Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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According to present research, a major challenge for firms in the GCC is adapting to regional customs and business practices. Learn more about this here.

This cultural dimension of risk management demands a shift in how MNCs operate. Conforming to local traditions is not only about understanding company etiquette; it also involves much deeper social integration, such as understanding local values, decision-making designs, and the societal norms that impact company practices and employee conduct. In GCC countries, successful business relationships are designed on trust and personal connections instead of just being transactional. Moreover, MNEs can benefit from adjusting their human resource management to reflect the social profiles of local workers, as factors affecting employee motivation and job satisfaction vary widely across countries. This requires a change in mindset and strategy from developing robust economic risk management tools to investing in cultural intelligence and local expertise as specialists and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.

A lot of the present academic work on risk management strategies for multinational corporations features particular uncertainties but omits uncertainties that are tough to quantify. Indeed, lots of research within the international administration field has centered on the management of either political risk or foreign exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables 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 area of the research gaps by giving empirical knowledge about the risk perception of Western multinational corporations and their administration methods at the firm level within the Middle East. In one research after collecting and analysing information from 49 major worldwide companies that are have extensive operations 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 factors of political risk and exchange rate visibility. Cultural danger is perceived as more important than political risk, economic danger, and financial risk. Secondly, even though elements of Arab culture are reported to really have a strong impact on the business environment, most firms struggle to adapt to local routines and customs.

Regardless of the political uncertainty and unfavourable economic climates in some parts of the Middle East, foreign direct investment (FDI) in the area and, specially, into the Arabian Gulf has been gradually increasing in the last two decades. The relevance of the Middle East and Gulf areas is growing for FDI, and the linked risk is apparently important. Yet, research on the risk perception of multinationals in the region is limited in quantity and quality, as experts and attorneys like Louise Flanagan in Ras Al Khaimah may 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 emerged in recent research, shining a spotlight on an often-ignored aspect specifically cultural variables. In these groundbreaking studies, the writers noticed that companies and their management frequently seriously disregard the effect of cultural factors due to a lack of knowledge regarding cultural variables. In fact, some empirical studies have found that cultural differences lower the performance of international enterprises.