Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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Find out more on how Western multinational corporations perceive and manage risks within the Middle East.

This cultural dimension of risk management demands a change in how MNCs function. Adjusting to regional customs is not only about being familiar with business etiquette; it also requires much deeper cultural integration, such as for example appreciating regional values, decision-making styles, and the societal norms that impact company practices and employee conduct. In GCC countries, successful business relationships are made on trust and individual connections rather than just being transactional. Additionally, MNEs can benefit from adjusting their human resource management to reflect the social profiles of local employees, as variables influencing employee motivation and job satisfaction differ widely across countries. This requires a change in mind-set and strategy from developing robust financial risk management tools to investing in social intelligence and regional expertise as experts and solicitors such Salem Al Kait and Ammar Haykal in Ras Al Khaimah may likely suggest.

A lot of the existing academic work on risk management strategies for multinational corporations emphasises particular uncertainties but omits uncertainties that are hard to quantify. Certainly, plenty of research in the international administration 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 coverage instruments can be developed to mitigate or transfer a company's danger visibility. However, current research reports have brought some fresh and interesting insights. They have sought to fill part of the research gaps by providing empirical understanding of the risk perception of Western multinational corporations and their administration methods at the firm level in the Middle East. In one research after gathering and analysing information from 49 major international companies that are have extensive operations in the GCC countries, the authors discovered the following. Firstly, the risk connected with foreign investments is obviously more multifaceted compared to the usually examined factors of political risk and exchange rate exposure. Cultural risk is perceived as more crucial than political risk, monetary danger, and financial danger. Secondly, even though aspects of Arab culture are reported to have a strong influence on the business environment, most firms find it difficult to adapt to local routines and traditions.

Regardless of the political uncertainty and unfavourable economic climates in certain elements of the Middle East, foreign direct investment (FDI) in the region and, particularly, in the Arabian Gulf has been continuously increasing in the last 20 years. The relevance of the Middle East and Gulf areas is growing for FDI, and the connected risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in amount and quality, as professionals 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, most analyses have been on political risk. However, a brand new focus has appeared in current research, shining a spotlight on an often-ignored aspect specifically cultural factors. In these pioneering studies, the authors pointed out that companies and their administration usually really brush aside the effect of social factors due to a lack of knowledge regarding cultural factors. In reality, some empirical research reports have discovered that cultural differences lower the performance of multinational enterprises.