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Contract Manufacturing

In contract manufacturing, an international firm negotiates arrangements with a company in the foreign target country to manufacture a product for subsequent sale by the international firm. To get the product manufactured to its own specifications, the international firm usually transfers technology to the contract manufacturer. Con tract manufacturing can offer several advantages to the manufacturers as a mode of foreign market entry. It requires only a modest commitment of capital and management resource compared to investment entry, avoids the political problem of local ownership, and allows the manufacturer to exercise full control over the foreign marketing program. On the other hand, the manufacturer may find it difficulty or impossible to locate a good contract manufacturer (especially in developing countries); he must often proved substantial technical assistance to bring the contract amngauctruer up to desired quality levels.

Manufacturers usually enter management contracts only in conjunction with other agreements such as joint ventures or turnkey projects, because they seldom see themselves as primary suppliers of management services.

Turnkey contraction contracts. Under a turnkey project a company provides not only engineering and construction services but also the additional services needed to bring the project up to the point of operation before it is turned over the owner. At times a company may also operate the project for a transition period, an arrangement called turnkey plus. In short, a turnkey contract calls for the international transfer of package of services-engineering, construction (often including financing), training, and (possibly) management.

Co production Agreements. Co production is a kind of non-equity joint venture. Under a long term contract a company (mainly in developed countries) provides technology, components and other inputs to an enterprise (mainly in developing country), in return for a share of the resulting production, which it then markets in its won country. A manufacturer in the developed country may gain several advantages from a co production agreement including the sale of equipment and other products to the enterprise in a developing country, a low cost source of products for sale in the developed market. but these advantages must be weighed against certain possible disadvantages- the failure of the partner to maintain quality standards or certain possible disadvantages – the failure of the partner to maintain quality standards or meet delivery schedules. Co production garments are very attractive to developing countries because payments to the developed countries come out of production rather than out of scarce foreign exchange.

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