Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

According to present research, an important challenge for companies within the GCC is adapting to local customs and business practices. Find out more about this here.

Much of the existing literature on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are difficult to quantify. Indeed, plenty of research within the worldwide administration 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 instruments can be developed to mitigate or transfer a company's danger visibility. But, recent studies 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 on the firm level in the Middle East. In one research after gathering and analysing data from 49 major worldwide businesses that are active in the GCC countries, the authors discovered the following. Firstly, the risk connected with foreign investments is actually a lot more multifaceted compared to frequently analyzed factors of political risk and exchange rate visibility. Cultural danger is regarded as more crucial than political risk, monetary danger, and economic danger. Secondly, despite the fact that elements of Arab culture are reported to really have a strong influence on the business environment, most firms find it difficult to adapt to local routines and traditions.

This social dimension of risk management requires a shift in how MNCs operate. Conforming to local traditions is not only about understanding company etiquette; it also involves much deeper social integration, such as for instance appreciating local values, decision-making designs, and the societal norms that affect business practices and worker behaviour. In GCC countries, successful business relationships are designed on trust and personal connections rather than just being transactional. Additionally, MNEs can take advantage of adjusting their human resource administration to reflect the social profiles of local workers, as variables influencing employee motivation and job satisfaction differ widely across countries. This requires a change in mindset and strategy from developing robust financial risk management tools to investing in social intelligence and local expertise as consultants and solicitors such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.

Regardless of the political instability and unfavourable economic climates in a few elements of the Middle East, international direct investment (FDI) in the region and, especially, in the Arabian Gulf has been continuously increasing over the past two decades. The relevance of the Middle East and Gulf areas is growing for FDI, and the associated risk is apparently crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in quantity and quality, as specialists and lawyers like Louise Flanagan in Ras Al Khaimah may likely attest. Although different empirical studies have examined the effect of risk on FDI, many analyses have largely been on political risk. However, a brand new focus has appeared in current research, shining a limelight on an often-neglected aspect namely cultural variables. In these pioneering studies, the writers pointed out that businesses and their management frequently really disregard the effect of cultural facets because of a not enough knowledge regarding social variables. In reality, some empirical studies have discovered that cultural differences lower the performance of international enterprises.