Is political risk overemphasised in FDI research

Is political risk overemphasised in FDI research

Blog Article

Studies claim that the success of international corporations within the Middle East hinges not only on financial acumen, but in addition on understanding and integrating into regional cultures.

Much of the present academic work on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are tough to quantify. Indeed, plenty of research in the worldwide administration field has focused on the handling of either political risk or foreign exchange uncertainties. Finance and insurance literature emphasises the danger factors for which hedging or insurance coverage instruments can be developed to mitigate or move a company's risk visibility. However, current research reports have brought some fresh and interesting insights. They have sought to fill the main research gaps by giving empirical understanding of the risk perception of Western multinational corporations and their administration methods on the firm level within the Middle East. In one research after collecting and analysing data from 49 major worldwide companies that are have extensive operations in the GCC countries, the authors found the following. Firstly, the risk related to foreign investments is clearly far more multifaceted compared to usually cited factors of political risk and exchange rate exposure. Cultural danger is regarded as more important than political risk, financial risk, and financial danger. Secondly, even though aspects of Arab culture are reported to have a strong impact on the business environment, most firms battle to adapt to regional routines and customs.

Despite the political instability and unfavourable economic climates in certain parts of the Middle East, foreign direct investment (FDI) in the region and, especially, into the Arabian Gulf has been steadily increasing over the past two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the connected risk is apparently essential. 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 would probably attest. Although various empirical studies have investigated the effect of risk on FDI, many analyses have largely been on political risk. Nevertheless, a new focus has appeared in present research, shining a limelight on an often-disregarded aspect particularly cultural facets. In these pioneering studies, the authors pointed out that companies and their management frequently seriously brush aside the effect of social factors because of a lack of knowledge regarding cultural variables. In reality, some empirical research reports have discovered that cultural differences lower the performance of international enterprises.

This social dimension of risk management requires a change in how MNCs function. Conforming to regional traditions is not only about being familiar with company etiquette; it also requires much deeper cultural integration, such as for instance appreciating local values, decision-making styles, and the societal norms that influence business practices and employee behaviour. In GCC countries, successful company relationships are built on trust and personal connections instead of just being transactional. Additionally, MNEs can reap the benefits of adjusting their human resource administration to reflect the cultural profiles of local employees, as variables affecting employee motivation and job satisfaction differ widely across countries. This involves a shift in mindset and strategy from developing robust financial risk management tools to investing in social intelligence and regional expertise as professionals and attorneys such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.