We're talking about foreign direct investment and remember, this is when a firm goes all in in a new foreign location and establishes operations in that new foreign location. So it turns out there's a couple of different ways that an organization can approach foreign direct investment. They can either do it through what's known as a Greenfield development or they can do it through making an acquisition, by acquiring an existing organization that's already operating in that foreign location. So, I want to talk about each of those two and the distinctions between them. First, let me talk a bit about the Greenfield development. This is when a firm creates a new entity in that new foreign location from scratch. We start up the organization, we build the building, we do everything we need to do from ground zero. So what are the advantages of pursuing a Greenfield development as a way of entering and going all in that new foreign location? Well, there are several advantages. First of all, it does give you the greatest control over technology, over marketing, over distribution. So it does afford you essentially the greatest control. You can start up that new organization exactly like you want it. You can build the building exactly like you want it, right? And that also suggests that the operations can be expanded incrementally as the firm learns and grows. In other words, if we're gonna go with a Greenfield development in a new foreign location, we could start small, we could build a small plant or a small facility or a small store. And we could sort of see how that goes, learn some things and we could expand it over time. So a Greenfield development does allow that luxury of sort of entering slightly smaller and building the size of your operations over time. When you enter via a Greenfield development, it also minimizes the risk of appropriation by others, by competitors or even by strategic partners. Why is that? It's because you're keeping everything in house. You built this new operation, you've got it going, and you're operating it as a direct division of potentially of your domestic organization. So there aren't all of these opportunities for others to observe what you're doing and learn from your capabilities and therefore appropriate the value from you. So, those are the potential advantages. There are some potential disadvantages to going with a Greenfield approach to foreign direct investment. First of all you need to acquire all kinds of expertise relevant to that new foreign location. In other words, you don't need to know just how to conduct business operations there, you need to understand how to establish business operations there. There're business licenses you need to acquire, or what are the real estate complexities? So all of these things, these startup lessons that you need to learn, that raises the bar for local knowledge. You'll need to acquire that additional expertise. And, of course, while you're doing all of that, that limits your ability to sort of engage in local responsiveness. If you're focused on starting up your operation and building it in that ramp-up phase, it's gonna be harder for you to adjust your product or your service, your mix, characteristics of the things you offer, in a way that's responsive to local needs. So again, with a Greenfield development, there are some pros and there are some cons. What about the alternative? The alternative to a Greenfield approach is making an acquisition. This is where a firm acquires a firm that's already established in that new foreign location. So, what are the advantages? Well It enables you to sort of make a more rapid entry, right? You don't have to do all of those startup things and build the building and everything else that you might be required to do in a Greenfield. Here you're just targeting, finding a local firm who's already in your industry and you're just acquiring them. So that might be a quicker way to get in that new foreign market. The appropriation risks that I spoke of a moment ago are still somewhat limited. Once you acquire that new firm, it's part of you. And, again, you don't have to worry so much about partners or competitors, right? And finally this perception, what's perceived as the liability of foreignness might be overcome more easily by acquiring a local firm that's already operating. They might have existing customers that are gonna stay with you just because we've changed the name on the building or the label on the goods, right? You might also be able to acquire that existing firm's political influence. They've figured out the tariff and the taxation, the regulation regime and that new foreign location and so you can sort of buy all of that and acquire that expertise as well. So these are potential advantages of pursuing an acquisition strategy to enter a foreign market. What are the downsides? Well, there are some downside risks. First of all, it can be very costly to acquire a foreign firm. I mean, in general, acquisition strategies are fraught with failure. Oftentimes, they don't work out very well. And, oftentimes, that's because the acquiring firm over pays. So, it can be very costly to do that. And that's something to consider. It usually requires complex and costly negotiations. So again, the process of negotiating with that target to acquire them can be a long and drawn out thing and that can take a lot of time and energy. And finally, even if we're successful in acquiring that firm in the financial transaction, it's awfully difficult to merge the cultures of these two organizations. It's a difficult thing to acquire an existing operation and turn them into a division of your operation. So there's some risks there as well. Some upsides and some downsides, but those are the two modes of foreign direct investment, either a Greenfield approach, building it from scratch or an acquisition approach, where you acquire a local, established firm that's already in that market. And there are pros and cons of each.
