SEMINAR 14 November 2011: Andrew Toole, US Department of Agriculture, Economic Research Service

This paper uses a real options perspective to augment the standard R&D investment model and implements a firm-level empirical analysis to assess the practical significance of market uncertainty and its interactions with strategic rivalry and firm size.  We use a measure of firm-relevant market uncertainty along with panel data and find that firms invest less in current R&D as uncertainty about market returns increases.  The effect of firm-specific uncertainty on R&D investment is smaller in concentrated markets – those where strategic rivalry is more intense.  Furthermore, holding access to financing constant, the effect of uncertainty on R&D investment is attenuated for large firms. 

Keywords: Real Options Theory, Uncertainty, R&D, Strategic Rivalry, Firm Size

JEL Classification: O31, L11, G31