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DATE: May 1st, 2013

TO: Professor Kopka

FROM: Luke Penne, Ngoan Phan, Juliette Rakotomalala, Alex Scalera

RE: Madagascar Country Team Report

Executive Summary

Madagascar is an island located in the Indian Ocean off the southeastern coast of Africa

with numerous little islands surrounding it. Despite its unique level of biodiversity and wide

array of natural resources, Madagascar is still considered an economically developing country.

In, 2009 the unstable republic suffered a coup d’état which has set the country back substantially.

As a result of the coup, poor quality infrastructure conditions continue to remain and have

increased in number; currently three in one-thousand inhabitants own telephones.

The population of Madagascar is ethnically diverse, with multiple official languages and

religions. The majority of the people is very poor and focuses its buying habits on commodity

goods, although Madagascar is also home to a small percentage of super-wealthy elites.

Traveling within Madagascar can be tricky with many unpaved roads and an erratic public

transportation system. It is advisable for visitors to plan their travel arrangements early and

thoroughly to avoid costly delays.

The bureaucracy of Madagascar is meticulous, with numerous processes in place for a

company to establish a business. From our research and analysis, our group recommends that

our company invests in Madagascar’s booming, state-owned chromite mines. Pairing our

financial support with their established expertise in the field will allow for economies of scale

and attractive profits.

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Table of Contents

Political Environment (3)

Economic-Commercial Environment (10)

Socio-Cultural Environment (18)

Travel Considerations (23)

Product-Industry and Mode of Market Entry (28)

References (34)

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Political Environment

Map of Madagascar

African Studies Center of University of Pennsylvania. (n.d.) African Studies Center of University of Pennsylvania.

Retrieved on April 28, 2013 from: http://www.africa.upenn.edu/CIA_Maps/Madagascar_19854.gif

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Geographic Characteristics

Over a hundred million years ago, an area of 587,041 square kilometers similar to the

shape of Florida separated from the Southeastern part of Africa into the Indian Ocean creating

the Mozambique Channel and the fourth largest island in the world, Madagascar (“Madagascar,”

2013). Madagascar is the most bio diverse country in the world housing thousands of different

animals, plants, and minerals most of which are endemic to it. The country is divided up into six

provinces: Antananarivo, Antsiranana, Fianarantsoa, Mahajanga, Toamasina, and Toliara

(Central Intelligence Agency, C. Michael Hogan, U.S. State Department, and World Wildfire

Fund, 2012). From region to region, its geography varies with plateau and mountains in the

middle and north of the island, and with rainforest and forest in the south (Undefined, 2008). In

addition, Madagascar’s coast is comprised of beautiful quiet relaxing beaches. As a tropical

country, Madagascar contains rich soil and ground that allows many vegetables, grains, and

fruits to be harvested, as well as many minerals to mine (Interactive Map, 2012). In Madagascar,

one can find graphite, chromite, coal, bauxite, salt, quartz, mica, tar sands, semiprecious stones,

and rare earth elements (Madagascar, n.d.). Thus, some very lucrative markets to enter within

Madagascar are various agriculture industries such as vanilla and the mining industry. It is

important to look at Madagascar’s political environment in order to see how a business would

fair there and which industry is the best to enter in this country.

Madagascar’s Government Structure

Although one of the most beautiful places on earth containing many precious resources,

Madagascar has a very unstable republic style government. There are three branches that make

up the Malagasy government: the Executive Branch, the Legislative Branch, and the Judicial

Branch (Madagascar, n.d.).

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The highest level of government is the Executive Branch. It is comprised of the chief of

state, the head of government, and the cabinet. The chief of state is recognized by the world as

the president. He or she is elected by a popular vote of the people, and is given power over the

whole country. The presidential term lasts five years and one can serve no more than two terms.

According to Article 44 in the Malagasy Constitution, the president is supposed continuously

work throughout his or her term(s) to unify the country; however, history shows that most

presidents do not work for the good of his or her constituents. In the presidential election, if no

single candidate wins majority vote, a run-off election will take place. After the president is

elected, he will choose a prime minister from the nominations of parliament officials and those

of his own. In order for a nominee to be appointed, there must be a sufficient amount of support

from parliament. If there is not enough support for the nominee, then the president may choose a

candidate from parliament. Once appointed, the Prime Minister will be established as the head

of parliament and will lead parliamentary activities, playing a similar role to the Vice President

of the United States. In addition to his or her head of government role, the prime minister will

also appoint cabinet members. The Malagasy Cabinet resembles that of the United States;

members take on roles such as Minister of Armed Forces and Minister of Foreign Affairs

(Ibpus.com & USA International Business Publications, 2011).

The second branch of government is the legislative branch, more commonly referred to

by the Malagasy people as Parliament. Like the American government, it is bicameral and made

up of two sections: the Senate and the National Assembly. Both divisions of government are led

by the prime minister and work together to create legislation. According to WildMadagascar.org,

there are 100 senators who represent territorial groups and they all deal with social and economic

issues. “Two-thirds of its members are chose by an Electoral College and the remaining one-

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third are chosen by the president” (Undefined, 2008). On the other hand, the National Assembly

checks the power of the prime minister and the cabinet. If it sees fit, the National Assembly “can

pass a motion of censure and require the prime minister” or a cabinet member to resign.

Furthermore, the president can dissolve the National Assembly if he or she so chooses

(GlobalEdge, 2013).

The third branch of government is the judicial branch which “is based on the French

system” (United Nations, 2004). This branch is comprised of four different court levels. The

lowest judicial division is the Courts of First Instance which rule on criminal and civil cases.

The next level of courts is the Court of Appeals which deals with appeals on the judgment of

criminal and civil cases. Appellants who are dissatisfied with the Court of Appeals ruling can

take their case to the next judicial level, the Supreme Court. The highest judiciary level is the

High Constitutional Court which “reviews the constitutionality of laws, decrees,” and “election

results” (United Nations, 2004).

Political Parties and Influencing the Government

There are currently seven different political parties: Association for the Rebirth of

Madagascar (AREMA), the Democratic Party for Union in Madagascar (PSDUM), Economic

Liberalism and Democratic Action for National Recovery (LEADER / Fanilo), Fihaonana Party

(FP), I Love Madagascar (TIM), Tanora malaGasy Vonona (TGV), and Renewal of the Social

Democratic Party (RPSD) (Madagascar, n.d.). Despite their presence and politicians’ affiliation

with them, political parties do not play a prominent role in Madagascar like they do in America.

There are no distinct differentiations in political views between the political parties; the parties

are set apart by their leaders, the politicians who establish them. The political party serves as a

platform for the vision the leader of the party has for the country. People who agree with the

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leader of the party become advocate followers of the politician, participating in their protests

against other views. Protests and demonstrations are the main way Malagasies lobby and make

their voices herd by the government.

Current Policy Issues

A prime example of the Malagasy way of lobbying is the coup d’état which took place in

March 2009. The 2009 coup stemmed from an act of suppressing democracy; at least that is how

Mayor Andry Rajoelina of Antananarivo saw it. Ever since Andry Rajoelina was elected in 2007

as the mayor of Antananarivo, President Marc Ravalomanana and Mayor Andry Rajoelina have

been arguing over how the capital Antananarivo should be run. Beginning with his second term,

Marc Ravalomanana “delayed the disbursal of funds for various local government infrastructure

projects in the capital, diverted investment away from the city, and in various other ways refused

to facilitate cooperation between the central and municipal governments,” (Cook & Ploch, 2012).

Andry Rajoelina finally had enough when Marc Ravalomanana shut down Rajoelina’s television

station, Viva TV, “after it aired an interview with former President Ratsiraka” (Cook & Ploch,

2012).

Didier Ratsiraka is the former president of Madagascar who Ravalomanana replaced.

Ratsiraka is believed to have led a corrupt government with policies along the lines of Marxism

and Communism. He lost support because he was unable to improve the Malagasy economy;

pressure from IMF and the World Bank led to Ratsiraka to implement privatization and

cancellation of many subsidies (“Madagascar,” 2013). As a result, the currency was devalued,

and many business and government programs became underfunded. Furthermore, Ratsiraka and

his friends benefited financially from these economic policy changes (“Madagascar,” 2013).

Many Malagasies, including Ravalomanana, disapproved of Ratsiraka’s decision. From then on,

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Ravalomanana saw Ratsiraka as a threat to Madagascar; as a result, Ravalomanana frowned upon

Viva TV interviewing Ratsiraka (Cook & Ploch, 2012).

Andry Rajoelina accused Ravalomanana of suppressing freedom of speech and running a

dictatorship. He believed that Ravalomanana should be removed from office. In an effort to

over throw Ravalomanana, Rajoelina led many public protests and demonstrations against the

government which turned violent. Ravalomanana owned businesses were vandalized and or

destroyed, and people were shot and killed. Towards the end of January, Rajolelina petitioned

parliament for the removal of Ravaolmanana from office so he could start a transitional

government. In return, Ravalomanana removed Rajoelina from office on February 3, 2009

(Cook & Ploch, 2012). That did not stop Rajoelina from speaking out against the government.

Thus, Protests and bloodshed continued. Pro-government demonstrations even started to

counter the anti-government protests. On March 13, 2009, the mutineering unit deployed tanks

in and around the capital in effort to prevent either side from sending out guerillas. During the

following days, the two sides met to attempt to settle differences, but were incapable of doing so.

Thus, on March 16, 2009, Andry Rajoelina, with the help of the military “seized the presidential

palace and the central bank” and “began to take control of” all the government offices (Cook &

Ploch, 2012). The following day, March 17, 2009, President Marc Ravalomanana announced his

resignation and went into exile in South Africa where he has been ever since. Andry Rajoelina

took over as president and began to set up a transitional government (Cook & Ploch, 2012).

In the eyes of the world, this turn in government was seen as an injustice and a coup

d’état. As a result many global organizations terminated Madagascar’s benefits. The African

Union and the South African Union suspended Madagascar from their organizations. Many

other countries and global organizations have been trying to find and suggest ways to establish a

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just government in Madagascar, but Andry Rajoelina’s opposition to those ideas have made it

impossible to do so (Cook & Ploch, 2012). Andry Rajoelina has been holding off presidential

elections so that he could rewrite the constitution and become a candidate in the elections.

Rajoelina finally finished rewriting the constitution in 2012. However, neither he nor

Ravalomanana will be running for president in the upcoming 2013 elections as a result of a

comprise established to avoid more political unrest. However, Ravalomanana’s wife will be,

despite the fact that she is banned from participating in Malagasy politics and she has not resided

in Madagascar for the past six months prior to the election which is a requirement to run

(Unknown, a). Other candidates for Madagascar’s 2013 presidential elections include Edgar

Razafindravahy, Pierrot Rajonarivelo, Hajo Andrianainarivelo, and Jean-Louis Robinson

(Unknown, b). Hajo Andriananinarivelo’s platform is based on change and economic

development making him seem like he would make the perfect candidate (Unknown, c). The

only problem with his platform is that past presidents and Malagasy politicians have promised

the same thing, but never followed through. This begs the question, is Andriananinarivelo really

an advocate for the people or is he just another politician trying to gain power.

Madagascar’s Relationship with the United States

Prior to the coup d’état, Madagascar had a strong relationship with the United States.

They interacted with each other in international organizations such as the United Nations,

International Monetary Fund, World Bank, and World Trade Organization. The friendship

between the two countries could even be seen through the many benefits the United States gave

to Madagascar. These benefits included trade benefits, and health and food security assistance

through nongovernmental organizations, community associations, and other private groups like

the Peace Corp. Furthermore, the U.S. exported items like machinery, vegetable oil, rice and

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wheat, aircrafts, and vehicles to Madagascar in return for products like apparel, vanilla beans,

precious stones/metals, and perfumes/cosmetics. However, as a result of the coup, Madagascar

lost access to many of these benefits (U.S. Relations with Madagascar, 2012).

Government Departments and Procedures for Business

In order for any type of business to start up operations in Madagascar there are

procedures the firm must follow. First it must contact with the Economic Development Board of

Madagascar (EDBM) in order to obtain a fiscal identification number also known as the tax

identification number; this whole process can be completed within a day. Afterwards, the firm

must register, apply for license, statistical identifications, and file a notice of constitution to be

published in a French newspaper; all of these processes together are completed within about

seven days (Investment and Business Opportunities, n.d.). Once the company has obtained the

appropriate documents to run business operations, the firm should contact the mining department

of government. From the mining department, the company can begin the process to obtain the

necessary mining licenses, begin to set up operations (Ibpus.com & USA International Business

Publications, 2011).

Economic-Commercial Environment

The following chart depicts various economic indicators of Madagascar’s, as well as the

US’s, overall economic position. The indicators are related to national expenditures, trade

conditions, population characteristics, and indicators of social lifestyle.

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imf.org

http://comtrade.un.org/pb/

http://databank.worldbank.org/ddp/home.do?Step=3&id=4

https://www.google.com/publicdata/explore?ds=d5bncppjo

National Expenditures 2009 2010 2011 2012 2009 2010 2011 2012Gross domestic product, constant prices, % -4.12 0.419 1.814 1.903 a -3.069 2.391 1.808 2.17Gross domestic product, current prices, 8.552 8.733 9.901 10.054 a 13,973.65 14,498.93 15,075.68 15,653.37Gross domestic product per capita, current 412.063 410.01 453.123 448.685 a 45,461.43 46,811.20 48,327.86 49,802.15Gross domestic product based on purchasing-power-parity (PPP) per capita 939.725 931.791 944.47 953.785 a 45,461.43 46,811.20 48,327.86 49,802.15Gross domestic product based on purchasing-power-parity (PPP) share of 0.028 0.027 0.026 0.026 a 19.918 19.414 19.09 18.914Total investment % of GDP 34.12 28.625 25.675 23.374 a 14.715 15.469 15.489 16.22Gross national savings, % of GDP 12.977 18.942 18.809 15.514 a 11.134 12.212 12.189 13.112Inflation, average consumer prices, % 8.957 9.278 10.02 6.452 a -0.321 1.64 3.142 1.967

Trade ConditionsRate of Exchange, Ariary to USD 2185 bTotal Imports, USD (Millions) 3197 2507 b 1605300 1969180 2265890Total Exports, USD (Millions) 1050 1087 b 1056750 1277580 1480410 Balance -2147 -1420 b -548550 -691600 -785480Volume of imports of goods and services, -31.716 -14.362 0.536 6.95 a -13.534 12.481 4.779 3.499Volume of exports of goods and services, -17.068 23.116 7.961 4.987 a -9.133 11.137 6.682 4.302Current account balance, USD (Billions) -1.809 -0.846 -0.68 -0.79 a -381.898 -441.952 -465.928 -486.525Current account balance, % of GDP -21.15 -9.685 -6.866 -7.859 a -2.733 -3.048 -3.091 -3.108Selected Commodities Imports (Mil. U.S. $) Jerseys, Sweaters, etc 134 126.6 b Men's Suits/Jackets 43.4 27.3 b Women's Suits/Jackets 89.9 27.7 b Crustaceans 82.6 66 b Exports (Mil. U.S. $) b Petrolium Oils 315 368.8 b Minerals 493.8 38.7 b Yarn of Carded Wool 54.7 62.5 b Rice 47.2 53.5 b

PopulationPopulation, total 20124150.00 20713819.00 21315135.00 c 3.07E+08 3.09E+08 3.12E+08 Population ages 0-14 (% of total) 43.43 43.10 42.74 c 20.11776 20.07708 20.06165 Population ages 15-64 (% of total) 53.42 53.76 54.12 c 67.03254 66.8635 66.63762 Population ages 65 and above (% of total) 3.14 3.14 3.14 c 12.8497 13.05941 13.30073 Population density (people per sq. km of land area) 34.60 35.62 c 33.5364 33.81824 Population growth (annual %) 2.91 2.89 2.86 c 0.876651 0.836905 0.722206 Population, female (% of total) 50.15 50.15 50.15 c 50.68371 50.66125 50.6327Life expectancy at birth, total (years) 66.19 66.47 66.70 c 78.09024 78.24146Labor force, total 9812380.12 10148339.9 c 1.58E+08 1.57E+08

Social LifestyleEnergy UseEnergy Use per capita (kg) 34 d 7,057.28 7,164.46 7,069.23Internet users as % of population 1.63 1.7 1.9 d 71.21 74.25 78.24

MADAGASCAR USA

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Level and Power of Unions

Both public and private sector workers have the right to establish and join labor unions of

their choice (“Encyclopedia,” 2013). However, only 5% of the total force was unionized in 2002.

Unions are required to register with the government, but authorization is customarily given. The

law provides for collective agreements between employers and trade unions. Strikes are also

legally permitted. The Labor Code of Madagascar prohibits discrimination by employers against

labor organizers, union members, and unions. In the event of anti-union activity, unions or their

members may file suit against the employer in civil court. Unions may join international labor

organizations and may form federations or confederations.

However, a new law on export processing zones adopted in Madagascar in January 2008,

following shortly after the adoption of a new constitution last year that entrenches the

government’s ability to limit the right to strike to some categories of public sector workers, bears

witness to a worsening trend of respect for workers’ rights, according to a report issued by the

ITUC on core labor standards in Madagascar (“Madagascar: Worsening,” n.d.)

Later that year in July 2008, the European Union, International Labour Organization,

Ministry of Education and Ministry of Labour signed a Partnership Protocol Agreement. The

implementation of the TACKLE project started effectively in January 2009 with the recruitment

of the project staff in Madagascar (“Madagascar”, 2013). The four main goals of this partnership

are to improve country level child labor and education legal framework, strengthen institutional

capacity to implement child labor strategies, take targeted actions to combat child labor, and

foster enhance networks on child labor and education.

Management and Technical Capabilities

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The management capabilities of Madagascar are relatively impressive compared to other

areas of Sub-Saharan Africa due primarily to a well-developed system of higher education

(“Education in Madagascar,” nd.). The university system of Madagascar operates through many

branches including the University of Mahajanga, University of Toliary, University of

Antananarivo, National Institute of Nuclear Sciences and Techniques, University of North

Madagascar, University of Fianarantsoa and University of Toamasina. The University of

Antananarivo is situated in Antananarivo which is the capital of Madagascar. This university is

Madagascar's chief public university and was set up on December 16th, 1955 in Antananarivo as

the Institute for Advanced Studies. The University of Toamasina is situated in Toamasina city.

At one time, this university was the part of the University of Madagascar, but became

autonomous in the year 1988 along with other public universities of Madagascar.

Madagascar’s technical strengths are primarily in mining, forestry and textile production.

They have been reliant on these primary industries for many years, and therefore have developed

a labor force skilled in high-efficiency operations.

Infrastructure Conditions

Madagascar’s poor infrastructure conditions are a leading reason why the country has

struggled financially. According to CIA figures, Madagascar has 49,827 km of roads, of which

just 5,780 km are paved. However, many of Madagascar's "paved roads" are in terrible shape,

filled with potholes and or wide enough for only a single vehicle. Cyclones and other weather

conditions often wipe out roads and bridges, making travel even more difficult (“Why is

Madagascar so Poor,” nd.).

The country's ports and airports fare better than the land or rail network (“Madagascar –

Transportation,” nd.). Madagascar has fifteen major ports along the 4,828- kilometer coastline,

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of which Toamasina, Mahajanga, and Antsiranana are the most important. The air network

revolves around the main international airport, Ivato-Antananarivo. Although the country

contains 211 airfields, but only approximately 50 percent are usable, and only thirty maintain

permanent-surface runways. Whereas the national airline, Air Madagascar, is two-thirds owned

by the government, twelve airports were taken over in 1990 by a private company, Aeroports de

Madagascar.

In 2004 Madagascar's telecommunication system was sparse, serving only commercial

users and residents of large towns and cities. Almost 60 percent of the country's 27,200

telephones were located in Antananarivo in 1999. Figures for that year showed that the country

averaged only three telephones per 1,000 inhabitants, and service was limited to government

offices, large companies, and a few wealthy families in urban areas. The telecommunications

system deteriorated appreciably during the 1980s and 90s so that Madagascar had fewer

telephones in 2004 than in 1975. Two satellite ground stations near the capital provide excellent

international links via the International Telecommunications Satellite Corporation's Indian Ocean

satellite and the Symphonie ground station, working with a European telecommunications

satellite.

Broadcast services are thinly scattered countrywide. The entire country has only

seventeen medium wave amplitude modulation (AM) radio stations, including a powerful

transmitter in the capital and sixteen low-power repeaters in other cities. A government-owned,

AM shortwave station broadcasting in French and Malagasy on five frequencies reaches listeners

in remote locations and in neighboring countries. In addition, Radio Nederlands has a powerful

station in western Madagascar that relays Radio Nederlands's programs throughout Africa and

the Indian Ocean on shortwave frequencies. Antananarivo and two other cities each have a single

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frequency modulation (FM) station. Thirty-seven low-power television transmitters broadcast for

three and a half hours daily in urban areas.

Tax Rates and Collection

The total tax rate for businesses in Madagascar is 36.0% of profits. This is lower than both the

average tax rate of 57.8% in Sub-Saharan Africa and 42.7% in the OECD (“Doing Business,”

2013). This 36% tax rate is broken down in to various categories as shown in the following table:

Indicator Madagascar Sub-Saharan Africa OECDPayments (number per year)

23 39 12

Time (hours per year) 201 319 176Profit tax (%) 14.0 19.0 15.2Labor tax and contributions (%)

20.3 13.3 23.8

Other taxes (%) 1.6 25.5 3.7Total tax rate (% profit) 36.0 57.8 42.7

It should also be noted that:

Non-residents are only taxed on Madagascar sourced income,

Export incentives are available to encourage operations in Madagascar.

Other taxes on corporations include:

Capital duty – An increase in share capital is subject to a 0.5% tax.

Payroll tax – Tax is withheld by an employer on a monthly basis at graduated rates up to

23%.

Real property tax – An annual building tax is imposed on the owner of buildings at rates

ranging from 5% to 10%.

Social security contributions – Contributions to the state pension scheme are required on

employee salaries. Employers must contribute 13% of salary to the scheme, while

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employees contribute 1%. The employer is entitled to a deduction on contributions made

up to 10%.

Transfer tax – Registration fees are paid upon registration of title deeds or on the transfer

of property or interests (“Madagascar Tax,” 2012)

Availability of Facilities

The existing facilities available for business in Madagascar are diverse. They include

three chrome mines, three hydro power stations, two lighthouses, one nickel mine, one simple oil

refinery and ten water storage dams (“Madagascar – An Overview,” 2013).

However, there may be a much more telling indicator of the level of facilities in Madagascar.

Although this country contains the extensive list identified above, it takes the average new

company 450 days and approximately 85,000,000 MGA to obtain something as basic and vital as

electricity. Compared to the average times of connection in Sub-Saharan Africa and the OECD

of 133 days and 98 days, it takes a relatively long time to obtain electricity from the one

company that offers such services, JIRAMA.

Distribution System

Imported goods can enter Madagascar via air at Ivato international airport in

Antananarivo or via sea at the ports of Tamatave, Majunga, Antsiranana, Tulear and Ft. Dauphin.

Products are then distributed by road, sea or rail throughout the country. Distribution is usually

handled by the importing company or by wholesalers and retailers. The use of distributors,

particularly with prior experience in distributing imported goods, is highly recommended. Local

agents have contacts to develop a customer base and can easily communicate in Malagasy and/or

in French (“Doing Business,” 2011).

Business Services

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Marketing is a relatively new industry to Madagascar. Avenues of advertising include

billboards, posters, newspapers, radio and television. Prominent campaigns have European

influence and often link the product with leisure activities or personal enjoyment. The quality of

advertising campaigns varies and appears to depend on the budget of the advertiser. It is possible

to pay a newspaper for a full-page article/advertisement, or all the television stations to broadcast

an info/ad program (“Doing Business,” 2011). Some other prominent advertising channels

include marketing companies and business journals.

Madagascar also offers a fair selection of private market research firms. GAMA offers

global consulting for textile projects, FTHM Conseils specializes in financial and technological

advising, and ATW Consultants focus on market segment research and consumer satisfaction.

Business Associations

Madagascar is home to six major business associations: AMCHAM Madagascar,

Chambre de Commerce, FIVMPAMA (Association of Malagasy Businessmen), GEM (Grouping

of Enterprises of Madagascar), SIM (Union of Industries of Madagascar), and GEFP (Grouping

of Export Processing Zone companies) (“Doing Business,” 2011).

The following list depicts a brief overview of the functions and purposes of a few of these

organizations:

AMCHAM - non-profit association of American and local businesses and businesspeople

o Mission is to enhance commercial ties between America and Madagascar

o Holds regular discussions regarding concerns and opportunities for these groups

Chambre de Commerce - National committees shape ICC policies and alert their

governments to international business concerns

GEM – foster economic growth through cross-industry communication and cooperation

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o Hosts trade shows aimed at encouraging Malagasy people to buy Made in

Madagascar products

GEFP – promotes free trade by reducing customs intervention at ports

o Corporations setting up in these free trade zones may be given tax breaks as

incentives

Economic Development Board of Madagascar (EDBM)

o Services entrepreneurs with the legal documents and processes required to start a

business

Malagasy Industrial Protection Office (OMAPI) and Malagasy Copyright Office

(OMDA)

o Service businesses by protecting international property rights

Socio-Cultural Environment

Languages

The main language of Madagascar is Malagasy. Malagasy is spoken by almost all of the

resident population. However, there are different accents and versions of Malagasy throughout

the country. Luckily, many of the different dialects have many of the same words, so most

people can understand one another.

French is another language that is used by many people in Madagascar. Many of the old

or historical government documents and publications are in French.

English is the third official language in Madagascar, though it is not as widely spoken as

Malagasy or French. In 2003, the government began English-teaching programs in 44 schools in

Madagascar, and many Peace Corps employees are teaching English there. Therefore, it is

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relatively easy to establish an English-speaking business in the country. (“Society and Culture of

Madagascar”, 2013)

Style of Communication

All countries in the world have their own way of expressing verbal communication.

Madagascar is not an exception. Much communication in Madagascar is done indirectly and

inexplicitly. This means that Malagasy people are not forward in their communication style.

When they want to transmit messages, they have to convey it indirectly to show the importance

of the message. As an example of indirect communication, when Malagasy people give a speech,

the speaker has to introduce his lecture by using proverbs and long excuses. For this reason, if

the speaker made mistakes during his speech he is already excused. However, if someone gives a

speech in a more direct manner, he or she is thought to have a bad attitude. This way of speaking

shows the haughtiness of the speaker. The goal of indirectness is saving face and living in

harmony. (“Madagascar-Communication style”, 2013)

Style of Business Negotiation

Bargaining is a business practice used in the everyday life in Madagascar. For example, if

you are not Malagasy, and you cannot speak the language, when you go to the market the native

people may try to give you a price that is at least twice the real price. You can cut the price by

25-30% of what they told you by bargaining with sellers. However, you need to have an idea of

the true value of the product or service that you are going to buy to bargain. It is better to go

shopping with a local when you go for the first time. Unlike in the U.S., taxes are included in the

shown prices in Madagascar. (“Madagascar-Negotiation”, 2013).

Nature of Business Relationships

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Madagascar is a member of the Indian Ocean Commission, the Organization of African

Unity (now renamed the AU) and the Non-Aligned Movement. In addition, Madagascar was

admitted to the Southern African Development Community in 2004. Business relationships in

Madagascar are based on levels of trust and common purpose.

For doing business in Madagascar, the people of Madagascar are not acceptable to be

late. Therefore, you should be on time for meetings and professional appointment in Madagascar.

However, it is common for businesspeople from other countries to be kept waiting a few

additional minutes for all Malagasy professionals to arrive.

Business Corruption

In 2011, Transparency International ranked Madagascar 100th out of 183 countries

surveyed, with a score of 3 on the Corruption Perception Index (CPI), indicating a severe

corruption problem. Corruption at high levels exists in nearly all sectors, and is most pervasive in

the following areas: judicial, police, tax, customs, land, trade, mining, industry, environment,

education, and health. The Independent Anti-Corruption Bureau (BIANCO) is the agency

responsible for combating corruption, and Transparency International has operated in

Madagascar since 2002.

Madagascar has signed and ratified the UN Anticorruption Convention, and the African

Union Convention against Corruption, but has not yet signed the Convention on Combating

Bribery of Foreign Public Officials in International Business Transactions.

There is no requirement yet for companies to establish internal codes of conduct that, inter alia,

prohibit bribery of public officials. However, some foreign companies have their own internal

controls, ethics, and compliance programs to prevent bribery. (“Doing Business”, 2011)

Religion(s)

21

In Madagascar, 52 percent of the population is of traditional beliefs, 41 percent are

Christians and 7 percent are Muslims. Most of the Malagasy are followers of Christianity. They

are sub-divided into Roman Catholic and Protestants. Betsileo and Merina are the two main ethic

groups in Madagascar. The Betsileo people are supporters of the Roman Catholicism; and the

Merina people are the supporters of Protestantism. The council of Christian churches plays a

pivotal role to maintain the integrity among the churches is other related factors. The nineteenth

century was a tough period for Madagascar as the country witnessed conflicts between

Christianity and traditional religious belief, thus leading to the death of many religious followers.

Later on Protestantism became the religion of the royal and noble families of Madagascar. The

Christian missionaries established the belief of Supreme Gold and used the term

“Andriamanitra” to define the Christian counterpart. (”Religion in Madagascar, 2013)

Popular Attitudes Toward Business

Madagascar is a poor country and the economy focuses on mining and agriculture, so it is

not easy for Malagasy to invest in a large business, especially under this political crisis. Poverty

affects two-thirds of the population, mainly in rural areas. This country also depends on foreign

aid. The business quality rating for Madagascar is “C”. For these reasons, Malagasy are

generally wary of investing in big business. (“Madagascar: Risk Assessment”, 2013)

Ethnic Groups

According to the 2008 survey, the main Madagascar ethnic groups are the Malayo-

Indonesian, Merina (forming about 25% of the population), Betsileo (about 12%) and the

Cotiers. These African ethnic groups of Madagascar were initially demarcated on the basis of

political groupings but later on the Europeans included them under the Madagascar ethnic

groups.

22

The Austronesian people are the major group living in Madagascar and they constitute about

57% of the total population. The territories occupied by the Austronesian peoples were together

known as Austronesia. The Malagasy ethnic group forms a good number of the population and

they are sub divided into two racial and socio-economic groups namely the Betsileo and the

Merina. Merina, the Madagascar natives, have been the descendant groups from the late 18th

century but the colonialism in Madagascar strengthened them politically.

Betsileo are the third largest among the Madagascar ethnic groups and they are the

highland tribe of Madagascar. The word Betsileo means "the invincible one". The population of

Betsileo is about one million. Other than Merina and Betsileo, other significant populations are

of French, Indian, Comoran and the Creole origin. (“Society and Culture of Madagascar”, 2013)

Social, Economic, Political Elites

Madagascar is governed under the constitution of 1992 as amended. As stated above, the

president, also known as the head of state, is elected by popular vote for a five-year term and is

eligible for a second term. The current interim president of Madagascar is Andry Nirina

Rajoelina who took over the country on March 21st, 2009 creating the current political crisis.

The government is headed by a prime minister, who is appointed by the president. Jean

Omer Beridiky is the current prime minister in Madagascar.

Ravalomanana is the richest man in Madagascar. People usually call him “yogurt king.”

His companies enjoy monopoly status in some sectors of the economy. The opposition accuses

him of selling out the country. Allegedly, the government leased 1.3 million hectares of land to a

South Korean company for the production of food for export to East Asia. The South Koreans

supposedly pulled out of the deal but many impoverished Madagascans, who rarely have enough

to eat, are still enraged. (“Two men, one island”, 2013)

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Special buying preferences of population

Madagascar is one of the poorest countries in the world. Therefore, Malagasy do not

spend a lot of money to buy luxury goods, mainly just commodities. Madagascar is famous for

exporting agriculture products. Capital goods, petroleum, consumer goods and food are the main

import products of this country.

Travel Considerations

Madagascar is the fourth largest island in the world. Home to many beautiful beaches,

mountains and wildlife, Madagascar makes a great place to do business. There are also lots of

intriguing activities to fill your time when visiting Madagascar, from the delicious food and

shopping, to site-seeing and everything in between. There are also some safety tips, weather

forecasts, and certain behaviors one should be aware of when visiting Madagascar.

Health and Safety

There are lots of health codes and other items a person must follow before traveling to

Madagascar. One important item that must be done is that a person must get their shots

(Madagascar Health and Safety, 2013). Madagascar has many different types of diseases that are

known in the area. Malaria, tuberculosis, rabies and yellow fever are just some of the many

diseases that one can contract while in Madagascar (Madagascar Health and Safety, 2013).

Visitors should never drink any type of water unless it has been boiled or chemically treated

(Madagascar Health and Safety, 2013). Also, travelers should carry a copy of their medical

insurance just in case it is needed (Madagascar Health and Safety, 2013). When walking around

in Madagascar, it is advised that a person not walk alone (Madagascar Health and Safety, 2013).

Pickpocketing is a popular mishap for tourists, especially around airports. Visitors should also

keep an eye out for weather changes, especially when it is cyclone season, which happens

24

between the months of January and March (Madagascar Health and Safety, 2013). One last

safety tip is to bring lots of bug spray to keep bugs away. Lots of diseases are contracted through

bugs like mosquitos so lots of bug spray is a good idea.

Food

Madagascar cuisine is said to be delicious. The cuisine is French based and almost every

meal is served with rice (Madagascar Food, 2013). The national dish of Madagascar is Ramazava

which is beef dish served with mixed greens that are sautéed in ginger, tomato and onion

(Madagascar Food, 2013). Fish is also a popular menu item found along the coastline. Overall,

the food isn’t very spicy, although you can add certain spices if you want a little extra flavor.

Fruits and vegetables are plentiful and can be prepared in many different ways. There is only one

type of beer that is widely available in Madagascar and that is the Three Horses beer, which is

brewed in Antsirabe, Madagascar (Madagascar Food, 2013). Despite there only being only one

type of beer that is distributed everywhere, there is still plenty of rum to go around. The rum can

be flavored with all types of different ingredients. Rum can be flavored with lychees, vanilla,

ginger and pineapple just to name a few (Madagascar Food, 2013).

Entertainment and Sight-seeing Opportunities

There are lots of activities that can fill your time when visiting Madagascar. There are

beautiful beaches along the coast that can be great spots for surfing and diving. Madagascar has

volcanoes, waterfalls, and mountains that are great for sight-seeing. The Queens Palace is

another great place to visit. The Queens Palace was once home to the Merina Dynasty in the 19th

century, which united all of Madagascar together for the first time (Madagascar things to do and

see, 2013). Montagne d’Arbre, a national park in Madagascar, is another spectacular place to

sight-see (Madagascar things to do and see, 2013). Home to many species of orchids and

25

animals, it is most famous for its lemurs (Madagascar things to do and see, 2013). The national

park, which provides a variety of different flowers, fruits, vegetables, and wildlife, is a real treat

for the eyes, nose and ears.

Expected and Acceptable Behavior

Malagasy (what people from Madagascar are called) have different customs and

behaviors that are expected to be followed, even for outsiders. Malagasy respect their elders

(Madagascar Safe and Responsible Travel, 2013). Special tombs are built for ancestors that have

passed on, and the even consult with their dead relatives (Madagascar Safe and Responsible

Travel, 2013). The consulting of dead ancestors is called Razona (Madagascar Safe and

Responsible Travel, 2013). Malagasy also respect the beautiful wildlife that is found all over the

island. That is why it is important as a visitor to respect the wildlife and not to disturb it as much

as possible. Littering is also something that is frowned upon in Madagascar (Madagascar Safe

and Responsible Travel, 2013). Certain dress codes must be followed as well in Madagascar

(Madagascar Safe and Responsible Travel, 2013). Dressing modestly and respectfully is

important in Madagascar. Your shoulders to your knees must be covered at all times, especially

when entering a place of worship (Madagascar Safe and Responsible Travel, 2013).

Unacceptable Behavior

There are also some unacceptable ways to behave in Madagascar. Disrespecting elders is

something that isn’t taken lightly with Malagasy (Madagascar Safe and Responsible Travel,

2013). They have a strong respect for their elders so any sort of disrespect shown toward them

would be extremely unacceptable. Malagasy take a lot of pride in the beauty of their country so

anything that would take away from the beauty of Madagascar would be unacceptable as well.

Things like littering, destroying wildlife and harming animals are things that Malagasy take very

26

seriously (Madagascar Safe and Responsible Travel, 2013). They also take care of their ancestors

with sacred tombs and burial grounds. Any destruction or harm to the tombs and burial grounds

is also unacceptable (Madagascar Safe and Responsible Travel, 2013). Malagasy have a lot of

respect for their wildlife and family. As long as visitors respect their traditions and cultures, you

will receive the same respect in return.

In-Country Travel

Even though Madagascar is a little over 226 thousand square miles, or twice the size of

Arizona, there aren’t a lot of ways to travel from town to town or city to city. The bigger roads

are paved but a lot of the smaller ones aren’t which makes it hard to travel from place to place

(Madagascar Country Specific Information, 2013). Also, roads can become flooded easily,

especially during the wet season, and can really back up traveling. There are taxis located on the

outskirts of town and at places like airports (Madagascar Country Specific Information, 2013).

The taxi’s that are used are mini vans that hold up to 15 people. The problem is that most drivers

will not leave until the taxi is full, so a customer may have to wait awhile before the taxi leaves

(Madagascar Country Specific Information, 2013). With the taxi delay and road conditions being

unpredictable, a traveler should leave themselves with plenty of time to get from place to place

(Madagascar Country Specific Information, 2013). There are also some bike carts that can fit two

to three people in them but they aren’t very fast (Madagascar Country Specific Information,

2013). Walking seems like the best way to travel, assuming someone doesn’t have to go very far.

Weather and Climate Conditions

The climate in Madagascar is hot and subtropical (Madagascar Weather, climate and

geography, 2013). There is a wet and dry season that dominates most of the year. The wet season

is the hottest part of the year, with temperatures ranging from 70-82 degrees Fahrenheit

27

(Madagascar Weather, climate and geography, 2013). The Indian Ocean trade winds help dictate

the climate of Madagascar, and bring many unpredictable storms during the wet season.

Cyclones happen often during the wet season, December to March, and can even be dangerous

(Madagascar Weather, climate and geography, 2013). The dry season brings cool temperatures

ranging from 48-70 degrees Fahrenheit (Madagascar Weather, climate and geography, 2013).

Since the dry season has a lot better temperatures and it is the safest part of the year, which is the

recommended time to travel to Madagascar (Madagascar Weather, climate and geography,

2013). From April to June is the best time to travel to Madagascar because of the cooler

temperatures, the cyclone and storm season is over, and there is still plenty of water to go around

from the wet season (Madagascar Weather, climate and geography, 2013). Madagascar is a

beautiful country and a great place to visit at the right time during the right weather season.

Shopping and Souvenirs

There are a lot of shopping opportunities in Madagascar. The common markets have a lot

of handmade products that they sell as souvenirs. From decorative cloth fabrics to handmade

jewelry, there are lots of unique items for sale (Shopping in Madagascar, 2013). The decorative

clothes, called lamba, are different pieces of traditional and unique cloth sewn together in a

pattern (Shopping in Madagascar, 2013). Lamba makes a perfect gift because of the uniqueness

and beauty of Madagascar is shown. Also, woodwork is a common item found in the common

markets. From wooden dolls to chessboards, there are lots of wooden souvenirs unique to

Madagascar (Shopping in Madagascar, 2013). There are lots of many exceptional, hand crafted

souvenirs to choose from in Madagascar that can only partially exemplify the beauty and

tradition of the country.

Visa and Other Entry Requirements

28

In order to enter Madagascar, you must have an active visa (Madagascar Country

Specific Information, 2013). The visa fees may be paid in the U.S rather than the country you are

traveling to (Madagascar Country Specific Information, 2013). A traveler must also have a

passport to enter Madagascar. The passport must have a full blank page and six months of

validity before being used (Madagascar Country Specific Information, 2013). Another important

entry requirement that must get taken care of before visiting Madagascar is to get all of the

medical shots that you need to go there (Madagascar Country Specific Information, 2013).

Diseases like malaria, yellow fever, and tuberculosis are common in Madagascar. Getting your

shots is important so you don’t get sick and bring the disease back into the U.S. Before traveling

to any country, a traveler needs to get his/her shots but especially in places like Madagascar, it is

extremely important to have their shots taken care of before they leave. Also, medical insurance

is a good thing to have when traveling the world. Although it is not required for entry into

Madagascar, it is a good thing to have in case you need medicine or medical help while in

Madagascar (Madagascar Country Specific Information, 2013). Without having your shots, a

passport, or a visa, there is no way to travel to Madagascar (Madagascar Country Specific

Information, 2013). Once the entry requirements are fulfilled, a traveler can enjoy his/her stay in

the beautiful country of Madagascar.

Product-Industry and Mode of Market Entry

The best prospects for future U.S. sales and investments are in the energy, oil exploration,

and mining sectors. There are also under-exploited opportunities in consulting and engineering.

The country has commercially significant reserves of several minerals including uranium, coal,

chromites, graphite, and mica. Despite Madagascar's poverty, the island's unique natural

environment, its wide variety of resources, its competitive labor force, and its location on the

29

crossroads between Asia and Africa offer potential long-term investment opportunities,

following the resolution of the current political crisis.

Taking these aspects into consideration, along with our economic, socio-cultural and political

analyses, we have decided that chromite mining and exporting is the most lucrative potential

business opportunity in Madagascar. Chromite is a key industrial mineral used for manufacturing

stainless steel because of its extremely high melting point. Below we will further justify our

recommendation to pursue this industry and describe how we will start our new business.

Mode of Entry

Kraomita Malagasy is the largest chromite mining/exporting company in Madagascar. It

is centrally owned by the Malagasy State, exports over 100,000 tons of chromite per year, and

supports 380 employees. Kraomita is headquartered in Antananarivo and primarily exploits its

ore in the north-west quarter of Madagascar. Our company will be pursuing a joint venture

strategy with Kraomita Malagasy. We will utilize our company’s capital to expand their existing

operations in order to achieve greater economies of scale. Surprisingly there are no additional

competitors located within Madagascar, so timing of entry is not a concern; we will be

competing solely on a global basis.

The greatest risks posed by this strategy include investment risk, country stability risk

and personality risk. Our company will be asked to bear most of the financial burden of this joint

venture in return for the locals’ expertise in chromite mining and exporting. There are a number

of political risk factors that will be explored in our political justification below.

A high volume of sales will be critical because our company will be investing heavily in

operations expansion, while splitting the profits with Kraomita. However, we expect the shorter

learning curve, due to existing domestic expertise, to lead to low cost production.

30

Political Justification

By looking at Madagascar’s history and government instability, there are reasons for a

company to be wary of starting operations there. The 2009 coup shows how little power the

Malagasy government and law holds. Thus, the major concern for our company is the holding

up of contracts and agreements we make with Kraomita Malagasy, our employees, and the

government. There could be a possibility that Kraomita Malagasy and or one of our employees

might seek to take over and buy out our company if they do not agree with how we are managing

operations. Or, Kraomita Malagasy may want to cancel its joint venture with us as a result of

dissatisfaction or personal reasons. Both of these scenarios can occur as a result of the Malagasy

government’s little to no power.

Another major concern is the possibility of operations being inhibited by another political

unrest that results in violent protests and demonstrations. Not only can riots possibly damage our

facilities and resources, but any prevention from carrying on operations could also result in a

decrease in revenue and net profit. However, we are a company originating from one of the most

powerful and stable countries in the world: the United States of America.

Our nationality supplies us with the support we need to overcome these types of

situations. The United States remains in good correspondence with many other nations around

the globe. So, if political issues begin to arise in Madagascar, the United States will most likely

learn about the unrest before there is apparent danger. After finding out about it, the U.S.

government could warn us about the severity of the situation and advise us on whether or not to

31

stop operations. If the U.S. does not foresee danger but a violent political conflict arises,

specially trained U.S. government agencies and departments can rescue us from Madagascar.

Economic Justification

Chromite production is already the major mineral export of Madagascar. As mentioned

above, the largest chromite mine, Bemanevika, resides in the city of Antananarivio.

Antananarivio also happens to be Madagascar’s hub of telecommunication activities. It is also

located relatively close to the coast, so shipping from a mine in the city to a port on the east coast

would pose few obstacles; in fact, there happens to be a well maintained railway connecting

Antananarivio to a large coastal port. As stated in our economic analysis, Madagascar’s ports

make up their most developed distribution channel. Furthermore, we could recruit top students

from the University of Antananarivio to work as plant managers in any mines we establish or

expand near the city. Because there are already related industries in Antananarivio, our company

will benefit from their pre-existing levels of expertise. We may also be able to take advantage of

government instituted tax breaks for new exporting companies.

Initially it will be important for our company to form partnerships with local related

companies, business associations, advertising firms and distribution services. Local agents have

contacts to develop a customer base and can easily communicate in Malagasy and French.

Some business groups we may be interested in joining are ACHAM and GEFP. Cost savings via

lower port fees and import taxes will be important to improve our financial position. ACHAM

may also be able to help our company connect with U.S. firms interested in buying our chromite

products, and provide valuable market research or customer analysis for other potential

customers. The private company, FTHM Conseils, specializes in business IT, human resources

32

and real estate solutions. It may be beneficial to rely on their expertise when first entering the

market.

There are hundreds of companies in the United States, Europe and Asia that specialize in

producing stainless steel (“TOP25”, 2013). We will utilize Madagascar’s preexisting competitive

advantage in mining chromite to ensure that we are the most attractive option for these firms to

do business with. A few of the largest steel producing companies in the world are listed below.

We will pursue these companies as our primary customers:

ArcelorMittal S.A. is the world’s largest steel producer, accounting for more than 6% of

global crude steel production. Headquartered in Luxembourg, ArcelorMittal has

operations in over 60 countries and annual gross revenues in excess of US$ 70 billion

Baosteel Group Corporation (Baosteel) is Chinese state-owned enterprise consisting of

Baoshan Iron & Steel Co. Ltd., Guangdong Iron & Steel Group Co. Ltd., Xinjiang Bayi

Iron & Steel Co. Ltd., Ningbo Iron & Steel Co. Ltd. along with numerous steel

processing, engineering and investment entities. The company's three major steel

production series include straight carbon steels, stainless steels and special steels. At the

end of 2010, Baosteel possessed assets valued at RMB 432.1 billion, had an annual

operating revenue of RMB 273 billion and employed 118,500 people.

Established in 1968, Pohang Iron and Steel Company (POSCO) operates two integrated

steel mills in South Korea and a joint venture with U.S. Steel (USS-POSCO) in

California. Major steel products include hot rolled steel, steel plate, wire rod, cold rolled

steel, electrical steel and stainless steel products.

Socio-cultural Justification

33

The English language is used for all global businesses around the world. In Madagascar,

people not only use Malagasy and French but can also speak English fluently. This is one of

advantages for our company to communicate. Once we become comfortable with the Malagasy

style of indirect communication, we can avoid misunderstandings about the culture. Moreover, a

number of Malagasy businesspersons have expressed interest in establishing franchises of U.S.

businesses in Madagascar. (“Doing Business in Madagascar: 2011”). Although corruption is a

big problem for Madagascar, the existence of the Independent Anti-Corruption Bureau make this

problem better, so we can take advantage of these reasons to start our business.

Travel Considerations for a Mining Business in Madagascar

Before our company begins mining in Antananarivo, there are some things that we need

to be aware of. Traveling to the mining site may be difficult; since roads aren’t as prominent in

Madagascar, besides a few main roads and are often times not even paved, it may be difficult to

get to and from the mining site. The unpaved and sometimes flooded roads can prolong any

operations at the mining site, so it is a good idea to keep an eye on the weather at all times,

especially during the rainy seasons. The flooded and unpaved roads will cause an occasional

back up in operations. There will be a set of rules that all employees will follow in order to keep

every employee at the mine safe. All employees working in and around the mine will need to get

shots to prevent any sorts of diseases known to Madagascar, like malaria and tuberculosis, and to

keep them from spreading. Also, employees that aren’t native to Madagascar must have a visa

and a passport. There are the rules and regulations of Madagascar and must be followed with no

exceptions. My team’s Chromite Mining business will provide each employee with standard

medical insurance, in case someone where to get sick or injured on the job. Also, employees

hours will vary, depending on the wet and dry seasons, because flooding is a major hazard and

34

can become very dangerous during the wet seasons. Despite the possibility of dangerous

conditions, we believe the benefits of investing in the Antananarivo mining business far

outweigh the potential dangers if we proceed carefully.

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