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Patent Protection, Market Uncertainty, and R&D Investment

  • Toole, Andrew A.
  • Czarnitzki, Dirk

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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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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  1. Arora, Ashish & Ceccagnoli, Marco & Cohen, Wesley M., 2008. "R&D and the patent premium," International Journal of Industrial Organization, Elsevier, vol. 26(5), pages 1153-1179, September.
  2. 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.
  3. 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.
  4. Alan Carruth & Andy Dickerson & Andrew Henley, 1998. "What Do We Know About Investment Under Uncertainty?," Studies in Economics 9804, School of Economics, University of Kent.
  5. Robert S. Pindyck, 1990. "Irreversibility, Uncertainty, and Investment," NBER Working Papers 3307, National Bureau of Economic Research, Inc.
  6. 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.
  7. 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.
  8. 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.
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