Research On Multiple R&D Projects Investment Decision Making Based On Real Option Theory

With the fast developing of economy, R&D has become an important factor that decides the competence of a high-tech corporation, especially in Bio-technology, Pharmacy, Telecommunication, Aeronautics and Astronautics, and so on. R&D activities not only can help enterprises to maintain competitive advantages, but also play decisive roles in enhancing national economics'capacity and boosting up national economic strength. So, enterprises are paying more and more attention to R&D investment. Researchers are paying more and more attention to investment decision making in R&D projects.In this paper, characteristics of R&D project are studied, firstly. Then the pros and cons of traditional investment decision-making methods and real option method are studied. Real option method is tested to be the best method for R&D investment. Secondly, initial investment decision and commercialization investment decision of R&D investment are studied. In the section of initial investment, because that volatility of R&D project in different stage is different, a compound option model with two different volatility rates is established. Then, by combing compound option with integer programming, a multi-program investment model is established. In the section of commercialization investment, because of the uncertainty of investment timing of projects, investment decision is divided into three stages in this paper. In each stage, investment decision model is established by combing real option with integer programming and investment rule is obtained. And then, influences of changes of several key variables on investment decision are described. Finally, the two models are verified and the process of computation is shown in this paper. The differences between models which are established in this paper and traditional methods are analyzed; also advantages of those two models are demonstrated.