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MANAGEMENT CONTRACTS
One of the most important assets a firm may have at its disposal is management talent. Despite huge endowments of capital and technology, many governmental enterprises in LDCs encounter difficulties because of inadequately trained management. The transmission of management internationally has depended largely on foreign investments that deploy expatriate managers and
specialists to foreign countries. Management contracts offer a means through which a firm may use part of its management personnel to assist a firm in a foreign country in general or specialized management functions for a specified period of time for a fee.
Management contracts are established in three types of situations. The first is when a foreign investment has been expropriated by a foreign government and the former owner is invited to continue supervising the operations until local management is trained. In this case the management structure may remain substantially the same, although board membership changes. A good example of this is the case on Aramco at the beginning of Chapter 13. After the Saudi Arabian government took over the ownership, the former owners continued to supply management. Some advantages of entering into contracts in this type of situation are that this may: (1) facilitate getting resources out of the country in addition to those agreed upon in the expropriation discussions, (2) ingratiate the firm with local authorities so that future business operations are possible, and (3) ensure continued access to raw materials or other resources needed from the country. The second type of management contract is when a firm is asked to manage a new venture, in which case it may sell much of its own equipment to the facility. The third situation occurs when a foreign firm is invited in to manage an existing operation more efficiently.
From the standpoint of the recipient country, the need to receive direct investment as a means of gaining management assistance is removed. From the standpoint of the firm providing management, contracts are appropriate in order to avoid the risk of capital asset loss, when returns on investment are too low and capital outlays are too high. A management contract may also serve as a means of gaining foreign experience for the supplier, thus increasing its capacity to internationalize. For example, Ansett Transport Industries of Australia developed contracts to operate Air Vanuatu for the government of Vanuatu. This led to other management contracts in the South Pacific, which in turn led to Ansett equity interests in Transcorp Airways (Hong Kong), Ansett New Zealand (New Zealand), Air Norway (Norway), Ladeco (Chile), and America West (United States).29
The contracts do have potential problems, not the least of which is the training of future competitors. Additionally, if the firm has differences of opinion on policy, incurs start-up inefficiencies, or does not train local managers quickly, bad feelings may result. Although the contractor has the responsibility for managing, it may frequently lack the ability to control the employees, particularly in government-owned facilities. Holiday Inn’s ten-year contract in Tibet is an example. The management was precluded from giving incentives to or disciplining its staff; consequently, there was little that could be done when waiters and waitresses took their lunch breaks all together when guests showed up for lunch.30 Contracts usually are drawn to cover three to five years, and fixed fees or fees based on volume rather than profits are most common.