Brownfield Investment Definition
Brown field investment, which is also known as “brownfield” is when a firm or a government body buys or contracts an existing facility to launch their new activity. Brown field investment is one of the plans used in foreign-direct investment. Foreign direct investment is where a company or individual invests into a business established in another country. The alternative strategy to brown field investment is green field investment where a new production unit is constructed.
A Little More on What is a Brownfield Investment
In brown field investing, it’s where a facility is either bought or leased. In this case the facility already existed and already have all the licenses and all approvals needed by the relevant regulators. In some cases, leased or bought facility may have the employed workers already.
The strategy is more preferred by most companies as the structure is already constructed. This approach is cost saving and also helps to eliminate some processes that come with building a facility from scratch like building authorization permits and fixing other necessary utilities.
The term brown field means that the land itself was already in use by another activity before the current activity took place. The effect of this is that there is no green vegetation on the land or property unlike green field investment.
A field may also be left unused for a purpose like incidences of hazardous waste, where the soil is contaminated or in case of pollution. In such case, the land is not referred to as brownfield property. The property owner might have no plans of allowing additional use of brownfield land; this is known as mothballed brownfield.
A company that is interested in foreign direct investment may choose brown field investment as the most common approach. The company will either choose a facility that is no longer in use of which does not operate on its full capacity as an alternative for new or an extra production facility. The company may need to add more equipment to the existing ones or modify the available ones.
However, this approach is economically effective than building and equipping a new facility.
Brown field investing is mainly attainable in cases where the intended new use of the facility is similar to the previous use. It’s very rare for a company to find a facility with the kinds of initial equipment to suit its purpose. For a leased production facility, there are also limitations on the type of improvement one is allowed to make on the equipment and facility.
With the purchase of new equipment, the strategy is still referred to as brown field investments. However, construction of an additional new facility to broaden the production is not considered as brown field investment, instead, the new facility is considered as green field investing.
Both brown field investment and green field investment are different types of foreign direct investment. Green field investment when a firm or government entity starts a venture by constructing the new facilities from the ground.
A company can decide to build new facilities rather than purchase or lease due to several factors. The main reason being a new facility brings flexibility in designs and also designed in a way to meet the needs of the project. An already established facility may force the firm to adjust according to the design of the facility. For a company to attract more employees and advertise the new operations, new facility is more favorable.
The main advantage of green field investment is that the company has a direct control over the investment. A firm that enters into foreign market using green field investment approach is in total control of the goods and services produced.
The company has control over the rate of expansion, the rate of production and quality of products manufactured. The company can opt to start as a small scale firm and gradually prepare for expansion into large scale company.
However, the green field investment comes with the disadvantages. The start – up process is slower and more expensive since the company requires building a new facility from a virgin land. In case of political or economic instability may cause a great loss to the company.
Examples of brown field investment
Let’s assume company X which is based in India wants to expand its business and invest in China. The CEO may decide to test the waters first due to uncertainties involved of investing in a foreign land. Besides the uncertainties, there could be more government licenses and approvals from regulators which need to be acquired in China, and it could take a long time to acquire the licenses.
Company X then gets an opportunity to lease a similar production unit in China. Company X decided acquires the target company in china. This is called brown field investment. Company X in this case is able to expand its operation in China faster and it is able to reduce the cost of foreign investment such as buying a land, construction of a new building and training and hiring new staff.
Real examples of Brown Field Investment
- Vodafone in India
Vodafone is a telecommunications firm with its headquarters in London and Newbury. In 2007, the firm acquired the majority stake of Hutchison Essar in Mumbai, India. Through this achievement, the Vodafone Company was able to enter into the Indian telecommunications industry which was a fast growing industry with around six million monthly subscribers.
- Tata motors in United Kingdom
In around 2007 and 2008, Tata Motors was the biggest automobile firm in India. The Indian automobile manufacturer was leading in the manufacturing of commercial vehicles. Tata acquired United Kingdom automobile business known as Jaguar Land Rover in a cash transaction of $2.3billion. This acquisition enabled the Indian automaker to get property right, two design centers and a manufacturing plant in the United Kingdom.
Pros of a Brown field Investment
Brown field investment has a number of advantages
- The company has the advantage of accessing a new market fast.
- The initial cost is reduced since there is an already existing facility and utilities.
- In some cases, the company can lease or buy a production unit that already has the employed workers, in this scenario, the cost of staffing and training is reduced.
- The already established facility may have existing licences and government approvals making the starting process easier.
- The facility already has the equipment; this reduces the cost to only maintenance cost and modification cost if any.
Cons of a Brown field Investment
- The facility and equipment may be too old which may cause a rise in maintenance cost.
- Difference in the company’s culture may be a problem especially when acquiring a company with the employed workers. The workers may be forced to embrace the new culture and policies of the new company.
- Sometimes the facilities could be located in an area that is not attractive and hard to develop.
- The expansion of the company is limited by using an already constructed building.
References for Brownfield Investment
Academic Research on Brownfield Investments
Brownfield entry in emerging markets, Meyer, K. E., & Estrin, S. (2001). Journal of international business studies, 32(3), 575-584.
Bankers, developers, and new investment in brownfield sites: Environmental concerns and the social psychology of risk, Yount, K. R., & Meyer, P. B. (1994). Economic Development Quarterly, 8(4), 338-344.
Assessing the effect of publicly assisted brownfield redevelopment on surrounding property values, De Sousa, C. A., Wu, C., & Westphal, L. M. (2009). Economic development quarterly, 23(2), 95-110.
Brownfield redevelopment strategies in the United States, Kushner, J. A. (2005). Ga. St. UL Rev., 22, 857.
Regulation of foreign investment in historical perspective, Chang, H. J. (2004). The European Journal of Development Research, 16(3), 687-715.
European Union enlargement and the foreign direct investment channel of industrial relations transfer, Marginson, P., & Meardi, G. (2006). Industrial Relations Journal, 37(2), 92-110.
FDI Policy, Greenfield Investment and Cross‐border Mergers, Qiu, L. D., & Wang, S. (2011). Review of International Economics, 19(5), 836-851.
The contribution of foreign direct investment to transition revisited, Kalotay, K. (2001). J. World Investment, 2, 259.
Barriers to brownfield redevelopment: lessons learned from two Great Lakes states, Coffin, S. L., & Shepherd, A. (1998). Public Works Management & Policy, 2(3), 258-266.
Background note on insurance and brownfield investment decisions, Meyer, P. B. (1998). Public Works Management & Policy, 2(3), 243-250.
Brownfield Acquisitions, Estrin, S., & Meyer, K. E. (2011). Management International Review, 51(4), 483.