What Is a Green Field Investment?
A green field investment is a type of foreign direct investment (FDI) where a parent company creates a subsidiary in a different country, building its operations 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
The Basics of a Green Field Investment
The term "green field investment" gets its name from the fact that the company—usually a multinational corporation (MNC)—is launching a venture from the ground up—plowing and prepping a green field. These projects are foreign direct investments—known simply as direct investments—that provide the highest degree of control for the sponsoring company. Another method of FDI includes foreign acquisitions or buying a controlling stake in a foreign company. However, when a business takes the acquisition route, they may face regulations or difficulties that can hinder the process.
Green field investments carry the same high risks and costs associated with building new factories or manufacturing plants.
In a green field project, a company’s plant construction, for example, is done to its specifications, employees are trained to company standards, and fabrication processes can be tightly controlled.
This type of involvement is the opposite of indirect investment, such as the purchase of foreign securities. Companies may have little or no control in operations, quality control, sales, and training if they use indirect investment.
Splitting the distance between a green field project and indirect investment is the brown field investment. With brown field investing, a corporation leases existing facilities and land and adapts them to suit its needs. Renovation and customization usually result in relatively lower expenses and quicker turn-around than building from scratch.
- In a green field investment, a parent company creates a new operation in a foreign country from the ground up.
- A green field investment provides the sponsoring company with the greatest degree of control.
- A green field investment poses greater risks and a greater commitment of time and capital than other types of foreign direct investments.
Risks and Benefits of Green Field Investments
Developing countries tend to attract prospective companies with offers of tax breaks, or they could receive subsidies or other incentives to set up a green field investment. While these concessions may result in lower corporate tax revenues for the foreign community in the short run, the economic benefits and the enhancement of local human capital can deliver positive returns for the host nation over the long term.
As with any startup, green field investments entail higher risks and higher costs associated with building new factories or manufacturing plants. 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.
Tax breaks, financial incentives
Everything done to specifications
Complete control of venture
Greater capital outlay
More complex to plan
As a long-term commitment, one of the greatest risks in green field investments is the relationship with the host country—especially politically unstable one. Any circumstances or events that result in the company needing to pull out of a project at any time can be financially devastating for the business.
Real World Examples of Green Field Investment
The U.S. Bureau of Economic Analysis (BEA) tracks green field investments—that is, the 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 2018, totaled US$259.6 billion in 2017. Also, $4.1 billion went to establish new businesses. Manufacturing expenditures accounted for 40% of the total. Food and information were the most popular industries.
In April 2015, Toyota announced its first green field project in Mexico in three years, costing US$1.5 billion for the new manufacturing plant in Guanajuato. The factory is scheduled to open in December 2019 with an eventual goal of hiring 3,000 employees and the capacity to produce 300,000 pickup trucks per year—the initial capacity and workforce will be a third of that number. Along with the plant, the automaker plans to build or improve urban development to provide housing for the workers, called Toyota City. 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.