Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

The Middle East is attracting global investment, particularly the Gulf region. Find out more about risk management within the gulf.

Despite the political instability and unfavourable fiscal conditions in a few areas of the Middle East, international direct investment (FDI) in the area and, specially, into the Arabian Gulf has been steadily increasing over the past two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the associated risk seems to be important. 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, many analyses have largely been on political risk. However, a brand new focus has emerged in current research, shining a limelight on an often-disregarded aspect specifically cultural variables. In these pioneering studies, the researchers remarked that businesses and their management often really brush aside the impact of cultural facets due to a lack of knowledge regarding cultural factors. In reality, some empirical research reports have discovered that cultural differences lower the performance of multinational enterprises.

This social dimension of risk management requires a shift in how MNCs operate. Conforming to regional customs is not only about being familiar with business etiquette; it also requires much deeper social integration, such as understanding regional values, decision-making styles, and the societal norms that affect business practices and employee conduct. In GCC countries, successful business relationships are built on trust and personal connections instead of just being transactional. Also, MNEs can benefit from adjusting their human resource management to reflect the social profiles of local workers, as factors affecting employee motivation and job satisfaction vary widely across countries. This involves a shift in mind-set and strategy from developing robust financial risk management tools to investing in social intelligence and local expertise as specialists and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.

Much of the prevailing literature on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are tough to quantify. Indeed, plenty of research in the worldwide management field has been dedicated to the management of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk variables which is why hedging or insurance instruments can be developed to mitigate or move a company's risk exposure. But, present studies have brought some fresh and interesting insights. They have sought to fill the main research gaps by providing empirical information about 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 active in the GCC countries, the authors discovered the following. Firstly, the risk related to foreign investments is obviously much more multifaceted compared to the often analyzed variables of political risk and exchange rate exposure. Cultural danger is regarded as more crucial than political risk, economic risk, and financial risk. Secondly, despite the fact that elements of Arab culture are reported to really have a strong influence on the business environment, most firms battle to adapt to local routines and customs.