Brownfield Entry in Emerging Markets.
Article from: Journal of International Business Studies | September 22, 2001 |
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Klaus E. Meyer [*]
Saul Estrin [**]
This paper focuses on the brown-field entry mode, as a special case of acquisition, in which the resources transferred by the investor dominate over those provided by the acquired firm. We see this mode as having particular relevance for entry strategies in emerging markets. The choice of entry mode is analyzed on the basis of a frame-work utilizing both resource-based and transaction-cost theories. The resource requirements have to be the investor through an acquired firm, and the decision has to account for the costs of acquiring and integrating the resources.
INTRODUCTION
The choice of appropriate mode of entry into new markets is a key strategic decision for international business. A greenfield project gives the investor the opportunity to create an entirely new organization specified to its own requirements, but usually implies a gradual market entry. An acquisition facilitates quick entry and immediate access to local resources, but the acquired company may require deep restructuring to overcome a lack of fit between the two organizations. In some situations, notably in emerging markets, this restructuring is so extensive that the new operation resembles a greenfield investment. We term such investment “brownfield”, and present it as a hybrid mode of entry.
Our aim in this paper is to delineate the concept of brownfield entry and, drawing on an analytical framework that we derived from the literature (e.g. Hennart and Park, 1993; Barkema and Vermeulen, 1998; Buckley and Gasson, 1998), identify the circumstances for its emergence. The framework draws upon both the resource-based view of the firm and transaction cost analysis. [1] Brown-field projects are attractive if local resources are necessary but not sufficient for the envisaged operation, and if high transaction costs inhibit the traditional modes of entry.
The analysis builds on our empirical work on entry strategies of Western companies in Central and Eastern Europe (CEE) (Estrin et al., 1997; Meyer, 1998). Brownfield emerges as an important entry mode in this case study research. The emerging markets of CEE pose particular challenges to investors because the legal and institutional environment is poorly developed, markets – especially for capital and skilled labor – are thin and there are numerous market failures (EBRD, 1999). At the same time, few local firms match international standards in technology and management. Since such imperfect institutional frameworks and weak resource bases exist throughout emerging economies, our hybrid entry mode may be of significance in other developing regions. In the next section, we introduce the alternative entry modes. Our analytical framework is presented in the third section while the fourth section discusses how brownfield can substitute for either of the traditional modes. Implications and directions for further res earch are outlined in section five.
ALTERNATIVE MODES OF INVESTMENT
The literature distinguishes two primary modes of foreign direct investment (FDI); greenfield (start-up) and acquisition. A greenfield project entails building a subsidiary from bottom up to enable foreign sale and/or production. Real estate is purchased locally and employees are hired and trained using the investor’s management, technology, know-how and capital. Acquisitions are ‘purchase of stock in an already existing company in an amount sufficient to confer control’ Kogut and Singh (1988, p. 412). The new affiliate joins the investing company as a going concern that normally possesses production facilities, sales force, and market share. The main distinction is therefore in the origin of the resources employed in the new operation. Whereas a greenfield uses the resources of the investor and combines them with assets acquired on local markets, an acquisition uses primarily assets of a local firm and combines them with the investor’s resources, notably managerial capabilities.
Most research on mode choice analyzes a dichotomous decision between acquisition and greenfield. However, we found in our casework on CEE that many investments, which are formally an acquisition, in fact resemble greenfield projects. In such ‘brownfield’ cases, the foreign investor initially acquires a &