Is political risk overemphasised in FDI research

Is political risk overemphasised in FDI research

Blog Article

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

In spite of the political uncertainty and unfavourable economic conditions in some parts of the Middle East, foreign direct investment (FDI) in the region and, particularly, within the Arabian Gulf has been progressively increasing within the last 20 years. The relevance of the Middle East and Gulf areas is growing for FDI, and the linked risk is apparently essential. Yet, research regarding the risk perception of multinationals in the area is limited in quantity and quality, as consultants 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, many analyses have largely been on political risk. Nonetheless, a fresh focus has materialised in present research, shining a limelight on an often-disregarded aspect particularly cultural variables. In these groundbreaking studies, the writers noticed that companies and their management often seriously underestimate the impact of social facets due to a lack of knowledge regarding cultural variables. In reality, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.

This cultural dimension of risk management calls for a shift in how MNCs do business. Conforming to regional customs is not just about understanding company etiquette; it also requires much deeper cultural integration, such as understanding regional values, decision-making styles, and the societal norms that influence business practices and worker conduct. In GCC countries, successful business relationships are built on trust and individual connections instead of just being transactional. Moreover, 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 vary widely across cultures. This calls for 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 may likely suggest.

Much of the prevailing literature on risk management strategies for multinational corporations highlights particular uncertainties but omits uncertainties that are tough to quantify. Indeed, a lot of research within the international administration field has centered on the management of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the danger variables for which hedging or insurance coverage instruments can be developed to mitigate or move a firm's danger exposure. However, present studies have brought some fresh and interesting insights. They have sought to fill an element of the research gaps by providing empirical knowledge about the risk perception of Western multinational corporations and their administration strategies on the firm level within the Middle East. In one investigation after gathering and analysing data from 49 major worldwide companies which are active in the GCC countries, the authors discovered the following. Firstly, the risk related to foreign investments is obviously even more multifaceted compared to usually analyzed variables of political risk and exchange rate exposure. Cultural risk is regarded as more important than political risk, economic danger, and economic danger. 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.