In recent times there has been a trend towards acquisitions as a mode of entry into foreign markets. There are many good reasons for that, but are acquisitions always better than greenfield investments?
Acquisitions as a mode of entry in international business have a major purpose – speed. Moving into a new market quickly brings about certain first mover advantages. A primary advantage of this is the ability to establish a strong and competitive advantage before other competitors arrive.
There are disadvantages, though. Sometimes investments into foreign markets fail, and the pioneering costs are lost. Investing later may also provide some benefits, by understanding that a solid market already exists for your product.
Another great reason for acquiring foreign companies is the collection of knowledge they possess. For your investment, you get more than bricks and mortar. You get a great resource of local knowledge, as well as pre-existing brands and customers. There’s also a known revenue stream, something which doesn’t exist with greenfield investments.
That’s not to say acquisitions have all the benefits, though. One thing acquisitions come with is culture, and sometimes that can be difficult to change. Greenfield investments, on the other hand, allow you to construct the business as you see fit. It’s a little like a bespoke suit compared to one that’s purchased off the rack.
A little like culture, knowledge can also be hard to tame. Although your fresh new acquisition may come with a great big bundle of knowledge, it’s difficult to codify that knowledge and put it to use. Just because it’s difficult, though doesn’t mean you shouldn’t try.
So, what’s the best option? It depends. There is no single answer to suit all cases. The important thing is not to immediately jump into an acquisition, without considering a greenfield investment. It’s always better to make a slow greenfield investment than a bad acquisition.