A real options framework for CVC Investments under technological uncertainty

Linda Salahaldin () and Baran Siyahhan ()
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Linda Salahaldin: Ecole Supérieure du Commerce Extérieur - ESCE - International business school
Baran Siyahhan: IMT-BS - DEFI - Département Droit, Économie et Finances - TEM - Télécom Ecole de Management - IMT - Institut Mines-Télécom [Paris] - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris], LITEM - Laboratoire en Innovation, Technologies, Economie et Management (EA 7363) - UEVE - Université d'Évry-Val-d'Essonne - IMT-BS - Institut Mines-Télécom Business School - IMT - Institut Mines-Télécom [Paris]

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Abstract: This paper studies the optimal timing of corporate venture capital in- vestments and subsequent acquisition decisions under technological uncer- tainty. We consider a large firm interested in a technology being developed by a start-up. The firm has the option of investing in the startup at an early R&D stage through a CVC, or to wait until the technology is mature before acquiring it. While an early CVC allows the firm to start integrat- ing the new technology, it induces the risk of losing the premium if the technology does not develop as expected. We formulate the problem as a real option problem where the firm aims at maximizing its profit at t = 0, considering possible CVC and acquisition decisions in the future. We solve the problem using a two-level dynamic programming algorithm and show the optimal firm decision.

Date: 2018-06-21
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Published in 22nd Annual International Real Options Conference, Jun 2018, Düsseldorf, Germany

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01823464

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