Q.Differentiate between contract manufacturing and setting up wholly owned production subsidiary abroad.

In contract manufacturing a firm gets goods made by local manufacturers abroad to its own specifications, without investing in production facilities, so investment and risk are very low but it loses tight control and depends on the local firm's quality. In a wholly owned subsidiary the parent makes a 100% equity investment to own and fully control the overseas operation, gaining full control and secrecy but bearing the entire cost, all losses and higher political risk. …

Contract manufacturing (outsourcing)

• Meaning — A firm signs a contract with one or a few local manufacturers in a foreign country to produce goods or components to its own specifications. Also called outsourcing.
• Investment — The international firm makes little or no investment abroad; it uses the local producer's existing facilities.
• Risk — With hardly any investment, there is hardly any investment risk.
• Control — The international firm does not run the production; it supplies technology and management guidance, but the actual manufacturing is in the local firm's hands. This brings a dependence on the local firm for quality and adherence to design standards.
• Advantages — Large-scale production without owning plants; lower production cost where local labour/materials are cheaper; local producers also gain a ready market and use idle capacity.
• Limitations — Local firms may fail to meet quality standards; the international firm relies on an outside party.

Wholly owned subsidiary

• Meaning — The entry mode for firms wanting full control over overseas operations. The parent acquires full control by making a 100 per cent investment in the equity capital of the foreign firm.
• How set up — Either by starting an entirely new firm abroad (a green field venture) or by acquiring an established firm in the foreign country.
• Investment — Requires a complete (100%) equity investment, so it is unsuitable for small and medium firms that lack the funds.
• Risk — The parent alone bears the entire losses if the operation fails, and faces higher political risk because some countries are averse to fully foreign-owned firms.
• Control — The parent enjoys full control over operations and is not required to disclose its technology or trade secrets to anyone.

Point-by-point difference

• Investment — Contract manufacturing: little or none. Subsidiary: full 100% equity. …