What are the advantages and disadvantages of serving a foreign market through a greenfield foreign direct investment compared to an acquisition of a local firm in the target market?

Question

What will be an ideal response?

Answer 1

Answer: A greenfield investment is defined as establishing a production or service facility starting from the ground up, i.e., from a green field. Compared to greenfield investment, a cross-border acquisition has a number of significant advantages. First and foremost, it is quicker. Greenfield investment frequently requires extended periods of physical construction and organizational development. By acquiring an existing firm, the MNE can shorten the time required to gain a presence and facilitate competitive entry into the market. Second, acquisition may be a cost-effective way of gaining competitive advantages such as technology, brand names valued in the target market, and logistical and distribution advantages, while simultaneously eliminating a local competitor. Third, international economic, political, and foreign exchange conditions may result in market imperfections, allowing target firms to be undervalued. Many enterprises throughout Asia have been the target of acquisition as a result of the Asian economic crisis's impact on their financial health. Many enterprises were in dire need of capital injections for competitive survival.
Cross-border acquisitions are not, however, without their pitfalls. As with all acquisitions–domestic or international–there are the frequent problems of paying too high a price, or suffering a method of financing that is too costly. Meshing different corporate cultures can be traumatic. Managing the post-acquisition process is frequently characterized by downsizing to gain economies of scale and scope in overhead functions. This results in nonproductive impacts on the firm as individuals attempt to save their own jobs. Internationally, additional difficulties arise from host governments intervening in pricing, financing, employment guarantees, market segmentation, and general nationalism and favoritism. In fact, the ability to complete international acquisitions successfully may itself be a test of the MNE's competence in the twenty-first century.