International Management Contracting

Using international management contracts or management service contracts a company is allowed to be involved in the management of a firm in a foreign market of which the managing company has no shares (see, e.g., Hollensen 2014, p. 389). Through such agreements a firm provides managerial expertise and operates the daily business of the second firm for a specified period in return for monetary compensation. The managing firm gets a commission based on the revenues or profits of the managed firm and/or yearly (minimum) lump-sum payments.

In the case of international management contracts there is a clear distinction between the investors or shareholders and the company which manages the operations, sometimes simultaneously training national managers until they are able to take over. Recent examples of management contracts can be found in industries like hotels (e.g. Accor or Marriott), hospitals, airports, seaports and public utilities.

International management contracts are a way for managed firms to attain expertise and/or experience in a new field (Czinkota/Ronkainen 2013, pp. 303-304). For the managing firm, such a contract serves as a source of income as well as an opportunity to scout a new market and establish the company or its brand there. This occurs when the managed firms appear externally as part of a global chain, usually under an internationally recognised name.

Figure 17.5 illustrates the structure of the management contract system used by German Fraport AG in managing Cairo International Airport.

International Equity Joint Ventures

The reasons for establishing an equity joint venture with foreign partners, i.e., a firm that is jointly owned by two or more otherwise independent firms, are legislation or the need for the other partner's skills, competences or assets. Some governments, mainly in less developed countries, insist on joint ventures with local partners. This policy restricts the ownership strategy alternatives. Access to the local partner's assets, such as capital, is another reason for entering into an equity partnership.

Equity joint ventures may provide access to complementary resources, e.g. technology, market knowledge, property rights or well-known international brands. Local partners may even accept such assets as a substitute for monetary resources as a payment for shares of the subsidiary's equity (Robock/Simmonds 1989, p. 216).

The main disadvantages of equity joint ventures are potential conflicts in managing the business and transaction costs in coordinating the foreign operations. This situation is typical for equal ownership rather than acquiring a majority stake. The advantages and disadvantages of international equity joint ventures are summarised in Table 17.2.

Table 17.2

Advantages

Disadvantages

* access to expertise and contacts in local markets

* typically, international partner contributes financial resources, technological know-how or products, the local partner provides local skills and knowledge

* reduced market and political risk

* shared knowledge and resources, shared risk of failures

* overcomes host government restrictions

* may avoid local tariffs or non-tariff barriers

* possibly better relations with local governments through having a local partner (meets host country pressure for local participation)

* objectives of respective partners may be imcompatible, resulting in conflicts

* contribution to joint venture can become disproportionate

* loss of control over foreign operations

* partners may become locked into long-term incvetments from which it is difficult to withdraw

* transfer pricing problems as goods pass between partners

* importance of venture to each partner may change over time

* loss of flexibility and confidentiality

* problems of management structures and dual parent staffing of equity joint ventures

Source: Adapted from Hollensen 2014, p. 391.

Figure 17.6

Source: Adapted from Bartlett/Ghoshal/Beamish 2008, pp. 338, 342.

 
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