Under an international management contract, an MNC manages the day-today operations of an enterprise in a foreign market. In addition, the MNC is usually responsible for long-range planning and goal-setting. The local enterprise maintains ownership and control of the organization. Large capital investment decisions are the prerogative of the host management.
There are several reasons for forming management contracts. For the MNC these may include the following: 1
- Licensing or franchising arrangements have turned out to be a disappointment because of the failure on the part of the licensee or the franchisee to manage the venture efficiently.
- Fees for management services are easier to transfer back to the home office than are dividends, royalties, and the like.
- The MNC has excess managerial talent, which for political and/ or policy reasons it does not wish to dismiss.
- Having a management contract with a foreign plant or company will allow the MNC to provide resources of some kind to one of its nearby operations.
- Managing a going concern is a good way to get acquainted with a foreign market.
The host country may enter into a management contract for any of the following reasons:
- The host country is dissatisfied with the performance of local management following the nationalization or expropriation of a foreign company. For example, after the Venezuelan takeover of foreign oil companies, most of the day-to-day operations of both the central Venezuelan oil company Petroven and its subsidiaries were performed by representatives of the so-called Seven Sisters (Shell, Exxon, Mobile, Chevron, BP, Texaco, and Gulf).
- Through a management contract, the government can acquire foreign expertise without the loss of control and adverse publicity associated with foreign ownership.
Management contracts are particularly common in the public sector, service industries, food processing, and natural resource development. Most countries, both developed and developing, reserve certain types of activities for the public sector. In many countries electricity, gas, water, telephone, telegraph, television and other public services are run as state enterprises. Governments that do not have the expertise necessary to continually update and modernize these facilities may enter into international management contracts. Similarly, managing service industries-hotels, hospitals, airlines, subway projects-requires a special type of talent that may not be readily available or easily developed in the host country. The highly sophisticated techniques used in food processing, along with the undesirability of depending on a foreign-owned company to provide the basic means for survival, makes this industry a perfect candidate for management contracts. Finally, searching for oil and minerals and then developing these resources into commercial products is a very sophisticated task with which many countries seek assistance through international management contracts.
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