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