Is a form of FDI where the company constructs new facilities in another country?

Companies that want to expand their interests internationally generally make physical investments and purchases in another country. This is known as foreign direct investment (FDI). They purchase, lease, or otherwise acquire assets in their host country including facilities such as plants, office space, or other types of buildings. These acquisitions may come in the form of new or existing facilities. In the business world, these investments are called greenfield and brownfield investments. But what exactly are they and how do they differ?

Read on to find out more about greenfield and brownfield investments, and the major differences between the two.

Key Takeaways

• Greenfield and brownfield investments are two types of foreign direct investment.
• With greenfield investing, a company will build its own, brand new facilities from the ground up.
• Brownfield investment happens when a company purchases or leases an existing facility.

Greenfield vs. Brownfield Investments: An Overview

As noted above, greenfield and brownfield investments are two different types of foreign direct investment. Both involve companies and production facilities in different countries. But that's primarily where the similarities between the two end.

In a greenfield investment, parent company opens a subsidiary in another country. Instead of buying an existing facility in that country, the company begins a new venture by constructing new facilities in that country. Construction projects may include more than just a production facility. They sometimes also entail the completion of offices, accommodations for the company's staff and management, as well as distribution centers.

Brownfield investments, on the other hand, occur when an entity purchases or leases an existing facility to begin new production. Companies may consider this approach a great time and money saver since there is no need to go through the motions of building a brand new building.

Companies may need to undergo a permitting process for greenfield investments, but can skip this step with a brownfield investment.

Greenfield Investments

The term greenfield refers to buildings constructed on fields that were, literally, green. The word green is also synonymous with the word new, which may allude to new construction projects by companies. These companies are generally multinational corporations that begin a new venture from the ground up, especially in areas where there are no facilities that already exist.

There are several reasons why a company may decide to build a new facility rather than purchase or lease an existing one. The primary reason is that a new facility offers design flexibility along with the efficiency to meet the project's needs. An existing facility forces the company to make adjustments based on the present design. All capital equipment needs to be maintained. New facilities are typically much less costly to maintain than used facilities. If the company wants to advertise its new operation or attract employees, new facilities also tend to be more favorable.

There are also downsides to constructing new facilities. Building from scratch can bring more risk as well as higher costs. For example, a company may have to invest more initially when it decides to build from scratch to fulfill feasibility studies. There may also be problems with local labor, local regulation, and other hurdles that come with brand new construction projects.

Brownfield Investments

With brownfield investing, companies scout available buildings in the host country that are compatible with their business models and/or production processes. If the existing national or municipal government requires licenses or approvals, the brownfield facility may already be up to code. In cases where the facility previously supported a similar production process, brownfield investments can be a real coup for the right company.

In an environmental context, the term brownfield may refer to the fact that the land on which a facility sits may be contaminated from the previous owner's activities. This is distinct from a brownfield investment strategy.

The clear advantage of a brownfield investment strategy is that the building is already constructed, therefore reducing the start-up costs. The time devoted to construction can be avoided as well.

Brownfield investments run the risk of leading to buyer's remorse. Even if the premises had been previously used for a similar operation, it is rare that a company finds a facility with the type of capital equipment and technology to suit its purposes completely. If the property is leased, there may be limitations on what kinds of improvements can be made.

What is greenfield FDI?

What is it called when a firm invests directly in a business or venture in another country?

What is an example of greenfield?

When one firm contracts with another to build complete ready to operate facilities it is called?