The Rise of the Virtual State ago.The frantic two weeks in December 1994 when the White House outmaneuvered the French to secure for Raytheon Company a deal worth over $1 billion for the management of rainforests and air traffic in Brazil exemplifies the new international crisis. Timeworn methods of augmenting national power and wealth are no longer effective.Like the headquarters of a virtual corpora- tion,the virtual state determines overall strategy and invests in its people rather than amassing expensive production capacity.It con- tracts out other functions to states that specialize in or need them.Imperial Great Rather than amass Britain may have been the model for the nineteenth century,but Hong Kong will land,capital,and labor, be the model for the zist. virtual states set strategy The virtual state is a country whose economy is reliant on mobile factors of and invest in people. production.Of course it houses virtual corporations and presides over foreign direct investment by its enter- prises.But more than this,it encourages,stimulates,and to a degree even coordinates such activities.In formulating economic strategy, the virtual state recognizes that its own production does not have to take place at home;equally,it may play host to the capital and labor of other nations.Unlike imperial Germany,czarist Russia,and the United States of the Gilded Age-which aimed at nineteenth-century omnicompetence-it does not seek to combine or excel in all eco- nomic functions,from mining and agriculture to production and distribution.The virtual state specializes in modern technical and research services and derives its income not just from high-value manufacturing,but from product design,marketing,and financing. The rationale for its economy is efficiency attained through produc- tive downsizing.Size no longer determines economic potential. Virtual nations hold the competitive key to greater wealth in the 2ist century.They will likely supersede the continent-sized and self-sufficient units that prevailed in the past.Productive special- ization will dominate internationally just as the reduced instruction set,or"RIsc,"computer chip has outmoded its more versatile but slower predecessors. FOREIGN AFFAIRS July/August 1996 [47] Copyright 2001.All Rights Reseved