How do businesses decide whether to do FDI via green field investments or acquisitions?

By Albert Phung AAA
A:

When businesses decide to expand their operations to another country, one of the more important dilemmas they can face is whether it is most beneficial to have the business take matters into its own hands and create a fresh new site of operations in the foreign country via a green field investment, or to simply purchase an existing company in the foreign country through an acquisition.

While both methods will usually accomplish the goal of extending a company's operations to a new foreign market, there are several reasons why a company might choose one over the other.

Businesses may be more inclined to opt to acquire an existing foreign business in situations where it is difficult to enter a foreign market. Buying a foreign businesses simplifies a lot of potentially tedious details. For example, the purchased business will already have its own personnel (both labor and management), allowing the acquiring company to avoid having to hire and train new employees.

Furthermore, the purchased company may already have a good brand name and other intangible assets, ensuring that the company will start off with a good customer base. Purchasing a foreign company can also provide the parent company with easier access to financing, because there may be less red tape to navigate around. Finally, if a foreign market is at or near its saturation point, buying an existing company may be the only viable way to enter a foreign market.

A business may also choose to build a foreign subsidiary from the ground up instead of making an acquisition. Depending on the countries or companies involved, there may be serious difficulties involved in integrating a parent company with its acquisition targets. Differences in corporate culture between the two organizations, for example, can stymie effective operations.

A business may also make a green field investment if there is not a suitable target in the foreign country to acquire. This is favorable in situations where businesses can gain government-related benefits by starting up from scratch in a new country, as some countries provide subsidies, tax breaks or other benefits in order to promote the country as a good location for foreign direct investment (FDI).

To learn more about acquisitions, see Mergers And Acquisitions - Another Tool For Traders or
The Wacky World of M&As.

RELATED FAQS

  1. What is the Pac-Man defense?

    The Pac-Man defense is a strategy in which a company that is facing a hostile takeover from another company essentially turns ...
  2. If a company undergoes an acquisition can an employee withdraw 401(k) funds tax free?

    Although the participant may be eligible to withdraw the funds if a plan is terminated as a result of an acquisition or other ...
  3. What is a tuck-in acquisition?

    A tuck-in acquisition, often referred to as a "bolt-on acquisition", is a type of acquisition in which the acquiring company ...
  4. A cash buyout agreement has been announced for a stock I own, but why isn't my stock ...

    The announcement of an acquisition or a merger does not necessarily mean that the deal will be resolved as originally stated. ...
RELATED TERMS
  1. Roll-Up Merger

    A rollup (also known as a "roll up" or a "roll-up") ...
  2. Foreign remittance

  3. Collateralized Loan Obligation - CLO

    A security backed by a pool of debt, often low-rated corporate ...
  4. Revlon Rule

    The legal requirement that a company’s board of directors make ...
  5. Business Consolidation

    The consolidation of several business units or several different ...
  6. Golden Bungee

    A benefit conferred to select top executives that is a combination ...
comments powered by Disqus
Related Articles
  1. Investing In China
    Investing Basics

    Investing In China

  2. War's Influence On Wall Street
    Bonds & Fixed Income

    War's Influence On Wall Street

  3. What You Need To Know About Net Neutrality
    Stock Analysis

    What You Need To Know About Net Neutrality

  4. Sovereign Wealth Funds - Friend Or Foe?
    Investing Basics

    Sovereign Wealth Funds - Friend Or Foe?

  5. Introduction To Asian Financial Markets
    Economics

    Introduction To Asian Financial Markets

Trading Center