When businesses decide to expand their operations to another country, one of the more vexing dilemmas they face is whether to create a new operation in the foreign country using 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.
The Case for an Acquisition
Businesses may be more inclined to acquire an existing foreign business in situations where it is difficult to enter a foreign market. Buying an overseas business 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, helping the company 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.
The Case for a Green Field Investment
A business may also make a green field investment if there is not a suitable target in the foreign country to acquire. A green field investment is a type of foreign direct investment (FDI) where a parent company builds its operations in a non-home country from the ground up. This is favorable in situations where businesses can gain local 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 FDI.
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 hinder effective operations.
(To learn more about acquisitions, see Mergers and Acquisitions: Another Tool for Traders or The Wacky World of M&As.)