"Investment under uncertainty and the threat of nationalization"

Abstract : The paper discusses how the threat of nationalization affects the timing and scale of foreign investments, and how do these two factors impact the exercise of the nationalization option on the host country side. I show that an increase in the nationalization risk, e.g. due to lower sanctions towards the local government, will result in underinvestment, both in terms of timing and in terms of scale, as well as hastened nationalization. Hence the threat of nationalization leads to premature and undersized investments, rather than deterring them entirely.