In the recent past, Brazil has become a favorite destination for foreign investors. There have been a lot of uncertainties by companies to invest away from their home countries. This has however not been the case of Latin America. Latin America countries, where Brazil is located, are believed to be among the few regions where foreign investment would not be affected by the unstable global economy (Twomey, 2000). In 2011, Latin America received a total of $94.4 billion with Brazil taking about half of this. Global Investment Trends Monitor reported that the figure had grown by 5.1% in the second half of 2010. Such an attractive market has led to Hyundai’s entry into Brazil in 2012 with a car model customized for the Brazilian market. The car is expected to get its first sales in October 2012 and an official launch before 2013.
Despite the well laid plans and projected returns on the new factory, the investment could face challenges and frustrations in the course of its operations (Schulze, 1987). Being an investment in a new country, its new market could have a different outcome due to the different circumstances that are found in the particular country. Among them are the changing rates of foreign exchange as well as capital needs of the investment (Zarsky, 2005). When the local currency falls in value against foreign currencies such as the US dollar, there would emerge the problem of increase in price of the cars produced in the plant. This would be as a result of increased capital need because the Brazilian currency would have lost value as compared to the rest of the global market. In an international company such as Hyundai, the stability if the currency in the countries they invest in would lead to a more accurate projection of future performance of the business.
In some countries, there are many regulations on foreign companies. Since these companies are not based in that country, they would return funds to their headquarters, thus the country they operate in looses some of its money (Schulze, 1987). Hyundai’s presence in Brazil could lead to funds getting blocked. If this happened, the subsidiary organization would retain the funds. This would deeply impact the parent organization in that there would be inaccurate annual returns on investment. Such companies publish their returns every year and this would lead to some details being left out. Secondly, the parent organization could face the problem of returning the funds from their source. Some of the sources for foreign investment for an organization like Hyundai could be sale of stock. Once the subsidiary starts to generate revenue, the parent organization could decide to start reclaiming the stock they sold in order to fund the new investment (Schulze, 1987). This could therefore reduce the rate of financial growth of the parent company
When the subsidiary provided the funds for investment in the new country, there would be little effect on the parent organization (Zarsky, 2005). This is because the revenue generated would not be required to be moved from the country. Although there are the projections that the company has already made, the company would leave the blocked funds spent by the subsidiary as ploughed back capital. Hyundai would therefore not have many problems if they decided to use funds from their earlier investments in Foreign Portfolio Investment (FPI). They would easily manage their fund and increase their investment in the sources they obtained it from. This would eventually lead to the increased growth and development n terms of capital and venture bases of the organization on the new country. It is usually advisable to have the subsidiary providing capital because it is more familiar with the local financial regulations thus can cope with any situation more comfortably and with fewer restrictions (Twomey, 2000).
The source of capital for investment in another country is highly significant to the parent organization as well as the subsidiary (Zarsky, 2005). This is because the movement of funds from one country to another is very vital in the final financial analysis of any organization. When the source of capital is a powerful economy where the currency is more stable as compared to the destination economy, the investment is likely to get affected and eventually the movement of funds. In this case, there is a higher likelihood that the country into which foreign domestic Investment was made might decide to block the funds. There are also some restricted countries as a result of failure to comply with certain guidelines resulting to poor reception of the new investment (Zarsky, 2005).
Investment from more volatile sources would be better in the case of Hyundai. This is because there is a minimal probability of loss of value during the transactions. One of the most effective sources is Foreign Portfolio Investment (FPI) (Twomey, 2000). Foreign Portfolio Investment are best when used in the country where the investment would be made to ensure that the financial trends of the country of investment are well studied and considered as a backup in case the new business gets into financial problems. Another better source of investment is International Portfolio Investment which is affected less by small economic issues in any particular country. This is because they cover a global perspective as opposed to domestic portfolio venture or a foreign portfolio that is affected by the economic movements of a given country (Zarsky, 2005). In these two cases, the cost of capital would be considerably reduced. The reduction would be as a result of little involvement in the operations of the business where the company the investing company would not manage the funds in order to get returns (Twomey, 2000). This ensures that there is a low cost of production and that the profits obtained are significantly higher and volatile.