States have long been involved in processes of production. For centuries, governments have sought to regulate prices, wages, and other facets of productive activity. States have manufactured weapons and built fortifications in the interest of "national security." And states have constructed and operated infrastructural facilities as a means of promoting industrialization. But the scope of states' productive activities recently has been extended much beyond market regulation, defense, and provision of infrastructure. States increasingly are engaged directly in the production of capital and consumer goods. Moreover, in many countries, the ownership and operation of state firms conforms, in many respects, to standard business practice. Despite the attention currently being given to the expansion of the public economy in industrialized and industrializing countries, there has been little systematic study of this important form of state intervention. This paper is such an investigation. It examines one explanation for why firms that traditionally have belonged to the private sector are owned as state or parastatal enterprises and operated in accordance with standard business criteria. In addition, the paper evaluates this practice with respect to a particular policy objective, namely, the goal of alleviating dependence on foreign sources of capital and technology. The discussion proceeds in two parts. In part one, we define this increasingly important form of intermediation as state entrepreneurship and explicate the rationale behind its use in Third World countries.' Our account emphasizes the ramifications of prolonged reliance on foreign capital and technology. The role of the state as exten-