With increasing globalisation, there has been a steady increase in the number of business organisations from developed nations fanning out to other geographical markets with their manufacturing presence. Parent companies, looking out for greener pastures, have been spreading their brands in other countries by creating subsidiaries and setting up their operations from scratch.
This practice is also, metaphorically speaking, the business equivalent of preparing a green field enough to get it to produce a good, lucrative yield. That is the genesis of Greenfield investments, a term that has come to signify the relevance and impact of foreign direct investment.
What Is a Greenfield Investment?
The concept of Greenfield investments itself is about a parent company starting a new project in a foreign market from the ground up or expanding its existing facility in a foreign country. Often referred to as one of the most stable forms of Foreign Direct Investment (FDI), here, the foreign company not only takes care of building the production facilities or plants, but also sets up distribution channels, sales offices, and living quarters, extends assistance in creating long-term jobs in the host country by hiring new employees, ultimately achieving the highest level of control over business operations.
Also, this is the best way to enter certain foreign markets, where the labour is cheap and investment opportunities are high. Also, Greenfield investments are more stable as it gets difficult for the foreign company to withdraw the investment overnight.
How Do Greenfield Investments Work?
Let us take the help of an example to understand how Greenfield investments work.
Let us assume that XYZ Ltd is a company based in Australia. To expand its operations to India, XYZ Ltd conducts research, which includes multi-region feasibility study, project design, and a strategic implementation plan, to find out whether their products have a market and demand in India?
After analysing the results and finding out there is a huge demand for their products in India, they study the operating costs for the new plant and find out whether the whole process would be cost-effective if they set up its subsidiary company from scratch in India.
Once XYZ Ltd chooses to extend its business in India, they start the set-up process, right from purchasing land, constructing offices and workspaces, hiring employees, and setting up machinery.
Real Examples of Global Greenfield Investments
- In 2017, South Korean automotive major Kia Motors, acquired land near Anantapur in Andhra Pradesh to build one of the largest Kia plant in India.
- Hyundai Motor Company’s Greenfield investment in Nošovice, Czech Republic led to the opening of a new manufacturing plant in 2008.
- In 2007, automotive major, Mercedes Benz acquired land in Pune, India to build a new manufacturing plant.
- In 2015, Toyota Motors started construction of a new passenger car manufacturing facility in Mexico.
- Careem, an Emirati-based ride-hailing service provider, now acquired by Uber, since being established in 2012, has expanded into other Middle Eastern, Northern African, and South Asian countries.
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Benefits of Greenfield Investments
Greenfield investment is a strategy that many companies worldwide have come to embrace by identifying new markets to start their presence from scratch and show their commitment to a new business landscape.
Here, we examine the reasons why this is attractive and compelling for companies looking to conquer a foreign market with as much involvement as their domestic counterpart.
✅ Total control: It has to be said that a ground-up approach offers a company total control over the investment it is making. There is complete freedom also with regard to building the brand and marketing it in the local market.
✅ High level of support from the parent company: In terms of finance and all aspects of operations, a subsidiary under the Greenfield program gets to enjoy a high level of support from the parent company. From the technology to the management expertise, the brand goodwill to the equipment, an established international company of repute can have an edge over even new homegrown businesses.
✅ Good for brand awareness: Of course, spreading wings to another geographical market, especially a new country, can be good for brand awareness. But when a company establishes itself as a local entity and builds itself from scratch, it gathers much more respect and recognition in the new market too. It gives them a great opportunity to import the cultural nuances and the intrinsic values of the country that can resonate with the consumers there. With more at stake for the brand, there is usually a higher commitment to the customer base and that can create a positive vibe among potential buyers and owners.
✅ Create employment for the locals: The venture is bound to create employment for the locals and this always is seen in a positive light by the government and the people. The larger the company and its plans, the more impactful this can be.
✅ Regulations: Local regulations often are different from those in the country of the parent company. Any changes in the product mandated by the host country get easier to execute in cases of Greenfield projects as they have dedicated manufacturing hubs that can cater to the local needs differently.
While the initial capital expenditure may have to be budgeted, the ongoing maintenance on new premises and material will be much less as compared to a brownfield asset.
Greenfield projects tend to get much more publicity and exposure from the local media as compared to opening a branch of a foreign company.
✅ Financial: The financial advantages are aplenty. There is much more freedom over budgeting and pricing for the subsidiary in all financial decisions with the support of the parent organisation. Also, it is possible to achieve economies of scale across the whole gamut of business operations ranging from purchase and transportation, research and development, production and finance, marketing and distribution and so on.
A business that is looking at a new country as a potential market for the long term is better off considering the Greenfield route.
The possibility of having better working relationships with regulators and local authorities become much higher when a business goes local. A company that just wants to open an office in a country and sells products usually does not enjoy that preference.
Read Also: Horizontal Integration: What's it?
Drawbacks of Greenfield Investments
❌ Creating a venture from the ground up, that too in a foreign land, calls for a large capital outlay. Setting up a factory and offices, purchasing and installing equipment, hiring and paying a large workforce, spending on marketing and publicity and so on. All these will mean huge budgets and spends and will be fiscally more challenging than taking the brownfield route or even having only a marketing and distribution network.
❌ Government regulations may put multinational enterprises at a disadvantage in the short term. There is a higher level of challenges and barriers at both the entry and exit for Greenfield investors.
❌ Any attempt at FDI can be an intensive and extensive project with immense planning involved all around. Estimating the budget, finding the right place, getting licences and permits and many other pre-production issues are a given. Then comes the execution that involves setting up the factory and offices, hiring and training, marketing and distribution and more. All this complexity calls for vision and high-level management skills.
❌ Unlike a normal entry into an overseas market, Greenfield investors have to be in it for the long haul. They would need to show long term commitment to the venture. This is equally important both from the return on investment and the brand image perspectives.
❌ There is this big risk for any Greenfield investment that its relationship with the host country can go sour. Typically, some countries take a populist stance for vote bank optics where politics forces governments to favour home-grown brands. Even otherwise, any instability on the overall international scene can be a risk, in itself.
❌ Often, Greenfield projects enter a new and foreign market later than home-grown brands. This, understandably, puts them in a slightly disadvantageous position till it reinvents itself or gives a local spin to their brand. As any Greenfield investor enters an overseas market in a space that is lucrative points to an intensely competitive sector.
Greenfield vs. Brownfield
Though, both the investments are foreign direct investments and involve companies and production facilities in foreign countries, unlike Greenfield investments, where the company has to set up the entire business in a foreign country, brownfield investments buy or lease a pre-existing facility in a foreign country. There is a lot of work involved in the former - acquiring land, getting permits, setting up buildings, hiring employees, etc. Having spent so much time and money, it is difficult for a company to withdraw operations overnight. As a result, Greenfield investments are costlier and riskier than brownfield investments.
However, Greenfield investments give flexibility to a business as the facilities are constructed as per their requirement and convenience. Whereas, in a brownfield process, though there is already established facilities, infrastructure, and network, the business has to put up with it.
A brownfield investment offers several advantages, including easier gain access to a foreign market, the presence of already-employed workers at the facility and existing approvals and licenses from the government or regulators.
Vodafone, a telecommunications major from the UK, acquired Hutchison Essar and was able to enter the fast-growing Indian telecommunications industry.
Greenfield investments are a good indicator of the global nature of businesses and their expansion story. Clearly, there are enough notable examples of companies that have used this strategy to grow by acquiring international customers with their parent company. But, through this route, they have also grown geographically and sown their brand and business in foreign fields as well.
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