Question

Suppose you are the head of a major oil company and are considering building a new oil rig in a foreign country with large oil reserves. However, the government of that country has a history of seizing infrastructure owned by foreign countries. How would this history affect your decision to build physical capital there?

Answer 1

Since the government of the country has a history of seiing infrastructure owned by foreign countries, the company must look to minimize this risk. A potential solution could be to partner with a local oil company in part to make it seem like it is a joint venture which could make the government less reluctant to seize the infrastructure. The existence of this risk also needs to be factored into the cost of building physical capital since it will be effectively worthless if the total cost with the risk is higher than the benefits that can be derived from the physical capital. The company should also calculate if boosting local employment reduces the risk of seizure and try to hire as many local workers as possible in order to accomplish this.