What are Greenfield investments? – ResearchFDI

Greenfield investments

If you have researched the subject of foreign direct investment, you may have come across the term greenfield investment. However, what exactly are greenfield investments?

FDI in a host country can take many forms, including mergers and acquisitions (M&A), greenfield investment, i.e. starting new businesses in foreign countries from scratch , and the extension of national capital. Each type of FDI brings distinctive benefits to the growth and welfare of host countries, but also presents its own unique set of risks and dangers.

Greenfield refers to investments in which a parent company establishes a subsidiary in a foreign country. Specifically, Greenfield FDI occurs when companies establish or expand their business operations overseas, creating new jobs and/or facilities from scratch, as opposed to mergers and acquisitions, which occur when a company in buy another.

The term greenfield comes from the action of the company starting a business from scratch, basically by plowing and preparing a green field. An investment in a greenfield project gives the parent company the most control over its investment.

Benefits and Risks of Greenfield Investment

Any investment involves risks and rewards. Often times, greenfield investments are riskier than other investments, but they also generate higher returns.

A greenfield investment offers the investor greater control over a business than an investment in an existing local business. The investor can develop an overall strategy by deciding which product or service to sell, determining production rates and the pace of expansion in their target market. It would generally not have such leeway if it had to invest in an existing local business. Adapting to the foreign market is easier and more efficient with entirely new investments. Investors have better control over product quality and can tailor products and prices to local conditions

Greenfield FDI has a significant effect on the economic growth of a country, which is why governments place great importance on such investments. These investments create new jobs and/or facilities. They tend to be long-term and involve large strategic investments by companies that are intended to last indefinitely or until another company takes over the facility. Moreover, when a greenfield investor establishes a presence abroad, it creates direct and indirect jobs. A company’s direct employment is the number of jobs created by its activities, while indirect employment is the number of jobs generated by other companies in the supply chain after a foreign investor has made an initial investment.

However, greenfield investments carry many risks for a parent company. In addition to the high fixed costs of building facilities from scratch, barriers to entry can also be high, such as local content requirements that require foreign companies to use domestic products or services to make Business. Many companies considering these projects invest heavily in research and planning to ensure they are feasible and profitable choices.

Advantages

  • The Investor has full control over the operations,
  • Projects can provide tax breaks and financial incentives,
  • Everything is done according to the specifications and regulations of the foreign government,
  • It increases the earning capacity of the parent company,
  • The brand image of the parent company is growing in international markets.

Risks

  • Higher fixed cost,
  • Projects are more complex and often require special skills,
  • To get a return on investment, investors must commit to the long term
  • Projects are time-consuming for the parent company,
  • Vulnerable to political instability.

Trends in greenfield investments in 2022

Greenfield foreign direct investment (FDI) projects are on the rise again. As economies began to reopen, investors reacted quickly and there was a strong rebound in global FDI levels. According The 2022 Global FDI Annual Report, produced by Global Data/Investment Monitor, there were a total of 16,516 greenfield FDI projects in 2021, growing 18%. This is just below pre-pandemic levels of 16,965 projects in 2019.


(Chart 1: Number of green field FDI projects, 2019-21)

However, there are always concerns about what the future holds for Greenfield projects. The year 2022 has brought companies to face several issues, ranging from supply chain disruptions, changing consumer demand patterns and lingering geopolitical issues, all of which could curb the growth of new investments. that we see.

Another trend we saw in 2021 was an increasing number of companies becoming more aware of their sustainability performance. New environmental, social and governance (ESG) goals have come to the forefront for many companies, and the past year has seen a significant increase in the presence of sustainability in their annual reports.

(Chart 2: Number of Greenfield FDI projects in SDG-aligned areas, 2020-21)

Sustainability has been a key issue for businesses globally, as the effects of climate change become increasingly evident, businesses begin to take the necessary steps to reduce their emissions. More and more companies are announcing transitions to net zero emissions, and we have seen a significant increase in sustainable investments in recent years. Greenfield investments in sectors relevant to the Sustainable Development Goals (SDGs) increased by 39% compared to 2020, demonstrating the continued progress towards sustainable investments.

Greenfield FDI Industry Trends

Most sectors saw an increase in FDI in 2021 – 26 of the world’s 34 FDI sectors experimented growth. VScommunications and renewable energies HaI had the The most important growth compared to the previous year. Communications and media sector FDI levels almost doubled compared to 2020while the renewable and alternative energy sector, which was too the largest growth sector in 2020, has continued thrive, growing 36% in 2021. These levels of growth have resurrected the renewable and alternative energy sector to now be the eighth largest FDI sector, surpassing the non-renewable sector.

(Graph 3: Top 10 FDI sectors by number of Greenfield FDI projects, 2021)

The growth of the renewable and alternative energy sector demonstrates once again the importance placed on sustainable FDI by investors in 2021. This sector is also experiencing significant growth due to its ability to combat inflationary prices of public services which have exerted significant pressure on consumers and businesses.

The growth of the communications and media sector is largely due to the boom in technological developments as well as the growth of home-based employment. An increase in 5G projects, points of presence and edge locations as well as continued data center builds have all pushed the sector to become the third largest FDI sector, closely following business and professional services.

The software and computer services sector is once again the leading FDI sector. Despite the significant decline in the number of projects of 24% that we saw in 2020, the sector saw high levels of growth in 2021, with the total number of projects increasing by 29%, allowing the sector to return to its pre-levels. the pandemic.

Leading companies in greenfield investments

The COVID-19 pandemic and its effects on consumer trends influenced new FDI projects in 2021. The surge in online shopping caused by the pandemic had several implications for leading FDI companies by number of projects in 2021.

It’s no surprise that online retail giant Amazon was the world’s top investor in 2021, creating 241 projects. Many projects focused on continuing the company’s consumer-oriented logistics. However, the company has also continued to diversify into new sectors over the past year, the most notable being renewable energy.

(Graph 4: Top FDI companies by number of projects, 2021)

We have also seen companies grow at a rapid pace in 2021. For example, CSL, an Australian biotechnology company, grew by 1,150%. This is attributed to the company opening plasma centers in 2021 in the United States through its subsidiary, CSL Plasma. This influx of projects after a quiet 2020 has resulted in exponential growth for the company.

Tesla also returned to the ranks of top investors in 2021. The company had a significant number of FDI projects, opening service centers in Asia, Western Europe and Canada. The company also recorded significant levels of FDI projects related to manufacturing, R&D and sales operations.

The future of greenfield investments

As mentioned earlier, there are still worries about what the future holds for Greenfield projects. While we saw significant increases in 2021, 2022 brought several issues for businesses. The growth trends we are currently seeing in creative investments could stagnate due to factors such as continued supply chain disruptions, changing consumer demand patterns and ongoing geopolitical issues.

These issues all indicate that we are most certainly seeing a decline in greenfield investment levels in 2022. However, the 2021 levels we have just seen have proven that FDI is resilient, and despite the expected declines in 2022, we could expect another quick rebound in 2023. .

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