Is political risk overemphasised in FDI research

Is political risk overemphasised in FDI research

Blog Article

The Middle East is attracting global investment, especially the Gulf region. Discover more about risk management within the gulf.

Much of the existing academic work on risk management strategies for multinational corporations emphasises particular uncertainties but omits uncertainties that are tough to quantify. Indeed, a lot of research within the worldwide management field has focused on the management of either political risk or foreign currency exchange uncertainties. Finance and insurance coverage literature emphasises the risk factors which is why hedging or insurance instruments can be developed to mitigate or move a company's risk visibility. Nonetheless, current studies have brought some fresh and interesting insights. They have sought to fill part 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 businesses that are active in the GCC countries, the authors discovered the following. Firstly, the risk related to foreign investments is obviously a great deal more multifaceted compared to frequently cited factors of political risk and exchange rate visibility. Cultural risk is regarded as more crucial than political risk, financial danger, and economic danger. Secondly, even though aspects of Arab culture are reported to really have a strong influence on the business environment, most firms find it difficult to adapt to local routines and traditions.

This cultural dimension of risk management calls for a shift in how MNCs do business. Conforming to local customs is not only about being familiar with business etiquette; it also requires much deeper social integration, such as understanding local values, decision-making styles, and the societal norms that affect business practices and employee conduct. In GCC countries, successful business relationships are designed on trust and personal connections instead of just being transactional. Also, MNEs can benefit from adjusting their human resource management to mirror the cultural profiles of regional workers, as factors affecting employee motivation and job satisfaction vary widely across countries. This requires a change in mindset and strategy from developing robust monetary risk management tools to investing in cultural intelligence and regional expertise as experts and solicitors such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.

In spite of the political instability and unfavourable fiscal conditions in some areas of the Middle East, foreign direct investment (FDI) in the region and, specially, within the Arabian Gulf has been steadily increasing in the last 20 years. The relevance of the Middle East and Gulf markets is growing for FDI, and the linked risk seems to be crucial. Yet, research regarding the risk perception of multinationals in the region is lacking in quantity and quality, as professionals and lawyers like Louise Flanagan in Ras Al Khaimah may likely attest. Although different empirical studies have investigated the effect of risk on FDI, many analyses have been on political risk. However, a new focus has come forth in recent research, shining a limelight on an often-disregarded aspect specifically cultural facets. In these pioneering studies, the writers remarked that companies and their management often seriously overlook the impact of social factors due to a not enough knowledge regarding social variables. In fact, some empirical research reports have unearthed that cultural differences lower the performance of multinational enterprises.