Green Field Investment - Explained
What is a Green Field Investment?
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Table of ContentsWhat is a Green Field Investment?How does a Green Field Investment Work?Risks and Benefits of Green Field InvestmentsReal-World Examples of Green Field InvestmentAcademic Research on Green Field Investment
What is a Green Field Investment?
A green field investment is a form of foreign direct investment where a company establishes operations in a different country. The company makes provisions for the independence of the subsidiary company by constructing new facilities (manufacturing and distribution hubs, administrative offices). All costs and activities pertaining to the creation of a new subsidiary in a foreign country are sponsored by the parent company.
How does a Green Field Investment Work?
Green field investment as its name suggests plowing a green field connotes a multinational corporation beginning operation in a foreign country from the grassroots. Compared to other methods of FDI, this investment allows parent company control such as buying and control of the company stakes. Green field projects are designed to suit company's specifications, workers are trained relatively on company's rules and regulations. Indirect investment is exactly the opposite of Green field investment in that, there is little or no control. Brown field investment is also different, it features leasing a corporation existing facilities. The major points to know about a Green Field Investment are;
- A green field investment requires that a parent company sponsors the creation of a new business operation in a foreign country.
- The parent company otherwise called the sponsoring company has a higher level of control over the newly created company.
- A green field investment is capital intensive and requires a greater level of commitment from the parent company.
Risks and Benefits of Green Field Investments
Green field investment entails a company beginning operation in a different country from the base to the finishing line. The parent company exercises control over the company. This investment is capital intensive and poses a greater risk. Subsidies, tax breaks and other promising advantages of developing countries give rise to Green field investment. In the long run, companies pay lower tax revenues, while the host nation also benefits over a period of time. The major risks of green field investment are that it is capital intensive and time-consuming as it demands detailed research, building factories, and others. One of the major factors that can affect a Green field investment is political instability. A host country that is politically unstable, in the long run, might demand a foreign company to stop business. This will be detrimental to the cost incurred in setting up the business. The pros of a Green Field Investment are; Financial incentives such as tax breaks and total control of the business venture. Complexity is planning a Green Field Investment, long-term commitment, and intensive capital need are some of the cons of this type of investment.
Real-World Examples of Green Field Investment
The statistics of Green field investments in the US according to BEA data declares the food and information industries as industries with the highest number of Green field projects in the United States. Toyota started her Green field project in Mexico hoping to hire about 3,000 employees and produce 300,000 pickup trucks per year. This project is aimed at beginning operation in December 2019. Mexico is seen as an attractive country for Green Field investment.
Academic Research on Green Field Investment