Valuation of an R&D project with three types of uncertainty

Michi Nishihara ()
Additional contact information
Michi Nishihara: Osaka University

EURO Journal on Decision Processes, 2018, vol. 6, issue 1, No 7, 93-113

Abstract: Abstract This paper develops an R&D decision-making model in the real options framework. The model is generic enough to capture three types of uncertainty in an R&D project, namely, uncertainty of research duration and costs, market value of technology, and a competitor’s technology development. I derive analytical solutions, which help practitioners and researchers to evaluate various cases of R&D investment. Further, by analyzing the model with a wide range of parameter values, I reveal the following effects of the three types of uncertainty on R&D investment: higher uncertainty of research duration and costs, unlike market value uncertainty, speeds up investment, especially combined with a higher risk of competition. The investment timing can be U-shaped in the strength of competition because of the trade-off between the preemptive investment effect and the decreased project value effect. These results can account for empirical findings about the uncertainty–investment relation in industries with high R&D intensity and severe competition.

Keywords: Capital budgeting; Decision analysis; R&D; Real options; 60G40; 91G50 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s40070-018-0076-5 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:eurjdp:v:6:y:2018:i:1:d:10.1007_s40070-018-0076-5

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/40070

DOI: 10.1007/s40070-018-0076-5

Access Statistics for this article

EURO Journal on Decision Processes is currently edited by Vincent Mousseau

More articles in EURO Journal on Decision Processes from Springer, EURO - The Association of European Operational Research Societies
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().