When it comes to beginning your investment journey, there are a lot of things you’ll have to get to grips with, one of these things is the vast amount of terminology you’ll have to learn.
In this guide, we’re going to be discussing Greenfield Investments, including what a Greenfield Investment is, what it means, what the advantages and disadvantages of them are, as well as some real-world examples of Greenfield Investments.
So if you’ve never heard of them before or simply want to know more, then read through this guide to find out!
What Are They?
Greenfield Investments, often just referred to as Greenfields, are a form of foreign direct investment (which is abbreviated to FDI), which is where a company creates a subsidiary in a country different from where the parent company is based, starting all over again from scratch.
This building process can include the production of new living spaces, offices, production facilities, and even distribution hubs.
The name for this type of investment comes from the fact that the new subsidiary is being built from the ground up, and is compared to the ploughing and prepping of a new field on a farm.
These foreign direct investments are usually done by multinational companies and provide the highest degree of control for the company that sponsors them.
FDI can also come in the form of a company purchasing a controlling stake in a company that is in a foreign country, however, this acquisition process can lead to a lot of complications and difficulties, and regulations often mean that this takes a lot longer to complete.
In one of these greenfield projects, everything from the construction of the plant, employee training, and fabrication processes are all completed to the standards of the parent company and are often incredibly tight.
This sort of project is the exact opposite of an indirect investment, for example, the purchase of foreign securities.
Since companies will often have little to no control over any of the processes that the company does, including things such as production, staff training, sales, and quality control.
There is actually a third type of investment that sits between both indirect and direct investments, which are known as brownfield investments, or brownfields.
This is where a corporation will provide their already existing facilities to a third-party, who is then able to customize and renovate the facilities to suit their needs, this process usually results in a quicker turnaround than having to start from scratch.
Advantages And Disadvantages Of Greenfield Investments
These sorts of projects tend to occur in developing countries, and lure in potential investors by offering them deals, with things such as big tax breaks, alongside subsidies and other incentives, in order for them to begin a greenfield project in that country.
Whilst this may mean that the government will receive less corporate tax revenue then they should be for what the company is earning, the enhancement of communities and generally more positive economic outlook that occurs as a result of these projects mean that they’re great in the long-term.
That’s not to say that these projects don’t come without a lot of risks however, and they also incur a pretty high cost too.
As you can imagine, having to build and develop entirely new infrastructure and facilities can be an incredibly tedious and expensive process, and there may be complications involving local labor, having access to the right resources, and possible delays with construction.
If a company is potentially considering a greenfield investment, large sums of money will often be spent doing vast amounts of research in order for them to understand where the project is going to be most feasible, and what sort of costs the project will incur.
- Often the country that the greenfield project is in will provide the company with financial incentives and tax breaks.
- The construction and development of the subsidiary company is completed to the standards and expectations of the parent company.
- The parent company then has full control over the operations of the subsidiary company.
- Planning a greenfield project like this is extremely time consuming and even the research process is complex.
- This sort of project is a long term project and is not a way for a company to increase profits rapidly.
Perhaps the biggest disadvantage of a project like this is that it all entirely depends on the relationship between the company and the country the subsidiary company is located in, especially if that country is suffering from political instability, which means that any event or action can lead the parent company to cease its development with immediate effect.
There are so many real-world examples of greenfield investments to choose from, but one of the most prolific ones in recent years has been Toyota’s greenfield project in Mexico, which saw the construction of a new manufacturing plant, with the aim being to employ 3,000 workers, and to produce up to 300,000 new vehicles a year.
The cost of this project was stated to be in the region of $1.5 billion US dollars, and will also see the development of the area, including the housing situation, which will help to improve life for the workers of the plant.
To summarise, a greenfield investment is where a company establishes a subsidiary company in a foreign country, and then has full control over that subsidiary’s operations, these projects often involve a lot of renovation and development of local areas, which prove beneficial to the local people and economy too.
So whilst they often take a while to come to fruition and are often expensive, they act as a long term investment for the parent company.