What Is a Green Field Investment?

A green field investment is a type of foreign direct investment (FDI) in which a parent company creates a subsidiary in a different country, building its operations from scratch. In addition to the construction of new production facilities, these projects can also include the building of new distribution hubs, offices and living quarters.

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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) is launching a venture from the ground up—plowing and prepping a green field, so to speak. These projects are foreign direct investments that provide the highest degree of control for the sponsoring company compared to other methods of FDI, such as foreign acquisitions or buying controlling stakes in a foreign company. 

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.

This type of involvement is the opposite of an indirect investment, such as the purchase of foreign securities, in which case companies may have little or no control in operations, quality control, sales, and training. One middle course is a brown field investment, in which a corporation leases existing facilities and land and adapts them to its needs. Renovation and customization usually result in relatively lower expenses.

Key Takeaways

  • 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, 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 for the host nation over the long term.

As with any start-up, 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.

Pros


  • Tax breaks, financial incentives

  • Everything done to specifications

  • Complete control of venture

Cons

  • Greater capital outlay

  • More complex to plan

  • Longer-term committment

As a long-term commitment, one of the greatest risks in green field investments is the relationship with the host country—especially one that is politically unstable. Any circumstances or events that result in the company having pulling out of a project at any time can be financially devastating.

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 $259.6 billion in 2017, with $4.1 billion going to establish new busineses. 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, a $1.5 billion 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 (initial capacity and workforce will be a third of that). Along with the plant, the automaker plans to build an 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.