Accounting Information System

Accounting Information System

Executive Summary

This report pertains to the selection of an Accounting Information System for an organization having 50 employees and annual revenues of $10 million. A number of accounting information systems has been discussed in the report, but most of them are suitable for a large sized organization with high geographical expansion and huge number of employees. It is evaluated whether a business is small or large, but it always requires the implementation of an appropriate accounting information system to enhance its productivity and reduce its operating expenses.

As the company is operating in an apparel industry, therefore, the PolyPM ERP software has been recommended for the better operations of the company because it contains a number of industry specific characteristics. This will help the company in effectively designing its strategies and products, which will increase its revenues in the long run.

Introduction

The paper provides an in-depth understanding of the potential challenges that ABC manufacturing will face due to its high dependence upon manual accounting and other management practices. It is important to notice that even in such a technologically advanced era, where almost all the manual and analogue tasks have been transformed to a digital one, ABC manufacturing is still operating manual systems for managing their accounts and other operational management tasks.

The paper is aimed to provide an appropriate suggestion for the selection of a suitable accounting information system that would not only help them in managing their accounts and financial transactions, but will also assist the management in effectively managing other operations of the business.

Company Overview

ABC manufacturing is a small sized family-owned business having its operations in the Melbourne city. The business has 50 employees working at different tasks and locations in the city. It has been established about 20 years ago as a small sized business and their main product line was winter clothes and the main target customers were a number of cloth shops in the city.

It has reported revenue of $10 million during the last year, which is a handsome profit for this size of business. The company has recently expanded its business and launched some new product lines, but due to ineffective cost management of the company, it was unable to offer these products to the customers at competitive prices and faced a downturn in the market in terms of revenues and market share.

One of the major reasons behind its high operating cost is the company’s manual operational and managerial practices because it has to hire a number of personnel for managing different tasks of the company, which can be otherwise cost effectively and efficiently performed by establishing an automatic or computer-based infrastructure for the management of all the major tasks of the company. With the help of such systems, the company would become capable of performing and monitoring multiple tasks simultaneously even in remote areas of the country.

Business Requirements

The current concern of ABC manufacturing is related to the uncontrollable operating cost of the company, which is causing huge losses to the company’s reputation and earnings as well. The major reason behind such a high operating cost is its manual business practices because manual operations don’t only require higher number of employees, but also requires a large office area and other related expenses to accommodate these high numbers of employees.

Therefore, the company needs to employ such an expert information system that will not only address the accounting related requirements of the company, but will also help the management of the company in reducing their operational expenses to increase its efficiency and performance. It will also help the company in transforming its manual sales management and revenues recognition methodologies to a digital one, which will enhance the accuracy and efficiency of the sales function of the organization and increase the overall productivity of the organization (Dickhaut & Lere, 1983).

For the success of a business, it is necessary to have such a competent team of the management, which can make timely and accurate future forecasts regarding the company’s future performance and earnings, such forecasts are usually based upon the company’s past performance and the adjustment of its operations towards the changes of the internal and external economic factors.

It is reported that the company has been planning to expand its business to other markets of the city and even outside the city, therefore, it is necessary for the management to make a competitive feasibility report regarding the company’s expansion of its operations. The feasibility report should be based upon certain realistic estimates and calculations because the company has to take their decision on the basis of that report.

Communication plays a vital role in the development and success of any sort of business because it keeps the employees updated about different departments and functions of the organization. Therefore, it is necessary to integrate an effective communication system into the current organization structure, which will help the company in effectively executing certain activities like job rotation and job enlargement. Inventory management is one of the important processes of an organization that can have a great influence over the future performance of a company.

In order to meet the increasing market demand and retain its customers in the long run, the company has to maintain an effective inventory management system. Which will not only help it in maintaining an effective purchasing function, but also help it in reducing the cost by employing a just in time inventory system. Although, the company has a limited number of employees, but in relation to its size that the management of these employees also becomes a very tough task, therefore, the company needs to have a competent payroll system.

So that it can become capable of keeping the payroll record and disbursement of salaries to the individual bank accounts of all the employees on certain fixed time, i.e., on the 1st day of a starting month or on the last day of an ending month. For a customer centric organization, it is very necessary to meet the changing trends and demands of the market because it would not be capable to stay in competition without addressing the needs and demands of the customers.

Therefore, the management of the company should be capable of evaluating the changing trends of the market and it should be able to timely respond to these changes. This will help the company in capturing the potential customers on a timely basis and give a competitive edge to the rest of the industry.

System Requirements

AIS should be designed in such a manner that it can cover all the business functions of ABC manufacturing, i.e., from managing the accounting transaction system for supporting the top executives of the company in financial planning and decision-making processes. The system should connect all the three major operational departments of the company, i.e., sales, purchasing and production, so that the transactions can be summarized for the internal decision making of the middle line managers.

The AIS should also be equipped with a sophisticated cost accounting system, which will help the management in tracking the total cost associated with the production of a product. This will help the company in proper allocation of its resources and also help it in exploring different opportunities to lower down the production cost. It should also have certain qualities of an expert management system, which means that the system should be capable of organizing data in a logical manner and then forming decision on the basis of this information (Dickhaut & Lere, 1983).

The AIS should be updated according to the applicable financial reporting framework of the entity and should also comply with all the legal requirements of the country where the entity is having operations. It should be capable of exercising strong internal controls over different functions of the organization and connect different departments of the organization with each other through a cloud computing mechanism. It should contain tools like customer relationship management, supply chain management and capable of using advanced accounting techniques, i.e., activity-based costing (ABC system). This will help the company in performing improved managerial reporting by employing a number of analytical techniques.

Software Selection

 There are a number of companies that are offering different software packages to the business community. Some of them sell the software as an end product to the buyer, while the other enter into a service agreement with the companies and offer them different packages, while retaining the ultimate control and ownership of the software with themselves (Fulmer & Gerard, 2015). Intacct is one of the most efficient and productive software that can be employed in a small or midsized business. It is a SaaS (Software-as-a-service) product, which means that it can be accessed at any time by visiting the website of the company through a browser.

It offers a number of products according to the requirement of the entity and support applications for the management of core accounting, project accounting, revenue management, purchasing, order and billing, multi-currency management, financial reporting and also help in the decision-making process (Wu & Cao, 2009). Another software known as Sage ERP is a collection of different products that are designed to meet the requirements of a highly diverse industry, i.e., Sage ERP Accpac, MAS and X3. These products cover a wide range of services and provide a competitive environment for a manufacturing concern. Sage ERP offers functionality for inventory control, supply chain management, manufacturing and distribution, material resource planning and human resource management.

PolyPM provides a complete ERP and PLM solution for small and mid-sized manufacturing and distribution concerns. The software is specifically developed for a company operating in the apparel manufacturing industry. It offers a wide range of industry specific services and possess certain unique characteristic like it can be customized according to the requirements and size of the business. The developer of this software is easily accessible and ready to help the users at any time on their doorsteps. It can be implemented in an organization having annual revenues not exceeding $300 million.

The company is currently operating in a single city with 50 employees and $10 million annual revenues; therefore, a medium sized ERP software is suitable for the company, which would only be able to manage the key operational and management functions of the company. Implementing a medium ERP solution will require lower capital investment as compared to implementing a high-end solution.

It is evaluated that the company is currently operating manual systems and it would require a significant number of resources to train the employees of the company to run a totally computerized system. Therefore, initially the implementation of a medium level ERP will help the company in arranging a suitable training environment for its employees, where they can learn how to carry out computerized based operations. This will reduce the expenses of the company by eliminating the cost required for the training of the employees (Mojzis & Coufal, 1970)

Another reason behind the implementation of a medium level ERP is its user-friendly interface, which will reduce the risk of error and execute different functions of the organization effectively even during the trial period. Unlike the high-end complicated ERP solutions, the medium level ERP system will not require the company to transfer all of its departments to the computerized system simultaneously rather it will provide an opportunity to initially implement the ERP over some of its departments and if the response is favorable, then the company should extend this system over the rest of the organization as well. This will help the company in evaluating the performance of the proposed ERP system and also help it in fixing the weaknesses of the proposed system (Kamiński, 2010).

Accounting Information System Vendor Selection

The Sage ERP and PolyPM ERP solutions are the most suitable options for the company and the company has to make a choice out of these two solutions because the ERP solution offered by the Intacct is not suitable for a business like that of ABC manufacturing. Sage ERP solution is developed by the Sage Company, which is a $2.24 billion business and headquarter of the company is located in England. The company is also operating in other regions of the world under the same brand name (Jutras, 2003). It offers a number of ERP solutions and users have to make their choices according to the specific requirements of their business.

The company also develops software on the demands of the customers and sells it to the buyer as an end product. The Sage ERP X3 is the most suitable product for ABC manufacturing because it is a very cost effective and easy to use product. Users can integrate this software into different processes of their business through a single common system that can be accessed through a single user interface. The software will help the management in timely decision making by dealing different issues of the customers and business in real time scenarios.

It is also capable of addressing the changing business environment and demands of the customers due to the growth of the company enabling the users to improve the productivity of their operations. This software can translate multiple languages for the users and can be used at different locations simultaneously. However, the implementation of this software would require the company to invest heavily at the start, but it will benefit the company in the long run.

PolyPm software is an ERP solution developed by the Polygon Software Company, which has a long history of developing industry specific software for the apparel industry. The company had developed its first software about 30 years ago, known as the PloyNest. However, with the development of technology, most of the businesses have started to transform their operations on the ERP solutions and therefore, the company had also developed a unique ERP solution that is also having the PLM/PDM in addition to the ERP, which are integrated into a single application. The software allows its users to integrate all the functions of the organization from product development to distribution processes.

It helps the management in building an understanding about the specific market requirements and changing trends of the market, so that they can adjust their products accordingly (Chen et al., 2011). Unlike the Sage ERP X3, it can be customized according to the specific requirements of a user’s business and can be installed directly into the client server and run over the SQL database of the Microsoft. This option will reduce the cost of implementation of new ERP software. By incorporating all the steps involved in product development, companies can get a better understanding of the overall lifecycle of a product, from the development of an appropriate and attractive design to the execution of production and distribution activities.

Some of the functions that are incorporated into the software and related to the specific requirements of the apparel business include fabric inspection, size ranges, Cut planning and CMT production. The software also contains some standard production functions to enhance the quality of the products like PSV, order tracking and BOM. It also connects different departments of the company with one another so that they can effectively communicate and share their individual experiences (Bell et al., 2010).

Accounting Information System Recommendation and Conclusion

I would recommend the PolyPM software to the ABC manufacturing company because the company is operating in the apparel industry and this software has been developed according to the specific requirements of the apparel industry. The software contains all the functions and specifications that can easily meet the requirements of ABC manufacturing. It will help the management of the company in managing their operations and product development activities and just like other management expert system, it will also provide suggestions to the management regarding incorporating different sort of changes in its products.

Due to its simple to use interface and low system requirements, it will not require the company to invest heavily in its installation or implementation in the organization (Fulmer & Gerard, 2015). The proposed ERP system will also help the company in managing its inventory, because inventory management is the most important function of an organization and a slight miss management of this function can cause huge losses to the organization, i.e., goodwill, customers and corporate reputation.

The proposed ERP solution will also make a real time connection between different departments of the company and especially between the production, inventory and sales department, this will help them in effectively communicating with each other, which will not only enhance the quality of the product but will also reduce the material wastage (Daneva, 2004).

Accounting Information System ERP
Accounting Information System ERP

A strong communication between different departments of the company will allow its management to implement a just in time inventory management system, which will further reduce its operating cost and the company will become capable of offering its products at competitive prices, based on the successful deployment of an accounting information system ERP.

On the basis of the discussion made in this paper, it has been concluded that Accounting Information System can enhance the productivity and performance of an organization and open a number of new opportunities in terms of new business ventures and growth strategies. The selection of an appropriate Accounting Information System should always be based upon a critical evaluation of the organization’s needs and operations (Hamilton, 2003).

Although, the implementation of such software requires a high initial investment, but in front of the long-term benefits associated with the establishment of such software, these elements are negligible. However, it is observed that a competent software is the one that can incorporate all the legal, ethical and accounting standards and implement them in the operations of the organization.

References

Bell, R., Dentale, S., Buchner, A. & Mayr, S., 2010. ERP correlates of the irrelevant sound effect. Psychophysiology.

Chen, K., Razi, M. & Rienzo, T., 2011. Intrinsic Factors for Continued ERP Learning: A Precursor to Interdisciplinary ERP Curriculum Design. Decision Sciences Journal of Innovative Education, 9(2), pp.149-46.

Daneva, M., 2004. ERP requirements engineering practice: lessons learned. IEEE Softw., 21(2), pp.26-33.

Dickhaut, J.W. & Lere, J.C., 1983. Comparison of Accounting Systems and Heuristics in Selecting Economic Optima. Journal of Accounting Research, 21(2), p.495.

Fulmer, B.P. & Gerard, G.J., 2015. Selecting an Enterprise Resource Planning System: An Active Learning Simulation. Journal of Emerging Technologies in Accounting, 4(12), pp.150-76.

Hamilton, S., 2003. Maximizing your ERP system. 1st ed. New York: McGraw-Hill.

Jutras, C.M., 2003. ERP optimization. 1st ed. Boca Raton, Fla.: St. Lucie Press.

Kamiński, A., 2010. Computer Integrated Enterprise in the MRP/ERP Software Implementation. Foundations of Management, 2(2).

Mojzis, M. & Coufal, J., 1970. ERP Experimentation Guide Software. Front. 2nd. INCF. Congr. of. Neuro..

Wu, H. & Cao, L., 2009. Community Collaboration for ERP Implementation. IEEE Softw., 26(6), pp.48-55.

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Did you find any useful knowledge relating to the selection of an accounting information system in this post? What are the key facts that grabbed your attention? Let us know in the comments. Thank you.

Time Driven Activity Based Costing (TDABC) in Service Industries

Time Driven Activity Based Costing (TDABC) in Service Industries

Time Driven Activity Based Costing – Pierre Omidyar, a computer programmer, formed the eBay incorporation in his own house in California. He designed a prototype of an auction site on his website and named it the Auction Web. From this business, he could charge the sellers for posting their items. A small portion of the auction sale from each sale meaning that the company got revenues from providing buyers and sellers a platform to trade. The business significantly grew and later established a platform where buyers and sellers would rate one another based on reliability and honesty. The company expanded by providing a wide range of products like home appliances, furniture, and electronics cars.

In the next financial year, the owner of the business hired Jeff Skoll being the first employee managing director of eBay. Much of the company’s success can be attributed to Skoll’s skills of designing a business plan which eBay adopted. By the end of 1996, the company had hosted over 250,000 auctions in its website. The following year, the company managed to host approximately two million users. At the start of 1998, Omidyar hired Meg Whitman to act as the Chief Executive Officer and the President of this corporation.

The new CEO brought diversified and experienced personnel from corporations like Disney and Pepsi. eBay was incorporated into the Public by the end of 1998. After this, the share price of the company rose up with three times its value and that how the owner became a billionaire. Due to the company’s success, eBay acquired Half.com. After this, users were able to purchase and sell their products at lower prices without the use of an auction.

By the end of the fiscal year 2002, eBay managed to acquire PayPal Inc., an online processing company. In the last decade, many companies have relied on eBay to buy or sell their equipment and machinery. The Company has consistently grown over the years which has enabled it to maintain loyal customers. Today, eBay is one of the largest companies dealing with e-commerce business In United States (Bazdan, 2011)

eBay is a service driven company, and hence a cost accounting system applies to this business (Ruhl, & Hartman, 1998). Alternatively, a time driven activity based costing approach used by manufacturing companies may also be utilized by services companies like eBay since it enhanced performance in the business and increases competitiveness. ABC system assists companies in managing their costs whereas TDABC enables cost managers to determine the different cost objects and identify areas that need improvement. Both service and manufacturing companies utilize similar procedures in the ABC system.

These steps include the identification of activities, cost drivers and their related activities. Concerning this, most expenses at eBay are found in research and development. In the financial year 2013, R& D expenses amounted to $1.77 billion. This is surprising since the selling expenses cannot be directly attributed to the transaction and auction services of eBay. However, eBay can use the TDABC system in its services activities.

One of the basic cost drivers of TDABC is time. This is utilized in allocating resources to costs objects. This method is essential since it reduces time wastage and eliminates the complication step that of allocating resource costs to activities and assigning them to cost objects. According to research, the time driven system to ABC defines time as a crucial cost driver because machinery and labor have elements which can be measured by the amount of time used in performing a particular task. Resource capabilities can also be developed by utilizing other metrics like storage capacity in gigabytes.

TDABC method is preferred since it utilizes the cost driver rates based on their ability to hold resources to conduct a particular activity (Kaplan and Anderson, 2004, p. 133). Managers in eBay would utilize this concept in estimating the demand for the resources per unit time needed for every activity like customer contacts and business transactions. Additionally, only two variables are required for each category of the resource; the unit cost used in supplying resource to each department and the consumption of resource by the organization’s activities.

In the first scenario, managers will be required to identify the different categories of resources which perform activities in eBay such as supervision, human resource, outside services, telecommunication department, IT support, legal and support department. For example, we may assume that the total cost in these activities for the Company unit/department which process all the website transaction is $480 million each quarter. The practical capacity will then be estimated for each unit. To develop a practical capacity of 85 percent, for instance, a manager can analyze the capacity in the previous quarter and then identify the percentage of a particular quarter which is 85 percent of a certain period.

Additionally, in this example, it is also assumed that the most significant transactions occurred without any delays such as labor breakdown. The capacity in minutes per quarter is also assumed to be 600 million. To compute the total cost of the resource capacity supplied, the cost analyses would divide the 480 million resource allocation supplied by the 600 million minutes. The cost per minute of supplying the resource capacity will, therefore, be $0.8 per minute; these include all customer services and website transactions.

Lastly, the manager can determine the time needed to perform customer service and website transaction per unit. For example, if the cost analyst determines that the website transaction per cost is 5 minutes per response, and 20 minutes for each customer inquiry, it, therefore, means that there will be a transaction cost of $4 and a customer inquiry of $16. From using the time driven cost information, the company is able to calculate meaningful costs for different activities.

From the analysis, it is evident that eBay can derive some benefits by utilizing the TDABC. Firstly, this approach provides management with a new focus on different costs. This improves the budget preparation which increases the business performance. The management is also able to come up with service mix decisions which enhance cost control in eBay. As a result, the administration can form accurate and appropriate decisions on how they can improve the business processes, pricing and customer services (Kaplan & Anderson, 2007). TDABC enables cost managers to determine cost efficiencies and how capacity can be utilized optimally. It is also the right way of predicting future resource demands.

eBay incorporation has faced recently faced stiff completion both locally and internationally. One of the rival companies includes the Alibaba which denying eBay more revenues. eBay may utilize a time driven ABC system which enables it to gain a competitive advantage over their competitors.

Additionally, the method is able to allocate the indirect costs like support to reflect the resource requirements and how consumes its resources in achieving customer and service activities. Management can monitor the resources by cutting the expenses hence enabling it to be competitive when determining the price structure. The budgeted expenses per unit such as customer inquiries and transaction costs can assist the management to cut down the costs without comprising the quality. Pricing strategies will also be determined based on these costs.

Time Driven Activity Based Costing
Time Driven Activity Based Costing

For services provided online, the management will have more information relating to indirect costs like R&D. The traditional ABC provides less information on direct costs and more labor costs involved. As a result, the cost per unit online services would be less since the business is not affected by physical and geographical factors.

The Company may utilize the low cost per unit in providing more competitive pricing and thereby offer quality online services. TDABC approach enables a company to determine the value of offering an online service and the cost of proving the service via traditional mechanisms. This enables the management to understand the overhead costs by identifying the activities involved in providing these services. This information is important since the management is able to form informed decisions which will increase the customer base.

In conclusion, TDABC use has significantly increased since it provides more and accurate information. This enables costs managers to respond quickly by lowering the costs used in providing the services. TDABC is a dynamic approach meaning that it can be used by both a manufacturing and an online service company. This method, therefore, proves to be more effective than the traditional ABC since it results in better management of costs.

References

Bazdan, Z. (2011). An International Economy and E-commerce Case Study: eBay. Our Economy (Nase Gospodarstvo), 57(3/4), 44-50

Ruhl, J. M. and B. P. Hartman. (1998). Activity Based Costing in the Service Sector. Advances in Management Accounting (6), 147-161.

Kaplan, R.S. & Anderson, S.R. (2007). Time Driven Activity Based Costing. Boston: Harvard Business School Press.

Kaplan, R.S. & Anderson, S.R. (2004). Time Driven Activity Based Costing. Harvard Business Review, November, 131-138.

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Did you find any useful knowledge relating to time driven activity based costing (TDABC) in this post? What are the key facts that grabbed your attention? Let us know in the comments. Thank you.

Change Management Dissertation Topics

Change Management Dissertation Topics

Change Management Dissertation Topics – Organizational change, significance of the organizational change, different theories used by the management in implementing organization change and the benefits derived by an organization from change implementation. Change is difficult to pull off and despite individual success; most of the organizations find it difficult to implement change with 70% of the change initiatives being unsuccessful.

Most change initiatives fail since managers often rush to implement change and lose focus and become mesmerized by all the available advice on-line and imprint and fail to identify the best strategy to use in change implementation. Most managers apply Theory E and Theory O without resolving the tension between them, something that is likely to lead to failure in change implementation.

Below is a collection of change management dissertation topics that will assist you with your studies all of which are available on our website.

Change Management Within the Retail Banking Sector

Using Change Management to Improve Turnaround Time and Quality Processes in a Clinical Laboratory Environment

Is the Human Resources Function Essential in Achieving Successful Organisational Change

A Review into Project Theoretical Concepts and Models in Regards to the Management of Change and Conflict

Some of the change management dissertation topics discussed include; Leadership, a successful change management requires strong leadership from the managers. Managers should, therefore, inspire employees through the change process. Engaging the people below, most often change is unsuccessful since managers fail to involve those below them.

Change Management Dissertation Topics
Change Management Dissertation Topics

However, persuading the employees of the need and the effects of change would be vital for successful change implementation. Need for consultants to educate the employees and coach leaders to ensure everyone understands his role and involvement in the change process. Motivation, managers, should evaluate the fears of the employees and consider appropriate incentives that may motivate them.

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Many academics agree that change is inevitable in any organization. However, managers should clearly understand the need for change and the best strategy to implement the desired change. This post and the links are relevant in that it provides an in-depth analysis of how effective combination of Theory E and Theory O can lead to successful change. The article could be applied to a career as it provides insight into the change process and how to ensure effective change as a manager.

The current global market is quite competitive and as such the success of the organization will largely depend on effective change management strategy formulation. The ability of the organization to choose an appropriate generic business strategy would prove to be the point of difference between different players in the market.

The generic business and change management strategies adopted by the organization determines the direction of the organization as well as its ability to effectively compete in the market. The businesses executives have the responsibility to integrate the generic business strategy with the organization culture as well as the formal organization structure.

Successful integration of generic business strategy along with the organization culture and structure creates an enabling environment for the organization to achieve its effective change management goals. Business leaders should ensure the adoption of the appropriate culture within the organization that can support the business strategies, organizational structure as well as effective change management.

Change management refers to the processes, tools, and techniques used to manage the people side of change in an organization. It involves planning, communicating, and implementing changes in a way that minimizes resistance and maximizes the likelihood of success. Change management is essential for organizations that want to stay competitive and adapt to new circumstances.

There are several key principles to successful change management. First, it’s important to communicate openly and honestly with employees about the need for change and the rationale behind it. Second, it’s important to involve employees in the change process by seeking their input and feedback. Third, it’s essential to provide training and support to employees to help them adjust to the new way of doing things. Finally, it’s important to measure the success of the change and make adjustments as needed.

There are many resources available to help organizations with change management, including books, articles, and training programs. Here are five references that may be helpful:

  1. Kotter, J. P. (1996). Leading change. Harvard Business Press.
  2. Cummings, T. G., & Worley, C. G. (2014). Organization development and change. Cengage Learning.
  3. Beer, M., & Nohria, N. (2000). Cracking the code of change. Harvard Business Review, 78(3), 133-141.
  4. Cameron, E., & Green, M. (2015). Making sense of change management: A complete guide to the models, tools and techniques of organizational change. Kogan Page Publishers.
  5. Hayes, J. (2018). The theory and practice of change management. Palgrave Macmillan.

These references provide a comprehensive overview of change management and offer practical advice for implementing successful change initiatives in organizations.

If you enjoyed reading this post on change management dissertation topics we have on offer. I would be very grateful if you could help spread this knowledge by emailing this post to a friend, or sharing it on Twitter or Facebook. Thank you.

Sustainable Development Theory

Sustainability Development Theory and Practice: Critical Reflections Applied to Local Situations

Sustainable Development Theory – Some projects are considered as sustainable endeavors, such as hydroelectricity production using dams, which do not, in the application, fulfill the requirements to be considered sustainable. That is the case of the infamous Bela Monte project in Brazil. For more than 27 years groups have fought against the construction, motivated by numerous demonstrations, lawsuits, and opposition by groups; especially indigenous communities, environmental advocates, and other social organizations.

The original project consisted of 6 dams with a size of 1,225 m2. However, after a strong challenge experienced during the first encounter with the indigenous nations that existed in Xingu in 1989, the project was reduced to one dam with an area of 440 m2 which makes it the 4th largest dam in world.

The cost of this dam is estimated to be about 18 billion USD, double the original estimates done 26 years ago and 80 percent is financed by national funds. The government claims these type projects are fundamental in order to spur on the Economy (Laurie, 2014). Belo Monte is projected to operate at peak capacity for a few months throughout the year, and during the low water levels season, it would generate electricity as low as 1,000 MW (Rivers, 2010, p. 2).

Climate change, during different seasons, may worsen the situation since most climate models predict that the river flows in various parts of Amazon may fall by 30% in the few decades to come. Deforestation has greatly caused the delay of onset of the rainy season to about six days every decade.

The government has refused to conduct comprehensive social and environmental studies to determine the potential negative impacts (Laurie, 2014). The Brazilian Institute of Environment and Renewable Natural Resources (IBAMA) has been responsible for the respective studies, permits, and limitations (IBAMA, 2017).

However, Belo Monte has a record of over 786 irregularities in the licensing by the Institute of the Environment and Renewable Natural Resources of Brazil (Fearnside, 2016, p. 19). More than 20,000 people have been evacuated and relocated to nearby cities like Altamira. The construction was initiated in the year 2011 and since then, the city of Altamira has seen a high influx of migrants.

Sustainable Development Theory Project
Sustainable Development Theory Project

Sustainable Development Theory and Wildlife

To date, over 40,000 plant species, about 2,200 fishes, 1,294 species of birds, approximately 427 mammals, and 378 reptiles are found in the region (Albert & Reis, 2011; Silva & Cardoso, 2005). With the completion of Belo Monte, biodiversity in the extensive area around the central Amazon would be affected.

The rich flooded forests of the middle Xingu and Big Bend would be diversely affected and would no longer receive seasonal floodwaters. Other than affecting migratory fish species and the causing endemic, construction of this dam would seriously affect land fauna, aquatic life, not forgetting the endangered species such as the black-bearded Saki monkey and white-cheeked spider monkey in the forests through which the dam will run.

Furthermore, the threatened species of turtle found downstream would risk losing their breeding grounds (Rivers, 2010, p. 4). Dams in Brazil emit high amounts of methane (CH4). On the same note, dams in the humid tropic areas emit higher amounts of CH4 compared to those in different climate zones.

The reason as to why dams produce methane is because the water stratifies into layers in the reservoir, forming a warm layer (epilimnion) at the upper water layer that is in contact with the air in about 2-10 meters that contain oxygen. On the other hand, a cold layer (hypolimnion) forms in the deeper water layers where the oxygen gets quickly exhausted decomposing the organic matter which leads to the production of CH4 instead of carbon dioxide (CO2) (Fearnside, 2016, p. 17).

In conclusion, Belo Monte project has failed sustainably when gauged within the economic, social and environmental contexts. First, on the economic basis, the project is not profitable; the government has invested 18 billion USD for a project that is scheduled to only work a quarter of the year producing as low as 1,000MW during low-water levels season.

Further, socially, the project will not be providing an economic incentive or jobs to the communities whose economies were destroyed to build the dam. Due to the wide coverage of the project, human shelter and income earning activities will be affected causing a significant economic impact. Next, environmentally, the dam is an unmitigated disaster. Greenhouse gas emissions will increase, fauna and flora will be destroyed and other more potentially harmful impacts are unknown. Besides, a large piece of land will be uncovered to establish the dam site by uprooting trees and soil covers which affect the environment.

Works Cited

Albert, James S., and Roberto E. Reis. Historical Biogeography of Geotropically Freshwater Fishes. The University of California. California: press, 2011.

Fearnside, Philip M. Environmental and Social Impacts of Hydroelectric Dams in Brazilian Amazonia: Implications for the Aluminum Industry. Manaus, Brazil: Crossmark, 2016.

IISD, International institute for sustainable development. “International Institution for Sustainable Development” 1987.

Rivers, International. “International Rivers” March 2010. Belo Monte.

Silva, Da, and Jose Maria Cardoso. “The Fate of the Amazonian Areas of Endemism“. Conservation Biology.” 2005.

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Patterns in Foreign Direct Investment

Patterns in Foreign Direct Investment

Patterns in Foreign Direct Investment – One of the greatest phenomena that the era of globalization has witnessed is that of rising Foreign Direct Investment. With technological advancements, end of the cold war and the boom witnessed in the financial services sector, we see firms increasingly looking towards foreign shores to establish their interests and thus boost profitability. Simply put, Foreign Direct Investment is the act of making an investment on part of a company in a business in another country. This paper will discuss the merits and faults of FDI and the role that it plays in the calculus of global business.

There are three forms of foreign direct investment. Firstly, the firm may acquire stocks in a host country’s company or may form an affiliate of sorts. This is a rather complex form of FDI. A simpler form is where the company simply reinvests the profits of the affiliate in the host country. Finally, the third method is where the companies raise capital through stock market in the host country.

In today’s world, a company can transform through an evolutionary process. Ohmae (1990) described the stages of evolution as early internationalization, exporting, production, complete and true globalization. Basically, the firm goes from using agents for export to setting up shop in the host country until the point where the company becomes truly global. In many cases, this process is sped up by the use of FDI, which is a wonderful miracle for the businesses of today.

Why a company may turn to FDI can be explained by a number of motives. Dunning (1993) identifies 4 primary reasons. Firstly, it could be to attain access to resources that may not be available in the home country. Secondly, FDI could be a tool to gain access to untapped markets with massive potential. Usually, alternatives to FDI such as exporting and licensing may face trade barriers or challenges such as monopoly laws, customs restriction and high tariffs. By using FDI, companies can avoid all such issues. A third reason for opting for FDI could be that it allows greater efficiency. The country being invested in may have low-cost labor or raw material or may provide low-cost manufacturing. Finally, FDI may be a tool for acquiring strategic assets. Often, in markets where there is rising monopolistic or oligopolistic behavior, firms can turn towards FDI to protect themselves in such harsh business environments. They may acquire certain assets, build specific capabilities or establish themselves in certain markets by using FDI, all for the simple reason of protecting the business against oligopolies.

It is important to first understand the nature of MNCs and how they integrate. When a company acquires or combines with another company that is producing a similar product which happens to be at the same stage of production as that of the company itself, we call such a company as horizontally integrated MNC. The motivation behind such an integration may be to diversify risk or lower costs. On the other hand, vertically integrated MNCs are such that acquire or merge with a company that is involved in a different stage of production for the same product as that of the company. An example could be that of an oil marketing company acquiring an oil drilling company. An entirely different type of MNC is that called Conglomerate MNC. It occurs when a company acquires or merges with another company that is producing a different product.

Another important distinction to understand is in that of the multiple kinds of investments and the purposes that they serve. Firstly, Brownfield Venture means an investment that is intended to improve the existing capacity or efficiency. In contrast, a Greenfield Venture means an investment that results in the construction of a new establishment or plant in the country where the investment is being made.

Foreign Direct Investment trends are often hard to identify and it is even more difficult to pin down the underlying factors that cause such trends. A recurring theme, however, has been that of the effect that global recessions and financial market meltdowns have on the FDI trends. As is evident from figure 1, FDI understandably fell after the 2008 recession. Slowly, global economies have been getting back on their feet but it is curious to note that FDI inflows to developed economies has generally followed a downward trend.

Developing Countries and Patterns in Foreign Direct Investment

In contrast, the developing economies have seen a rise in FDI, albeit at a slow rate and with many fluctuations. To further argue this point, author argues that “Notably, the high-wage differential between West Europe and Asia has been the most significant factor contributing to the restructuring of US FDI during 1981–2000” and that “Populous countries such as China and India have been further liberalizing their economies and improving infrastructure” (Sethi et al 2003, p.325).

Figure 2 shows data for year 2015 identifying the countries that attracted the greatest FDI inflow. The United States leads it all the way followed by China and Netherlands. While this data confirms the understanding that the US and Western Europe continue to be the recipients of most of the FDI, it must be noted that China, India and Brazil also receive a considerable amount of the FDI which shows the rise of what is called the ‘BRICS’ bloc.

Foreign Direct Investment Inflow
Foreign Direct Investment Inflow

Table 1 identifies huge growth in the FDI inflows for developed countries and developing Asia. Quite curiously, it may be noted that the inflows to Africa and Latina America actually fell.

Patterns in Foreign Direct Investment
Patterns in Foreign Direct Investment

 Following the same trend, Cross-border mergers also grew enormously for developed countries. While on the subject of developing Asia, it will be pertinent to consider the trends in FDI specific to this region, given the fact that it is rising to play an increasingly important role in global economy. The ASEAN Investment Report 2016 notes a number of interesting observations.

It identifies the close relationship between USA and this region in the following words: “South-East Asia is host to the largest number of United States companies in Asia, with over 1,500 companies operating in ASEAN. Some 70 per cent of the 130 United States MNEs listed in the Global Fortune 500 in 2015 are present in the region. United States FDI stock in ASEAN has risen sharply in recent years, from $50 billion in 2000 to $226 billion in 2014”.

Sources of Foreign Direct Investment Finance
Sources of Foreign Direct Investment Finance

The report also indicated that while FDI flows declined in 2015 as compared to 2014, “FDI in manufacturing rose, equity capital financing of FDI activities was at an all-time high, and regional investment expansion by MNEs remained strong” (The ASEAN Secretariat xiv, 2016). Finally, the form of FDI that was most popular continued to be equity investment as is evident from figure 1.4.

Developing Asia has enormous influence with regards to the inflow of FDI in these economies. A UNCTAD identifies that “developing economies saw their FDI reaching a new high of US$741 billion, 5% higher than in 2014. Developing Asia, with its FDI flows surpassing half a trillion US dollars, remained the largest FDI recipient region in the world, accounting for one third of global FDI flows” (Global Investment Trends Monitor). Having said that, the same report concludes that while FDIs have indeed increased, there is little constructive impact on the global economy because there is little Greenfield investment. Overall, a slowing global economy and fragile geopolitical scenarios are making analysts all over the world issue grim outlook regarding the FDI flows globally.

It is appropriate to discuss the structural variations that have been noted in FDI. Primary and manufacturing sectors have been involved in increasingly lesser FDI flow while the service sector has been on the rise. This has multiple implications because services, unlike manufactured goods, cannot be stored and sold later. This is why we see that service industry firms are increasingly establishing outfits/branches in other countries, often at heavy costs.

The reason why such firms are willing to bear these costs is because globalization offers greater payoff in the long term as getting established in multiple markets allows these firms to attract a greater number of customers. Furthermore, many economies in the world have been moving towards deregulation which has also boosted service trade. A point to be noted here is that the rise of nationalism can certainly hurt FDI as politicians with ‘protectionist’ agenda are voted to power.

To understand FDI patterns, it is also important to consider the several theories regarding this topic. One theory presented by Raymond Vernon suggests that FDI really depends upon the product lifecycle. What this basically means is that there is a period of growth which stimulates production both at home and abroad. Soon, the foreign production becomes competitive which marks the beginning of the maturity stage in the cycle. This competition then seeps into the domestic market thus leading to a decline in sales. This is the product lifecycle theory.

The International Production theory which basically states that a firm considering foreign investment is likely to be swayed by the attractions presented by the home country relative to those provided in the country which is under consideration for investment. A number of economists have presented arguments against this theory citing the relatively recent patterns noted globally. A key argument is that while the theory would suggest that businesses should move to developing countries since they provide a cost advantage, the actual pattern is quite opposite because businesses are moving to developed countries to take benefit from the greater market opportunities in those economies.

Another curious business behavior is explained by the oligopolistic theory. This theory says that when one major firm of an industry moves abroad, its competitors feel obliged to copy the behavior. This may be done with a motivation to prevent the competitor from tapping into an unexplored market. While this doesn’t necessarily explain why a business might move to a developed country, some economists suggest that in a lot of cases, firms are simply copying each other in moving to developed countries.

Internalization theory talks about controlling activities in the intermediate market and bridging the gaps in the various stages of production by moving into new markets. What this means that a company may use its subsidiaries to attain raw materials for its primary concern. It is curious to note that while this theory may hint towards a Greenfield pattern with regards to manufacturing companies, the reality is quite different as such firms have stayed away from investing in developing countries.

Patterns in Foreign Direct Investment Theory

Another interesting theory is the market imperfection theory. What this basically means is that a company’s decision to invest in foreign economies may be motivated by a variety of factors. This includes its competencies and capabilities that are unique to the company and not shared by any of its competitors. There exists great information asymmetry especially with regards to the relationship between exchange rates and its impact on FDI. This can cause variations in the cost of external financing as compared to internal financing.

A very important theory to consider is the OLI eclectic paradigm which was developed by John Dunning. He argued for the benefits of FDI as compared to exporting or licensing. His argument was that if a firm is to involve itself in profitable FDI, it must have 3 advantages: ownership-specific, location-specific and internalization. The first one is self-explanatory; FDI cannot be successful until the firm undertaking it has a competitive advantage in form of a tangible asset e.g., manpower, capital.

It may also have an advantage in intangible assets such as knowledge, access to markets. The second advantage is location-specific which means that the country being invested into must have an advantage as a location such as infrastructure, natural resources, government incentives etc. Finally, internalization is necessary otherwise the firm may as well simply hire a firm in the other country to do the task. Internalization is basically a tool to exploit the market imperfections in price.

While these theories are important to understand, what is even more crucial is the effect FDI can have on the country receiving all the investment. Some of the more obvious benefits include greater employment, tax revenue generation, transfer of technology and other spillover effects. A more subtle effect can be increase of competition which makes markets more efficient thus ultimately helping the consumers.

Disadvantages include the fact that the firms investing in a country are usually large MNCs which have greater market power than local firms engaged in the same industry. Thus, greater FDI could really hurt local business. In some cases, FDI can also adversely affect the balance of payments. This happens when the investing firm imports its capital from abroad. Finally, there is the feeling of the economy being high jacked by powerful MNCs. Many consumer protection groups thus argue that FDI can hurt the local consumer and national interest in the long run.

In conclusion, it may be argued that while FDI has its merit, the current global outlook does not seem too hospitable for such form of investment. While unemployment and terrorism have allowed the rise of nationalist governments in most of the western civilization, it can lead to decreased FDI in the less developed countries. Governments may pressurize companies to invest within the country rather than taking the business to a low-cost country.

This will not only reduce FDI, it will also reduce efficiency and may contribute towards abject poverty and a whole host of other problems for the developing nations. Increasing concerns over China and its overheating economy will also have implications for investors’ investment behavior and it will be curious to watch whether the concerns over China’s alleged credit bubble have any effect on FDI patterns globally.

Works Cited

Sethi, D et al. “Trends and Patterns in Foreign Direct Investment Flows: A Theoretical And Empirical Analysis”. Journal of International Business Studies 34.4 (2003): 315-326. Web. 12 Jan. 2017.

Ohmae, Kenichi, The Borderless World; Power and Strategy in the Global Marketplace, London: Harper Collins, 1990

The ASEAN Secretariat, ASEAN Investment Report 2016 – Foreign Direct Investment and MSME Linkages. ASEAN Secretariat and United Nations Conference on Trade and Development, 2016. Print.

United Nations Conference on Trade and Development, Global Investment Trends Monitor. United Nations Conference on Trade and Development, 2016. Print. No.22.

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Question: What other patterns in foreign direct investment have you encountered that have not been covered in this post? Feel free to leave a comment below