Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

Studies claim that the prosperity of multinational companies in the Middle East hinges not only on economic acumen, but in addition on understanding and integrating into regional cultures.

Regardless of the political instability and unfavourable economic conditions in a few areas of the Middle East, international direct investment (FDI) in the region and, particularly, in the Arabian Gulf has been continuously increasing within the last 20 years. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk is apparently important. Yet, research on the risk perception of multinationals in the region is lacking in volume and quality, as experts and solicitors 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. However, a brand new focus has come forth in present research, shining a spotlight on an often-overlooked aspect specifically cultural variables. In these groundbreaking studies, the authors remarked that businesses and their management frequently really disregard the effect of social factors due to a lack of knowledge regarding cultural variables. In fact, some empirical research reports have found that cultural differences lower the performance of international enterprises.

This cultural dimension of risk management demands a change in how MNCs do business. Conforming to regional traditions is not just about understanding company etiquette; it also requires much deeper social integration, such as for instance appreciating local values, decision-making styles, and the societal norms that influence company practices and employee 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 adjusting 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 involves a change in mind-set and strategy from developing robust economic risk management tools to investing in cultural intelligence and local expertise as consultants and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.

A lot of the present literature on risk management strategies for multinational corporations illustrates particular uncertainties but omits uncertainties that are tough to quantify. Certainly, plenty of research within the international management field has been dedicated to the handling of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the risk factors for which hedging or insurance coverage instruments can be developed to mitigate or move a company's risk exposure. Nonetheless, current research reports have brought some fresh and interesting insights. They have sought to fill area of the research gaps by providing empirical information about the risk perception of Western multinational corporations and their management strategies on the firm level in the Middle East. In one research after collecting and analysing data from 49 major international companies which are active in the GCC countries, the authors found the following. Firstly, the risk associated with foreign investments is obviously a lot more multifaceted than the usually cited factors of political risk and exchange rate exposure. Cultural danger is perceived as more crucial than political risk, economic risk, and financial risk. Secondly, despite the fact that elements of Arab culture are reported to have a strong impact on the business environment, most firms struggle to adapt to regional routines and customs.