Greenfield Investment or Merger and Acquisition

Greenfield investment is defined by Investopedia as “A form of foreign direct investment where a parent company starts a new venture in a foreign country by constructing new operational facilities from the ground up.” So is greenfield investment is a better choice to enter a new market in a developing country, or should the investor target an existing local company for merger or acquisition.

Nanda (2009) state that greenfield Foreign Direct Investment (FDI) can bring benefits to the developing countries while Merger and Acquisition (M&A) FDI can be harmful or have little help for the same country. FDI should promote economical growth in the developing country to be considered a useful investment.  FDI transfer physical capital to the developing country along with technology and other intangible assets (Miao & Wong, 2009). Greenfield investment should start new business that help the developing country to grow, however, some of the investments are oriented mostly toward benefiting the investor (Nanda, 2009). M&A investments should be welcomed in the developing countries to help national ailing organization that need capital and knowhow to rise again as a competitive organization.

M&A investment is easier in developing countries because of the acquired organizations is established and operating within the local rules and regulations. The greenfield investments would need clearances from different governmental departments that could delay the greenfield investment beyond the target date (Nanda, 2009). Nanda (2009) state that China has more stringent regulatory regime than India but China is faster in approving or disapproving FDI projects. This simple fact is believed to be one of the reasons that made China more economically successful than India (Nanda, 2009). A study based on 84 countries from 1987 to 2001 by Miao & Wong (2009) showed positive growth effect from the greenfield investments while the M&A had negative effect. Furthermore, M&A investments required a minimum level of human capital to have positive impact on the developing country’s economy, but the Greenfield investment does not need that level of human capital to be effective (Miao & Wong, 2009). Muller (2007) had more accurate segmentations on the choice of entry mode in the developing countries. Muller (2007) suggest that Greenfield investments is best used if the competition in the local market is either high or low, but acquisition would be the best choice if the completion is intermediate.

Also read in this blog: Mergers and Acquisitions: How Good Are They?

References:

Nanda, N. (2009). Growth effects of FDI: Is greenfield greener? Perspectives on Global Development & Technology, 8(1), 26-47. doi: 10.1163/156914909×403171

Miao, W., & Wong, M. C. S. (2009). What drives economic growth? The case of cross-border M&A and greenfield FDI activities. Kyklos, 62(2), 316-330. doi: 10.1111/j.1467-6435.2009.00438.x

Muller, T. (2007). Analyzing modes of foreign entry: Greenfield investment versus acquisition. Review of International Economics, 15(1), 93-111. doi: 10.1111/j.1467-9396.2006.00634.x