What is a Green Field Investment
A green field investment is a type of foreign direct investment (FDI) where a parent company builds its operations in a foreign country from the ground up. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.
Green Field Investment
BREAKING DOWN Green Field Investment
The term "green field investment" refers to a project where a company builds operations in a foreign market starting from scratch, or a so-called green field. These projects are foreign direct investments that provide the highest degree of control for the sponsoring company when compared to other methods of FDI, such as foreign acquisitions or buying controlling stakes in a foreign company.
This type of involvement is completely different from indirect investments, such as the purchase of foreign securities, in which case companies may have little or no control in operations, quality control, sales and training. In green-field projects, a company’s plant construction, for example, is done to its own specifications, employees are trained to company standards and fabrication processes can be tightly controlled.
Risks and Benefits of Green Field Investments
Developing countries tend to attract prospective companies with offers of tax breaks, subsidies and other incentives to set up green field investments. While these concessions may result in lower corporate tax revenues in the short term, the economic benefits and the enhancement of local human capital can deliver positive returns over the long term.
As opposed to a brown field investment, where leasing existing facilities and land results in relatively lower expenses, green field investments forwarded by multinational corporations entail higher risks and higher costs associated with building new factories or manufacturing plants.
As a long-term commitment, one of the greatest risks in green field investment is the relationship with the host country. Any circumstances or events that result in the company pulling out of a project at any time can be financially devastating. Smaller risks include construction overruns, problems with permitting, difficulties in accessing resources and issues with local labor. Companies contemplating green field projects typically invest large sums of time and money in advance research to determine feasibility and cost-effectiveness.
Examples of Green Field Projects
The Bureau of Economic Analysis (BEA) defines green field investments in the United States as an investment by a foreign entity to either establish a new business in the U.S. or expand an existing foreign-owned business. U.S. green field expenditures, according to data released by the BEA in July 2017, totaled $7.7 billion in 2016, with the most popular industries for such investments being real estate and rental leasing.
In April 2015, Toyota announced its first green field project in Mexico in three years, a $1.5 billion manufacturing plant in Guanajuato. The factory is scheduled to open in 2019 with 2,000 employees and the capacity to produce 200,000 cars per year. Historically, Mexico has been viewed as an attractive country for green field investments due in large part to its low costs of labor and manufacturing, as well as its proximity to markets in the United States.