Greenfield investments are those where a company establishes a new subsidiary on foreign soil by investing in new facilities such as offices, factories, staff accommodation, and distribution hubs. They are named after the notion that a company launching a new venture from scratch starts with nothing but a green field. A greenfield investment, therefore, is a form of foreign direct investment where a company establishes operations in another country by constructing new facilities from scratch.
Greenfield investment examples
Greenfield investments differ from brownfield investments, where the company purchases or leases existing infrastructure for the same expansionary purpose.
The strategy is commonly employed by companies who desire more control over their operations and want to avoid the extra costs associated with intermediaries.
In this section, let’s take a look at some real-world examples:
Toyota Motor Corporation
In 2015, Toyota announced it would be building a new production facility in the Mexican state of Guanajuato.
The factory, which would produce the Corolla mid-size sedan, was slated to cost around $1 billion.
Hyundai
South Korean auto manufacturer Hyundai made a similar commitment in 2006 when it received approval to build a factory in the Czech Republic.
The factory opened three years later with an initial capacity of 200,000 vehicles per year, with the Czech government providing incentives to attract Hyundai to lower unemployment and stimulate economic activity in the country.
Weber
In 2021, American outdoor cooking innovation and technology company Weber opened its first manufacturing and distribution hub in southern Poland.
The 50,000 square meter facility allows the company to produce high-quality barbecue products for the European market and improve its delivery and service speed in the process.
Advantages of greenfield investments
Control
As noted earlier, greenfield investments tend to be associated with more control since the company can build its infrastructure to spec without the need to adapt or retrofit.
This also the company more control over the quality of its products.
Brand reputation
In some cases, a company that commits to establishing a presence in another country and recruits local expertise will enjoy a superior brand reputation.
It may also be able to profit from stronger local networks and partnerships.
Economic benefits
Greenfield investments also come with several economic benefits.
Companies sometimes receive incentivization from governments in the form of tax breaks and subsidies and may be able to bypass trade restrictions and import tariffs.
Disadvantages of greenfield investments
Greenfield investments require vast sums of money which exposes the company to more risk should the project become unviable for whatever reason.
If nothing else, the capital expenditure required is a substantial barrier to entry.
Political risk
While a government may initially be supportive of greenfield investment, this can change after an election if a new government takes power and is less supportive of international companies operating within its jurisdiction.
Regulations
Some countries will also require that the foreign company use domestically manufactured components or services to support their operations.
Others will require that a certain percentage of the workforce be comprised of local employees.
These requirements can make a greenfield investment problematic for companies that must control every aspect of the process to maintain exacting standards.
Greenfield investment vs. joint venture
Where a greenfield investment is a form of foreign direct investment where a company establishes operations in another country by constructing new facilities from scratch.
A joint venture is a form of strategic alliance where two parent companies come together to form a child company with shared resources and equity in a binding agreement.
Joint ventures have a clear objective, with profits split equally between each party.
A joint venture might also comprise the construction of a massive operation in a foreign country but it doesn’t necessarily need to be structured in that way.
Greenfield investment vs. brownfield investment
Where a greenfield investment implies a heavy operation, in a brownfield investment, quite the opposite, the company tries to avoid too high start-up costs, thus purchasing pre-existing facilities or operations to kick off the business.
Greenfield investment vs. franchaining
Another interesting difference is between greenfield investment and what we labeled as a franchained operation, which is a form of expansion strategy built by Coca-Cola.
The Coca-Cola system works as a short-term chain, where the company does structure heavy operations early on, similar to what happens in a greenfield investment.
Yet, in the long run, it transitions toward a light operational model, where the operations on the ground are run by a franchisee partner that though is tied to Coca-Cola.
Key takeaways
- A greenfield investment is a form of foreign direct investment where a company establishes operations in another country by constructing new facilities from scratch.
- Real-world examples of greenfield investment include Toyota in Mexico, Hyundai in the Czech Republic, and Weber in Poland.
- Greenfield investments can afford the company more control over its foreign operations and grant access to various financial incentives. However, the significant capital expenditure represents a substantial barrier to entry and can make the company more vulnerable to a change in government or regulations.
What are greenfield investments examples?
Greenfield investment examples comprise:
What are the advantages of greenfield investments?
The advantages of greenfield investments comprise:
What are the disadvantages of greenfield investments?
The disadvantages of greenfield investments comprise:
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