An Evolutionary Theory of Economic Change. By Richard R. Nelson and Sidney G. Winter. (Cambridge: Harvard University Press, 1982. xi + 437 pp. $25.00.)

that the failure of British firms to engage in FDI during the mid-1980s, and hence the failure of the product cycle model as a predictor of multinationalization, was due to the high costs of internal organization rendering markets more efficient. Generally, his historical examples demonstrate the tendency toward small, decentralized enterprises, which he attributes to the rather primitive state of contemporary management techniques. There existed severe diminishing returns from increasing labor and other inputs with a given degree of entrepreneurial input. Hence, markets tended to be a more efficient organization than hierarchial firms, for international transactions. The inhibitions on FDI from legal institutions are also considered. For example, until the Joint Stock Companies Act of 1856, a legal vacuum existed for business organizations separating ownership from control. Geographical patterns of FDI are also analyzed with the model. Citing studies of comparative management, the striking tendency of FDI during the 1950s and 1960s to be U.S.-based is explained by the superior management techniques of U.S. companies. Specifically, the multidivisional managerial structure, which was resisted by European firms prior to 1960, gave U.S. firms a more efficient internal organization than their European counterparts. Hennart provides a rich comparison between U.S. and European business enterprises, focusing on the contrasts in managerial practices and organizational structures. He convincingly uses his model to explain the dominance of U.S.based firms in FDI during the 1950s and 1960s. I am disappointed that he did not apply his analysis to the relative decline of U.S. multinationalization and the increase in Japanese and European FDI during the past decade. In this sense his applications may be more historical than contemporary.