Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

The Middle East is attracting global investment, particularly the Gulf area. Learn more about risk management in the gulf.

Regardless of the political uncertainty and unfavourable economic climates in certain parts of the Middle East, foreign direct investment (FDI) in the region and, especially, within the Arabian Gulf has been steadily increasing over the past two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in volume and quality, as specialists and solicitors like Louise Flanagan in Ras Al Khaimah would probably attest. Although different empirical research reports have examined the effect of risk on FDI, many analyses have largely been on political risk. Nonetheless, a fresh focus has materialised in present research, shining a limelight on an often-disregarded aspect particularly cultural facets. In these revolutionary studies, the researchers remarked that businesses and their administration frequently seriously disregard the impact of cultural factors because of a lack of knowledge regarding social factors. In reality, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.

This cultural dimension of risk management requires a shift in how MNCs work. Adapting to local customs is not only about being familiar with company etiquette; it also involves much deeper cultural integration, such as understanding regional values, decision-making styles, and the societal norms that influence business practices and worker conduct. In GCC countries, successful business relationships are built on trust and individual connections instead of just being transactional. Moreover, MNEs can take advantage of adapting their human resource administration to mirror the cultural profiles of regional workers, as factors influencing employee motivation and job satisfaction differ widely across countries. This calls for a change in mind-set and strategy from developing robust economic risk management tools to investing in cultural intelligence and local expertise as consultants and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.

A lot of the present literature on risk management strategies for multinational corporations features particular uncertainties but omits uncertainties that are difficult to quantify. Indeed, plenty of research within the international management field has focused on the handling of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk variables which is why hedging or insurance coverage instruments can be developed to mitigate or transfer a company's danger exposure. However, present research reports have brought some fresh and interesting insights. They have sought to fill area of the research gaps by providing empirical knowledge about the risk perception of Western multinational corporations and their administration techniques at the firm level within the Middle East. In one investigation after collecting and analysing information from 49 major international companies which are have extensive operations in the GCC countries, the authors found the following. Firstly, the risk associated with foreign investments is clearly even more multifaceted compared to frequently cited variables of political risk and exchange rate exposure. Cultural danger is perceived as more important than political risk, monetary risk, and financial danger. Secondly, even though elements of Arab culture are reported to have a strong influence on the business environment, most firms battle to adapt to local routines and customs.