1. The local firms producing under such kind of agreement are not free to sell the contracted output to anywhere and anybody else. The local manufacturers has to sell the goods to the international company at the predetermined rates. This results in lower profits for the local firms if the open market offers them higher prices than the prices agreed up on contracting.
2. Local manufacturers has no control over manufacturing process because the goods are produced as the per the guidelines given under the contract.
3. Sometimes local manufacturers cannot adhere the quality standard hence loss should be borne by the party fixed up in the contract.
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Licensing |
Franchising |
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1. Permitting another party in a foreign country to produce and sell goods under one’s own trade mark, patent or copy right in lieu of some fee is termed as licensing e.g. Pepsi and Coca Cola. 2. It is relatively liberal in terms. |
• When permission is given by a producer of one country to the producer of another country with regard to sale of services under its brand name, trademark etc. is known as franchising e.g. McDonalds. • It is very rigid in its terms and conditions. |
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Contract Manufacturing |
Wholly owned production subsidiary |
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1. It is a type of international business where a firm enters into a contract with one or a few local manufactures in foreign countries to get certain components or goods produced as per its specifications. 2. The goods are produced or assembled by the local manufacturer as per the technology and management guidance provided to them by the foreign company. 3. It is suitable for small and medium sized firms. 4. Government does not oppose it rather prefers it with some rules and regulations. |
1. When the companies want to exercise full control over the foreign company by making 100% investment in its equity capital, it becomes wholly owned production subsidiary abroad. 2. Here, it is not required to disclose technology or trade secrets to others. 3. It is not suitable for small and medium sized firms. 4. Government policies can oppose it. |
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