Another option is contract manufacturing. The company contracts with manufacturers in the foreign market to produce its product or provide its serviec. Many western firms have used this mode for entering Taiwanese and South Korean markets.
The drawbacks of contract manufacturing are the decreased control over the manufacturing process and the loss of potential profits on manufacturing. The benefits are the chance to start faster, with less risk, and the later opportunity either to form a partnership with or to buy out the local manufacturer.
• Management Contracting
Under management contracting, the domestic firm supplies management know-how to a foreign company that supplies the capital. The domestic firm exports management services rather than products. Hilton uses this arrangement in managing hotels around the world. Management contracting is a low-risk method of getting into a foreign market, and it yields income from the beginning. The arrangement is even more attractive if the contracting firm has an option to buy a share in the managed company later on. The arrangement is not sensible, however, if the company can put its scarce management talent to better uses or if it can make greater profits by undertaking the whole venture. Management contracting also prevents the company from setting up its own operations for a period of time.
contract manufacturing A joint venture in which a company contracts •with manufacturers in a foreign market to produce the product.
management contracting A joint venture in •which the domestic firm supplies the management know-ho-na to a foreign company that supplies the capital; the domestic firm exftorts management services rather than products.
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