Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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According to current research, an important challenge for businesses in the GCC is adjusting to regional customs and business practices. Learn more about this here.

This social dimension of risk management calls for a shift in how MNCs work. Conforming to regional customs is not just about being familiar with company etiquette; it also requires much deeper social integration, such as for instance understanding local values, decision-making styles, and the societal norms that impact business practices and employee behaviour. In GCC countries, successful business relationships are built on trust and personal connections rather than just being transactional. Also, MNEs can reap the benefits of adjusting their human resource administration to reflect the cultural profiles of local employees, as factors influencing employee motivation and job satisfaction vary widely across cultures. This requires a shift in mindset and strategy from developing robust economic risk management tools to investing in cultural intelligence and local expertise as experts and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.

Regardless of the political instability and unfavourable economic conditions in some parts of the Middle East, international direct investment (FDI) in the area and, specially, into the Arabian Gulf has been considerably increasing in the last two decades. The relevance of the Middle East and Gulf areas is growing for FDI, and the linked risk appears to be crucial. Yet, research on the risk perception of multinationals in the region is limited in quantity and quality, as experts and attorneys like Louise Flanagan in Ras Al Khaimah may likely attest. Although various empirical studies have investigated the effect of risk on FDI, most analyses have largely been on political risk. Nevertheless, a new focus has appeared in current research, shining a spotlight on an often-ignored aspect namely cultural variables. In these pioneering studies, the authors remarked that businesses and their administration usually seriously take too lightly the impact of cultural facets due to a lack of knowledge regarding social factors. In fact, some empirical studies have found that cultural differences lower the performance of international enterprises.

A lot of the prevailing academic work on risk management strategies for multinational corporations illustrates particular uncertainties but omits uncertainties that are hard to quantify. Indeed, a lot of research within the worldwide management field has centered on the management of either political risk or foreign exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables which is why hedging or insurance coverage instruments could be developed to mitigate or transfer a firm's danger visibility. Nonetheless, current studies have brought some fresh and interesting insights. They have sought to fill an element of the research gaps by providing empirical understanding of the risk perception of Western multinational corporations and their administration strategies at the company level in the Middle East. In one investigation after gathering and analysing data from 49 major international businesses that are have extensive operations in the GCC countries, the authors discovered the following. Firstly, the risk related to foreign investments is obviously far more multifaceted compared to the often examined variables of political risk and exchange rate exposure. Cultural danger is regarded as more important than political risk, monetary risk, and economic danger. Secondly, even though elements of Arab culture are reported to have a strong influence on the business environment, most firms struggle to adapt to regional routines and traditions.