When considering international business expansion, there are multiple ways to enter foreign markets. Businesses can opt for direct export licensing, hire international agents, enter joint ventures and strategic alliances, or make foreign direct investments (FDI). Within FDI there is a form of direct market entry strategy known as Greenfield Ventures or Greenfield investments.
Greenfield investments are when a business strategically establishes a wholly owned subsidiary in a foreign market by constructing its facilities from the start. This means investing in projects that bring them full control over the FDI and offer them the freedom to set prices for their products. These investments are coined as greenfield investments, eliminating the need for intermediaries.
What is a greenfield investment?
It’s a form of FDI in which a business establishes a new business operation, a working office space, a factory, or a facility from scratch in a foreign country.
Greenfield investments refer to a form of FDI where there is a parent company establishes its subsidiary in a foreign country. They expand their business operation abroad by also creating brand new jobs and facilities from the ground up. The term comes from the action of a business launching a venture from the ground up, signifying plowing and preparing a green field.
How are greenfield investments different from other modes of international expansion?
It’s different from other forms of FDI, such as mergers and acquisitions. In Greenfield investments the business is involved in creating an entirely new entity, not acquiring an old one. This can mean a new retail front, manufacturing unit, R&D centers, etc.
a. Firstly, Greenfield investments require more time, and resources, and come with a greater risk than other modes such as licensing or exporting. In the latter, a business relies on existing local partners to access the foreign market.
b. Secondly, in greenfield investments there is more autonomy and decision-making power within the business. Different from an M&A where a business must share the ownership or control with a local partner.
c. Lastly, greenfield investments allow businesses to customize their operational requirements like product design, marketing strategy, business processes, etc. They do not need to adapt these to the practices of a local partner.
Global brands making greenfield investments
Let’s learn about how some of the leading global brands are practicing international market expansion with greenfield investments:
1. Tesla’s Gigafactories in China
One of the most spoken-about examples of greenfield investments in our modern business world is Tesla’s massive investment in China for its Gigafactories. This has become a global case study across business schools to inspire managers towards strategic decisions.
What?
A Tesla Gigafactory is essentially a giant manufacturing unit that involves the production of its EVs, batteries, and other parts. The brand made this strategic move to scale its operations from production of parts to assembly of the vehicle.
Why?
A key reason for Tesla to establish a greenfield investment in China for its brand-new factory operations was lower costs and scaled production feasibility. The brand announced in 2018 a new investment in China after having an existing factory within the US. Today, the Tesla Gigafactory in China is a fully owned foreign manufacturing unit representing a key milestone for global expansion for the EV giant.
Tesla made the strategic move considering:
i. Low costs of production in China
ii. China’s growing EV market, with experts in the domain available in the country.
iii. Leveraging the country’s already established supply chain manufacturing processes in the EV sector.
This move has become a cornerstone for the brand’s partnership efforts and its increasing network plans that have significantly contributed to its overall success. Tesla at the same time offered China a growth sprout in the EV sector by:
– Setting up a manufacturing plant using Chinese resources
– Generating several new factory-level and executive-level jobs for the locals
– Hiring experts in the domain to work with the US team and in US offices
With this investment, Tesla recognized the need for the brand to expand its global reach and accelerate the rapid transition towards EVs.
2. Weber’s greenfield investment in Poland
Weber is an American outdoor cooking business that opened its brand-new manufacturing hub in Poland in 2021. This is a 50,000-meter facility in Southern Poland that is aimed to enhance Weber’s market entry into European markets. Offering its clients speedy delivery and service.
What?
The factory is a state-of-the-art facility that brings the brand’s outdoor cooking product innovations to Europe. The factory manufactures high-quality barbeque products in Europe like barbeque grills. The manufacturing facility also comes with the Weber Grill Academy Experience Center and green space areas for its members to enjoy.
This experience center offers European clients now access to hands-on learning space for learning the skills and art of barbecuing, culinary classes, interactive chef’s table sessions, private parties, corporate team-building sessions, and more.
With its latest innovation, technology, and product, Weber opened a new BREEAM-certified facility in Zabrze, Poland. Bringing a boost to the local economy with job opportunities, growth, and the latest technology in manufacturing processes.
Why?
The main point is to bring the manufacturing and barbeque experience closer to its clients.
Chris Scherzinger, CEO of Weber then said to Business Wire in an interview “A key element of our growth plans includes our ‘Make-Where-We-Sell’ strategy. This approach focuses on manufacturing high-quality Weber barbecue products closer to our retail customers and consumers, improving our delivery and service speed. We also gain considerable efficiencies operationally and a new level of flexibility to respond and react to local market dynamics and needs.’’
This is Weber’s first manufacturing unit outside of the states which is a greenfield investment example that has stimulated the local economy in Southern Poland.
Other examples:
1. Hyundai Motor’s greenfield investment in Nošovice
Hyundai Motors made a strategic investment in the Czech Republic in 2006 to open a new manufacturing plant. It employed close to 3,000 new employees within its first year of operations. It is known that the Czech Republic Government provided tax relief and subsidies to Hyundai Motors to prompt the greenfield investment. Aiding them to boost the country’s economy and lowering the unemployment rate.
2. Google Data Center in Finland
Google made a key greenfield investment in Finland for making one of its Data Centers. Data is the prime service at Google for which the brand employs a vast cloud infrastructure support. These data centers essentially store the brand’s data in a structured and well-scientifically engineered manner. In Finland, Google made use of the country’s naturally cool temperatures to reduce energy resource consumption. Lowering the carbon footprint. Google worked with renewable sources of energy like wind energy to support its data center’s energy needs.
If we can take away one key point from each of these examples, it’s the extensive strategic planning behind each greenfield investment. These global brands have conducted relevant research, assessing many factors like climate change, sustainable solutions, local economy, job market situation, government policies, labour costs, etc. Making informed decisions about the operation location not only helps them save costs but also makes a societal and economic impact in the local economy.
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