Abstract
This research extends the real option with preemption and uncertainty framework of Lambrecht and Perraudin [8] to foreign direct investment. This is a mix of strategic game theory where the foreign investor and its local competitor impact each other‘s project values and real option analysis. The optimal investment strategy will depend on the distribution of competitors' costs and the implied fear of expropriation by the local competitor with the assistance of the host government. The model has empirical implications for the strategic behavior of foreign direct investors. These implications are illustrated with a stylized example from a recent high profile, foreign direct natural resource investment in the Russian Far East by a consortium of Japanese and European companies.
