What is a Greenfield Investment?In economics, a greenfield investment (GI) refers to foreign direct investment (FDI), where a company establishes operations in a foreign country. In a greenfield investment, the company constructs new (“green”) facilities (sales office, manufacturing facility, etc.) cross-border from the ground up.According to the Bureau of Economic Analysis (BEA), greenfield investment is a project “where foreign investors establish a new business or expand an existing business on U.S. soil.” (or where a U.S. investor establishes a new business on foreign soil)Understanding a Greenfield InvestmentA greenfield investment is a form of market entry commonly used when a company wants to achieve the highest degree of control over its foreign activities. It can be compared to other foreign direct investments, such as purchasing foreign securities or acquiring a majority stake in a foreign company. The parent company exercises little to no control over daily business operations.Apart from potential tax breaks or subsidies in establishing a greenfield investment, the overarching goal of such an investment is to achieve a high level of control over business operations and avoid intermediary costs.Advantages of a Greenfield InvestmentThere are numerous advantages to greenfield investment, including the following:
- High level of control over business operations.
- High-quality control over the manufacturing and sale of products and/or services.
- Increased control over brand image and staffing.
- Economies of scale and economies of scope can be achieved in marketing, research and development, and production.
- Bypassing trade restrictions
- Creating jobs for the economy where the greenfield investment is taking place
- An extremely high-risk investment – a greenfield investment is the riskiest form of foreign direct investment
- Potentially high market entry cost (barriers to entry)
- Government regulations that may hamper foreign direct investments
- High fixed costs involved in establishing a greenfield location
Evita Veigas
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