Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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According to current research, a major challenge for businesses within the GCC is adapting to local customs and business practices. Discover more about this right here.

This cultural dimension of risk management calls for a change in how MNCs work. Adjusting to local traditions is not only about being familiar with company etiquette; it also requires much deeper cultural integration, such as for example appreciating regional values, decision-making designs, and the societal norms that influence company practices and employee conduct. In GCC countries, successful business relationships are built on trust and individual connections rather than just being transactional. Also, MNEs can take advantage of adapting their human resource administration to mirror the cultural profiles of regional employees, as factors affecting employee motivation and job satisfaction vary widely across countries. This requires a change in mind-set and strategy from developing robust economic risk management tools to investing in social intelligence and local expertise as professionals and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.

A lot of the existing academic work on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are hard to quantify. Certainly, a lot of research within the international management field has been dedicated to the management of either political risk or foreign currency exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables which is why hedging or insurance instruments are developed to mitigate or transfer a firm's danger visibility. However, current research reports have brought some fresh and interesting insights. They have sought to fill the main research gaps by giving empirical information about the risk perception of Western multinational corporations and their management methods on the firm level within the Middle East. In one research after gathering and analysing information from 49 major international businesses which are active in the GCC countries, the authors discovered the following. Firstly, the risk associated with foreign investments is obviously even more multifaceted than the frequently analyzed variables of political risk and exchange rate visibility. Cultural risk is perceived as more crucial than political risk, monetary risk, and economic risk. Secondly, even though elements of Arab culture are reported to really have a strong impact on the business environment, most firms struggle to adapt to local routines and traditions.

Regardless of the political uncertainty and unfavourable economic conditions in some areas of the Middle East, international direct investment (FDI) in the area and, particularly, within the Arabian Gulf has been considerably increasing within the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the associated risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in amount and quality, as specialists and solicitors like Louise Flanagan in Ras Al Khaimah would likely attest. Although various empirical studies have investigated the effect of risk on FDI, many analyses have been on political risk. However, a fresh focus has come forth in present research, shining a limelight on an often-disregarded aspect particularly cultural facets. In these revolutionary studies, the researchers remarked that businesses and their administration usually really overlook the effect of social facets as a result of not enough knowledge regarding social variables. In fact, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.