How Much Value within Foreign Direct Investment Can a Government Destroy?

Abstract

This article employs techniques from real options analysis to determine an actual value that can be gained or lost due to government policy instead of a speculated value. Although a government commits to promoting a particular area of business (in this case, the sugar industry in Vietnam), implementation and conflicting policies can make the investment much less profitable. By employing real options analysis, the investor receives a clearer picture of the losses and gains under a particular governmental policy, which should lead to more prudent investment decisions.

TOPICS: Legal/regulatory/public policy, risk management