Real Options in Foreign Investment: A South American Case Study

Abstract

The levels of foreign investment globally have increased at a rapid pace during recent years. However valuing these investments is complex and involves additional risks. We argue that foreign investment opportunities can often be best structured as a series of investment options, and thus the investment appraisal should often be carried out using a real options framework. The ability to expand globally is now a core corporate skill. Quality appraisals will assist businesses to make fundamentally better capital budgeting decisions. We illustrate the use of real option investment appraisal via a case study re-traces Force Corporation’s troubled investment via Village South America in Argentina. A FDI investment decision is recreated and evaluated.