The star spangled banner has been firmly planted outside Rare's headquarters in the sleepy Warwickshire village of Twycross.

The sale of the highly regarded computer games developer to Microsoft makes it the latest British group to sell up to a foreign firm as the industry consolidates and competition between big console manufacturers hots up.

Despite Britain's worldwide reputation for games development, the City's lack of enthusiasm for investing in a risky, hit-driven industry has seen ownership trickle overseas.

The growing cost of developing games and the risks involved have driven many smaller firms into the arms of bigger and richer foreign developers. Big console firms are eager to buy developers to increase their offerings of exclusive games.

Liverpool-based Psygnosis has been bought by Japan's Sony, while Sheffield's Gremlin group and Birmingham's Ocean were snapped up by Infogrames of France.

Electronic Arts, the big US games firm, bought Bull Frog, formerly run by respected developer Peter Molyneux. Richard Branson's Virgin Interactive Entertainment sold control to Titus of France.

Eidos - owner of the Tomb Raider franchise - Rage, SCI and Argonaut are the four largest remaining UK-owned, stock market-listed firms.

Eidos was almost acquired by Infogrames two years ago. Analysts believe that the others may not be able to avoid the consolidation process.

The following correction was printed in the Guardian's Corrections and Clarifications column, Wednesday October 2 2002

In the above article we described Ocean Software as a Birmingham-based company. In fact it is in Castlefield, Manchester.