INTERNATIONAL BUSINESSBrownfield Investments

Ganesh Kamble (19)Faraz Khan (22)

Siddharth Naik (37)Prachi Nemade (39)Soniya Rahate (44)Shashi Shelke (48)

BROWNFIELD INVESTMENTS

A Brownfield is a foreign acquisition undertaken as part of the establishment of a local operation. From the outset, its resources and capabilities are primarily provided by the investor, replacing most resources and capabilities of the acquired firm.

BROWNFIELD INVESTMENTS

Firms seeking specific complementary resources to pursue their growth strategy in emerging markets may use ‘Brownfield’ acquisitions to provide access to resources that are embedded in existing firms.

Organizational change in the acquired firm.

Combination with redeployment and divestment of resources.

Organizational restructuring at the corporate level.

Does not involve the new construction of plant operation facilities.

Pursue strategic objectives that assign the acquired firm a clearly defined role

BROWNFIELD INVESTMENTS

ENTRY MODE CHOICE

TC IC

TC IC

Conventional

Acquisition

Brownfield

Greenfield

Resources of investor

Resources of local firms

Resources of markets

TC : Transaction Cost IC : Integration Cost

ENTRY MODE CHOICE

Mode Choice

The firm to be acquired posses sufficient resources?

Conventional Acquisition

Brownfield

Does the project depend on critical resources not freely available?

Brownfield

Greenfield

External Expansion Preference

Internal Expansion Preference

Yes

Yes

No

No

STRATEGIC RESOURCE REQUIREMENT Foreign investors frequently pursue strategic

objectives concerning the control of resources in oligopolistic markets.

Market-oriented FDI may seek a local partner to provide market intelligence or access to distribution networks, brand names and market share.

Resource-seeking investment may aim to utilize the local human capital to strengthen the global R&D of the investor.

HUTCH – VODAFONE

Vodafone Group is a mobile network operator headquartered in Newbury, Berkshire England, UK.

It is one of the largest mobile telecommunications network company in the world.

Vodafone has a strategy of seeking new markets away from saturated developed countries which still have the untapped potential of providing increasing profits in the telecom sector.

Vodafone started negotiations over acquisition of Hutchison Essar in 2006 as soon as Hutch announced to sell its stock in Hutchison Essar.

At that time, Hutch Essar had operations in 16 circles covering 86% of India’s mobile customer base, with over 38.5 million customers according to the Cellular Operators Association of India, November 30, 2007.

It was the second largest mobile telecom company after Bharti Airtel.

HUTCH – VODAFONE…

A close scrutiny of Vodafone’s stand in other countries reveals that wherever it established its presence in new markets, it targeted to grab maximum market share to consistently remain within the top three slots. In such a scenario, the announcement of sale of share of Hutch in Hutchison Essar provided an attractive opportunity to make a grand entry in the Indian market.

HUTCH – VODAFONE…

After getting the necessary government approvals with regards to the acquisition of a majority by the Vodafone Group, the company was re-branded as Vodafone Essar. The marketing brand was officially changed to Vodafone on 20 September 2007.

HUTCH – VODAFONE…

Brownfield FDI that came to India via Vodafone Hutch deal added marginally to the income, brought new technology and skills and took (late)Hutch Essar to greater heights by better management and skill.

Opportunity cost here deals with the second best alternative which Vodafone had, in order to enter the Indian telecom market i.e. via full-fleshed setting up the company instead of buying already present infrastructure, in other words the cost of undertaking Greenfield investment. 

As opposed to this, the entry of Richard Branson led Virgin in the Indian markets, which is a Greenfield investment was not that favorable.

HUTCH – VODAFONE…

FDI IN PHARMA Investments resulting in an equity holding higher

than 49% in an Indian Pharma company will have to apply for the approval of the Foreign Investment Promotion Board (FIPB), a part of the ministry of finance.

Investments resulting in an equity holding lower than 49% as well as those made in subsidiaries will not need approval and will go through what is called the automatic route.

Multinational firm buying a stake higher than 49% in an Indian Pharma company will maintain the same level of investment in research activities and production of essential medicines for five years.

FDI IN PHARMA In June 2008, Japanese drug maker Daiichi

Sankyo Co. Ltd acquired New Delhi-based Ranbaxy Laboratories Ltd. for nearly $5 billion.

Two years later, US-based Abbott Laboratories bought the healthcare solutions business of Piramal Healthcare Ltd for $3.72 billion.

Alarmed by such acquisitions and their possible impact on the availability of low-cost medicines, the health and commerce ministries demanded that foreign investment in domestic Pharma companies be routed through FIPB.

FDI IN PHARMA A meeting called by Prime Minister

Manmohan Singh in October last year to resolve the differences decided that while 100% FDI in Greenfield investments through the automatic route will continue to be allowed.

Brownfield investments in Indian pharma companies will be routed through FIPB for six months (from October) and that CCI will then take over the job.

CONCLUSIONS

Brownfield investment gives a positive accounting benefit due to marginal spillovers in the economy.

Positive economic profit can be definitely attributed to Greenfield investment which involves the setting up of the company from the zero level.

This mobilizes the resources of the economy to a greater extent, increasing output and employment to a greater deal not only in the sector concerned but also in others due to forward and backward linkages.

CONCLUSIONS

However, unlike Greenfield investment, acquisitions provides no such long term benefits to the local economy in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy.

Brownfield 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.

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