A:

Green-field and brown-field investments are two different types of foreign direct investment (FDI). Green-field investments occur when a parent company begins a new venture by constructing new facilities in a country outside of where the company is headquartered. Brown-field investments occur when a company or government purchases an existing facility to begin new production.

Green field

There are several reasons why a company opts to build its own new facility rather than purchase or lease an existing one. The primary reason is that a new facility offers the maximum design flexibility and efficiency to meet the project's needs. An existing facility forces the company to adjust based on the present design.

Additionally, 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.

Brown field

The clear advantage of a brown-field investment strategy is that the building is already constructed. The costs of starting up may be greatly reduced. The time devoted to construction can be avoided as well.

If the existing national or municipal government requires licenses or approvals, the brown-field facility may already be "up to code." In cases where the facility previously supported a similar production process, brown-field investments can be a real coup for the right company.

Brown-field investments run the risk of leading to buyer's remorse. It is rare that a company looking to engage in FDI 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.

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