What Is a Green-Field Investment?
A green-field 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.
Key Takeaways
- In a green-field investment, a parent company creates a new operation in a foreign country from the ground up.
- A green-field investment provides the sponsoring company with the greatest degree of control.
- A green-field investment poses greater risks and a greater commitment of time and capital than other types of foreign direct investments.
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The Basics of a Green-Field Investment
The term "green-field 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.
Another method of FDI includes foreign acquisitions or buying a controlling stake in a foreign company.However, when a business takes the acquisition route, it may face regulations or difficulties that can hinder the process.
Green-field investments carry the same high risks and costs associated with building new factories or manufacturing plants.
In a green-field 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 brown-field investment. With brown-field 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.
Risks and Benefits of Green-Field Investments
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.
Pros
Tax breaks, financial incentives
Everything done to specifications
Complete control of venture
Cons
Greater capital outlay
More complex to plan
Longer-term committment
As a long-term commitment, one of the greatest risks in green field investments is the relationship with the host country—especially politically unstable one. Any circ*mstances or events that result in the company needing to pull out of a project at any time can be financially devastating for the business.
Real-World Examples of Green-Field Investments
Green-field investments can be measured well into the billions of dollars. For example, total planned expenditures for investments in the U.S. initiated in 2022 exceeded $85 billion. This includes first-year expenditures and future expenditures. The U.S. Bureau of Economic Analysis (BEA) tracks green-field investments that involve investments by foreign entities to either establish new businesses in the U.S. or expand existing foreign-owned businesses.
Historically, Mexico has been viewed as an attractive country for green-field investments due in large part to its low costs of labor and manufacturing, as well as its proximity to markets in the United States. In April 2015, Toyota announced its first green-field project in Mexico in three years, costing $1.5 billion for the new manufacturing plant in Guanajuato. Along with the plant, the automaker planned to build or improve urban development to provide housing for the workers, called Toyota City.
Where Do Green-Field Investments Get Their Name?
The name comes from the fact that these developments are taking place in previously undeveloped areas, such as green fields. This can be true both literally and figuratively. The development might literally take place in a previously green field. Figuratively, it might be taking place in an area with no other such developments.
How Did Green-Field Investments Differ From Brown-Field Investments?
Brown-field investments involve redeveloping areas where industry already has existed. In some cases, it might involve redeveloping a previously developed property that has gone unused for some time.
How Do Foreign Nations Benefit From Green-Field Investments?
As a new development, a green-field project brings jobs to the nation where the development is taking place. This benefits the local economy directly and also benefits the local population that gains income from the jobs in addition to the professional experience.
The Bottom Line
Green-field investments involve companies building new facilities from the ground up in other nations. The companies benefit because they often are able to get tax breaks for developing in the nations in question. Those nations benefit from the new jobs that will benefit their economies. These differ from brown-field investments, which involve companies building on land that already has been developed or used for industry.
