Is political risk overemphasised in FDI research

Is political risk overemphasised in FDI research

Blog Article

Studies suggest that the prosperity of multinational companies in the Middle East hinges not just on financial acumen, but in addition on understanding and integrating into regional cultures.

In spite of the political uncertainty and unfavourable fiscal conditions in some areas of the Middle East, foreign direct investment (FDI) in the region and, specially, into the Arabian Gulf has been considerably increasing in the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the associated risk is apparently essential. Yet, research on the risk perception of multinationals in the region is lacking in amount and quality, as consultants and solicitors like Louise Flanagan in Ras Al Khaimah would probably attest. Although various empirical studies have investigated the effect of risk on FDI, most analyses have been on political risk. Nevertheless, a fresh focus has materialised in present research, shining a limelight on an often-ignored aspect namely cultural factors. In these revolutionary studies, the writers pointed out that businesses and their management usually really disregard the impact of social facets because of a not enough 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 illustrates particular uncertainties but omits uncertainties that are hard to quantify. Indeed, plenty of research within the worldwide management field has centered on the management of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the danger factors for which hedging or insurance coverage instruments could be developed to mitigate or transfer a company's risk visibility. However, present studies have brought some fresh and interesting insights. They have sought to fill area of the research gaps by providing empirical information about the risk perception of Western multinational corporations and their management strategies on the firm level in the Middle East. In one research after collecting and analysing information from 49 major worldwide companies which are active in the GCC countries, the authors discovered the following. Firstly, the risk associated with foreign investments is actually more multifaceted compared to the frequently analyzed variables of political risk and exchange rate exposure. Cultural danger is perceived as more crucial than political risk, financial risk, and financial risk. Secondly, despite the fact that aspects of Arab culture are reported to really have a strong impact on the business environment, most firms struggle to adapt to regional routines and traditions.

This cultural dimension of risk management requires a change in how MNCs function. Conforming to local traditions is not just about understanding company etiquette; it also involves much deeper social integration, such as understanding local values, decision-making designs, and the societal norms that affect business practices and worker conduct. In GCC countries, successful company relationships are designed on trust and personal connections instead of just being transactional. Moreover, MNEs can reap the benefits of adapting their human resource administration to mirror the cultural profiles of local workers, as variables affecting employee motivation and job satisfaction differ widely across cultures. This calls for a change in mindset and strategy from developing robust monetary risk management tools to investing in cultural intelligence and regional expertise as experts and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.