A Real Options Perspective On R&D Portfolio Diversification
This paper shows that the conditionality of investment decisions in R&D has a critical impact on portfolio risk, and implies that traditional diversification strategies should be reevaluated when a portfolio is constructed. Real option theory argues that research projects have conditional or option-like risk and return properties, and are different from unconditional projects. Although the risk of a portfolio always depends on the correlation between projects, a portfolio of conditional R&D projects with real option characteristics has a fundamentally different risk than a portfolio of unconditional projects. When conditional R&D projects are negatively correlated, diversification only slightly reduces portfolio risk. When projects are positively correlated, however, diversification proves more effective than conventional tools predict.
|Keywords||portfolio analysis, real options, research & development|
|JEL||D21, Firm Behavior (jel), L20, Firm Objectives, Organization, and Behavior: General (jel), M, Business Administration and Business Economics; Marketing; Accounting (jel), O31, Innovation and Invention: Processes and Incentives (jel), O32, Management of Technological Innovation and R&D (jel)|
|Publisher||Erasmus Research Institute of Management (ERIM)|
van Bekkum, S, Pennings, H.P.G, & Smit, J.T.J. (2009). A Real Options Perspective On R&D Portfolio Diversification (No. ERS-2009-019-STR). ERIM report series research in management Erasmus Research Institute of Management. Erasmus Research Institute of Management (ERIM). Retrieved from http://hdl.handle.net/1765/15410