Green Field vs. Acquisition to Enter New Country?

When businesses decide to expand their operations to another country, one of the more vexing dilemmas they face is whether to create a new operation in the foreign country using a green field investment, or to simply purchase an existing company in the foreign country through an acquisition.

While both methods will usually accomplish the goal of extending a company's operations to a new foreign market, there are several reasons why a company might choose one over the other.

Businesses may be more inclined to acquire an existing foreign business in situations where it is difficult to enter a foreign market. Buying an overseas business simplifies a lot of potentially tedious details.

For example, the purchased business will already have its own personnel — both labor and management — allowing the acquiring company to avoid having to hire and train new employees.

Furthermore, the purchased company may already have a good brand name and other intangible assets, helping the company start off with a good customer base. Purchasing a foreign company can also provide the parent company with easier access to financing, because there may be less red tape to navigate around.

Finally, if a foreign market is at or near its saturation point, buying an existing company may be the only viable way to enter.

A business may also make a green field investment if there is not a suitable target in the foreign country to acquire. A green field investment is a type of foreign direct investment (FDI) where a parent company builds its operations in a non-home country from the ground up. This is favorable in situations where businesses can gain local government-related benefits by starting up from scratch in a new country, as some countries provide subsidies, tax breaks or other benefits in order to promote the country as a good location for FDI.

A business may also choose to build a foreign subsidiary from the ground up instead of making an acquisition. Depending on the countries or companies involved, there may be serious difficulties involved in integrating a parent company with its acquisition targets. Differences in corporate culture between the two organizations, for example, can hinder effective operations.

(To learn more about acquisitions, see Mergers and Acquisitions: Another Tool for Traders or The Wacky World of M&As.)