Optimal R&D Investments of the Firm

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Abstract

This paper examines irreversible decisions on innovative activities where it takes time to complete an R&D project. The totala mountof R&D investments that the firm needs to undertake in order to obtain the breakthrough in the innovation process is uncertain. R&D investments are limited by the restriction that they must be self-financed. It is shown that R&D investmentsar e morev aluable when the level of uncertainty is large. Especially, it is very attractive to undertake R&D investments if a project faces many uncertainties during its ea rly phases. Furthermore we study how R&D behavior is inuenced by different levels of the discount rate and the financing limit. Moreover, the effects of R&D subsidies, spillover benefirts and a payoff that decreases over time are analyzed.
Original languageEnglish
Place of PublicationTilburg
PublisherOperations research
Number of pages26
Volume1996-47
Publication statusPublished - 1996

Publication series

NameCentER Discussion Paper
Volume1996-47

Keywords

  • research and development
  • investment
  • uncertainty

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