The ultimate market entry strategy a company might pursue on its own is to build a wholly owned subsidiary in the target market. This is a form of foreign direct investment and is referred to as Greenfield investment.

The strategy involves building everything the company needs from the ground (or green field) up. This can include all facets of the business, from plant construction to marketing and distribution channels.

Companies can also invest in a foreign market indirectly by purchasing shares, stocks and bonds in a foreign company or government.

The difference between indirect and direct investment is whether or not the company has any direct influence over the operations of a company in the foreign market and whether or not any capital, skills, personnel or managerial influence are transferred. With indirect investment, a company has no influence.

Carefully consider the risks involved

Greenfield investment is the riskiest and most expensive method for entering a target market. Companies must be committed to a long-term association with the country they are entering, because the losses involved with pulling out would be substantial.  On top of that, there is no guarantee that a large investment will be successful.

Depending on the market being targeted, foreign investment can be welcomed and encouraged, or substantially limited. Companies must determine the legal, regulatory and tax structure of the market they wish to invest in and determine the level of government approval of foreign investment.

Careful planning is required to establish the best form of investment that can be made.

For example, a land purchase must be carefully assessed to ensure that it will be close to essential distribution networks, relatively protected from natural disasters such as flooding, suitable for development, and will not lose value over time.

When should you start from the “Greenfield” up

However, for companies with substantial resources to invest, foreign direct investment provides an opportunity to break into a new market while maintaining a high level of control over operations.

Profits do not have to be shared, and the company benefits in the following ways:

• It has the use of cheaper production facilities
• It obtains access to new processes, skills and personnel
• It can position itself as a local company
• It can expand into new areas of trade and reposition itself
• It can gain access to in-depth local marketing skills and knowledge

Large, multinational companies are the ones that most often use Greenfield investment. If a company wants to expand market share, increase profits, reposition itself or acquire new resources and technology, Greenfield investment can meet these strategic objectives.

Greenfield investment strategies are excellent options for companies  facing trade barriers, that might not be able to export to a market, or when governments in the target market favour local production.

For a Greenfield investment to be a suitable strategy, companies should be able to invest long-term in a market and be able to handle high levels of risk. The market of interest should also be one that supports foreign investment.

Alternative “Brownfield” approach may be more appealing for those with a limit on time and budget

Relatedly, a company may opt to make a “Brownfield” investment in a target market – this referring to the scenario where a business chooses to undertake investment in a target market based on acquisition of existing facilities or operations, either through leasing or purchase, for purposes of undertaking a different type of production activity.

This approach may involve lower costs, and may accelerate ‘time to market’, but often refers to the acquisition of facilities in ‘dirty’ industries such as steel production or the refining of petroleum products, with a view to transforming such facilities to cleaner (less polluting) usage.

Brownfield investments share some of the characteristics of Greenfield investments, and are typically pursued by large companies due to the related costs.

They also imply a level of expertise in converting acquired sites to new production uses and capabilities, as well as potentially managing the environmental risks related to the decommissioning or refitting of acquired sites.

So if you have the means, the motive, and the market, a Greenfield investment could be the right approach for your company to enter and excel in a new global market.

Have you participated in a “Greenfield” or “Brownfield” investment? Did the rewards outweigh the risks? Would you recommend this strategy to others?

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