Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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According to recent research, a major challenge for companies within the GCC is adjusting to local customs and business practices. Find out more about this right here.

In spite of the political uncertainty and unfavourable fiscal conditions in some elements of the Middle East, international direct investment (FDI) in the region and, particularly, into the Arabian Gulf has been steadily increasing within the last 20 years. The relevance of the Middle East and Gulf markets is growing for FDI, and the linked risk appears to be important. Yet, research regarding the risk perception of multinationals in the area is limited in volume and quality, as professionals and attorneys like Louise Flanagan in Ras Al Khaimah would likely attest. Although different empirical research reports have investigated the effect of risk on FDI, many analyses have been on political risk. Nevertheless, a fresh focus has appeared in recent research, shining a limelight on an often-neglected aspect namely cultural facets. In these groundbreaking studies, the authors noticed that companies and their administration often really disregard the impact of social factors due to a lack of knowledge regarding social variables. In reality, some empirical studies have unearthed that cultural differences lower the performance of multinational enterprises.

A lot of the present academic work on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are difficult to quantify. Certainly, a lot of research within the worldwide administration field has focused on the handling of either political risk or foreign exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables for which hedging or insurance coverage instruments can be developed to mitigate or move a firm's risk visibility. Nonetheless, present research reports have brought some fresh and interesting insights. They have sought to fill area of the research gaps by providing empirical understanding of the risk perception of Western multinational corporations and their administration techniques at the firm level in the Middle East. In one research after collecting and analysing information from 49 major international companies that are have extensive operations in the GCC countries, the authors found the following. Firstly, the risk connected with foreign investments is obviously a lot more multifaceted compared to usually examined variables of political risk and exchange rate visibility. Cultural risk is regarded as more essential than political risk, financial danger, and financial risk. Secondly, even though elements of Arab culture are reported to really have a strong influence on the business environment, most firms find it difficult to adapt to regional routines and customs.

This cultural dimension of risk management requires a change in how MNCs run. Conforming to regional customs is not just about being familiar with company etiquette; it also involves much deeper cultural integration, such as for instance understanding regional values, decision-making styles, and the societal norms that impact company practices and worker conduct. In GCC countries, successful business relationships are built on trust and individual connections rather than just being transactional. Also, MNEs can reap the benefits of adjusting their human resource management to reflect the cultural profiles of regional workers, as variables influencing employee motivation and job satisfaction vary widely across cultures. This calls for a change in mind-set and strategy from developing robust economic 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 may likely suggest.