Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

Blog Article

Find out more exactly how Western multinational corporations perceive and handle dangers within the Middle East.

In spite of the political instability and unfavourable fiscal conditions in some parts of the Middle East, international direct investment (FDI) in the area and, especially, 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 associated risk is apparently crucial. Yet, research on the risk perception of multinationals in the area is lacking in quantity and quality, as consultants and solicitors like Louise Flanagan in Ras Al Khaimah may likely attest. Although various empirical studies have investigated the effect of risk on FDI, many analyses have largely been on political risk. Nonetheless, a brand new focus has appeared in recent research, shining a limelight on an often-ignored aspect namely cultural facets. In these groundbreaking studies, the authors remarked that businesses and their management usually seriously underestimate the effect of cultural facets due to a not enough knowledge regarding cultural factors. In reality, some empirical studies have unearthed that cultural differences lower the performance of multinational enterprises.

A lot of the present literature on risk management strategies for multinational corporations emphasises particular uncertainties but omits uncertainties that are hard to quantify. Indeed, plenty of research in 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. Nevertheless, recent research reports have brought some fresh and interesting insights. They have sought to fill part of the research gaps by giving empirical knowledge about the risk perception of Western multinational corporations and their administration techniques on the firm level within the Middle East. In one investigation after collecting and analysing information from 49 major international businesses which are active in the GCC countries, the authors discovered the following. Firstly, the risk associated with foreign investments is actually much more multifaceted compared to usually examined variables of political risk and exchange rate visibility. Cultural risk is perceived as more essential than political risk, monetary risk, and financial danger. Secondly, even though aspects of Arab culture are reported to really have a strong impact on the business environment, most firms struggle to adapt to local routines and traditions.

This social dimension of risk management calls for a shift in how MNCs function. Conforming to local customs is not only about being familiar with business etiquette; it also involves much deeper social integration, such as for example appreciating local values, decision-making styles, and the societal norms that affect business practices and worker conduct. In GCC countries, successful business relationships are made on trust and individual connections instead of just being transactional. Furthermore, MNEs can benefit from adapting their human resource administration to mirror the social profiles of local employees, as factors affecting employee motivation and job satisfaction differ widely across countries. This calls for a shift in mindset and strategy from developing robust financial risk management tools to investing in cultural intelligence and regional expertise as specialists and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would probably suggest.