Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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According to present research, an important challenge for companies in the GCC is adapting to regional customs and business practices. Discover more about this right here.

This social dimension of risk management calls for a shift in how MNCs function. Adjusting to local traditions is not just about understanding business etiquette; it also requires much deeper social integration, such as appreciating local values, decision-making designs, and the societal norms that affect company practices and employee behaviour. In GCC countries, successful business relationships are made on trust and individual connections instead of just being transactional. Furthermore, MNEs can take advantage of adjusting their human resource administration to mirror the social profiles of regional employees, as factors influencing employee motivation and job satisfaction vary widely across countries. This calls for a change in mind-set and strategy from developing robust financial risk management tools to investing in cultural intelligence and local expertise as experts and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.

Despite the political instability and unfavourable fiscal conditions in a few areas of the Middle East, international direct investment (FDI) in the area and, especially, within the Arabian Gulf has been considerably increasing within the last 20 years. The relevance of the Middle East and Gulf areas is growing for FDI, and the linked risk seems to be important. Yet, research regarding the risk perception of multinationals in the area is lacking in volume and quality, as specialists and lawyers like Louise Flanagan in Ras Al Khaimah would probably attest. Although different empirical research reports have examined the effect of risk on FDI, many analyses have largely been on political risk. However, a brand new focus has come forth in current research, shining a limelight on an often-neglected aspect specifically cultural variables. In these pioneering studies, the authors pointed out that companies and their administration usually really brush aside the effect of social factors because of a lack of knowledge regarding social factors. In reality, some empirical studies have found that cultural differences lower the performance of multinational enterprises.

A lot of the prevailing academic work on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are hard to quantify. Indeed, plenty of research within the international management field has focused on the handling of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk variables which is why hedging or insurance instruments can be developed to mitigate or move a firm's risk visibility. Nonetheless, current studies have brought some fresh and interesting insights. They have sought to fill an element of the research gaps by giving empirical understanding of the risk perception of Western multinational corporations and their management methods at the firm level within the Middle East. In one investigation after collecting and analysing information from 49 major international companies which are have extensive operations in the GCC countries, the authors found the following. Firstly, the risk connected with foreign investments is actually more multifaceted than the usually analyzed factors of political risk and exchange rate visibility. Cultural risk is perceived as more essential than political risk, economic risk, and financial risk. Secondly, even though elements of Arab culture are reported to have a strong impact on the business environment, most firms battle to adapt to local routines and traditions.