Greenfield investment is a kind of foreign direct investment (FDI) where a parent organization constructs its activities in an outside nation from the beginning. In addition to the development of new creation offices, these projects can likewise incorporate the working of new conveyance centre points, workplaces and living quarters.
A greenfield investment is a form of market entry commonly used when a company wants to achieve the highest degree of control over foreign activities. It can be compared to other foreign direct investments such as the purchase of foreign securities or the acquisition of a majority stake in a foreign company in which 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 to avoid intermediary costs.
Advantages of a Greenfield Investment
There are numerous advantages of a greenfield investment, including:
- High level of control over business operations
- High-quality control over the manufacturing and sale of products and/or services
- High control over brand image and staffing
- Economies of scale and economies of scope can be achieved in terms of marketing, research and development, and production
- Bypassing trade restrictions
- Creating jobs for the economy where the greenfield investment is taking place
Disadvantages of a Greenfield Investment
There are numerous disadvantages of a greenfield investment, including:
- An extremely high-risk investment – a greenfield investment is the riskiest form of foreign direct investments
- Potentially high market entry cost (barriers to entry)
- Government regulations that may prevent foreign direct investments
- High fixed costs involved in establishing a greenfield location