Technological Innovation In The Real Options Analysis

The fierce competition of the current markets requires that businesses assign a higher weight to the technology innovation. As a major component of business technological innovation, R&D has become the only means for all businesses to gain competitive advantages. And how to value R&D investment is an important issue in the management of technological innovation. In the academic circle, it is admitted that the traditional discounted cash flow approach is not efficient to deal with the issue, and thus the financial option theory should be introduced to this field. However, the financial option theory varies a lot, so it's not feasible to solve real option pricing problems with the financial option theory.From the broad definition of option, this paper derives the concept of real option. Further, based on theories of net present value, decision tree, and real options, the risk-neutral pricing theory is introduced. Then by drawing on the latest achievements of the foreign option studies, this paper introduces the binomial pricing method which can be easily mastered by business managers.In this paper, several real options used in project investment pricing---deferral option, abandonment option, extending or shortening option--are analyzed before more complex option pricing methods like compound option and switching option are discussed. Also several ways to solve the project investment pricing problems are suggested. Further to this, the quadrinomial approach is adopted to solve the compound option pricing problems which involve uncertainties in terms of technology and market and which are often incurred in R&D activities.In the end, this paper offers a real case of technological innovation program at this school. On the basis of preliminary research results and feasibility study, the binomial pricing method of real option is used to quantitatively analyze and decide on the R&D program...