Real options and the management of R&D investment: An analysis of comparative advantage, market structure, and industry dynamics in biotechnology.

摘要

This study examines the US comparative advantage in biotechnology vis-a-vis other Northern countries, and the pattern of biotechnology industry dynamics emerging from the early entry of start-ups and the lagged entry of multinationals. The development of high technology industries like biotechnology is heavily influenced by the R&D investment behavior of firms active in the industry. Many theoretical treatments of R&D investment tend to be excessively stylized, emphasizing the outcome, rather than the process, of investment. In doing so, they neglect key characteristics of biotechnology R&D investment.; In contrast, real options theory represents investment as a dynamic process, extending over multiple time periods, and continuously impacted by evolving conditions in the stochastic investment environment. Real options incorporate the principle that firms actively manage their investments, adapting investment strategies in response to the gradual resolution of ongoing uncertainty surrounding the investment. This corresponds to the general structure of biotechnology R&D investment.; A real options model of investment with uncertain cost was used to analyze the source of the US comparative advantage in biotechnology vis-a-vis Europe, its closest rival. Empirical evidence suggests two sources of heterogeneity in the biotechnology R&D process: US biotechnology firms, on average, invest in R&D at a faster per-period rate, and face a less uncertain domestic regulatory regime, than European biotechnology firms. This leads to a cross-country asymmetry in strategies for managing the option to invest in biotechnology R&D: more specifically, US firms impose a less rigorous decision criterion, vis-a-vis European firms, to evaluate and manage their biotechnology R&D investment opportunities.; Computer simulation was used to examine the implications of this result for the average R&D investment behavior of representative US and European biotechnology firms. The simulation results suggest that, on average, US biotechnology firms initiate more R&D projects, commence investment sooner, innovate more rapidly, persevere longer in the face of mounting R&D costs, are less selective about potential projects based on expected return, and ultimately, successfully complete more projects, than their European counterparts. This supplies a plausible explanation for the emergence of the US as the world leader in biotechnology, relative to other Northern countries, based on the key insight that the US comparative advantage lies within the structure of the economic process central to leadership in high technology industries: the ability to create, develop, and commercialize new technologies. (Abstract shortened by UMI.)