IDEAS home Printed from
MyIDEAS: Login to save this article or follow this journal

Dynamic R&D Investment Policies

  • Paul D. Childs

    (Gatton College of Business and Economics, University of Kentucky, Lexington, Kentucky 40506-0034)

  • Alexander J. Triantis

    (Robert H. Smith School of Business, University of Maryland, College Park, Maryland 20742-1815)

Registered author(s):

    This paper examines dynamic R&D investment policies and the valuation of R&D programs in a contingent claims framework. We incorporate the following characteristics of R&D programs into our model: learning-by-doing, collateral learning between different projects in the program, interaction between project cash flows, periodic reevaluations of the program, different intensities of investment, capital rationing constraints, and competition. We show that a firm may invest in multiple projects even if only one can be implemented after development is complete. Furthermore, the firm may significantly alter its funding policy over time. For example, it may simultaneously develop multiple projects for a period of time, then focus on a lead project, and potentially resume funding of a "backup" project if the lead project fails to deliver on its early promise. We show how a firm can forecast expected R&D spending through time for an optimally executed R&D program. While project volatility plays an important role in determining R&D program value, we find that for high volatility projects the optimal investment policy is not very sensitive to changes in (or misestimation of) volatility. In considering whether to accelerate development of a project, a firm should balance the adverse effects of increased costs and the loss of investment flexibility against the positive effects of rapid uncertainty resolution and accelerated cash flows. In the presence of a budget constraint that prevents the firm from simultaneously accelerating projects and developing projects in parallel, we find that, if one project significantly dominates another early in the development stage, the option to accelerate the lead project is likely to be more valuable than the option to exchange projects. Thus, the backup project would be shelved in order to commit extra resources to development of the lead project. Finally, competition from other firms leads to more parallel investment in the early development stages of projects, less parallel investment in the latter stages of development, and lower overall investment.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL:
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 10 (October)
    Pages: 1359-1377

    in new window

    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1359-1377
    Contact details of provider: Postal: 7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA
    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page:

    More information through EDIRC

    No references listed on IDEAS
    You can help add them by filling out this form.

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:inm:ormnsc:v:45:y:1999:i:10:p:1359-1377. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mirko Janc)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.