The classification between Greenfield FDI and Brownfield FDI has its origin in two types of investment- Greenfield investment and Brownfield investment.
Greenfield and Brownfield investments
Greenfield investment is investment in new plants. It is establishing new production capacity by an investor or company. On the other, Brownfield investment is an investor investing in an existing plant. Brownfield investment is mainly made through merger and acquisitions.
Green field and Brownfield FDI
Applying the same criteria, Greenfield FDI in India is investment by a foreign investor in fresh production facilities. It is a situation where an MNC starts a new venture in India by constructing new operational facilities.
This new production capacity creation will bring new physical assets (like plants and machineries), creates fresh employment and adds to more production of the concerned good. Often Greenfield FDI has a merit that it brings superior technology by the MNC.
Brownfield FDI is investment made by a foreign company in existing production arrangements. An important form of Brownfield investment is merger and acquisition by foreign MNCs in India. Here, a domestic company is taken over by the MNC.
Greenfield FDI makes additional production capacity, whereas Brownfield FDI is purchase of existing production capacities. The latter is just a transfer of ownership of existing firm from a domestic entrepreneur to a foreign one.
Disadvantage of Brownfield FDI as a source of investment is that it doesn’t create expansion of production capacities or employment generation etc.
The differentiation between Greenfield and Brownfield FDI is very important in the context of developing countries like India. A sensitive aspect related with Brownfield investment is that it led to acquisition of domestic companies by MNCs.
The issue became very pronounced in India’s pharmaceutical industry. The sector is very competitive globally and India is known as the pharmacy of the developing world. Takeover of Indian firms by foreign MNC pharmaceutical companies will reduce competition for MNCs at the same time they can influence the domestic market by pursuing their own policies.
For example, since 2001, there were at least a dozen notable acquisitions by foreign companies in India. Mylan pharma, a US based firm has made eight acquisitions starting from the acquisition of API (Active Pharmaceutical Ingredient) supplying Matrix laboratories of Hyderabad in 2006 to the takeover of Agila Specialities in 2013. Japanese drugmaker Daiichi Sankyo acquired Ranbaxy in 2008 though it has later bought by Sun pharma in 2014.
The trend of foriegn MNCs makign brownfield investment in India through brown field investment has initiated public policy debate.
Once, the Department of Industrial Policy & Promotion (DIPP) has sought restrictions on foreign direct investment (FDI) in existing pharmaceutical projects in specific areas, such as vaccines, injectibles and oncology medicines.
In April 2014, the government has modified the FDI regime for pharmaceutical sector by introducing the mor restrictive government approval route for Brownfield FDI in the sector. As per the new regulations, Foreign Direct Investment (FDI) up to 100 per cent is permitted under automatic route for Greenfield investments and FDI up to 100 per cent is permitted under the Government approval route for Brownfield investments (i.e. investments in existing companies) in pharmaceuticals sector.