Greenfield Investment

A greenfield investment is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different country, building its operations from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices, and living quarters.

The term “greenfield investment” gets its name from the fact that the company—usually a multinational corporation (MNC)—is launching a venture from the ground up—plowing and prepping a green field. These projects are foreign direct investments—known simply as direct investments—that provide the highest degree of control for the sponsoring company. In a greenfield project, a company’s plant construction, for example, is done to its specifications, employees are trained to company standards, and fabrication processes can be tightly controlled.

This type of involvement is the opposite of indirect investment, such as the purchase of foreign securities. Companies may have little or no control in operations, quality control, sales, and training if they use indirect investment.

Splitting the distance between a green-field project and indirect investment is the brownfield investment. With brownfield investing, a corporation leases existing facilities and land and adapts them to suit its needs. Renovation and customization usually result in relatively lower expenses and quicker turn-around than building from scratch. Developing countries tend to attract prospective companies with offers of tax breaks, or they could receive subsidies or other incentives to set up a green-field investment. While these concessions may result in lower corporate tax revenues for the foreign community in the short run, the economic benefits and the enhancement of local human capital can deliver positive returns for the host nation over the long term.

As with any startup, green-field investments entail higher risks and higher costs associated with building new factories or manufacturing plants. Smaller risks include construction overruns, problems with permitting, difficulties in accessing resources and issues with local labor.

Companies contemplating green-field projects typically invest large sums of time and money in advance research to determine feasibility and cost-effectiveness.

As a long-term commitment, one of the greatest risks in greenfield investments is the relationship with the host country—especially politically unstable one. Any circumstances or events that result in the company needing to pull out of a project at any time can be financially devastating for the business.

The US Bureau of Economic Analysis (BEA) tracks green-field investments—that is, the investment by a foreign entity to either establish a new business in the US or expand an existing foreign-owned business. US green-field expenditures, according to data released by the BEA in July 2018, totaled US$259.6 billion in 2017. Also, $4.1 billion went to establish new businesses. Manufacturing expenditures accounted for 40 per cent of the total. Food and information were the most popular industries.

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