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Effects of creative destruction on the size and timing of an investment

Anne G. Balter, Kuno J.M. Huisman and Peter Kort

International Journal of Production Economics, 2022, vol. 252, issue C

Abstract: Today’s economy is innovation driven. Besides the launch of new innovative products, this implies that established products have a finite lifetime. This paper investigates its implications for optimal firm investments while explicitly taking into account that an investment decision is not only about timing, but also involves choosing the investment size. Moreover, we also consider strategic implications by implementing the finite product-life assumption in a duopoly framework. We find that in the duopoly setting, the project life being finite reduces the incentive to preempt the investment of the opponent. Furthermore, we obtain that considerable value losses will be achieved when the project life being finite is mistakenly not taken into account when making the investment decision.

Keywords: Investment analysis; Finite project life; Capacity choice; Real options; Uncertainty (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.ijpe.2022.108572

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