Given the widespread use of the term globalization, it is surprising how little we know about it. In most cases, it is asserted but never defined. Those who do describe it characterize it as a continuous increase of cross-border financial and economic activities leading to greater economic interdependence. Essentially, interdependence and globalization are used interchangeably. This creates a paradox: the same term that is understood as a mere quantitative rise in a trend going back to the 1960s is also used to refer to a fundamental qualitative change in the international system, predicting perhaps the end of the nation-state. If the former is true, there is little need for governments to reassess their role, or that of the institutions and principles that have governed the world economy since the end of World War II, in view of globalization. If the latter holds, it becomes necessary to draw a distinction between economic interdependence and globalization, a distinction that provides a basis for reassessing the role of government and governance in an emerging global economy.
Unlike interdependence, which narrowed the distance between sovereign states and caused closer macroeconomic cooperation, globalization is a microeconomic phenomenon. Globalization represents the integration of a cross-national dimension into the very nature of the organizational structure and strategic behavior of individual companies. The cross-border movement of intangible capital, such as finance, technology, and information, allows companies to enhance their competitiveness.
While in the 1960s and 1970s foreign direct investment closely correlated with world output and trade, it expanded at an average of 16 percent annually between 1985 and 1995, compared with 2 percent and 7 percent, respectively, for output and trade. Most of this additional investment was concentrated in the countries of the Organization for Economic Cooperation and Development and a few developing countries and consisted of mergers and acquisitions in research and development-intensive industries. Controlling for the opening of both China and the former Soviet bloc, which attracted almost no investment before 1985, the share of foreign direct investment going to the