What is a Greenfield Investment?
When a parent company opens a subsidiary in a foreign country, instead of starting operations in the existing facilities in that country, that subsidiary company sets up its facilities from the ground up, from the beginning. The subsidiary company prefers establishing new infrastructure rather than merely a production facility.
It includes setting up offices and residences for the staff and management.
It is a market entry strategy where a company seeks the highest degree of control over its foreign activities. It is a form of Foreign Direct Investment, similar to buying foreign securities or acquiring a majority stake in a foreign company in which the parent company exercises little to no control over everyday business operations.
Besides receiving tax breaks or subsidies, what incentivizes companies to establish a greenfield investment is to achieve a high level of control over business operations and to cut down intermediary costs.
Pros of a Greenfield Investment
Greenfield investment offers various advantages, including but not limited to:
- A greater degree of control over business operations, aligning with their strategic goals
- Better quality control over the manufacturing and sale of goods and/and services
- Better control over brand image and staffing
- Easily ducking trade restrictions
- Beneficial for the people where investment is made, as it will provide them with employment opportunities.
Cons of a Greenfield Investment
On the contrary, there are some potential risks to the greenfield investments as well:
- It can be called the riskiest form of foreign direct investment
- Higher cost of entry to a market
- Government regulations may dampen foreign direct investments
- Costlier to set up faculties and facilities
Greenfield Investment In India:
In July this year, Toyota Kirloskar Motor signed a MOU with the Maharashtra government for setting up a Green Field Manufacturing Facility at Chhatrapati Sambhaji Nagar.
Similarly, ExxonMobil in 2023, committed Rs 900 crore towards building a lubricant manufacturing plant in Maharashtra.
Sectors Where Top 100 MNEs are Investing:
As per the World Investment Report 2024 by UNCTAD, two-thirds of greenfield investments by the top 100 MNEs over the last decade were highly focused on setting up services subsidiaries. Interestingly, even within manufacturing sectors often considered strategic, such as automotive and pharmaceuticals, more than fifty percent of greenfield projects were towards setting up sales and marketing offices, support and technical services centers, or other professional services.
Image: UNCTAD
What is a Brownfield Investment?
Brownfield investments are a form of FDI in which a company or government entity invests in an existing facility to start operations in a foreign country.
In this form, the company acquires the existing facilities and infrastructure either through a merger and acquisition (M&A) deal or leases existing facilities in a foreign country. It is opposite to the greenfield investment, where the production facility is set up from the ground up.
A brownfield investment requires scouting buildings in the host country that match the company’s business/production requirements. Investing in a site where similar production activities were already happening could prove a masterstroke for the company.
Pros of a Brownfield Investment
Brownfield investment offers various advantages, including but not limited to:
- Easy access to new foreign market
- Fixed costs slump because of access to established facilities, infrastructure, and network
- Lower staffing and training costs, the reason being access to already-employed workers at the facility
- Access to already-approved approvals and licenses from the government or regulators
- Cost-effective compared to greenfield investments. If the site does not match the company’s requirements, then the company carries out only such modifications to facilities or infrastructure that conform to requirements.
Cons of a Brownfield Investment
On the contrary, there are some potential risks to the brownfield investments as well:
- The facility or infrastructure may require upgrades, adding up to the foreign investment cost
- High maintenance and upkeep costs if the facility or infrastructure is old
- Lead to operational inefficiencies if the facility fails to adapt to new production needs
- Location limitations
- Possibility of unforeseen tax and regulatory issues
Brownfield Investment In India:
Vodafone in India
Vodafone, a UK-based telecommunications company in 2007, completed the acquisition of a majority stake in Mumbai-based Hutchison Essar for $10.9 billion in cash. This acquisition opened floodgates for Vodafone to access Hutch subscribers and bear fruit of the fast-growing Indian telecommunications industry.