Foreign direct investment or FDI is when a business owns another business in a different country. Under this type of investment, the investing company do not simply put their money into assets in another country— which is commonly known as foreign portfolio investment. In FDI the foreign company is directly involved with day-to-day operations of the business based in the other country.
This means, user foreign direct investment, apart from funds, foreign investors also bring in knowledge, technical skills, managerial knowhow, new tech, and more job opportunities.
What is a Greenfield Investment?
In economics, a greenfield investment (GI) refers to common type of foreign direct investment (FDI) where a company establishes operations in a foreign country. Under greenfield investment, the firm that is set to invest constructs new facilities (sales office, manufacturing facility, etc.) cross-border from the ground up.
As per the definition given by the Bureau of Economic Analysis (BEA), a greenfield investment is a project “where foreign investors establish a new business or expand an existing business on U.S. soil.”
A Greenfield investment is the best way to enter a foreign market if the investing company wants to achieve the highest degree of control over foreign activities.
Other forms of foreign direct investment include the purchase of foreign securities or the acquisition of a majority stake in a foreign company in which the parent company exercises little to no control over daily business operations.
Advantages of a Greenfield Investment:
-The biggest advantage of this type of FDI is the high level of control the investor gets over business operations.
-Significant and quality control over the manufacturing and sale of products and/or services.
-Say in brand image and staffing.
-Building a business from the ground up in another country will create more employment opportunities.
-Diversity and new talent.
-Bypassing trade restrictions.
Let us define a Greenfield investment with a real life example: In 2015, Toyota Motor Corporation announced plans to establish a new manufacturing facility in Mexico through an investment of about USD 1 billion. Slated to open in 2019, the facility is expected to produce up to 200,000 units per year in conjunction with the currently established Tijuana plant.