Greenfield (india V. Germany)

Introduction

As a part of its international expansion program, Acme, a U.S. multinational enterprise (MNE), is currently in the planning stages of establishing a Greenfield which is an investment that establishes a production or service facility starting from the ground up overseas (Eitman, Stonehill, Moffett, 2004). In this paper, we will present a proposal to the steering committee comparing the advantages and disadvantages of starting operations in one of two selected foreign countries overseas. However, the steering committee has determined that one alternative must be a member of the European Union EU while the other cannot be a member of the EU or the country of China. In this paper, we will provide the reason behind selecting Greenfield as the form of foreign investment, the Difference between Domestic and International Market. After that, we will provide a comparative analysis between India and Germany. The analysis will focus on each countries trade polices, workforce, tax rate, right to private ownership and establishment, countries' currencies, corruption and political risk. This will help provide us with a picture of where a Greenfield investment is most appropriate.

Why Greenfield?

Greenfield compared to other entry methods (Joint venture, Acquisition, etc.) is characterized as being a long-term method, and requires much more planning. It may take a year and a half to two years according to Jan Scheers, a partner with Price Waterhouse, Brussels, Belgium (Heft, 1998). He also mentions, "The advantages are you can set up exactly where you want-you have optimal location. You can benefit from the [government] incentives offered. It also allows you to fully implement the corporate culture from the beginning" Anytime a company enters a new country or continent, there will be cultural and national differences to deal with. That shines as an advantage for Greenfield sites because the corporate culture can be brought in fresh, rather than inherited, as is the case with an acquisition or joint venture.

The Difference between Domestic and International Market

It is critical to realize the main differences between international and domestic financial management that may affect operations and profitability. In order to establish a Greenfield in a foreign country these differences need to be understood. They range from cultural, historical, institutional differences, corporate governance to domestic financial instruments. International financial management requires a thorough understanding of each foreign country's culture, history and institutional differences that are unique to it. In the domestic market, corporate governance describing the regulations and institutional practices are well known. In the international market however, these regulations and institutional practices are uniquely different. Foreign exchange risk is a greater issue in the international market because these risks are due to their subsidiaries, import/export, and foreign competitors. On the other hand, the domestic market does not have to be concerned about risks from subsidiaries. Another factor is the political climate risk emanating from its subsidiaries existing in foreign countries. Finally, MNEs utilize the modified version of domestic finance theories and instruments such as options, swaps, and letters of credit but the domestic market applies those theories and instruments in their basic form.

As requested, we will compare the pros and cons of establishing a green field in India vs. a Germany, which is a member of the European Union. Next, we will explain and compare each country's currencies, political risk, trade policies, labor costs, cultural variables and contract risks that may affect operations and profitability in each country. This will enable us to decide where to establish a Greenfield that will bring a greater success. We will start by discussing each country's currency and foreign exchange risk.

The Trade Policies

Recognizing the important linkages between trade and economic growth, the Indian Government has simplified the tariff, eliminated quantitative restrictions on imports, and reduced export restrictions during the 1991 initiation of economic and financial reforms. Since then, the Indian economy has grown rapidly over the past decade, with real GDP growth averaging some 6% annually (wto.org, 2002). Despite external shocks, such as the Asian economic crisis and fluctuations in petroleum prices, which resulted in a slowdown to 4.8% in 1997/98, the economy recovered to grow at over 6% during the two subsequent years (wto.org, 2002).

The Indian Government has recently announced to further simplify and reduce the tariff and other taxes in a second-generation reform aimed at further and faster integration of the Indian economy with the global economy.

It should be clear that India's economic policies are designed to attract significant capital inflows into India on a sustained basis to encourage technology collaboration agreements between India and foreign firms. Policy initiatives taken over the past few years have resulted in a significant investment in all areas of the economy, except those reserved for the public sector.

FDI is freely allowed in most sectors, including the service sector. FDI for virtually all items or activities can be bought in through the Automatic Route under powers delegated to the Reserve Bank of India and for the remaining items or activities through the Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board. India's trade policy reform caused the foreign investment inflow to increase from US $ 133 million in 1991-92 to US 5,925 million by 2001-02 (Thornton, 2004).

Germany on the other hand, has a modern financial market sector and transparent and effective laws and policies to promote competition. Germany has strict domestic anti-corruption and anti-bribery laws and is considered one of the least corruption-plagued countries of the industrialized world. The German government and industry actively encourage foreign investment in Germany. Germany also provides support to investors in the form of simple, clearly defined tax and levy regulations and bureaucracy-free approval procedures (fdimagazine, 2005).

Paralleling German government efforts to deregulate the economy, the European Commission is expected to continue to pressure member states to reduce barriers to trade in services within the Community. U.S. firms, especially those with operations