Assignment No.

04

Submitted To: Sir. Qazi Shujat

Submitted By: Sohaib Anjum (FA09-MBA-041)

Aman-U-Allah (FA09-MBA-099)

Mashood Karam Shah (FA09-MBA-076)

Fahad Khan (FA09-MBA-060)

Topic:
Greenfield or Acquisition?

Dated: July 06, 2010.

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 Table of Content

Sr. Title Page No

1. Greenfield investment 3

2. Acquisition 3

3. Pros and Cons of Greenfield Venture 3

4.Greenfield or Acquisition 4-5

5. Figure for Greenfield or Acquisition 6

6. Case Study 7

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1.Greenfield investment:

Greenfield is the establishment of new business in a foreign country. A form of foreign direct
investment where a parent company starts a new venture in a foreign country by constructing
new operational facilities from the ground up. In addition to building new facilities, most
parent companies also create new long-term jobs in the foreign country by hiring new
employees.  Developing countries often offer prospective companies tax-breaks, subsidies and
other types of incentives to set up green field investments.

Example of Greenfield-- Hyundai Motor Company goes ahead with a major Greenfield
investment in Nosovice in the Moravia-Silesia region of the Czech Republic. The company plans
to open a new manufacturing plant, which should begin operations in October 2008 and employ
3,000 people. It is expected that a further 13,000 people will find work within the supply
industry and in services. Both the Czech government and Hyundai will sign an agreement
outlining the conditions of this investment.

2.Acquisition:

Acquisition involves merger or acquisition in a foreign country with an existing firm. It is firm’s
strategy of buying capital, technology, assets and firm’s management of various companies to
grow quickly in a foreign country.

Example of Acquisition— The big example is CEMEX, that is the world’s third largest cement
company. CEMEX’S rise to global status took less than a decade and has been driven primarily
by acquisition. If CEMEX relies on Greenfield it could not become so large so fast.

3.Pros and Cons of Greenfield Venture

Developing a greenfield site or territory is an opportunity not without a challenge. That challenge
becomes even greater when the greenfield territory or site is part of a new, developing area. It
has some pros and cons.

•Pros:

-Can build subsidiary it wants

-Easy to establish operating routines

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 -It will have its own new strategic plans, technical assets.

-Strategy may be made for business, from its parent country, after some commitment with the

host country, by keeping in mind the cultural, social aspect and consumer taste and

preferences.

 Cons:

- Slow to establish

- Risky, because they have no proven track record.

- Preemption by aggressive competitors

- Political instability can make adverse effect on greenfield investment.

- New firm may fails to meet the demand and requirement of the country, if it fails know
the demand of the people. That causes a great loss. Because the firm has invested huge
amount.

- Can be problematic if a competitor enters via acquisition and quickly.

4.Greenfield or Acquisition?

It is very difficult to choose either Greenfield or acquisition. Because, both ventures has some
advantages and disadvantages. As the green field is slower than, while acquisition is quick to
execute. In fact the choice depends upon the circumstances and factors that influence the activity
and make difficult choice for the firms either they go for Greenfield or acquisition. We will
discuss both either the firm choose Greenfield or acquisition.

Greenfield—

 Firms that have competitive advantage on technical know-how, management skills, and
core competencies and know the culture of that country (where they go for investment)
can make Greenfield. For example, firms such as McDonald’s prefer to Greenfield rather
than acquisition.

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  When the firm is considering entering the market, where there are no potential or existing
competitors, then the firm can enter the market with green field investment. Although, it
is slow to establish, but it is beneficial for the firm because it grows with low risk and
with its own physical, financial, human resources and with productive employees.
 When markets are very much or very little competitive, greenfield investment is the
optimal entry mode, while for intermediate values it is acquisition.

Acquisition—

 If the firm is seeking to enter the market where there are already established firms and
where global competitors also interested in establishing a business. The firm will have
to enter in that market with acquisition. In this way firm can compete with its rivals.
 Firms could prefer to acquisition in such a case, when foreign firm has strategic assets,
brand loyalty, customer relationship, trade mark or patent, distribution system and well
production system.
 Merger and acquisition are quick to execute than green field, so firms prefer this
strategy to acquire the business. For example- Zong acquire the business with its
telecommunication equipments of Paktel, and quickly execute their business in at a very
low price in Pakistan.
 Acquisition is better, when a foreign firm has high technology, technical assets and
skilled labor. Its better to acquire that business rather than green field.

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Figure1.0 Green field Or Acquisition?

Well
established,

Acquisition

Competitors
interested in
entry.

Embedded
skills,
Greenfield

No Competition

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6.Case Study: Hyundai plans major greenfield investment.

Hyundai Motor Company goes ahead with a major greenfield investment in Nošovice in the
Moravia-Silesia region of the Czech Republic. The company plans to open a new manufacturing
plant, which should begin operations in October 2008 and employ 3,000 people. It is expected
that a further 13,000 people will find work within the supply industry and in services. Both the
Czech government and Hyundai will sign an agreement outlining the conditions of this
investment.

After several months of negotiations with the government of the Czech Republic, Hyundai Motor
Company will go ahead with a greenfield investment worth CZK 28–30 billion (€0.98–€1.06
billion) in the Moravia-Silesia region in the northeast of the Czech Republic. This represents the
largest investment in the Czech Republic’s modern history. ‘The Czech Republic is the right
place for our project. After commencing production, we intend to produce 300,000 cars a year’,
commented the vice-president of the company, who indicated that initial works on the
construction of the factory should commence by mid 2006.

Over the coming weeks, the Czech government (Vláda Ceské republiky), the committee of the
region of Moravia-Silesia and Hyundai’s board of directors will finalize the wording of the
agreement; specific aspects of the investment agreement will only be published once it is signed
in mid May. According to the Ministry of Industry and Trade (Ministerstvo prumyslu a obchodu
CR), Hyundai can expect subsidies amounting to CZK 4.3 billion (€151.5 million) as well as tax
relief of CZK 1.3 billion (€45.8 million); if the company’s investment exceeds one billion euro,
tax relief may be even higher.

Economic impact
Hyundai’s investment will impact positively on the economic development of the region of
Moravia-Silesia, as well as on the overall economic growth of the country. It is expected that the

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investment will significantly help curb unemployment – by up to 2.5% in Moravia-Silesia – and
increase state revenue. The effect on the country’s gross domestic product (GDP) will be
substantial: according to economic analyses, nominal GDP should grow by up to 2.5% once the
manufacturing plant attains its full production volume. As a result, Hyundai’s investment could
improve the Czech foreign trade balance by about CZK 54 billion (€1.9 billion).

According to company representatives, Hyundai chose the Czech Republic for several reasons,
including:

 The country’s long industrial tradition;

 An already existing good technology base;
 A highly-qualified Czech workforce.
 Prerequisites guarantee the company an ideal strategic base in the country.

The automobile industry is one of the main drivers of the Czech economy: today, it is one of the
leading European countries with regard to the number of automobiles produced per capita. In
2005, the Czech Republic reached a peak in manufacturing by producing almost 600,000 cars
(excluding industrial vehicles) for the first time in its history; in the coming years, annual
production should exceed 1.2 million cars, according to some estimates.

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