Study On Technological Innovation Investment Decisions: Options Game Approach

As far as firms are concerned, the velocity and intensity of technological innovations have become the two key factors to measure firms'achievements, competitive power and the potential for development. Meanwhile, technological innovations have brought firms lots of overwhelming investment opportunities. However, these investment opportunities are accompanied with the uncertainty of technologies, the contradictions of the displacement between the new technology and the old one and competition of the homogeneous technologies in the market. Moreover, firms which have implemented technological innovations are often not single. Fierce competition among them impels the application, diffusion and improvement of technology. Thus firms must adopt flexible management strategies to invest and produce according to market conditions, rival's actions and technological development states, etc. Options game approach, applying mathematical tools, such as stochastic analysis, optimal stopping times, martingale, stochastic differential equations, stochastic optimal control, game theory, etc., overcomes the drawbacks of traditional methods, and combines corporate finance, management science and investment decisions. And it has formed a set of new strategic investment management methods of firms'technological innovation investment decisions and has applied more and more in both theoretic and realistic aspects of corporate decision-making analysis. This thesis applies options game approach to study several problems related to firms'technological innovation investment.At first, this text has carried on the survey and summarized the investment decision method of the project, and has pointed out the limitation and the deficiency of traditional investment decision method and the material object option decision method, on this basis of that, develops and explains systemtically latest morden investment decision theory and method. Secondly, it have analyzed and described project investment and theory characteristic of the definition, division at stage, influence factor and playing chess of decision. At the same time,the main factors influenced the investment decision of the project include irreversibility of the cost , uncertainty of the project and competitiveness caused by sharing among the competitors of option. Project investors should bring those three elements into the same decision frame to be analyzed and evaluated, for reducing the probability of failure and receiving an optimum decision. Real options approach can deal with the uncertainty analyze and competitive reaction problem of investor well at the same time. Therefore the project investment decision in the realistic economic life has options to play chess characteristics. So direct against the characteristic of the realistic economic life, can irreversibility in option method of material object, play chess theory can deal with.Then, we analyze the influence of costs on the technological innovation investment decision with a duopoly real option timing game. As the operating costs increasing, the payoffs of firms decrease while investment thresholds increase. We derive that value function and investment threshold. Then three equilibriums such as preemptive, sequential and simultaneous equilibrium are discussed. The results indicate that when the asymmetry among firms is relatively small and so is the first - mover advantage ,the firms invest jointly; when the first-mover advantage is significant, the lower-cost firm preempts the higher-cost firm to be a leader; in the situation where the asymmetry among firms becomes sufficiently large, the firms exercise their investment options sequentially. Finally, numerical techniques are employed to calculate the optimal investment thresholds of duopoly and the findings are consistent with the theoretic results.