Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

The Middle East is attracting global investment, especially the Gulf area. Discover more about risk management within the gulf.

This cultural dimension of risk management requires a change in how MNCs function. Conforming to regional customs is not only about being familiar with business etiquette; it also involves much deeper social integration, such as for instance appreciating regional values, decision-making designs, and the societal norms that impact business practices and worker conduct. In GCC countries, successful company relationships are made on trust and individual connections rather than just being transactional. Also, MNEs can benefit from adjusting their human resource management to mirror the cultural profiles of local employees, as variables affecting employee motivation and job satisfaction differ widely across countries. This calls for a change in mindset and strategy from developing robust economic risk management tools to investing in cultural intelligence and regional expertise as consultants and solicitors such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.

Much of the present academic work on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are tough to quantify. Indeed, plenty of research in the international administration field has focused on the handling of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk factors which is why hedging or insurance instruments can be developed to mitigate or move a firm's risk visibility. However, current research reports have brought some fresh and interesting insights. They have sought to fill the main research gaps by giving empirical knowledge about the risk perception of Western multinational corporations and their management techniques on the firm level in the Middle East. In one research after collecting and analysing data from 49 major international businesses which are active in the GCC countries, the authors found the following. Firstly, the risk connected with foreign investments is obviously more multifaceted compared to the frequently examined variables of political risk and exchange rate visibility. Cultural risk is perceived as more important than political risk, economic risk, and economic danger. Secondly, despite the fact that 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 traditions.

Despite the political instability and unfavourable fiscal conditions in a few elements of the Middle East, international direct investment (FDI) in the region and, particularly, within 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 associated risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in volume and quality, as consultants and lawyers like Louise Flanagan in Ras Al Khaimah may likely attest. Although various empirical research reports have examined the effect of risk on FDI, many analyses have largely been on political risk. Nonetheless, a new focus has appeared in current research, shining a limelight on an often-neglected aspect particularly cultural facets. In these pioneering studies, the researchers remarked that businesses and their administration often seriously disregard the effect of cultural factors due to a lack of knowledge regarding cultural variables. In fact, some empirical studies have found that cultural differences lower the performance of multinational enterprises.