Greenfield Investment In Host Countries Essay

2836 words - 12 pages

Greenfield investment in host countries

1 Introduction

Foreign direct investment (FDI), a most important product of economic globalization, has swept the world in the past few years. As an investment mode of FDI, greenfield investment refers to a kind of strategy that the multinational enterprises(MNEs) start new firms by constructing facilities in the host countries from the ground up (Wang & Wong, 2009). It flows to the host countries and becomes their primary source of external financing (Calderón, Loayza & Servén, 2004). Various types of incentives such as prospective tax-breaks, preferential loans and subsidies were given by the host governments in order to encourage more ...view middle of the document...

The number of problems and benefits discussed in this essay is quite limited. In addition, this essay do not used various statistic figures or mathematical models as persuasive tools to prove the opinions. Thus, if it is possible, a comprehensively analysis should be made in the future study.

2 Problems in Host Countries

This part of the essay concentrates on some realistic problems found in the host countries where the greenfield investment is used. Basically, there are three main problems including pollution, regional inequality and competition that may emerge during the process of greenfield investment.

2.1 Pollution

The first problem that should be considered is pollution caused by greenfield investment projects. This is particularly obvious when the projects are related to pollution-intensive industries or planned new foreign-owned manufacturing facilities (Keller & Levinson, 2002). When country development comes across environment protection, most countries may put the development in the priority therefore the pollution is overlooked. But actually, the pollution caused by greenfield investment will not only raise the antipathy of the local people but also influence the profits of the greenfield projects.

The pollution of greenfield firms may cause an extensive civil reaction in the state. One example of it is the Botnia case that happened in Uruguay. A company named Botnia built a gigantic pulp mill in a small town (Joutsenvirta & Vaara, 2009). The local government seems to believe that this project can bring certain great advantages to this small town while the residents there held marches against this investment and complained that this project would dirty the river, threaten their health and affect the region’s tourism (Joutsenvirta & Vaara, 2009).

Another survey also shows that incoming projects may also induce moderate impacts on pollution abatement costs of capital as well as human resources (Keller & Levinson, 2002) which may place the host countries into a dilemma as to whether these projects should be continued.

Consequently, the host countries need to re-examine the actual value of the greenfield projects and make wise decisions.

2.2 Regional Inequality

Regional inequality is another problem that can be attributing to the establishment of greenfield firms. Regional differences such as different degree of openness amongst areas or the uneven distribution of essential productive factors exist among different areas (Zhang & Zhang, 2003) which can influence the manufacture of greenfield firms. So, the regional inequality can be explained that the developed coastal regions have more advantage to gain further development through greenfield investment while the other areas will not. It is understandable that MNEs’ operational decision-making is based on the anticipative profit and capital repatriation. Therefore, when these companies decided to make a greenfield investment, they prefer...

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