Second, franchisees can experience a loss of organizational fiexibility in franchising

agreements. Franchise contracts can restrict their strategic and tactical options, and they may
even be forced to promote products owned by the franchiser’s other divisions. For years me
PepsiCo (www.pepsico.com) owned the well-known restaurant chains Pizza Hut, Taco Bell, and
KFC. As part of their franchise agreements with PepsiCo, restaurant owners were required to sell
only PepsiCo beverages to their customers. Many franchisees worldwide were displeased with
such restrictions on their product offerings and were relieved when PepsiCo spun off the
restaurant chains.

Management Contracts

Under the stipulations of a management contract. one company supplies another with
managerial expertise for a specific period of time. The supplier of expertise is normally
compensated with either a lump~sum payment or a continuing fee based on sales volume. Such
contracts are commonly found in the public utilities sectors of developed and emerging markets.
Two types of knowledge can be transferred through management contracts-the specialized
knowledge of technical managers and the business~management skills of general managers. ‘

Two examples of management contracts include:

 DBS Asia (Thailand) awarded a management contract to Favorlangh Communication

(Taiwan) to set up and run a company supplying digital television programming in
Taiwan
 Lyonnaise de Eaux (France) and RWE Aqua (Germany) agreed to manage drinking-
water quality and client billing and to maintain the water infrastructure for the city of
Budapest, Hungary, for 25 years.

ADVANTAGES OF MANAGEMENT CONTRACTS Management contracts can benefit

organizational and countries. First, a firm can award a management contract to another company
and there by exploit an international business opportunity without having to place a great deal of
its own physical assets at risk. Financial capital can then be reserved for other promising
investment projects that would otherwise not be funded.

Second, governments can award companies management contracts to operate and upgrade public
utilities, particularly when a nation is short of investment financing. That is why the government
of Kazakhstan contracted with a group of international companies called ABB Power Grid
Consortium to manage its national electricity-grid system for 25 years. Under the terms of the
contract, the consortium paid past wages owed to workers by the government and invested more
than $200 million during the first three years of the agreement. The Kazakhstan government had
neither the cash flow to pay the workers nor the funds to make badly needed improvements.

Third, governments use management contracts to develop the skills of local workers an
managers. ESB International (www.csb.ie) of Ireland signed a three-year contract not only
manage and operate a power plant in Ghana, Africa, but also to train local personnel in the skill
needed to manage it at some point in the future.
DlSADVANTAGES OF MANAGEMENT CONTRACTS Unfortunately, management
contracts also pose two disadvantages for suppliers of expertise. First of all, although
management contract reduce the exposure of physical assets in another country, the same is not
true for the supplier personnel; political or social turmoil can threaten managers’ lives.

Second, suppliers of expertise may end up nurturing a formidable new competitor in the local
market. After learning how to conduct certain operations, the party that had originall needed
assistance may be capable of competing on its own. Firms must weigh the financial in turns from
a management contract against the potential future problems caused by a new launched
competitor.

Turnkey Projects

When one company designs. constructs, and tests a production facility for a client, the agreement
is called a turnkey (build-operate-transfer) project. The term turnkey project is deriv from the
understanding that the client, who norrnall y pays a flat fee for the project, is expected do
nothing more than simply “turn a key" to get the facility operating. The company awarded
turnkey project completely prepares the facility for its client.

Similar to management contracts, turnkey projects tend to be large-scale and often involve
government agencies. But unlike management contracts, turnkey projects transfer special process
technologies or production-facility designs to the client. They typically involve the construction
of power plants, airports, seaports, telecommunication systems, and petrochemical facilities that
are then turned over to the client. Under a management contract, the supplier of service retains
the asset-the managerial expertise.

Two examples of international turnkey projects include:

 Telecommunications Consultants India constructed telecom networks in both Madagascar

and Ghana-two turnkey projects worth a combined total of $28 million.
 Lubei Group (China) agreed with the government of Belarus to join in the construction of
a facility for processing a fertilizer byproduct into cement.

ADVANTAGES 0F TURNKEY PROJECTS Turnkey projects provide benefits to providers

and recipients. First, turnkey projects permit firms to specialize in their core competencies and to
exploit opportunities that they could not undertake alone. Exxon Mobil (we.exxonmobil.com)
awarded a turnkey project to PT McDermott Indonesia (www.medermott.com) and Toyo
Engineering (www.toyo-eng.com) of Japan to build a liquid natural gas plant on the Indonesian
island of Sumatra. The providers are responsible for constructing an offshore production
platform laying a lOO-kilometer underwater pipeline, and building an on-land liquid natural gas
refinery. The $316 million project is feasible only because each company contributes unique
rtise to the design, construction, and testing of the facilities.

Second, turnkey projects allow governments to obtain designs for infrastructure projects from the
world’s leading companies. For instance. Turkey’s government enlisted two separate
consortiums of international firms to build four hydroelectric dams on its Coruh River. The dams
combine the design and technological expertise of each company in the two consortiums. The
Turkish government also awarded a turnkey project to Ericsson (www.ericsson.com) of Sweden
to expand the country’s mobile telecommunication system.

DISADVANTAGES OF TURNKEY PROJECTS Among the disadvantages of turnkey

projects is the fact that a company may be awarded a project for political reasons rather than for
technological know-how. Because turnkey projects are often of high monetary value and
awarded by government agencies, the process of awarding them can be highly politicized. When
the selection process is not entirely open. Companies with the best political connections often
winn Contracts usually at inflated prices-the costs of which are typically passed on to local
taxpayers.

Second, like management contracts, turnkey projects can create future competitors. A newly
created local competitor could become a major supplier in its own domestic market and perhaps
even in other markets where the supplier operates. Therefore, companies try to avoid projects in
which there is danger of transferring their core competencies to others.

Investment Entry Modes

Investment entry modes entail direct investment in plant and equipment in a country coupled
with ongoing involvement in the local operation. Entry modes in this category take a company‘s
commitment in a market to a higher level. Let’s now explore three common forms of investment
entry: wholly owned subsidiaries, joint ventures, and strategic alliances.

Wholly Owned Subsidiaries

As the term suggests, a wholly owned subsidiary is a facility entirely owned and controlled by a
single parent company. Companies can establish a wholly owned subsidiary either by forming a
new company and constructing entirely new facilities (such as factories, offices, and equipment)
or by purchasing an existing company and internalizing its facilities. Whether an international
subsidiary is purchased or newly created depends to a large extent on its proposed operations.
When a parent company designs a subsidiary to manufacture the latest high-tech products, it
typically must build new facilities. The major drawback of creation from the ground up is the
time it takes to construct new facilities, hire and train employees, and launch production.

Conversely, finding an existing local company capable of performing marketing and sales will be
easier because special technologies are typically not needed. By purchasing the existing
marketing and sales operations of an existing firm in the target market, the parent can have the
subsidiary operating relatively quickly. Buying an existing company’s operations in the target
market is a particularly good strategy when the company to be acquired has a valuable trade
mark, brand name, Or process technology.

ADVANTAGES OF WHOLLY OWNED SUBSlDlARIES There are two main advantages to

entering a market using a wholly owned subsidiary. First, managers have complete control over
day-to-day operations in the target market and access to valuable technologies, processes, and
other intangible properties within the subsidiary. Complete control also decreases the chance that
competitors will gain access to a company’s competitive advantage, which is particularly
important if it is technology based. Managers also retain complete control over the subsidiary’s
output and prices. Unlike licensors and franchisers, the parent company also receives all profits
generated by the subsidiary.

Second, a wholly owned subsidiary is a good mode of entry when a company wants to
coordinate the activities of all its national subsidiaries. Companies using global strategies view
each of their national markets as one part of an interconnected global market. Thus the ability to
exercise complete control over a wholly owned subsidiary makes this entry mode attractive to
companies that are pursuing global strategies.

DISADVANTAGES OF WHOLLY OWNED SUBSIDIARlES Wholly owned subsidiaries

also present two primary disadvantages. First, they can be expensive undertakings because
companies must typically finance investments internally or raise funds in financial markets.
Obtaining the necessary funds can be difficult for small and medium-sized companies but
relatively easy for thelargest companies.