Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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Find out more on how Western multinational corporations perceive and handle risks in the Middle East.

This social dimension of risk management requires a change in how MNCs work. Conforming to local traditions is not just about being familiar with business etiquette; it also requires much deeper social 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. Moreover, MNEs can reap the benefits of adapting their human resource administration to mirror the cultural profiles of regional workers, as factors affecting employee motivation and job satisfaction differ widely across cultures. This involves a change in mind-set and strategy from developing robust financial risk management tools to investing in social intelligence and regional expertise as consultants and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.

A lot of the prevailing literature on risk management strategies for multinational corporations features particular uncertainties but omits uncertainties that are tough to quantify. Indeed, plenty of research in the international administration field has centered on the handling of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk variables which is why hedging or insurance coverage instruments could be developed to mitigate or transfer a company's danger exposure. Nonetheless, present research reports have brought some fresh and interesting insights. They have sought to fill part of the research gaps by providing empirical information about the risk perception of Western multinational corporations and their administration methods at the firm level in the Middle East. In one research after gathering and analysing data from 49 major international companies that are active in the GCC countries, the authors found the following. Firstly, the risk related to foreign investments is obviously a lot more multifaceted compared to the usually cited variables of political risk and exchange rate visibility. Cultural danger is regarded as more essential than political risk, monetary danger, and economic danger. Secondly, despite the fact that elements of Arab culture are reported to really have a strong impact on the business environment, most firms battle to adapt to regional routines and traditions.

In spite of the political uncertainty and unfavourable economic climates in certain elements of the Middle East, international direct investment (FDI) in the area and, specially, within the Arabian Gulf has been continuously increasing in the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk seems to be important. Yet, research on the risk perception of multinationals in the region is limited in volume and quality, as specialists and solicitors like Louise Flanagan in Ras Al Khaimah would probably attest. Although different empirical research reports have examined the effect of risk on FDI, most analyses have been on political risk. Nevertheless, a new focus has appeared in recent research, shining a spotlight on an often-overlooked aspect namely cultural facets. In these revolutionary studies, the writers noticed that companies and their management often really overlook the effect of social facets due to a lack of knowledge regarding cultural variables. In reality, some empirical research reports have unearthed that cultural differences lower the performance of multinational enterprises.