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 does it mean when a country has little activity in its capital account?

    Know what a country's capital account represents and understand what the implications are if a country has little activity ... Read Answer >>
  2. What are the advantages of foreign portfolio investment?

    Learn the advantages that businesses can derive from foreign portfolio investment in an increasingly globalized business ... Read Answer >>
  3. What are some examples of a Foreign Institutional Investor (FII)?

    Discover some examples of foreign institutional investors, and learn information about the nature of foreign institutional ... Read Answer >>
  4. What is foreign exchange?

    Foreign exchange, or Forex, is the conversion of one country's currency into that of another. In a free economy, a country's ... Read Answer >>
Related Articles
  1. Taxes

    Get A Tax Credit For Your Foreign Investments

    The foreign tax credit provides a break on investment income made and taxed in a foreign country.
  2. Investing

    Investing Beyond Your Borders

    Investing abroad poses risks, but can also help you diversify. Discover ways to invest in foreign stocks.
  3. Insights

    Ever Wanted to Own International Stocks? Here's How

    Tips and strategies for users to trade in different exchanges around the world.
  4. Investing

    Protect Your Foreign Investments From Currency Risk

    Hedging against currency risk can add a level of safety to your offshore investments.
  5. Insights

    Cautionary Signs For International Investors

    "Going global" is a fashionable investing style, but investors should know the risks.
  6. Investing

    Should You Open A Foreign Savings Account?

    Would opening a savings account in a foreign bank make sense for you? The pros and cons, how to establish one – and alternatives to consider.
  7. Managing Wealth

    What Taxes Do I Owe On Retirement Accounts Abroad?

    If you're a U.S. retiree, but previously worked abroad, here's what you need to know about taxes on foreign pensions and retirement accounts.
  8. Investing

    Broadening Your Portfolio's Borders

    Find out what type of international fund might suit your needs in gaining exposure to foreign markets.
  9. Financial Advisor

    Advisors: Don’t Overlook This Foreign Dividend Tax

    Paying income tax on income earned from foreign investments can be a tricky proposition. Here's what advisors and their clients need to know.
  10. Taxes

    Understanding Taxation Of Foreign Investments

    Technically, any gains from foreign investments owned by an American citizen are subject to tax by the company's home country as well as the IRS. However, the Foreign Tax Credit enables you to ...
RELATED TERMS
  1. Foreign Direct Investment - FDI

    A foreign direct Investment (or FDI) is an investment made by ...
  2. Direct Investment

    1. The purchase or acquisition of a controlling interest in a ...
  3. Green Field Investment

    A form of foreign direct investment where a parent company starts ...
  4. Foreign Investment

    Flows of capital from one nation to another in exchange for significant ...
  5. Foreign Debt

    An outstanding loan that one country owes to another country ...
  6. Foreign Earned Income Exclusion

    The amount of income earned from a foreign source that is excludable ...
Hot Definitions
  1. Book Value

    1. The value at which an asset is carried on a balance sheet. To calculate, take the cost of an asset minus the accumulated ...
  2. Dividend Yield

    A financial ratio that shows how much a company pays out in dividends each year relative to its share price.
  3. Fixed-Income Security

    An investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. ...
  4. Free Cash Flow - FCF

    A measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents ...
  5. Leverage Ratio

    Any ratio used to calculate the financial leverage of a company to get an idea of the company's methods of financing or to ...
  6. Two And Twenty

    A type of compensation structure that hedge fund managers typically employ in which part of compensation is performance based. ...
Trading Center