Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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Studies claim that the success of international businesses within the Middle East hinges not merely on economic acumen, but additionally on understanding and integrating into local cultures.

This social dimension of risk management calls for a change in how MNCs work. Adjusting to regional customs is not only about understanding company etiquette; it also requires much deeper cultural integration, such as for example appreciating regional values, decision-making styles, and the societal norms that affect business practices and employee conduct. In GCC countries, successful business relationships are made on trust and personal connections instead of just being transactional. Moreover, MNEs can reap the benefits of adapting their human resource administration to reflect the social profiles of local workers, as variables influencing employee motivation and job satisfaction differ widely across cultures. This calls for a shift 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 probably suggest.

Much 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 management field has been dedicated to the management of either political risk or foreign currency exchange uncertainties. Finance and insurance coverage literature emphasises the risk variables which is why hedging or insurance instruments could be developed to mitigate or move a firm's risk 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 strategies at the company level within the Middle East. In one investigation 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 even more multifaceted than the frequently analyzed variables of political risk and exchange rate visibility. Cultural risk is perceived as more crucial than political risk, economic danger, and financial risk. Secondly, even though aspects of Arab culture are reported to really have a strong impact on the business environment, most firms battle to adapt to regional routines and customs.

Despite the political instability and unfavourable fiscal conditions in certain elements of the Middle East, international direct investment (FDI) in the region and, particularly, in the Arabian Gulf has been continuously increasing within the last 20 years. The relevance of the Middle East and Gulf areas is growing for FDI, and the associated risk seems to be important. Yet, research on the risk perception of multinationals in the region is limited in amount and quality, as professionals and attorneys like Louise Flanagan in Ras Al Khaimah would probably attest. Although different empirical research reports have examined the effect of risk on FDI, many analyses have been on political risk. Nevertheless, a new focus has surfaced 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 neglect the impact of cultural factors because of a lack of knowledge regarding social factors. In reality, some empirical research reports have discovered that cultural differences lower the performance of international enterprises.