Greenfield foreign direct investment acts as a venture into markets in other nations, one of the numerous alternatives for businesses in search of chances to expand to emerging marketplaces (Stepanok, 2015). As an alternative, acquisition of a local firm is the process of acquiring a business that offers services or goods to the population in a given region within a particular country in an effort to boost the success of the acquiring company. Some of the benefits of the local firm acquisition are gaining access to an already established market and having skilled employees at hand. On the other hand, some of its drawbacks are that it may result in conflicts and decreased productivity. The benefits of greenfield foreign direct investment encompass enhanced control, the capacity to create marketing affiliations, and the prevention of intermediary outlays.
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Advantages of Greenfield Foreign Direct Investment
The fundamental benefits of greenfield foreign direct investment emanate from the existence of a great extent of direct management of the operations (Stepanok, 2015). Companies that venture into a foreign market via greenfield investment manage all aspects involving the services and goods they trade, for instance, the quality of goods and services, the level of production, and the degree of spreading out their presence. Such companies have the alternative of starting their endeavors on a small scale and progressively boosting their success in the market or getting ready in advance for a large-scale venture. Greenfield investment facilitates an easy and successful adaptation in foreign markets as both pricing and products may be acclimatized to existing demands.
Greenfield foreign direct investment has the disadvantage of being extremely expensive or suffering an approach to funding that is exceedingly costly in the short term (Blonigen & Piger, 2014). Similar to the case of a local firm acquisition, harmonizing dissimilar corporate cultures in the process of greenfield investment is, at times, traumatic. The management of a post-establishment practice is frequently typified by downscaling to attain economies of scale and range in overhead tasks. This leads to ineffective influences on the company as people endeavor to retain their positions. Globally, further challenges emanate from governments’ involvement in funding, prices, job assurances, and market operations, as well as of patriotism and prejudice. Unlike the case of a local firm acquisition, the capacity to accomplish greenfield foreign direct investment may be hindered by insufficient knowledge of functions in the host nation. This occurs even when the managerial team has adequate experience in the operation of foreign businesses.
Advantages of Local Firm Acquisition
The local firm acquisition offers the capacity to sharpen production, marketing, and quality skills. Other pros of local firm acquisition encompass boosting the significance of the shared entity through eradication of redundancies and increment of profit. A company can also benefit from the operations that it can control successfully with its other services and goods. In contrast to greenfield foreign direct investment, the local firm acquisition enables the company to acquire existing expertise and business practices, which might otherwise have been tough to develop (Ahammad & Glaister, 2013).
Moreover, it allows easy access to talented workers and executives and is devoid of the need to take part in a comprehensive search and recruitment progression. On the same note, the company gets instant exposure to an established market, a huge customer base, and the chance to reach a large audience while minimizing risks and monetary outlay required for fresh development. Furthermore, local firm acquisition assists companies in tapping into new and emerging markets in a manner that may speed up growth if done meticulously. Full possession of a local firm enables companies to offer discounts and warranties to clients, which enhances customer loyalty for facilitated success.
Despite its numerous benefits, a local firm acquisition also offers considerable drawbacks. For instance, it could be hard to execute and might result in decreased worker productivity as well as failure to satisfy the anticipation of stakeholders. A local firm acquisition may also generate likely conflict involving a company’s corporate culture and that of the business that is to be acquired (Ahammad & Glaister, 2013). There could also be disagreements between workers in both businesses. For example, the employees in the firm that is to be acquired might develop a feeling that their jobs may be on the line (and their worries might even be reasonable). In this regard, the company might suffer monetary fallout attributable to the interruption of workflow and greater than expected outlays for acquisition over and above an unproductive labor force in the event the workers oppose the practice. In addition, a local firm acquisition may result in huge debts if the company borrows funds to carry out the acquisition. This could limit the ability of the company to borrow additional money to undertake other business objectives.
Greenfield foreign direct investment occurs as a venture into markets in other nations. In greenfield investment, the parent company creates its auxiliary businesses in foreign countries. Through greenfield investment, a company manages all aspects of its services and goods, for example, quality, the rate of production, and the extent of developing its presence. On the contrary, greenfield foreign direct investment has the drawback of being exceedingly expensive or suffering a practice that is overly costly in the short run. Unlike greenfield foreign direct investment, acquisition of a local firm facilitates the company’s ability to obtain existing proficiencies, which may otherwise have been demanding to develop. In contrast, a local firm acquisition has the disadvantage of being hard to accomplish and could cause decreased employee productivity in addition to the failure to gratify the anticipation of stakeholders.
Ahammad, M. F., & Glaister, K. W. (2013). The pre-acquisition evaluation of target firms and cross-border acquisition performance. International Business Review, 22(5), 894-904.
Blonigen, B. A., & Piger, J. (2014). Determinants of foreign direct investment. Canadian Journal of Economics, 47(3), 775-812.
Stepanok, I. (2015). Cross‐border mergers and greenfield foreign direct investment. Review of International Economics, 23(1), 111-136.