Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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

Regardless of the political uncertainty and unfavourable economic climates in a few elements of the Middle East, international direct investment (FDI) in the area and, particularly, in the Arabian Gulf has been gradually increasing in the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the linked risk is apparently essential. Yet, research on the risk perception of multinationals in the region is limited in amount and quality, as professionals and attorneys 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 new focus has surfaced in recent research, shining a spotlight on an often-overlooked aspect namely cultural facets. In these groundbreaking studies, the writers noticed that companies and their administration frequently seriously neglect the impact of social facets due to a lack of knowledge regarding cultural factors. In reality, some empirical studies have found that cultural differences lower the performance of international enterprises.

A lot of the present literature on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are tough to quantify. Certainly, lots of research in the worldwide administration field has been dedicated to the management of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the danger variables for which hedging or insurance instruments can be developed to mitigate or move a company's danger exposure. But, 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 management strategies on the firm level in the Middle East. In one investigation after gathering 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 clearly even more multifaceted than the often cited variables of political risk and exchange rate exposure. Cultural risk is regarded as more important than political risk, financial danger, and financial risk. 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 local routines and traditions.

This social dimension of risk management demands a shift in how MNCs do business. Adapting to regional customs is not only about understanding business etiquette; it also requires much deeper cultural integration, such as for instance understanding local values, decision-making designs, and the societal norms that influence business practices and worker behaviour. In GCC countries, successful company relationships are built on trust and individual connections instead of just being transactional. Furthermore, MNEs can take advantage of adapting their human resource administration to mirror the cultural profiles of regional employees, as variables influencing employee motivation and job satisfaction differ widely across countries. This involves a change in mindset and strategy from developing robust financial risk management tools to investing in cultural intelligence and regional expertise as specialists and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.