1994 paper published by the investment banking firm Morgan Stanley,they have nearly closed the widely noted productivity gap between services and manufactur- ing.The gap that remains is most likely due to measurement problems.The most efficient corporations are those that can maintain or increase output with a steady or declining amount of labor.Such corporations grew on a worldwide basis. Meanwhile,corporations in Silicon Valley recognized that cost-cutting,productivity,and competitiveness could be en- hanced still further by using the production lines of another company.The typical American plant at the time,such as Ford Motor Company's Willow Run factory in Michigan,was fully integrated,with headquarters,design offices,production work- ers,and factories located on substantial tracts ofland.This com- prehensive structure was expensive to maintain and operate, hence a firm that could employ someone else's production line could cut costs dramatically.Land and machines did not have to be bought,labor did not have to be hired,medical benefits did not have to be provided.These advantages could result from what are called economies of scope,with a firm turning out different products on the same production line or quality circle. Or they might be the result of small,specialized firms'ability to perform exacting operations, such as the surface mounting of miniaturized components directly on circuit boards without the need for soldering or con- ventional wiring.In either case,the original equipment manufacturer would WEYA contract out its production to other firms. [5o] FOREIGN AFFAIRS Volume 75 No.4 wRooOT
scI Systems,Solectron,Merix, Flextronics,Smartflex,and Sanmina turn out products for Digital Equipment, Hewlett-Packard,and IBM.In addition, AT&T,Apple,IBM,Motorola,MCI,and Corning meet part of their production needs through other sup- pliers.TelePad,a company that makes pen-based computers, was launched with no manufacturing capability at all.Compaq's latest midrange computer is to be produced on another company's production line. Thus was born the virtual corporation,an entity with research, development,design,marketing,financing,legal,and other head- quarters functions,but few or no manufacturing facilities:a com- pany with a head but no body.It represents the ultimate achievement of corporate downsizing,and the model is spreading rapidly from firm to firm.It is not surprising that the virtual corporation should catch on.“Concept'”or“head”corporations can design new products for a range of different production facilities.Strategic alliances between firms,which increase specialization,are also very profitable.Accord- ing to the October 2,1995,Financial Times,firms that actively pursue strategic alliances are so percent more profitable than those that do not. TOWARD THE VIRTUAL STATE IN A sETTING where the economic functions of the trading state have displaced the territorial functions of the expansionist nation,the newly pruned corporation has led to the emerging phenomenon of the vir- tual state.Downsizing has become an index of corporate efficiency and productivity gains.Now the national economy is also being downsized.Among the most efficient economies are those that pos- FOREIGN AF FAIRS July/August 1996 [5] Copyright 2001.All Rights Reseved