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Patent Protection, Market Uncertainty, and R&D Investment

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  • Toole, Andrew A.
  • Czarnitzki, Dirk

Abstract

Real options investment theory predicts current investment falls as uncertainty about market returns increases. In the case of R&D investment, which is usually considered an irreversible form of investment, this effect should be quite pronounced. This paper tests the real options prediction about the R&D investment-uncertainty relationship and further considers how patent protection influences this relationship. Patent protection, by limiting the threat of market rivalry, should mitigate firm-specific uncertainty and stimulate current R&D investment. Our empirical results support both the prediction of real options theory and the mitigating effect of patent protection. --

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Bibliographic Info

Paper provided by ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with number 06-056 [rev.].

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Date of creation: 2008
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Handle: RePEc:zbw:zewdip:7191

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Keywords: Real Options Theory; Uncertainty; R&D; Intellectual Property Protection; Censored Regression;

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References

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  1. Sunil Kanwar & Robert Evenson, 2003. "Does intellectual property protection spur technological change?," Oxford Economic Papers, Oxford University Press, vol. 55(2), pages 235-264, April.
  2. Goel, Rajeev K. & Ram, Rati, 2001. "Irreversibility of R&D investment and the adverse effect of uncertainty: Evidence from the OECD countries," Economics Letters, Elsevier, vol. 71(2), pages 287-291, May.
  3. Pindyck, Robert S, 1991. "Irreversibility, Uncertainty, and Investment," Journal of Economic Literature, American Economic Association, vol. 29(3), pages 1110-48, September.
  4. Ashish Arora & Marco Ceccagnoli & Wesley M. Cohen, 2003. "R&D and the Patent Premium," NBER Working Papers 9431, National Bureau of Economic Research, Inc.
  5. Wesley M. Cohen, 2005. "Patents and Appropriation: Concerns and Evidence-super-1," The Journal of Technology Transfer, Springer, vol. 30(2_2), pages 57-71, 01.
  6. Carruth, Alan & Dickerson, Andrew & Henley, Andrew, 2000. " What Do We Know about Investment under Uncertainty?," Journal of Economic Surveys, Wiley Blackwell, vol. 14(2), pages 119-53, April.
  7. Lanjouw, Jean Olson, 1998. "Patent Protection in the Shadow of Infringement: Simulation Estimations of Patent Value," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 671-710, October.
  8. Mark Schankerman, 1998. "How Valuable is Patent Protection? Estimates by Technology Field," RAND Journal of Economics, The RAND Corporation, vol. 29(1), pages 77-107, Spring.
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Cited by:
  1. Katrin Hussinger, 2004. "R&D and Subsidies at the Firm Level: An Application of Parametric and Semi-Parametric Two-Step Selection Models," Public Economics 0403005, EconWPA.
  2. Balsmeier, Benjamin & Czarnitzki, Dirk, 2014. "How important is industry-specific managerial experience for innovative firm performance?," ZEW Discussion Papers 14-011, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
  3. Barge-Gil, Andrés & López, Alberto, 2012. "R&D Determinants: accounting for the differences between research and development," MPRA Paper 41270, University Library of Munich, Germany.
  4. Basant, Rakesh & Mishra, Pulak, . "Concentration and Other Determinants of Innovative Efforts in Indian Manufacturing Sector: A Dynamic Panel Data Analysis," IIMA Working Papers WP2013-02-01, Indian Institute of Management Ahmedabad, Research and Publication Department.
  5. Marco Di Cintio & Emanuele Grassi, 2013. "Uncertainty, flexible labour relations and R&D expenditure," EERI Research Paper Series EERI RP 2013/13, Economics and Econometrics Research Institute (EERI), Brussels.
  6. LOPES BENTO Cindy & CZARNITZKI Dirk, 2012. "Value for money? New microeconomic evidence on public R&D grants in Flanders," CEPS/INSTEAD Working Paper Series 2012-19, CEPS/INSTEAD.
  7. Czarnitzki, Dirk & Lopes-Bento, Cindy, 2012. "Value for money? New microeconometric evidence on public R&D grants in Flanders," ZEW Discussion Papers 12-034, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.

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