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 manage dangers within the Middle East.

Much of the prevailing literature on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are difficult to quantify. Certainly, lots of research within the worldwide management field has been dedicated to the management of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the risk factors which is why hedging or insurance coverage instruments could be developed to mitigate or transfer a company's risk visibility. However, current studies have brought some fresh and interesting insights. They have sought to fill area of the research gaps by giving empirical knowledge about the risk perception of Western multinational corporations and their administration methods at the company level in the Middle East. In one research after gathering and analysing data from 49 major worldwide companies which are active in the GCC countries, the authors discovered the following. Firstly, the risk associated with foreign investments is clearly more multifaceted than the often cited variables of political risk and exchange rate exposure. Cultural danger is perceived as more crucial than political risk, monetary risk, and financial risk. Secondly, even though elements of Arab culture are reported to really 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 economic climates in a few areas of the Middle East, international direct investment (FDI) in the area and, especially, into the Arabian Gulf has been steadily increasing within the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the linked risk seems to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in quantity and quality, as experts and attorneys like Louise Flanagan in Ras Al Khaimah would probably attest. Although various empirical studies have examined the effect of risk on FDI, most analyses have been on political risk. Nonetheless, a fresh focus has materialised in current research, shining a spotlight on an often-neglected aspect particularly cultural facets. In these pioneering studies, the researchers pointed out that businesses and their administration often seriously underestimate the impact of social factors due to a not enough knowledge regarding social factors. In reality, some empirical studies have discovered that cultural differences lower the performance of international enterprises.

This cultural dimension of risk management demands a change in how MNCs run. Adapting to local customs is not just about being familiar with company etiquette; it also involves much deeper cultural integration, such as for example appreciating regional values, decision-making designs, and the societal norms that influence business practices and worker conduct. In GCC countries, successful company relationships are designed on trust and individual connections instead of just being transactional. Additionally, MNEs can benefit from adapting their human resource management to mirror the social profiles of local workers, as variables affecting 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 social intelligence and regional expertise as consultants and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.