Comparative Management Course Material

Frank Davis entered the cocktail lounge at the Madagascar Hilton Hotel, located in the nation's

capital city of Antananarivo, and quickly scanned the room. Behind a cloud of cigarette smoke in the

corner there was a table of boisterous French businessmen. A few other tables of two or three people

were scattered throughout the lounge. Frank chose a seat at the bar next to a well-dressed white man

who looked like he might be American. This was Frank's first visit to Madagascar and he wanted to

get the impressions of other Americans doing business there.

"What would you like?" asked the bartender in slightly accented English.

"A beer, please. What kind do you have?" Frank asked.

"Actually the THB isn't bad. It's the local beer," offered the well-dressed gentleman next to

Frank.

"Thanks. I'll try a THB," Frank told the bartender.

"Is this your first time in Madagascar?" asked the man after introducing himself as Jean-Paul,

an American of French descent.

"Yes. I'm here evaluating the local business climate. I work for a U.S. food processing

company, Summit Foods, that is interested in the local spice market. How about you?"

Case Frank Davis Comes to Madagascar.doc page 2 of 14

"I head up the operations of a textile company in Madagascar's free trade zone, Zone Franche.

I've been here since right after the presidential election in 1993."

Frank was somewhat familiar with the recent political history based on background material

he had received from the U.S. State Department. Madagascar was a former French colony that had

gained independence in 1960. Since independence, there have been four presidents: Tsiranana, from

1960 to 1972, and Ratsimandrava, assassinated in 1975, were both in power during the First Republic.

Then came Ratsiraka, who introduced the country to the Second Republic and socialism, but he was

forced to yield to a transitional government in 1991 after a 6-month strike. In February 1993 the

current president, Zafy, was elected after a popular referendum which adopted a new constitution

establishing a mixed presidential-parliamentary regime. Since the late 1980s and particularly under

Zafy's Third Republic, the country was attempting to shift to a free-market economy from a centrally

planned one.

"A textile company?" said Frank. "Then you must be pretty familiar with the general

investment climate here. My boss is convinced there's a lot happening in this country because he has a

distant relative who made a fortune here. But I haven't had a chance to look around yet, except for the

ride from the airport to the hotel, and that was pretty depressing. The poverty seems to be so pervasive,

and yet we passed several Mercedes and sport utility vehicles that didn't seem to be driven by

foreigners. I don't get it."

Jean-Paul laughed and shrugged his shoulders. Although he was smiling, his eyes seemed to

be sad. "Investment climate? Investment climate . . . Well, I guess it depends on how you define it, and

how badly you want to invest. It also depends on who you know and who you are willing to pay to get

things done."

Frank's eyebrows shot up. "Pay to 'get things done'? Like what things?" he thought to himself.

He let Jean-Paul continue.

"The Third Republic is about 2 years old. The present administration was elected after a

general strike that brought the government and the economy to a standstill. Conditions were bad,

wages were low, and people got sick of socialism because it seemed to be benefiting only those in

power, not the country. The new administration claims to support free-market capitalism, but

according to many of my Malagasy business associates, this crew is almost as bad as the crew they

voted out."

"But your company is still here. Obviously you are making money if you're still here, right?"

"Believe it or not, we're making money despite the local business climate and the Malagasy

government, not because of it. Thanks to the Zone Franche, we pay no taxes on our export receipts and

we can hold our profits in U.S. or French currency. Otherwise all the foreign exchange we earn would

have to be directly deposited into local banks and then would be automatically converted and held in

Malagasy currency. If we were not in the Zone Franche, each time we needed foreign exchange to do

business outside the country, we would have to apply for it and, of course, pay a fee! Our firm is doing