Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

Find out more about how precisely Western multinational corporations perceive and handle risks in the Middle East.

In spite of the political instability and unfavourable fiscal conditions in certain elements of the Middle East, foreign direct investment (FDI) in the area and, specially, in the Arabian Gulf has been considerably increasing over the past two decades. The relevance of the Middle East and Gulf areas is growing for FDI, and the associated risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the region is limited in amount and quality, as specialists and lawyers like Louise Flanagan in Ras Al Khaimah would likely attest. Although various empirical research reports have examined the effect of risk on FDI, most analyses have been on political risk. However, a fresh focus has emerged in recent research, shining a spotlight on an often-ignored aspect particularly cultural facets. In these pioneering studies, the authors noticed that companies and their administration usually really underestimate the impact of cultural factors because of a lack of knowledge regarding cultural variables. In fact, some empirical research reports have discovered that cultural differences lower the performance of international enterprises.

This social dimension of risk management demands a change in how MNCs operate. Adapting to local customs is not just about understanding business etiquette; it also involves much deeper cultural integration, such as appreciating local values, decision-making styles, and the societal norms that influence business practices and worker conduct. In GCC countries, successful company relationships are designed on trust and individual connections instead of just being transactional. Also, MNEs can reap the benefits of adjusting their human resource administration to mirror the social profiles of regional workers, as variables influencing employee motivation and job satisfaction vary widely across cultures. This requires a shift in mindset and strategy from developing robust monetary risk management tools to investing in social intelligence and regional expertise as professionals and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.

Much of the existing literature on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are hard to quantify. Indeed, a lot of research in the international administration field has been dedicated to the handling of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the risk variables which is why hedging or insurance instruments can be developed to mitigate or move a company's risk exposure. But, present studies have brought some fresh and interesting insights. They have sought to fill the main research gaps by providing empirical information about the risk perception of Western multinational corporations and their administration methods at the firm level within the Middle East. In one investigation after collecting and analysing data from 49 major international businesses which are active in the GCC countries, the authors discovered the following. Firstly, the risk related to foreign investments is clearly a great deal more multifaceted compared to often examined variables of political risk and exchange rate visibility. Cultural risk is perceived as more essential than political risk, economic risk, and financial danger. Secondly, even though elements of Arab culture are reported to have a strong influence on the business environment, most firms find it difficult to adapt to regional routines and customs.