Whenever a foreign investor company decides to expand its business into new horizons through an FDI (Foreign Direct Investment), these two always come into consideration throughout balancing and measuring.
In the ever-growing global market, multi-national companies and major investors are always scanning for the best investment options, often an option is considered as best when it can also be called “safe” in terms of minimizing risk and ensuring short-term and long-term benefits as much as possible through prior studies of the possibilities. Companies invest a great deal of time and money in research to determine feasibility and value.
Greenfield sites and brownfield redevelopment sites are two different FDI strategies, these two investment strategies are contemplated depending on a project’s aims and needs. One is not more fit than the other if the different variants, risks, and possibilities are not assessed to match the project’s needs.
What is the essential difference between the two?
A greenfield site investment is when a parent company chooses to begin operations in a foreign country establishing the construction of new production facilities from scratch, including all the necessary offices, living quarters and distribution hubs. A Greenfield project is different from the brownfield investment in that the operations are completely customized from the beginning.
Countries in development constantly offer various benefits and incentives to call the attention of multinational companies willing to perform Greenfield investments. These benefits include tax breaks, preferential rates for import/export, subsidies and other incentives, which in exchange improves the economy in the target country and enhances the human capital in the area by offering additional job opportunities.
The name “green” comes from building in a pristine literally green new land, often covered with vegetation prior to the construction and that has never been used for production.
- The company following the Greenfield approach can completely control the design of its facilities, establishing its own rules and policies without a transition process, control all production processes and train its personnel up to the company’s standards. This offers much more control and customization than a brownfield.
- After extensive research and study, this is always a solid long-term strategy with commitment to the market.
- The necessary relationships with the market and authorities can be established under the sponsor company’s influence and image since the beginning. A fresh facility attracts customers and employees alike.
- Naturally, the cost of the project is the main difficulty for a greenfield investment strategy, as it covers building, transporting and buying everything the company needs to operate under foreign laws and regulations, and often takes years. The startup process is slower than that of a brownfield in this case.
- Any sudden changes in political environment or relationship with the government in the foreign country could pose an immediate threat to the company. A cease of operations for a greenfield investment would mean a catastrophic loss for the company.
- Difficulties with gaining the necessary permits and accessing resources could slow down the growth process
When a company or government chooses to purchase an already built production facility within a foreign market, this is called a brownfield investment.
The investing company can buy or lease the existing facility eliminating building costs of the project, focusing on remodeling or upgrading, and skipping some of the initial paperwork and requirements from operating with a new property. This sometimes could be a good advantage for new companies as well, and a good short-term startup opportunity.
The name “brown” comes from the fact that the used land may be contaminated by previous activities from the last existing company. When there is contamination the absence of vegetation is portrayed by a brownfield lacking green, when speaking about a new land which has not been used before for production, this is a Greenfield.
Land that is heavily contaminated is not a brownfield site and is not used for production.
- Besides avoiding construction, the company can choose a facility that is already functioning and has its own personnel, which would also save time when it comes to employment.
- If the facility already possesses the required equipment, this reduces the expenses down to only maintenance, if there is the need to add or upgrade new equipment, this approach still proves to be cost friendly. This is one of the features that saves the most time and money.
- The environmental impact is reduced, no new green areas need to be developed, and it often improves urban areas.
- The difference in corporate culture may pose an obstacle when joining the company with the acquired personnel, as they are forced to embrace new policies of behavior and business.
- Brownfield sites are sometimes located in really unattractive areas that are harder to develop for the public or even the employees. If investors can’t be attracted to the business it won’t be able to sustain itself.
- Environmental remediation can come as a costly and legally slow process.
Naturally, foreign investors and Foreign Direct Investment strategies possess both positive and negative aspects to consider with both greenfield and brownfield sites. Multinational companies and investors always take into account all of the different possibilities and take the decision based on what’s more profitable and convenient.
A quick summary of the essential differences between greenfield and brownfield investment strategies:
- Greenfield involves establishing operations, building all necessary facilities, and going through an employment process from scratch,
- Brownfield consists of acquiring already built active or inactive facilities (absorbing personnel in the case of an active facility) and modifying them for the company’s needs.
- Greenfield is established taking advantage of unused new land without any previous industrial or commercial impact. Which causes a new impact on the environment.
- Brownfield is established with the acquisition of an existing property in a land contaminated or exploited to some extent, which generally requires some remediation.
- Greenfield requires more time to establish, build and run the production operations. It is more expensive at the beginning.
- Brownfield is relatively fast as it generally takes over a previous process and either modifies it or improves it. It requires more maintenance expenses.
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