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 region. Learn more about risk management in the gulf.

A lot of the existing academic work on risk management strategies for multinational corporations illustrates particular uncertainties but omits uncertainties that are difficult to quantify. Certainly, a lot of research in the worldwide management field has been dedicated to the management of either political risk or foreign exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables for which hedging or insurance coverage instruments could be developed to mitigate or move a firm's risk visibility. Nevertheless, present studies have brought some fresh and interesting insights. They have sought to fill area of the research gaps by giving empirical understanding of the risk perception of Western multinational corporations and their administration techniques on the firm level in the Middle East. In one research after collecting and analysing data from 49 major worldwide businesses that are active in the GCC countries, the authors discovered the following. Firstly, the risk connected with foreign investments is obviously even more multifaceted than the often analyzed variables of political risk and exchange rate exposure. Cultural risk is perceived as more crucial than political risk, monetary risk, and economic danger. Secondly, despite the fact that aspects of Arab culture are reported to have a strong influence on the business environment, most firms battle to adapt to regional routines and customs.

Regardless of the political uncertainty and unfavourable economic climates in certain parts of the Middle East, foreign direct investment (FDI) in the area and, specially, into the Arabian Gulf has been progressively increasing within the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk is apparently essential. Yet, research on the risk perception of multinationals in the region is limited in amount and quality, as professionals and solicitors like Louise Flanagan in Ras Al Khaimah would likely attest. Although various empirical research reports have investigated the effect of risk on FDI, most analyses have been on political risk. However, a fresh focus has emerged in current research, shining a limelight on an often-disregarded aspect namely cultural factors. In these pioneering studies, the writers noticed that companies and their management frequently seriously disregard the effect of social facets as a result of not enough knowledge regarding social factors. In reality, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.

This social dimension of risk management requires a change in how MNCs function. Conforming to regional customs is not just about understanding business etiquette; it also involves much deeper cultural integration, such as appreciating regional values, decision-making designs, and the societal norms that influence business practices and employee conduct. In GCC countries, successful company relationships are designed on trust and individual connections instead of just being transactional. Also, MNEs can take advantage of adapting their human resource management to reflect the cultural profiles of local workers, as variables affecting employee motivation and job satisfaction differ widely across cultures. This requires a shift in mind-set and strategy from developing robust monetary risk management tools to investing in social intelligence and local expertise as experts and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.