Profit sharing under the threat of nationalization

► We model a multinational corporation and a host country sharing profits from natural resource extraction. ► We examine the impact of market uncertainty and threat of nationalization on foreign direct investment. ► The threat of nationalization has no impact on the investment timing but reduces the bargaining solution set. ► To induce investment, profit distribution must trade off the chance of nationalization with the share paid to the investor. ► The optimal sharing rule results from the way the parties differently trade off rents with option values.