Research Of R&D Investment Decision Making Based On Option Game Theory

For an enterprise, research and development (R&D) is the basis of its core competence, and also an important component of its long-term development strategy. In the quantitative assessment of R&D projects, conventional means of investment decision making, generally based on net present value, neglects some significant factors, including the uncertainty of investment projects, the allowable delay of vestment time, the non-reversible of costs, and competitive. Such problems result in hard-mode strategy of investment, which always is"now or never". This will give rise to lose of investment opportunities as well as room to grow. Thus, it is evident that scientific identification of investment time plays a key role in R&D activities on the condition of uncertain competitive environment. Option game theory is not a complete negation of conventional investment decision-making method, but a new scientific decision-making method combined with real option theory and game theory on its basis. In this paper, real option theory is incorporated with game theory on the basis of traditional investment decision making. In the assessment of R&D projects'option value with real option theory, the problems arising from non-reversible of costs, uncertainty, and flexibility are addressed. Moreover, by analyzing competitors'interactive with game theory, possible equilibrium formulates and conditions for these equilibriums are obtained and option game model of R&D investment decision-making is constructed, thereby determining optimized investment opportunities and strategies.This paper reviews and evaluates basic theories of R&D investment decision-making. Traditional means of R&D investment decision-making are analyzed with discussion of their limits. The advantages of real option theory in dealing with uncertainty in R&D investment decision-making are discussed, and the option feature and game feature in R&D investment are anatomized. On that basis, an application framework of option game theory in R&D investment decision-making is built, and from both angles of the enterprise's competitive status and the competitor's strategy, R&D investment strategy-selecting mode and first-mover advantages and disadvantages are analyzed. The uncertainties, as well as their impact on project value, are identified, with mathematical description, so that R&D investment project value structure is further ascertained from the perspective of option games, to form a solid theoretical foundation for option game price fixing model.With real option price fixing theory, dynamic planning and simulation, aiming at R&D investment timing and strategy, an option-game model of R&D investment decision-making under the condition of market uncertainty and technical uncertainty is constructed. Under the uncertainty of market, considering the randomness of unexpected events and various kinds of enterprises involved in the R&D competition, on the assumption that random market demand is in line with the geometric Brownian motion and the original investment costs are different, an asymmetric, duopoly-monopoly, and continuous game-option model is established to gain the value functions and investment thresholds of corporations as followers, leaders, and investors, respectively. The impact on investment threshold imposed by unexpected events and investment cost is analyzed, and the occurrence forms and conditions of the three equilibrium strategies are discussed. The analysis shows that the investment threshold of followers is highly sensitive to the variation of operation cost, whereas that of leaders is highly sensitive to original investment cost; though instantaneous fluctuation rates and unexpected events result in the rise of investment threshold, they impose a larger impact on those of followers; the optimized R&D investment strategy relied on cost differences and initiatives of distinguished enterprises.According to Weeds'model concerning technical uncertainty, the option-game model on condition of technical uncertainty is constructed on the assumption that enterprises'R&D capabilities are asymmetric, as well as their investment costs, achieving the value functions and investment thresholds of corporations, as followers, leaders, and investors, respectively. The following analysis focuses on the impact of enterprises'own R&D capacity and competitors'capability on the value of investment threshold. And the result demonstrates that the rise of own capability contributes to drop of threshold, while the rise of competitors gives rise to increase of threshold. Both of them play a large impact on threshold of followers. The analysis of investment strategies related to asymmetric duopoly-monopoly enterprises gives rise to an equilibrium result different from that gained in traditional research, indicating possible existence of sequential equilibrium investment. This possibility is further verified by means of numerical explanation and simulation.