Is political risk overemphasised in FDI research

Is political risk overemphasised in FDI research

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

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 involves much deeper social integration, such as for instance understanding local values, decision-making designs, and the societal norms that impact company practices and employee conduct. In GCC countries, successful business relationships are designed 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 factors influencing employee motivation and job satisfaction differ widely across cultures. This calls for a shift in mind-set and strategy from developing robust financial risk management tools to investing in social intelligence and local expertise as professionals and lawyers such Salem Al Kait and Ammar Haykal in Ras Al Khaimah would likely suggest.

A lot of the prevailing literature on risk management strategies for multinational corporations emphasises particular uncertainties but omits uncertainties that are difficult to quantify. Certainly, plenty of research within the worldwide management field has centered on the handling of either political risk or foreign exchange uncertainties. Finance and insurance coverage literature emphasises the danger factors for which hedging or insurance coverage instruments can be developed to mitigate or transfer a company's danger exposure. Nonetheless, present studies have brought some fresh and interesting insights. They have sought to fill area of the research gaps by giving empirical knowledge about the risk perception of Western multinational corporations and their administration methods at the firm level within the Middle East. In one research after collecting and analysing data from 49 major worldwide businesses that are active in the GCC countries, the authors found the following. Firstly, the risk connected with foreign investments is obviously a lot more multifaceted compared to the frequently examined factors of political risk and exchange rate visibility. Cultural danger is perceived as more important than political risk, economic danger, 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 fiscal conditions in certain parts of the Middle East, foreign direct investment (FDI) in the region and, especially, within the Arabian Gulf has been considerably increasing over the past two decades. The relevance of the Middle East and Gulf markets is growing for FDI, and the associated risk appears to be crucial. Yet, research regarding the risk perception of multinationals in the area is lacking in volume and quality, as consultants and lawyers like Louise Flanagan in Ras Al Khaimah may likely attest. Although various empirical studies have investigated the effect of risk on FDI, most analyses have been on political risk. However, a brand new focus has come forth in present research, shining a limelight on an often-disregarded aspect particularly cultural factors. In these pioneering studies, the authors pointed out that companies and their management often seriously take too lightly the impact of cultural factors because of a not enough knowledge regarding social factors. In reality, some empirical research reports have unearthed that cultural differences lower the performance of international enterprises.