What is Brownfield Investment
The term “brownfield investment” refers to those type of foreign direct investments in which an established company ventures into a new market by investing in an entity that already has an existing facility. Effectively, a brownfield investment can be seen as the purchase of a pre-existing facility in a foreign country. This type of investment strategy helps the investing company to establish itself very quickly in the foreign market. Foreign direct investment refers the investment that a company or individual makes in a country other than their home country.
Explanation of Brownfield Investment
In the case of foreign direct investment, companies usually prefer to go for brownfield investment. Brownfield investment means the purchase or lease of pre-existing facilities in a foreign country.In some cases, the investing companies are required to purchase additional equipment, while in other cases they need to upgrade the existing equipment. Nevertheless, in both cases, it is often more cost effective than setting up a new facility from scratch, which is the case with greenfield investment. The only condition that needs to be fulfilled for brownfield investment is that the previous use should be akin to the new intended use. Please note that while the addition of new equipment is considered to be part of a brownfield investment, the addition of new facilities to complete production is considered to be part of greenfield investment.
Real Word Examples of Brownfield Investment
Now, let us look at some of the very famous brownfield investment:
1. Vodafone’s acquisition of Hutchinson Essar
Headquartered in london (england), vodafone group plc. is a british multinational telecom company. on the other hand, hutchinson essar ltd., which was india’s fourth largest mobile operator, was a jv between hutchison max telecom ltd. and essar group. In 2007, vodafone acquired a majority stake in hutchison essar by purchasing a controlling stake in it at a purchase consideration of $10.9 billion. In this way, vodafone group was able to venture the indian telecom market through an established player. During that time the indian telecom market was quiet large with close to six million monthly subscribers and was growing at a rapid rate.
2. Tata motors in the United Kingdom
Headquartered in mumbai (india), tata motors ltd. is an indian multinational automotive manufacturing company. it is one of the leading manufacturers of commercial vehicles in india. On the other hand, jaguar land roverautomotive plc. Was operating as a british subsidiary of ford motor company. in 2008,tata motors acquired jaguar land rover in an all cash transaction worth $2.3billion. In this way, the indian automaker was able to get the property rights, authorization to setup a manufacturing plant in the united kingdom along with two design centers.
Importance of Brownfield Investment
The inflow of foreign direct investment has the potential to significantly boost the economic growth of any country as it facilitates the healthy accumulation of capital along with the transfer of technological knowledge and expertise. Furthermore, the inflow of foreign direct investment can also indirectly influence economic growth by fostering financial development. Now, brownfield investments is one of the two ways to attract foreign direct investments that can dictate all the above mentioned positive changes in a country.So, it is imperative that the policymakers should consider the positive impacts of brownfield investments on an economy and take all the required institutional and economic measures in order to attract such brownfield investments.
Advantages of Brownfield Investment
Some of the major advantages of brownfield investment are as follows:
- It provides quick access to the investing company in a new foreign market.
- It requires a lower cost of establishment as it involves the acquisition of entities with pre-existing established infrastructure, facilities, and network.
- Since it largely employs the existing manpower of the previous entity who are already familiar with the setup, the staffing and training costs are relatively lower.
- In some industries, regulatory approvals and government licenses are required upfront. In such cases, brownfield investments are very useful as all the approvals and licenses are already in place.
- In case, the newly acquired entity doesn’t require any major investments, in terms of modifications or up-gradation of existing facilities, then a brownfield investment can be a lucrative option vis-à-vis a greenfield investment.
Disadvantages of Brownfield Investment
Some of the major disadvantages of brownfield investment are as follows:
- In case, the newly acquired entity requires a major facelift in the name of machinery upgrades, then brownfield investment can prove very costly investment as compared to a greenfield investment.
- The pre-existing facilities might be outdated, which might result in higher maintenance and running cost.
- If the existing facilities are operationally inefficient, then these facilities can’t even be modified to cater to the new production requirements.
- The already constructed facilities might have scalability and expansion related issues.
- The sites for brownfield investment may be contaminated with hazardous waste due to the previous usage and this would require high clean-up cost.
- There is a risk of local issues for a company venturing from outside.
- There is a risk of unprecedented issues pertaining to taxation or regulatory clearances.
So, it can be seen that brownfield investments are a very important investment strategy that may companies use while participating in foreign direct investment. Although there are several risks and limitations of brownfield investments, but if it is implemented with proper due diligence and investigation, then it can very beneficial for the investing company as it facilitates easy access to any foreign market.
This is a guide to Brownfield Investment. Here we also discuss the introduction and importance of brownfield investment along with advantages and disadvantages. You may also have a look at the following articles to learn more –