What is a Brownfield Investment?
In economics, a brownfield investment (BI) is a type of foreign direct investment (FDI) where a company invests in an existing facility to start its operations. In other words, a brownfield investment is the lease or purchase of a pre-existing facility in a foreign country.
Understanding a Brownfield Investment
A brownfield investment is often undertaken when a company wants to invest and start operations in a new country but does not want to incur high start-up costs associated with a greenfield investment. The underlying rationale behind a brownfield investment is to enter into a new foreign market.
In a brownfield investment, the company either invests in existing facilities and infrastructure through a merger and acquisition (M&A) deal or leases existing facilities in the foreign country. A brownfield investment can be contrasted to a greenfield investment in which the company builds a new facility from the ground up.
Advantages of a Brownfield Investment
A brownfield investment offers the following advantages, including:
- The ability to gain access to a new foreign market swiftly
- Lower fixed costs due to already established facilities, infrastructure, and network
- Lower staffing and training costs due to already employed workers at the facility
- May include existing approvals and licenses from the government or regulators
- Depending if the facility is made to fit, whether modifications exist, or if the facility can be utilized without major alterations and upgrades, a brownfield investment can be a cost-effective option
Disadvantages of a Brownfield Investment
A brownfield investment comes with a few disadvantages, including:
- The facility or infrastructure may require major upgrades, which would increase the foreign investment cost
- The facility may be old and may require high maintenance and upkeep cost
- There may be operational inefficiencies if the facility cannot adapt to new production needs
- There may be scalability and expansion issues by using already constructed facilities
- Locational constraints
- There may be unforeseen tax and regulatory issues
Example of a Brownfield Investment
Company A is currently based in the United States and is looking to expand operations into India. Due to uncertainty in the overseas market for their product, the CEO decided to conduct a brownfield investment to “test the waters.”
In addition, there are numerous approvals and licenses to be acquired in India, and it’s been determined that such time-consuming activities can be eliminated by acquiring a local company with already approved licenses.
Company A then identifies a potential target company in India. By making a brownfield investment by acquiring the target company, Company A is able to expand into the market quickly. In addition, through a brownfield investment, it is able to avoid significant foreign investment costs such as building its own facilities or hiring and training new staff members.
Real World Examples of a Brownfield Investment
1. Vodafone in India
Vodafone is a telecommunications company headquartered in London and Newbury, Berkshire. In 2007, the telecoms firm completed the acquisition of a majority stake in Mumbai, India-based Hutchison Essar for $10.9 billion in cash. Through the acquisition, Vodafone was able to penetrate into the fast-growing Indian telecommunications industry which, at that time, was adding nearly six million subscribers monthly.
2. Tata Motors in the United Kingdom
Tata Motors was the largest automobile company in India during 2007-08. At that time, the Indian automaker was the leader in the production of commercial vehicles and was the world’s second- and fourth-largest bus and truck manufacturer, respectively.
In June 2008, Tata acquired Jaguar Land Rover’s businesses in an all-cash transaction valued at $2.3 billion. Through the acquisition, the Indian automaker was able to obtain intellectual property rights, manufacturing plants, two design centers in the United Kingdom, and a world-renowned network of National Sales Companies.
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