Dynamic R&D projects selection: The role of uncertainty and managerial flexibility

Tao Yao

Research output: Chapter in Book/Report/Conference proceedingConference contribution

Abstract

Selecting between investing on R&D in incremental innovations and radical innovations is particularly challenging. In this paper, we focus on the problem of project selection under technical uncertainty and market uncertainty. After motivating the challenges and decisions facing firms using a real-life application from GM, we formulate a mathematical model of a firm, that must develop its products in the presence of uncertainty. Specifically, the firm faces two options: (i) an incremental innovation project that is known to be relatively easy to develop and (ii) a radical innovation project that offers superior performance but whose development is much more difficult. We examine how characteristics of R&D projects such as projects' relative efficiencies and future benefits affect R&D investment policy, valuation and risk premia. Our analysis helps understand the appropriateness of the different development approaches. We illustrate our model with a Hybrid Electric Cars vs Hydrogen Fuel Cell Vehicles example as pursued by GM and note the managerial implications of our analysis.

Original languageEnglish (US)
Title of host publication2006 IIE Annual Conference and Exposition
Publication statusPublished - 2006
Event2006 IIE Annual Conference and Exposition - Orlando, FL, United States
Duration: May 20 2006May 24 2006

Other

Other2006 IIE Annual Conference and Exposition
CountryUnited States
CityOrlando, FL
Period5/20/065/24/06

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All Science Journal Classification (ASJC) codes

  • Industrial and Manufacturing Engineering

Cite this

Yao, T. (2006). Dynamic R&D projects selection: The role of uncertainty and managerial flexibility. In 2006 IIE Annual Conference and Exposition