What is a Greenfield Investment?
In economics, a greenfield investment (GI) refers to a type of foreign direct investment (FDI) where a company establishes operations in a foreign country. In a greenfield investment, the company constructs new (“green”) facilities (sales office, manufacturing facility, etc.) cross-border from the ground up.
According to the Bureau of Economic Analysis (BEA), a greenfield investment is a project “where foreign investors establish a new business or expand an existing business on U.S. soil.” (or where a U.S. investor establishes a new business on foreign soil)
Understanding a Greenfield Investment
A greenfield investment is a form of market entry commonly used when a company wants to achieve the highest degree of control over its foreign activities. It can be compared to other foreign direct investments such as the purchase of foreign securities or the acquisition of a majority stake in a foreign company in which the parent company exercises little to no control over daily business operations.
Apart from potential tax breaks or subsidies in establishing a greenfield investment, the overarching goal of such an investment is to achieve a high level of control over business operations and to avoid intermediary costs.
Advantages of a Greenfield Investment
There are numerous advantages to a greenfield investment, including the following:
- High level of control over business operations
- High level of quality control over the manufacturing and sale of products and/or services
- High control over brand image and staffing
- Economies of scale and economies of scope can be achieved in terms of marketing, research and development, and production
- Bypassing trade restrictions
- Creating jobs for the economy where the greenfield investment is taking place
Disadvantages of a Greenfield Investment
There are, of course, potential disadvantages as well, such as the following:
- An extremely high-risk investment – a greenfield investment is the riskiest form of foreign direct investment
- Potentially high market entry cost (barriers to entry)
- Government regulations that may hamper foreign direct investments
- High fixed costs involved in establishing a greenfield location
Example of a Greenfield Investment
Company A is based in Europe and is looking to expand its operations internationally. Namely, the company wants to penetrate the US market with a new innovative product. Upon completing market research, Company A realizes that there are few to no competitors in the United States.
Thus, there are no acquisition opportunities available to the company to establish a “base.” In addition, the United States previously imposed tariffs on all European imports, causing the selling price of the company’s product to be very high when it comes as an import product.
Company A decides to create a sales office and manufacturing facility on US soil, with the goal of bypassing existing US import tariffs and also to penetrate into the domestic market with its new product. The company’s CEO deems establishing a foreign subsidiary crucial, as it will then be able to exert complete control over its overseas business operations and brand image.
Real-World Examples of Greenfield Investments
Hyundai Motor Co. in Nošovice
In 2006, Hyundai Motor Company received approval to make around one billion euros with a major greenfield investment in Nošovice in the Czech Republic. The automaker established a new manufacturing plant that employed up to 3,000 individuals in its first year of operation. The Czech Government provided tax relief and subsidies to prompt the greenfield investment, in hopes of boosting the country’s economy and lowering the unemployment rate.
Toyota Motor Corp. in Mexico
In 2015, Toyota Motor Corporation announced plans to establish a new manufacturing facility in Mexico through an investment of about US$1 billion. Slated to open in 2019, the facility is expected to produce up to 200,000 units per year in conjunction with the currently established Tijuana plant.
The rationale behind Toyota’s greenfield investment is to improve competitiveness in North America – specifically within the United States. The low labor cost and the close proximity to US markets offered the Japanese automaker an attractive opportunity to establish an overseas manufacturing facility.
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