Question

Under what conditions should a firm consider a greenfield vs. a brownfield (acquisition) strategy for FDI?  Illustrate with an example.

Answer 1

Green field investment is a type of a Foreign of investment (FDI). A green field investment involves building completely new business through a business plan developed by the parent company. Green field investment strategy used by big firms to get access to potential foreign market. It is a idea of building a facility on a green field such as farmland or a foresrt

For eg : Suppose there is a company 123 Inc .Which is having its headquarters in America.Company conducts research to know the demand for its product in the country of India. After this conducting the research in the India market, it is found that there is a huge demand for the product of the company of India, and it can get a food customer base over the there. So, the management of the company decided to expan dits business by creatingits subsidary companyin India and starts the operation there from the ground level by constructing new production facilities, distributing hubs, and the offices.

Investment by the company 123 Inc. in the other country by creating a subsidary over there will be considered as the greenfield investment as the company start its operation there from the ground level by constructing new production facilities, distribution hub, and the offices. Also the company will be managing all the operations using its own staff and not just investing its money, unlike in the other type of foreign direct investment where the day to day operation are being managed is not managed by the investing company.

Brownfield investment is when a company or goverment entity purchases or leases existing production facilities to launch a new production activity. Brownfield investing is common when a company looks toward a foreign direct investment option. Often, a company considers facilites that are either no longer in use or not running at full capacity as option for new or addditional producting.

Green field vs brown fields

• Green field invest and sets up the whole business afresh
• On the other hand , brown field leases the entire business and makes lessee work according to its requirements
• Green field is costly than the brown field investment
• Also, green field investment are more risky than brown field

Green field

• Investors construct new facility
• Required more time
• Does not require clean up cost
• Undeveloped
• Location - periphery of city
• Characters - clean, green and pristine
• Treatment before develpment - ready for development
• Land use type - farm land wood land , wet land, etc

Brown field

• Redevelops existing facility
• Required less time
• Clean up costs are incurred
• Developed
• Location - inner city
• Characters - contaminated
• Treatment before development needing treatment before develpoment
• Land use type- industrial district, commercial properties

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