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.
Green 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.
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 in the hopes of lowering unemployment and stimulating economic activity in the country.
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 and disadvantages 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.
- Capital expenditure – 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.
- 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.
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