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Optimal diversification for R&D project portfolios

Author

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  • Lieh-Ming Luo

    (Fu Jen Catholic University)

Abstract

Diversification of R&D projects not only can reduce overall risk, but also can create value-enhancement effect. A useful guideline for optimal diversification of R&D projects is important to R&D organizations. This paper extends financial portfolio analyses for R&D management particularly incorporating the technology risk. This study uses a survival model to describe the technology risk since termination of an R&D project can be caused by any technology risk factors. A formula of optimal R&D resource allocation that can dynamically achieve the greatest diversification effect is offered. Furthermore we provide an alternative method for estimating correlations between R&D portfolios, which has a critical influence on diversification effect. The method can be useful in risk assessment when measure the exposure of R&D portfolio to particular sources of uncertainty. The evaluation framework for R&D portfolios optimization also can be applied in project-selection decisions.

Suggested Citation

  • Lieh-Ming Luo, 2012. "Optimal diversification for R&D project portfolios," Scientometrics, Springer;Akadémiai Kiadó, vol. 91(1), pages 219-229, April.
    • Handle: RePEc:spr:scient:v:91:y:2012:i:1:d:10.1007_s11192-011-0537-0
    DOI: 10.1007/s11192-011-0537-0
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    References listed on IDEAS

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    1. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    2. Nicholas G. Hall & John C. Hershey & Larry G. Kessler & R. Craig Stotts, 1992. "A Model for Making Project Funding Decisions at the National Cancer Institute," Operations Research, INFORMS, vol. 40(6), pages 1040-1052, December.
    3. William F. Sharpe, 1964. "Capital Asset Prices: A Theory Of Market Equilibrium Under Conditions Of Risk," Journal of Finance, American Finance Association, vol. 19(3), pages 425-442, September.
    4. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
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    Cited by:

    1. Mavrotas, George & Makryvelios, Evangelos, 2021. "Combining multiple criteria analysis, mathematical programming and Monte Carlo simulation to tackle uncertainty in Research and Development project portfolio selection: A case study from Greece," European Journal of Operational Research, Elsevier, vol. 291(2), pages 794-806.

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    More about this item

    Keywords

    R&D portfolios optimization; Risk management; Diversification;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • L53 - Industrial Organization - - Regulation and Industrial Policy - - - Enterprise Policy
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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