- (supra-national) and micro- (sub-national) regions as economic units, issues such as the economies of regional integration and those of the spatial agglomeration of related activities are now gaining increasing attention.  Here, some interesting work is being done both by economists and industrial geographers as they seek to identify both optimum spatial areas for particular kinds of economic activity, and the ingredients of industrial clusters which best promote the interests of members of the cluster.  From the firm's perspective, the main question of interest revolves around how best to organize its portfolio of unanchored assets across geographical space; and how, in turn, this balance is affected by industry and firm specific contextual variables. 
 The ability of most firms⁸ - both large and small - to cope with the demands of the knowledge-based globalizing economy essentially rests on the extent to which they can summon the necessary organizational capacity to respond to the challenges posed by these three features.

3. TOWARDS A NEW PARADIGM OF NATIONAL GOVERNMENT

We have suggested that alliance capitalism is currently being fashioned by technological change, as is the spatial dimension of business activity.  But, it has been the renaissance of the market system and the liberalization of individual markets, together with the acceptance by governments of the benefits of regional economic integration, and the need for a more systemic harmonization of investment and trading regimes, that has set a new macro-economic and organizational environment have conditioned the reactions of businesses to technological change.

Thus, in recent years, most national governments - of both developed and developing countries - have substantially reduced barriers to trade and fdi; and (for good or bad) have permitted, and even encouraged, more cross-border mergers and acquisitions.  In many instances, governments (including sub-national authorities), in the belief that they compete with each other to acquire  scarce created mobile assets, have stepped up their incentives to foreign investors⁹.  Others have recognized the need to improve the supportive (domestic) services for such investment over which they have some control or influence, e.g. human and physical infrastructure; and where it is desirable to do so, to foster the spatial agglomeration of related activities.

In seeking to respond to, and indeed influence, the events of the last two decades, and those likely to occur in the next two decades, governments - and particularly Western governments - need to draw upon a new paradigm of governance.  Paradigms which have stood the test for most of the present century are no longer appropriate for the knowledge-based and globalizing economy of the later 1990s.  Table 3 summarizes some of the ways in which the characteristics and scope of governments in the economic realm have changed, and are continuing to change.  Again, these are reasonably self-explanatory, but we would highlight four distinctive and inter-related features of the new paradigm.

Click here to down load Table 3 in Adobe Acrobat

1) In a global economy, in which knowledge related assets can flow easily across national borders, national governments have only a limited autonomy in their economic strategies and policies¹⁰.  In effect, many governments do compete with each other for such assets, even though trade in these, or their rights, is rarely a zero sum game.
2) In spite of the deregulation and the liberalization of many markets, the role of governments in affecting the creation and utilization of immobile assets, critical to the economic prosperity of the constituents under their jurisdiction, is increasing.  This is because market failure is generally more pronounced in the provision of these assets - and especially those complementary to the core competencies of firms - than in the provision of natural assets.

This market failure - in its various guises¹¹ - is especially noticeable in the less specialized areas of human resource development, in innovatory activities, and in the provision of capital intensive public goods, which have a long pay-back period.
3) We earlier suggested that the more successful firms in the contemporary world economy, are restructuring the scope and depth of their value added (by externalizing their non-core activities); and revamping their organizational structures (e.g. by flattening their hierarchical pyramids).  Likewise, we believe, if they are to be successful in the pursuance of their economic and social strategies, governments need to reconsider the content of their tasks and the way in which they coordinate these, both internally and with other economic institutions.  Elsewhere (Dunning 1994) we have argued that while globalization may require national governments to surrender some of their traditional tasks to the marketplace, those which remain are no less vital to the economic welfare of their constituents.  Therefore, we would assert that, even allowing for the reformulation of the role of government suggested by such scholars as David Osborne and Ted Graebler (1992), the need for strong and efficient and entrepreneurial government is as great as it has ever been.
4) One consequence of the above three features is that the optimum locus or level of governance is requiring reexamination.  On the one hand, one is seeing an increasing role for sub-national areas of governance as, in their location strategies, firms are the spatially `sticky' resources provided.  On the other, to minimize market distorting policies by national governments to attract inbound fdi or foster domestic production, new or strengthened supranational governance institutions, might be necessary. 

Although some East Asian governments are well on the way to accepting the new paradigm of government, their Western counterparts are, for the most part, reluctant to embrace many of its facets.  This is partly because old attitudes, opinions and habits - not to mention institutional rigidities - die hard, governments usually take a short term perspective on the likely consequences of their actions.

To some extent, the problem is educating the decision takers in government.  Here, the fault partly lies with the academic community.  We have just not got over the message that there is a fundamental difference between the kind of government action necessary to help overcome endemic market failure and to facilitate the upgrading of the resources within their jurisdiction, and that which seeks to replace or modify the behavior of firms in the belief that central planning and regulatory mechanisms can do a better job in advancing economic and social welfare than can markets.  We have not got over the message that, to optimize their efficiency and response to market signals, firms require the availability of created assets and a wealth creating ethos which, frequently, only governments can provide.  We have not got over the message that increasingly what governments do and how they do it, is much more important than how much government involvement should there be!

To some extent, too, the problem is one of re-forming opinions and attitudes towards the role of governments.  There is need for a new vocabulary to promote the image of government as a public good rather than as a necessary evil.  We need a `perestroika' of government.  We need to recognize that, just as `Fordism' is an out-dated method of organizing work, so the kind of government interventionism appropriate to a `Fordism' is outdated.  And, just like the emerging managerial structure of twenty-first century firms, we need governments to be lean, flexible and anticipatory of change.  The new paradigm of government should eschew such negative or emotive sounding words such as `command', `intervention', `regulation', and replace them by words such as `empower', `steer', `cooperative', `coordination' and `systemic'.  Moreover, not only must governments recognize the need for a much more integrated and holistic system of organizing their responsibilities, which demands a `spider's web' rather than a `hub and spoke' relationship between the various decision taking initiatives and the core of government); but, for all those affected by governments, and particularly the ordinary tax payers, to take a more positive view of the benefits which only the former can produce.

4. THE CHANGING ROLE OF FIRMS AND GOVERNMENTS

Finally, what are the respective tasks of firms and governments in acknowledge based economy and in an age of alliance capitalism, as compared with those exercised in earlier eras?  Here it might be useful to refer to Figure 1, which illustrates the three main organizational mechanisms for resource creation and allocation in a market based economy, and depicts four situations in which each of these mechanisms plays a rather different role. 

Click here to down load Figure 1 in Adobe Acrobat

In Situation 1, as, for example is the case of a purely communist society neither private hierarchies nor markets play any part in the creation and allocation of resources: each is assumed to incur unacceptably high transaction costs, and/or to promote unacceptable social goals.  By contrast, in a purely market economy, private buyers and sellers are the sole determinants of the level and composition of goods and services produced and traded.  Governments play a minimal role, while firms engage in only a single value-added activity, the inputs for which and outputs of which are bought and sold in the open market.  In this scenario, the transaction costs of the market are assumed to be negligible, while those of hierarchies and governments are both assumed to be positive (see Situation 2). 

In a hierarchical-market managed economy, economic activity is organized partly by markets, and partly by multi-product firms which govern the deployment of resources and capabilities which might otherwise have been coordinated through the market¹² (see Situation 3).  This situation suggests that different kinds of economic activity require different modes of governance, and that the greater the market failure, the more likely its functions will be performed by, and within, hierarchies. 

In alliance based capitalism (see Situation 4), governments, along with markets and hierarchies, may either directly engage in production and transactions; or they might indirectly influence the structure of resource creation and allocation, which, otherwise, would be decided by the other two members of the triad.  Such a tripartite arrangement presupposes that governments perceive that, in the case of some activities, at least, neither markets nor hierarchies, by themselves, can achieve socially optimum results, and hence some additional organizational modality is required.

Click here to down load Figure 2 in Adobe Acrobat

It is, I think, generally acknowledged that changing economic, political and technological forces over the past century and one-half have resulted in a substantial realignment of the costs and benefits of the three main modes in organization of cross-border economic activity.  Figure 2 illustrates the direction of these shifts.  For example, in the mid-nineteenth century, international transactions were mainly organized by arm's length markets.  There was some government intervention, but large managerial hierarchies were in their infancy.  Over the following century, while the relative significance of governments and markets in determining the level and terms of international transactions fluctuated, that of hierarchies continued to increase.  However, no less noteworthy was the changing extent and character of the interaction between the triad of organizational entities; which, in the main, took on an adversarial form.

What then of the situation of the knowledge economy late 1990s, and the prospects for the next decade or so?  Consider, first, business corporations. As we have seen, all the evidence points to the further pushing back of their territorial boundaries, and to a larger number of them initiating regional or global production and marketing strategies, particularly within the OECD countries.  In addition, the organizational forms of these strategies are likely to becoming more pluralistic as firms pursue a more holistic approach to their trans-border operations.  The boundaries of firms are becoming increasingly blurred as they forge new allegiances, and as their networking with other firms becomes multi-focused.  While it is probable that internalized cross-border bonding will increase, other less formal exchange relationships are likely to proliferate as firms interpenetrate each other's territories.  More and more, the large international firm is becoming an orchestrator or a set of geographically dispersed, but interdependent, knowledge-based assets.  Some of these, which represent its core competencies, it will wish to own; but others (which may be no less important to its commercial success) it will either jointly supply with other firms, or purchase from its global network of suppliers.

Next, consider the role of governments.  We are currently in the midst of a wind of change towards the liberalization of markets, and a reduction of government interventionism in the production process.  However, while accepting the dramatic changes now occurring in the economic management of the erstwhile communist countries, the role of government in affecting the organization and competitiveness of economic activity in knowledge-based economies has, in no way, diminished. Several of the most market-oriented national administrations have consistently pursued strategies and policies which have had a very fundamental impact upon the manner in which intellectual capital is created and used.  In a variety of ways, and to achieve many diverse objectives, governments are increasingly taking actions which taken as a whole, have repercussions on the nature and behavior of firms far in excess of anything that the kind of industrial policies practiced by Western nations in the 1970s ever achieved.

The fact is that governments do themselves a disservice by belittling their role as a promoter and sustainer of the efficient organization of knowledge based resources.  It is the consensus of many studies that national governments have played a critical role in influencing the success or failure of post-war industrial economies; and that it is not the countries with the least government involvement which have performed the best, but those which have worked most closely and efficiently with hierarchies and markets to promote the most efficient and cost-efficient allocation and upgrading of resources under their jurisdiction.  These are also the same governments which acknowledge that, while they, as resource managers, must lessen their intervention and reduce their own costs of governance, markets and hierarchies do sometimes fail, and that a systemic and integrated approach is needed if economic activity is to be optimally organized.

Finally, what of the characteristics of markets?  Despite the current fashion towards the deregulation and liberalization of markets, we suspect that the unaided efficiency of that particular exchange mechanism for many goods and services in the knowledge based economy of the later 1990s is likely to fall in the 1990s.  This is partly because we foresee a greater supra-market control over the conditions of supply of a whole range of products, e.g. to reduce information asymmetries, harmonize technical and safety standards and advance environmental goals, and partly because the interdependence between, and the risks associated with, the markets for intermediate products seem likely to increase.  We also think it probable that there will be a recasting of international supervisory or control mechanisms to take account of the specific attributes of global production, and also to minimize the adverse effects of `beggar my neighbor' strategic behavior, e.g. with respect to investment incentives, on the part of national governments.  At the same time, future developments in information and communications technologies may well reduce the costs of organizing corporate networks; while a combination of the opportunities afforded by regional integration and the fear of regional protectionism is prompting firms to become insiders in both Western Europe and the US.

5. CONCLUSIONS

The age of alliance capitalism and the maturation of the knowledge economy is, then, demanding a reconfiguration in the role of each of the three main organizing mechanisms in a market oriented economy; and, indeed, to the very structure of capitalism itself.  Such a reconfiguration is primarily the result, on the one hand, of a shift in the origins of wealth in most industrial societies from natural resources to created assets - and especially all forms of knowledge -; and on the other, of the widening geographical spread of all kinds of value adding activity.

In the late twentieth century market based economies, as in earlier phases of capitalism, the privately owned and managed firm remains the critical wealth creating agent.  But, over the years, and particularly in the last two decades, the criteria for its success, the ingredients of its core competencies and its territorial boundaries have all changed; as, indeed, have its relationships with other firms.

Similarly, the emergence of an innovation led global economy, with all its uncertainties and the difficulties of national macro-economic management, has demanded that national governments should reconsider their role, and how, in particular, their actions, for good or bad, may affect the dynamic comparative advantage of its resources and the competitive advantages of firms in world markets.  Also, because firm specific created assets are increasingly mobile across national boundaries, national governments need to recognize and take account of each other's macro-organizational policies if they are to attract and retain mobile investments; and also to reappraise the instruments and policies which may best achieve that objective. In so doing, they may, and do, affect the functions and boundaries of firms; and, this means that any discussion of the changing nature of the firm, without considering the changing role of government, will be inadequate.

Indeed, it is the interaction between the new paradigm of the firm and that of government which, at the end of the day, will determine the nature and scope of the firm in late twentieth century alliance capitalism.  Here we see a movement towards a more cooperative and synergistic relationship between governments and firms; in which each is acknowledged to have a unique, but complementary role in a knowledge based economy; and in advancing the economic welfare of its constituents.  While, to a certain extent, the respective roles of the state, firms and markets has always been recognized, it is only as we approach the twenty-first century that a holistic and integrative approach to the organization of wealth creating activities is being seriously considered.  Even so, in most OECD countries, such an approach is still very much an early stage; and this being so, the current changes in the nature of firms are simply a foretaste of those yet to be experienced.

REFERENCES

Booz, Allen and Hamilton (1997), Cross Border Alliances in the Age of Collaboration, Los Angeles: Booz Allen and Hamilton
Chang, H.-J. and Rowthorn, R. (eds) (1995), The Role of the State in Economic Change, Oxford, The Clarendon Press
Cantwell, J. (1991), `The theory of technological competence and its application to international production,' in McFetridge, D. G. (ed) Foreign Investment, Technology and Economic Growth, Calgary: University of Calgary Press
Chandler, A. D. Jr. (1990), Scale and Scope: The Dynamics of Industrial Capitalism, Cambridge, MA: Harvard University
Dunning, J. H., (1994), Globalization: The Challenge for National Economic Regimes, Dublin: The Economic and Social Research Council
Dunning (1995) (reprinted in Dunning 1997a), `Reappraising the eclectic paradigm in the age of alliance capitalism', Journal of International Business Studies 26 (3), 461-93
Dunning, J. H. (1996), `The geographical sources of competitiveness of firms: the results of a new survey,' Transnational Corporations 5 (3), December, 1-30
Dunning, J. H. (1997a), Alliance Capitalism and Global Business, London and New York: Routledge
Dunning, J. H. (ed) (1997b), Governments, Globalization and International Business, Oxford University Press 
Edvinson, L. (1997), Intellectual Capital Development, Stockholm: Skandia
Gerlach, M. L. (1992), Alliance Capitalism: The Social Organization of Japanese Business, Oxford: Oxford Press
Grabher, G. (eds) (1993), The embedded firm, London and Boston: Routledge, 116-137
Grant, R. M. and Baden-Fuller, C. (1995), `A knowledge based theory of inter-firm collaboration,' Academy of Management Best Paper Proceedings, 17-21.
Handy, C. (1990), The Age of Unreason, London: Hutchinson
Hagedoorn, J. (1996), `Trends and patterns in strategic technology partnering since the early seventies,' Review of Industrial Organization 11, 601 - 16.
Markusen, A., (1994), Sticky Places in Slippery Spaces: The Political Economy of Post-War Fast Growth Regions, New Brunswick Center for Urban Policy Research, Rutgers University Working Paper No. 79
Osborne, D. and Gaebler, T. (1992), Reinventing Government: How the Entrepreneurial Spirit is Transforming the Public Sector, Reading, Mass.: Addison Wesley
Spender, J. C. and Grant, R. M. (eds) (1996), `Knowledge of the firm,' Strategic Management Review, Vol. 17, Winter, Special Issue
Stewart, T. A. (1997), Intellectual Capital, London: Nicholas Bradley
UNCTAD (DTCI) (1995), World Investment Report 1995: Transnational Corporations and Competitiveness, Geneva and New York: UN 
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*  An abbreviated version of this paper was first presented at a Carnegie Bosch conference on Knowledge in International Corporations held at Rome, November 6 -  8, 1997.

ENDNOTES

¹    Or what some commentators (e.g. Edvinson 1997) have referred to as intellectual capital.

²  In 1995, on average, services accounted for 63% of the world's gnp, compared with 53% in 1980 and 45% in 1965.  For further details see, for example, World Development Report (World Bank 1997) Tables 11 and 12.

³    The implications of alliance capitalism, a term originally coined by Michael Gerlach (1992), and also called `relational', `collective', collaborative and `stakeholder' capitalism, are explored in a new book by the current author, viz Dunning (1997a).  In that book, we accept that the current wave of strategic et al alliances could lead to a reconfiguration, rather than a replacement, of hierarchical capitalism.  Here the eventual impact of the rash of mergers and acquisitions on the organizational structure of US industry towards the end of the last century should not be ignored (Chandler 1990).

⁴    Estimates of such ventures vary considerably.  A recent study by Booz Allen and Hamilton has put the number of cross-border alliances (including acquisitions and mergers) found in 1995 and 1996 as high as 15,000 (Booz Allen and Hamilton 1997).  Another assessment by Hagedoorn (1996) suggests that between 1980 and 1994, the number of newly established cross-border technology alliances rose by over three times.  Finally, the value of international mergers and acquisitions over the same period were estimated to have accounted for between 50% and 60% of all new foreign direct investment (UNCTAD 1997). 

⁵   One estimate (Dunning 1996) suggests that between 20% and 25% of R&D undertaken by the world's largest industrial corporations is located outside their home countries; while patent statistics confirm that an increasing proportion of patents registered by firms in the US are in respect of innovations arising from their foreign subsidiaries.

⁶     i.e. disinternalizing activities both along a value chain (i.e. vertical disintegration) and across value chains (i.e. horizontal disintegration).

⁷  See, for example, various articles in a special issue of the Strategic Management Review, Vol. 17, Winter (1996) and edited by J. C. Spender and R. M. Grant.

⁸   We say most because there still remain some firms which engage in more traditional sectors, but even here communication and related technologies are requiring considerable restructuring of their activities.

⁹  According to UNCTAD (1995), between 1991 and 1994, of 373 changes in the foreign investment regimes made by over 50 countries, 368 were in the direction of liberalization or more aggressive promotional procedures.

¹⁰   Clearly, the extent of such autonomy depends upon the economic and other characteristics of the country in question, not only its size and resource structure; compare, for example, that of the US with that of Singapore.

¹¹  As set out at length in the literature, e.g. in Chang and Rowthorn (1995), by Dunning (1994) and by several contributions in Dunning (1997b). 

¹²   Relative to the number of goods and services produced in the world economy, the number of separate and discrete economic activities required to produce and market these goods and services has increased.  In other words, the transactional intensity of economic activity has risen.