Greenfield Initiative: Bulgaria vs. Panama

As opposed to an acquisition, a Greenfield initiative requires a different set of parameters when selecting a country for expansion. Companies use a different set of priorities when establishing wholly owned subsidiaries through Greenfield initiatives as these initiatives are much riskier than direct acquisitions. Advantages of building a Greenfield site include establishing local goodwill by creating jobs, premises designed specifically to your operation's activities taking advantage of the newest technologies, a greater choice of locations, and sales will likely increase in this area. If a company embarks on a Greenfield initiative early in an areas development, then the company will enjoy a lack of competition however there is more risk involved. These risks include building and site opening delays, cost overruns in developing the site, and difficulties in estimating what expected sales will be in the new region.
Neto, Brandao, and Cerqueira identified certain country characteristics as being more favorable to foreign direct investment, (FDI), Greenfield initiatives than merger and acquisition initiatives, (M&A): notably that Greenfield initiatives increase as uncertainty avoidance and cultural distances increase, while as uncertainty avoidance and cultural differences decrease as traditional M&A activities increase, (2010). It is more appealing for a company to acquire another company when they know the cultures are similar and the society will tolerate the company’s management, even though there are still inherent risks involved with a Greenfield initiatives those risks are more tolerable and it is more appealing to build a company from the ground up when cultural differences are more noteworthy and there may be less tolerance for a company’s management. Additionally, Neto et al note that while economic growth potential is an important factor in attracting FDI Greenfields, it is not a factor in attracting FDI M&A activity; alternatively while investor protection is important for both M&A inflows and outflows, it is not as important for Greenfield initiatives, (2010). Most importantly, Neto et al note that variables such as a country’s governance, openness, economic size, literacy, life expectancy, and per capita wealth, have no effect on whether a company chooses either an acquisition or a Greenfield initiative, (2010). Clearly when a company chooses to embark on an FDI Greenfield initiative they are aware of the risks involved, and rather than seeking to expand market share, they are more importantly seeking to create and control new markets.
When reviewing different FDI Greenfield initiatives, although risks are planned, protecting stakeholder values is still important and the inherent risks of doing business in some foreign countries are more tolerable than others. In a ranking of 133 economies Panama was rated in a 2009-2010 as number 59 and Bulgaria as number 76 by the World Economic Forum Index, (Blanke, Geiger, Browne, Mia, Hanouz, & Sala-I-Martin, 2009). Both counties occupied a similar ranking on the 2008-2009 Index, with Panama moving down one place one the index and Bulgaria staying the same indicating a certain amount of stability despite the global economic crisis of the past year, (Blanke et al, 2009). At number 76 Bulgaria is the lowest rated member of the European Union in the World Economic Forum Index. Bulgaria’s currency is pegged to the euro while Panama uses the U.S. Dollar.
Both Bulgaria and Panama are listed by the United Nations Development Program as developing countries with high human development, indicating that people living in these nations have similar literacy rates, education levels, life expectancies, and standards of living, (UNDP, 2009). Notably, Panama is rated as number 60 on the list and Bulgaria as number 61 on the list of 182 countries. In each country the literacy rate is nearing 100%, the life expectancy rates and education enrollment rates are similar, and at $11,391.00 and $11,222.00, the GDP per capita of each country is nearly identical, (UNDP, 2009). According to the CIA World Factbook, the unemployment rate increased in Bulgaria in 2009 from 6.3% to 9.1%, and is therefore now substantially higher than Panama’s 7%, however, with over 7 million people Bulgaria has more than twice the population than Panama with less than 3.5 million, and while 28.6% of Panama live in poverty only 14% of Bulgarians live below the poverty level, (2010). Additionally the CIA World Factbook notes that the GDP composition by sector of each nation are similar, with Panama’s economy comprised of 5.9% agriculture, 17.2% industrial, and 76.8% services, and Bulgaria’s comprised of 7.5% agriculture, 27.6% industrial and 64.9% services, (2010).
While most of the preceding information indicates a great deal of parity between doing business in Panama and doing business in Bulgaria, the World Bank however ranks the ease of doing business in Bulgaria as 44th out of 183 countries, while Panama ranks 77th. The most noticeable disparities are employing workers in Panama ranked at 177th on the list, while employing workers in Bulgaria is ranked as 53rd, while in trading across borders in Panama ranks 10th place and Bulgaria ranks 106th, (2010). The World Bank gives Panama a score of 78 out of 100 on difficulty in hiring workers while Bulgaria receives a score of 17. The World Bank gives Panama substantially poorer scores on rigidity of hours, difficulty and costs of redundancy, and rigidity of employment. Clearly managing workers in a particularly rigid employment environment would be more difficult for a Greenfield initiative and legislatively is indicative of a more developed economy. Although the World Bank notes that it is substantially easier, more timely, and less costly to trade across borders when either importing and exporting from Panama than from Bulgaria, as noted previously this activity is more conducive to an M&A initiative than to a Greenfield initiative. The World Bank data notes that although starting a business is easier in Panama than Bulgaria, (scoring Panama a 27 out of 100 and Bulgaria a 50 out of 100), paying taxes and protecting investors are substantially more difficult while enforcing contracts, registering property, and getting credit are moderately more difficult in Panama. These factors are again more indicative of a country that is conducive to M&A activity rather than Greenfield development.

Bulgaria’s recent inception into NATO in 2004 and its recent accession to the European Union in 2007 has promoted rapid economic development in industrial areas that has abated only slightly over the last year in light of the global economic recession. Bulgaria attracted $4,467 million in FDI flows in 2009, down from $9,795 million in 2008 and a high of $12,388 million in 2007, (due to a slowing down in M&A activities). Meanwhile 2009 recorded a record high of inward FDI stocks, indicating that although investment flow is slowing down it is still an attractive and stable, although not a wholly new, economic investment environment, (UNCTAD, 2010). As such, Bulgaria is a better opportunity for a Greenfield investment initiative than Panama.











References:
Blanke, J., Geiger, T., Browne, C., Mia, I., Hanouz, M., & Sala-I-Martin, X. (2009). World Economic Forum: Global Competitiveness Report 2009-2010 (30th ed.). Retrieved from http://gcr.weforum.org/gcr09/

Bulgaria. (2010, June 24). In U.S. Central Intelligence Agency World Factbook [online]. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/bu.html

Panama. (2010, June 24). In U.S. Central Intelligence Agency World Factbook [online]. Retrieved from https://www.cia.gov/library/publications/the-world-factbook/geos/pm.html

Neto, P., Brandao, A., & Cerqueira, A., (2010, June). The macroeconomic determinants of cross-border mergers and acquisitions and Greenfield investments. IUP Journal of Business Strategy, 7 (1/2), 21-57. Retrieved from ProQuest ABI/INFORM Complete.

United Nations Conference on Trade and Development. (2010). World Investment Report 2010 Country Fact Sheet: Bulgaria. Retrieved from http://www.unctad.org/sections/dite_dir/docs/wir10_fs_bg_en.pdf

United Nations Development Program. (2009). Human Development Report. Retrieved from http://hdr.undp.org/en/statistics/

World Bank Group. (2010). Doing Business: Measuring Business Regulations Economy Rankings. Retrieved from http://www.doingbusiness.org/economyrankings/