Introduction to Greenfield Investment
A greenfield investment (GI) is an international market expansion strategy. It is a form of foreign direct investment (FDI) in which a business begins operations in a foreign market. It is a FDI when a parent business establishes a subsidiary in another nation and starts up its activities there from scratch. When a business wishes to exert the greatest amount of influence over its international operations, this type of market entrance is adopted. It can be compared to other FDIs such as purchasing foreign securities, acquiring a major stake of a foreign company where there is little to no influence from the parent company in day-to-day operations.
As mentioned above, the main objective of a greenfield investment is to acquire a high degree of control over corporate operations and to cut out intermediary expenses, aside from any potential tax benefits or subsidies. However, there are a number of advantages as well as disadvantages of greenfield investment.
Advantages of Greenfield Investment
- A business establishes a subsidiary in a foreign country. This gives the control of the business and corporate procedures to the parent company.
- Association in GI is maximum i.e. established subsidiary companies represent the parent company. This means GI assures high standards of quality control over the production and selling of goods or services.
- Such investments ensure high levels of personnel and brand control.
- Achievement of economies of scale and economies of scope in terms of marketing, R & D, and production. Such investments get full financial and managerial support from the parent company.
- As a subsidiary company starts its operation in the foreign land as a part of Greenfield investment, it avoids trade limitations.
- Such investments employ the resources of the host countries and contribute back to the host company. Such investments are highly prized in the host country. GI uplifts the economic mobility inside the country.
- Greenfield investment introduces new employment, facilities, technologies and other resources.
Disadvantages of Greenfield Investment
- The riskiest type of FDI is a greenfield project, which carries an exceptionally high level of risk.
- Greenfield investments are capital intensive FDIs (high fixed cost) and it requires proper research, infrastructures, regulatory authorization etc. This makes such investment less attractive.
- Along with the benefits of resource and economic mobility, such investments exploit the resources and economy. GI poses a big threat to local businesses. Hence, the host government has potentially high barriers to entry for such investments, to protect the local businesses and resources.
- There is a high degree of regulatory requirements and authorization for a greenfield investment. Host countries may impose various barriers in such investments.
- Return on Investment (ROI) in such investments require long-term commitments and strategic stability.
- Political interference, instability and market sentiment can be huge setbacks at times for greenfield investment.