Case Frank Davis Comes to Madagascar

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Case: Frank Davis Comes to Madagascar Antananarivo, Madagascar Valerie VinCola    

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?"

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"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 okay here due to the low barriers to entry in the textile industry, low labor costs, and the ability of the Malagasy work force to master new skills quickly. But you would not believe all we've gone through to get where we are now." Jean-Paul fell silent and took a long drink of his beer. Frank was thoughtful. "This guy doesn't seem too optimistic, but he himself said he's making money. I wonder what kinds of problems he ran into." "Don't get me wrong. This is a beautiful country and the people work incredibly hard. When I first came here after President Zafy took office, I was full of optimism and could see lots of possibili- ties. I've been in operations management for 20 years. I've dealt with unions, weathered the effects of the energy crisis and foreign competition on the textile industry, as well as the relocation of our company to the southeastern United States from Massachusetts, my home state. I've even helped my company locate a facility in Taiwan. But it hasn't prepared me for some of the things I've dealt with here." He smiled ruefully and pushed back his chair. "Oh, and one more thing," Jean-Paul added. "What's that?" Frank asked, eager for more information "Do you have an umbrella?" "An umbrella? No. Why?" Frank asked, puzzled by the amused expression on Jean-Paul's face. "Buy one, you'll need it. We're getting into the rainy season here, complete with cyclones. You'll see what I mean soon enough. I wish you luck."

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"Cyclones!" Frank thought to himself. "Thanks," he said to Jean-Paul's back as he headed toward the door. Frank wasn't sure whether Jean-Paul was wishing him luck with his assignment or in weathering the rainy season in Madagascar. He felt a bit discouraged, but at the same time his interest was piqued. He smelled a challenge and envisioned himself as an investment pioneer in rugged territory.    

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Frank's Assignment Frank Davis had been sent to Madagascar on an exploratory mission by his supervisor, Martin Herlihy, a regional vice president of a multinational food processing company, Summit Foods, based in the United States. Frank had been asked to identify potential opportunities for the company to either import agricultural products or set up a food processing operation in Madagascar. He was also asked to assess the country's general investment climate. Even if opportunities could be found, Frank's boss knew there could be several non-quantifiable costs of doing business in a developing country that could render an otherwise profitable project infeasible. Frank's foresight and good judgment had saved the company money in past expansion projects, and Martin knew Frank would be thorough in considering the many factors that could influence a potential investment. Martin was eagerly awaiting Frank's assessment of the situation. Martin Herlihy was interested in expanding Summit Foods' product offerings to include spices. Due to the heightened health consciousness of U.S. and European consumers, spices were quickly replacing oils and heavy sauces as a natural flavor enhancer in both commercially processed and prepared-at-home foods. Given the increased numbers of dual-income families, consumers cooked at home less often than they did 20 years ago. However, they were using more volume and a greater variety of spices when they did cook at home. Ethnic cooking and ethnic restaurants were extremely popular, and that preparation required many nontraditional spices. Madagascar was known for its spices, particularly vanilla and cloves. (See Exhibit 1.)