Greenfield, FDIWhat is a Greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely choose? Explain your answer. Can you name any that have taken this...
What is a Greenfield investment? How does it compare to an acquisition? Which form of FDI is a firm more likely choose? Explain your answer. Can you name any that have taken this route?
In terms of FDI, Foreign Direct Investment, acquisition is taking over all or a majority stake in a company in a foreign land, as a hypothetical instance, Tesco in England taking the majority stake in Whole Foods in America. This is quite different from FDI that is greenfield. Greenfield FDI is very often a company in a developed country investing in building facilities in a developing country (this is very different from what are commonly called "start-ups") to take advantage of tax breaks and other incentives. Which form of FDI a multinational company might choose depends upon their expansion objectives, thus, hypothetically, the objective for diversification might lead toward FDI acquisition investment, while the objective for cost-cutting might lead to FDI greenfield investment. Bear in mind, while acquisition and "start-up" apply to homeland company expansion, greenfield is strictly applicable to Foreign Direct Investments, and acquisition may be a type of Foreign Direct Investment.
Greenfield investments, as previously stated, are ones which a company comes in a builds a new business from the ground up. There is no building to which they are moving into. When one acquires a business, the building, product, and workers are already established. Both have their problems: starting expenses in building from the ground up can be substantial and taking over a business which is suffering can be just as costly.
You would want to do a greenfield investment if your firm already has good visibility and a recognizable brand in the country you are entering. That way, you wouldn't dilute that brand. On the other hand, an acquisition might be best if you're entering a country like China that has rules (formal and informal) that are not easily understood by outsiders.
Almost by definition, many start-ups are greenfield investments, though these must be in foreign countries. Creating a new company involves great risks, but the dividends can be enormous if the company has the right products and the right strategies.
Engaging on a greenfield investment does involve massive risks, as other editors have commented. However, the potential success as a result of a greenfield investment is massive as opposed to an acquired investment.