Global integration has rapidly transformed how companies approach and sustain growth. In the past, growth cycles were typically limited to national jurisdictions. However, with the emergence of fintech innovations and regulatory reforms, there has been a steady increase in greenfield investment projects.
This form of foreign direct investment (FDI) ensures a company can establish new operations or facilities in another market. This is in contrast to a merger or acquisition strategy, offering the freedom to build a new basis of operations from the ground up without having to dismantle or alter an existing company structure.
Greenfield investments are on the rise – project announcements rose by 15% in 2022, with sectors dealing with supply chain issues recording a surge in activities. Delving into regional FDI, China, Singapore, Hong Kong, India and the United Arab Emirates (UAE) accounted for 80% of capital flows in developing Asia. While this is not surprising given the significance of these markets to global supply chains, it does overshadow the trends we are seeing in other emerging markets.
Central Asia ripe for investment
Central Asia is on the brink of a digital revolution that could see it on the path to becoming a global hub for IT and tech innovation. State-backed initiatives in countries such as Tajikistan and Uzbekistan are encouraging the creation of private enterprises, with governments showcasing local talent and the opportunity for international partnerships. The overall aim is to attract foreign interest through projects such as greenfield investments, with regional integration as a core pillar.
Findings from the Uzbek Institute of Macroeconomics and Regional Studies revealed that between 2017 and 2021, there was a marked increase in regional cooperation between Kazakhstan, Uzbekistan, Kyrgyzstan and Tajikistan. Of note, the share of regional investment flows between these countries grew 5.6 times.
It is the approach Alif Bank has taken. Founded in 2014 in Tajikistan, Alif operates as a fully licensed bank. Its services are sharia-compliant and deliver fintech solutions to address local banking challenges in the country, such as cost-efficient remittance payments. Following a rapid expansion, Alif’s primary focus is on consolidation, refining the services delivered and gradually expanding the customer base. It now commands more than a 50% share of all Visa payments in Tajikistan.
Alif’s founding came at a time when Central Asia was beginning to experience technological disruption through financial services. It stemmed from a combination of mobile penetration, an increase in internet coverage through infrastructure investment, and the creation of new fintech companies heeding the lessons from advanced economies and delivering regionally specific solutions.
This experience was not limited to Tajikistan. Many countries in the region are seeking to diversify their economies away from traditional sectors such as oil and gas, focusing instead on the likes of agriculture, technology, tourism and renewable energy. Based on the positive local reception of Alif Bank, it made sense to consider greenfield investment projects in neighbouring jurisdictions.
Alif’s Uzbekistan arm was founded in March 2019, and for the moment, offers a range of e-commerce and fintech services. Despite regional similarities, Uzbekistan differs from Tajikistan, particularly when taking into account regulations and licence arrangements. While not seeking to replicate the growth strategy of Alif in Tajikistan, there is interest in gaining a banking licence in Uzbekistan should this be aligned with broader business objectives and values. Similarly, there are active moves to consider Alif-led greenfield investments in Pakistan and the UAE. At the moment, the focus is on carrying out the research needed to understand which market gaps exist and how Alif can provide a fintech suite of services.
The experience of Alif reinforces the complexities of undertaking greenfield investments, even when in the same region.
How to negotiate the regulatory landscape
From a legal standpoint, navigating local regulatory and licensing requirements in Central Asia can be complex and time-consuming if not properly researched and addressed. The level of time and resource investment needed when applying for a banking licence is significant, demonstrating that a scale-up growth plan cannot simply be replicated from one market to another.
One example that comes to mind is the experiences of the UK-based neobank Monzo. Having established a presence in the US market, the fintech launched an application for a US banking licence that was ultimately withdrawn in October 2021. Monzo is now looking to increase its presence in North America with new senior leadership appointments and has confirmed it will not relaunch an application for a licence.
How should we perceive the application rejection? In short, the neobank was ambitious in its goals to offer banking services in the US. When faced with this reality, it was quick to pivot, adjusting to the market over the medium term and now focusing on a gradual expansion.
For FDI expansions, there is also the appreciation of native customs and cultural nuances, both in terms of handling internal business operations and the type of services required. This requires local insight alongside a willingness to be flexible and accommodating to the core values of a culture. Approaching a greenfield investment from a purely commercial perspective will undermine its long-term success.
A final point here revolves around timing. In recent years, the rapid scale-up and record valuations being achieved by companies with a limited operating history seem to have set a new measure of success. There is a broad market perception that success comes from speed and the ability to scale quickly, be it through an internal expansion or launch in another country.
In reality, investors are prioritising revenue generation over hype investing, focusing on due diligence and growth projections in the long term. They want to see companies that are being guided by a strategy, rather than simply opening operations in new countries to quickly establish a presence.
For Alif, the greenfield approach has catered to the broader ambitions of the company in Central Asia, allowing for its gradual expansion. Yet there are natural risks linked to such an approach, including the high risk and initial investment needed to get operations off the ground. In contrast, a mergers and acquisitions approach offers faster market analysis, a customer relationship, and market position and synergy opportunities. This is countered by integration complexities, a loss of central autonomy and high acquisition costs.
From what we have seen so far, Central Asia offers significant potential for greenfield investments due to its emerging market status, abundant resources, strategic location, ongoing economic reforms and rising local enterprises. The companies that understand the region are likely to drive innovation, and we are likely to see intra-regional FDI increase as a result. That doesn’t undermine the principles of an expansion outside of a home country – thorough market research, risk assessments and due diligence are key to their success.
Source : InvestmentMonitor
