Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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The Middle East is attracting global investment, particularly the Gulf area. Learn more about risk management within the gulf.

This social dimension of risk management demands a shift in how MNCs do business. Adjusting to local customs is not only about understanding company etiquette; it also requires much deeper social integration, such as appreciating regional values, decision-making styles, and the societal norms that affect business practices and worker behaviour. In GCC countries, successful business relationships are designed on trust and individual connections rather than just being transactional. Also, MNEs can benefit from adjusting their human resource administration to reflect the cultural profiles of regional employees, as factors affecting employee motivation and job satisfaction differ widely across cultures. This calls for a shift in mind-set and strategy from developing robust financial risk management tools to investing in social intelligence and regional expertise as specialists and solicitors such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.

Despite the political instability and unfavourable economic conditions in certain areas of the Middle East, foreign direct investment (FDI) in the area and, specially, in the Arabian Gulf has been gradually increasing within the last 20 years. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk seems to be essential. Yet, research regarding the risk perception of multinationals in the area is limited in quantity and quality, as experts and lawyers like Louise Flanagan in Ras Al Khaimah would likely attest. Although different empirical research reports have examined the effect of risk on FDI, most analyses have been on political risk. Nonetheless, a fresh focus has come forth in recent research, shining a limelight on an often-overlooked aspect particularly cultural factors. In these pioneering studies, the writers noticed that companies and their management usually seriously underestimate the impact of social factors as a result of not enough knowledge regarding cultural variables. In fact, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.

A lot of the existing academic work on risk management strategies for multinational corporations emphasises particular uncertainties but omits uncertainties that are tough to quantify. Certainly, lots of research in the international administration field has been dedicated to the management of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the danger factors which is why hedging or insurance instruments are developed to mitigate or transfer a firm's danger exposure. Nevertheless, present studies have brought some fresh and interesting insights. They have sought to fill part of the research gaps by providing empirical understanding of the risk perception of Western multinational corporations and their management methods on the firm level within the Middle East. In one investigation after gathering and analysing information from 49 major worldwide businesses which are have extensive operations in the GCC countries, the authors found the following. Firstly, the risk related to foreign investments is clearly a lot more multifaceted than the frequently analyzed factors of political risk and exchange rate exposure. Cultural risk is perceived as more important than political risk, monetary risk, and financial danger. Secondly, even though elements of Arab culture are reported to have a strong impact on the business environment, most firms find it difficult to adapt to local routines and traditions.