Why political risk overemphasised in FDI analysis

Why political risk overemphasised in FDI analysis

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Studies claim that the prosperity of multinational corporations within the Middle East hinges not merely on economic acumen, but also on understanding and integrating into regional cultures.

A lot of the existing academic work on risk management strategies for multinational corporations demonstrates particular uncertainties but omits uncertainties that are difficult to quantify. Certainly, lots of research within the international administration field has centered on the management of either political risk or foreign currency exchange uncertainties. Finance and insurance literature emphasises the risk variables for which hedging or insurance instruments can be developed to mitigate or transfer a company's risk visibility. However, present studies have brought some fresh and interesting insights. They have sought to fill area of the research gaps by providing empirical understanding of the risk perception of Western multinational corporations and their administration strategies on the firm level within the Middle East. In one investigation after collecting and analysing information from 49 major worldwide companies which are active in the GCC countries, the authors found the following. Firstly, the risk connected with foreign investments is obviously a great deal more multifaceted than the often cited factors of political risk and exchange rate exposure. Cultural danger is regarded as more important than political risk, economic danger, and economic risk. Secondly, despite the fact that aspects of Arab culture are reported to have a strong impact on the business environment, most firms battle to adapt to local routines and customs.

In spite of the political instability and unfavourable economic climates in some areas of the Middle East, international direct investment (FDI) in the region and, especially, into the Arabian Gulf has been continuously increasing within the last two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the linked risk is apparently important. Yet, research on the risk perception of multinationals in the area is lacking in volume and quality, as experts and attorneys like Louise Flanagan in Ras Al Khaimah would probably attest. Although different empirical studies have investigated the effect of risk on FDI, many analyses have largely been on political risk. Nonetheless, a new focus has appeared in current research, shining a limelight on an often-neglected 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 facets as a result of not enough knowledge regarding social factors. In reality, some empirical research reports have unearthed that cultural differences lower the performance of multinational enterprises.

This social dimension of risk management demands a change in how MNCs operate. Adjusting to local customs is not just about understanding business etiquette; it also involves much deeper cultural integration, such as for example appreciating local values, decision-making designs, and the societal norms that affect company practices and worker conduct. In GCC countries, successful company relationships are designed on trust and individual connections instead of just being transactional. Additionally, MNEs can benefit from adapting their human resource management to reflect the cultural profiles of local employees, as factors influencing employee motivation and job satisfaction vary widely across cultures. This requires a change in mind-set and strategy from developing robust monetary 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 probably suggest.