Investment in high-tech industries: An example from the LCD industry

K.J.M. Huisman, P.M. Kort, J.E.J. Plasmans

Research output: Chapter in Book/Report/Conference proceedingChapterScientificpeer-review

Abstract

This chapter considers a representative firm taking investment decisions in a high-tech environment where different generations of production facilities are invented over time. First, we develop a general real options investment model for high-tech industries in which, according to standard practice, the sales price and the unit production cost both satisfy a geometric Brownian motion (GBM) process. Second, we use the developed model to analyze actual investment decisions in the LCD industry. Real life data is used to fit the parameters of the model and to discuss the actual investments of the two largest companies in the LCD industry: Samsung Display and LG Display. We conclude that their investments in the 8th generation LCD production facilities are have negative NPVs. We present several reasons how these investments can be justified.
Original languageEnglish
Title of host publicationReal Options, Ambiguity, Risk and Insurance
EditorsA. Bensoussan, S. Peng, J. Sung
Place of PublicationAmsterdam
PublisherIEEE Computer Society
Pages20-32
ISBN (Print)9781614992370
Publication statusPublished - 2013

Publication series

NameStudies in Probability, Optimization and Statistics Series
Number5

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