Greenfield Investments - A Comprehensive Guide

In a landscape where companies must provide tailored solutions that cater to local markets while adhering to regulatory standards, expanding to different countries becomes a big barrier. In addition to this, a company’s ability to flexibly respond to the specialized needs of these target markets can also cause issues in operations.

This is where a greenfield investment comes in. It is an FDI (foreign direct investment) approach in which the parent company makes a subsidiary in different countries. In this guide, we will explore how it can benefit a company and help it expand to different regions.

The term “greenfield” refers to creating an entirely fresh venture from scratch to cultivate a business that is tailored to providing solutions catered to the local market.A greenfield investment is a common method used by companies to enter into a new market overseas while maintaining maximum control. This is a way to bypass the minimal influence dilemma companies face through indirect investments like purchasing foreign securities.

Through approaches like mergers or acquisitions, companies can at most purchase already existing businesses which comes with regulatory challenges and much more. Through greenfield investments, companies can build new facilities for manufacturing, development, research, operations, and more in foreign locations. The parent company, can thus, maintain maximum control over all operations in the new market. Now that we have covered what is a greenfield investment, let’s dig deeper into how it works.

Greenfield investments require parent companies to be extremely strategic and accustomed to local market conditions. They require companies to comprehensively evaluate factors like local regulations, cultural nuances & ethics of the region, assessing consumer demand, and availability of labor.

This due diligence can inform the parent company to make decisions that cater to the local market and contribute to the local economy. Greenfield investments act as a catalyst to reduce unemployment rates and foster skill enhancement of the local workforce. This encourages host countries to attract foreign capital and improve business relationships.

This is why greenfield investments have grown in importance and gained such significance over the years.

1. Full Control Over Operations

   The parent company that opens the subsidiary in the country gets maximum control over the operations, management, and relevant decision-making verticals. This is especially important for MNCs that want to maintain their credibility and keep their brand image consistent in whichever country they operate.

2. Potential for Higher Long-Term Returns

   With economies of scale and scope, companies can yield much higher long-term returns and profits with greenfield investments. Reduction in production costs per unit in a country where production is cheaper can yield scaled production of goods or services. Moreover, greenfield investments also enable diversification of product range to serve different market segments. It also allows for the centralization of various functions like development, research, and marketing to boost innovation and optimize cost efficiency.

3. Tax breaks & financial incentives

   Host governments can usually provide financial incentives like tax breaks to parent companies looking to expand in their country. Additionally, establishing local manufacturing or production plants can help companies bypass any tariffs or trade restrictions that apply for importing their goods or services in that country. This can help companies in meeting market demands of the region in a more cost-efficient method.

• High Initial Costs

  This initial investment for parent companies to open up new plants for manufacturing, research, development, or other operations is high. These costs also extend to land acquisition, procuring equipment in compliance with regulations, construction, and more

  The initial costs also involve risks that can stem from various uncertain factors like regulatory changes, the economic condition of the country, market acceptance, and more.

• Building Brand Recognition from Scratch

  While the brand might be moderately known to the region, in often the best-case scenario, building its recognition from scratch is a high-risk job. How well the company’s policies and practices gel with the new region and how well the consumers accept their products or services compared to the competitors is very unpredictable.

Greenfield investments are ideal for companies that see a high growth potential in the target market after their due diligence analysis of the region. This can further help companies gain a competitive edge and prevent any legacy issues from the competitors. Greenfield investments can also prove highly advantageous for companies in specific locations that favor them the most in terms of investment incentives from governments, and regulatory standards that give them more flexibility in operations.

Some effective strategies for a greenfield investment include:

1. Meticulous Market Research: A comprehensive analysis as due diligence into understanding the market demand, target consumer base, and competition.

2. Building Strong Local Partnerships: Collaboration or association with local businesses with a good and established brand image to create a network and smoothly navigate the marketplace.

3. Regular Compliance Checks: To ensure proper adherence to local regulations, standards, and compliances to avoid any penalties or legal issues.

4. Leveraging Governmental Incentives: Make use of available tax breaks, subsidies, and schemes to optimize cost efficiency.

Many MNCs have reaped the benefits of a greenfield investment. Some of the most prominent examples include:

1. Toyota in Mexico

   Toyota’s first greenfield project in Mexico was a $1.5 billion investment to open a new plant in Guanajuato, with a goal to manufacture 300,000 pickup trucks. This investment was a very fruitful endeavour that also proved to be beneficial for the locals, as it provided employment for over 3000 employees. Toyota’s contribution to local development also extended to building housing for workers (now known as Toyota City), and more initiatives in urban development.

   Since the plant commenced operations in 2019, this facility has proven to be a cost-efficient investment for Toyota with reduced labour costs and close vicinity to the US market.

2. Hyundai in the Czech Republic

   Hyundai gained authorization to invest almost €1 billion as a greenfield project in 2006, in the town of Nošovice. Here, the company set up a new production plant that hired over 3000 employees in just the initial year.The government of the Czech Republic also encouraged this project to bolster the nation’s economy and provided significant subsidies and tax benefits to Hyundai to expand operations there.

With the establishment of new operations of any kind in unfamiliar markets and regions, greenfield projects must have robust financial reporting. This helps companies to mitigate potential risks, assess the feasibility of operations, and attract more investment from the stakeholders. Project appraisal services from trusted sources can provide companies with much-needed assistance here.

A strong financial reporting strategy plays a crucial role in decision-making and enables good positioning of investments in newer markets.