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The Radical Innovation Investment Decision Refined

Author

Listed:
  • Bilkic, Natasa

    () (University of Paderborn)

  • Gries, Thomas

    () (University of Paderborn)

  • Naudé, Wim

    () (Maastricht University)

Abstract

We refine modelling of the radical innovation decision in this paper by extending real option theory to include non-marginal stochastic jump processes. From the model analytics we determine that the average magnitude and frequency of non-marginal stochastic jump processes are the most important parameters in this highly uncertain decision process. We show that these stochastic shocks imply that investment in radical innovation may very often be too time consuming and/or expensive to remain attractive for private entrepreneurs.

Suggested Citation

  • Bilkic, Natasa & Gries, Thomas & Naudé, Wim, 2013. "The Radical Innovation Investment Decision Refined," IZA Discussion Papers 7338, Institute for the Study of Labor (IZA).
  • Handle: RePEc:iza:izadps:dp7338
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    References listed on IDEAS

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    1. Tommy Clausen & Mikko Pohjola & Koson Sapprasert & Bart Verspagen, 2012. "Innovation strategies as a source of persistent innovation," Industrial and Corporate Change, Oxford University Press, vol. 21(3), pages 553-585, June.
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    4. Jan Fagerberg & Bart Verspagen, 2007. "Innovation, growth and economic development: have the conditions for catch-up changed?," International Journal of Technological Learning, Innovation and Development, Inderscience Enterprises Ltd, vol. 1(1), pages 13-33.
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    6. Yang, Hailiang & Zhang, Lihong, 2005. "Optimal investment for insurer with jump-diffusion risk process," Insurance: Mathematics and Economics, Elsevier, vol. 37(3), pages 615-634, December.
    7. Doraszelski, Ulrich, 2001. "The net present value method versus the option value of waiting: A note on Farzin, Huisman and Kort (1998)," Journal of Economic Dynamics and Control, Elsevier, vol. 25(8), pages 1109-1115, August.
    8. Sharon Belenzon, 2012. "Cumulative Innovation and Market Value: Evidence from Patent Citations," Economic Journal, Royal Economic Society, vol. 122(559), pages 265-285, March.
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    13. Vania Sena, 2004. "The Return of the Prince of Denmark: A Survey on Recent Developments in the Economics of Innovation," Economic Journal, Royal Economic Society, vol. 114(496), pages 312-332, June.
    14. Fudenberg, Drew & Gilbert, Richard & Stiglitz, Joseph & Tirole, Jean, 1983. "Preemption, leapfrogging and competition in patent races," European Economic Review, Elsevier, vol. 22(1), pages 3-31, June.
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    More about this item

    Keywords

    radical innovation; innovation; entrepreneurship; investment; R&D; risk; real option theory; technology;

    JEL classification:

    • D92 - Microeconomics - - Micro-Based Behavioral Economics - - - Intertemporal Firm Choice, Investment, Capacity, and Financing
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • L26 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Entrepreneurship

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