If you have been doing some research on the topic of foreign direct investments, you may have come across the term greenfield investment. However, what exactly are greenfield investments?
FDI into a host country can take many forms, including mergers and acquisitions (M&A), greenfield investment—that is, starting new businesses in foreign countries from scratch—and extending domestic capital. Each type of FDI brings distinctive benefits to the host countries’ growth and welfare but also poses its own unique set of risks and dangers
Greenfield refers to investments where a parent company establishes a subsidiary in a foreign country. Specifically, Greenfield FDI is when companies set up or expand their business operations abroad, creating brand new jobs and/or facilities from the ground up—as opposed to mergers and acquisitions, which occur when one company buys another.
The term greenfield comes from the action of the company launching a venture from the ground up, essentially plowing and prepping a green field. An investment in a greenfield project gives the parent company the greatest control over its investment.
Benefits and Risks of Greenfield Investment
Any investment comes with risks and benefits. It is often the case that greenfield investments are riskier than other investments, but they also yield higher returns.
A greenfield investment affords the investor greater control over a business than does investing in an existing local firm. The investor can develop an overarching strategy by deciding what product or service to sell, determining rates of production and the pace of expansion in its target market. It wouldn’t usually have such freedom of action if it were to invest in an existing local business. Foreign market adaptation is easier and more effective with greenfield investments. Investors have greater control over product quality and can adapt products and pricing to local conditions
Greenfield FDI has a significant effect on a country’s economic growth, which is why governments highly prize such investments. These investments create new jobs and/or facilities. They tend to be long-term and involve large, strategic investments by corporations that are intended to last indefinitely or until another company takes over the facility. Furthermore, when a greenfield investor establishes a presence overseas, it creates both direct and indirect employment. A company’s direct employment is the number of jobs created by its operations, while indirect employment is the number of jobs generated by other companies in the supply chain after a foreign investor makes an initial investment.
However, greenfield investments carry a lot of risks for a parent company. Aside from the high fixed costs involved in building facilities from scratch, entry barriers can be high as well, such as local content requirements that require foreign firms to use domestic products or services to conduct business. Many companies considering these projects invest heavily in research and planning to ensure that they are feasible, cost-effective choices.
Benefits
- The Investor has complete control over the operations,
- The projects can bring tax breaks and financial incentives,
- Everything is done according to specifications and regulations of the foreign government,
- It boosts the earning capabilities of the parent company,
- The brand image of the parent company expands in international markets.
Risks
- Higher fixed cost,
- Projects are more complex, and often require special skill sets,
- To get Return on Investment, investors need to make a long-term commitment
- The projects are time-consuming for the parent company,
- Vulnerable to political instability.
Greenfield investment trends in 2022
Greenfield foreign direct investment (FDI) projects are once again on the rise. With economies beginning to reopen, investors responded quickly, and there was a strong rebound in global FDI levels. According to The Global FDI Annual Report 2022, produced by Global Data/Investment Monitor, there were a total of 16,516 greenfield FDI projects in 2021, growing by 18%. This is just below the pre-pandemic levels of 16,965 projects in 2019.
(Graph 1: Number of Greenfield FDI projects, 2019-21)
However, there are still worries about what the future will hold for Greenfield projects. 2022 brought several issues for companies to face, from supply chain disruptions, changing consumer demand patterns and lingering geopolitical issues, all of which may stall the growth of greenfield investments we are seeing.
Another trend we saw in 2021 was a growing number of businesses becoming more aware of their sustainability performance. New environmental, social and governance (ESG) goals have become front and center for many companies, and the past year showed a significant increase in the presence of sustainability in their annual report fillings.
(Graph 2: Number of Greenfield FDI projects in SDG aligned areas, 2020-21)
Sustainability has been a key issue for companies globally, as the effects of climate change are becoming more evident, companies are beginning 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 rise in sustainable investments over the past few years. Greenfield investment in sectors relevant to sustainable development goals (SDG) rose by 39% from 2020, proving the continuing progression towards sustainable investments.
Greenfield FDI Sector Trends
Most sectors saw a rise in FDI in 2021 – 26 of the 34 global FDI sectors experienced growth. Communications and renewables have had the most significant growth compared to the year prior. The communications and media sector FDI levels have almost doubled those of 2020, while the Renewable and alternative power sector, which was also the largest growth sector in 2020, has continued to thrive, increasing by 36% in 2021. These levels of growth have risen the renewable and alternative power 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 in the renewable and alternative power sector once again demonstrates the importance that was placed on sustainable FDI by investors in 2021. This sector is also growing significantly due to its ability to combat the inflationary utility prices that have been a significant strain on consumers and companies.
The growth of the communications and media sector has been largely due to the rise in technological developments as well as the growth of work-from-home employment. A surge in 5G projects, points of presence and edge locations as well as continued data centre constructions have all pushed the sector up to bring the third largest FDI sector, closely following business and professional services.
The Software and Computer Services sector once again remains the leading FDI sector. Despite the significant drop of projects numbers by 24% we saw in 2020, the sector experienced high levels of growth in 2021, with total projects increasing by 29%, allowing the sector to regain its pre-pandemic levels.
The leading companies in greenfield investments
The COVID-19 pandemic and its effects on consumer trends influenced FDI greenfield projects in 2021. The surge in online shopping the pandemic brought has had several implications on the leading FDI companies by number of projects in 2021.
It is no surprise that the online retail giant, Amazon, was the world’s leading investor in 2021, creating 241 projects. Many of the projects were focused on continuing to drive the company’s consumer-based logistics. However, the company did also continue to diversify into new sectors this past year, the most notable being renewables.
(Graph 4: Leading FDI companies by number of projects, 2021)
We also saw companies grow at rapid rates in 2021. For example, CSL, an Australian biotech company saw growth of 1,150%. This is attributed to the company opening plasma centres in 2021 across the US through its subsidiary, CSL Plasma. This influx of projects following a quiet 2020 has resulted in exponential growth for the company.
Tesla also returned to the leading investor ranks in 2021. The company had a significant number of FDI projects, opening service centres across Asia, western Europe and Canada. The company also saw significant levels of FDI projects in relation to manufacturing, R&D and sales operations.
The Future of Greenfield Investments
As previously mentioned, there are still worries about what the future will hold for Greenfield projects. While we saw significant rises in 2021, 2022 has brought several issues for companies to face. The growth trends we are currently seeing in greenfield investments may stall due to factors such as continued supply chain disruptions, changing consumer demand patterns and lingering geopolitical issues.
These issues all indicate that we most certainly see a fall in greenfield investment levels in 2022. However, the 2021 levels we have just seen have proven that FDI is resilient, and despite the predicted falls in 2022, we could expect another quick rebound in 2023.
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