Fdi and Greenfield Ventures

An organisation entering a foreign market via foreign direct investment (FDI) has the choice between acquiring an existing plant (mergers and acquisitions), or setting up an entirely new plant (greenfield investment), according to Holger (2000: 165). He elucidates by stating that certain company characteristics and market characteristics exist, which affect the choice of entry strategy (Holger, 2000: 166), and that the results depend on the scale of the marginal and additional cost parameters, which may differ across host countries (Holger, 2000: 177). Ahammad and Glaister (2008: 89) observed that mergers and acquisitions are more beneficial the greater the organisational and managerial skills of a firm, while greenfield operations are more desirable the greater the technological skills of the firm.

Although the simplest definition of a greenfield operation would be the establishment of a new business in a foreign country, Hipsher (2008: 108) explains that greenfield operations are mainly subsidiaries or extensions with bonds to a company or enterprise in the home country of the owner. He further elaborates that even if a company is built on experience and expertise gained from running a domestic company and shares similar characteristics, but is completely without any ties to any company in the home country, it is still classified as a greenfield operation. Investments and Income.com (2011:1) explains on their website that the primary objectives of greenfield investments are the host country’s promotional efforts, due to creating new production capacity and jobs, transfer technology and know-how, which can lead to linkages to the global marketplace.

However, they cautions that the host country often does this by crowding out local industry, as multinationals are able to produce goods more cheaply because of advanced technology and efficient processes, and uses up resources such as intermediate commodities, labour, etc. They also mention that another disadvantage of greenfield investments is that proceeds from production do not relay back into the local economy, but instead to the home economy, which is in contrast to local industries whose profits flow back into the domestic economy and promote growth.

Nevertheless, countries encourage greenfield operations as much as they do mergers and acquisitions as it also holds its own benefits for the country. Ahammad and Glaister (2008: 90) indicated that companies have continued to rely on greenfield investments in industries where they have superior competitiveness. Shuler-Zhou and Schuller (2009: 27) specify that greenfield investments holds the advantages of being the preferred mode of entry as it is the most effective way to transfer the investing company’s competitive advantages to foreign markets and to introduce the firm’s best practices.

Conversely, Shuler-Zhou and Schuller (2009: 27) also believe that through an acquisition a firm