Technology-intensive Industries, New Product Development Value: A Real Options-based Approach

How to make research and development (R&D ) decision under uncertainty is an essential problem in the practice and theory of management. Existing quantitative analysis method and qualitative analysis are not effective to solve the problem because it is a long-term and strategic investment project. During the last ten years, the literature and applications of real option theory increased rapidly, especially in the field of Management of Technology and Innovation (MOTI). And because real option theory can put more flexibility to R&D investment as it takes all factors which can have effect on R&D management into account and it can partially correct the mistakes made by the traditional methods, so it has positive effect on the project management.This paper gives a perspective for the development of real option pricing theory and reasoning in R&D field and the limitations of existing research. Based on, we build up a frame for the application of real option theory and method in the management of new product development. And to better understand the frame and the method itself, we differentiate the Real Options Pricing Method with Real Options Reasoning, expatiate the real option characteristics of new product, then boundary and occasion where real options theory and methd can be used are advanced.Option pricing provides a clear criterion for choosing among substitute technologies. As such, forward-looking option pricing leads to rapid technologies specialization. The logic of real option pricing is compelling, but the question of when it is (or can be) used in practice is still open. And qualitative aspeact of real option anaysis may turn out to be more important in pratice in pratice than quantitative analysis. In this study, we view the two approaches as having a dialectic relationship with each other, and based on, the paper is mostly carried in two sides: (1) Based on an analysis of a large sample of patents by firm active in China pharmaceutical industry, we try to explore whether actual firm investment behaviors appears consistent with ROR; (2) Build up the mechanism and model for the evaluation of high-techonology R&D project. The purpose of part is to analyze real option pricing theory and the application in R&D in-depth, based on the the similarity between real option and R&D. Remarkablely, we introduce New Product Development Gate Mangment method into the real options analysis, and based on a tri-stage investment-analyzing frame is constructed to realize an organic combo of the R&D, commercial startup and scale expansion during the uncertain investments and aninteracting investment chain. Then via simplified case, we illustrate how to use this method to evaluate the option value of new product development project, how to use it in disciplined way in the future.The application in R&D is not a simple deny but an improvement to the tradional investment decision-making method. It overcame weakness and added rationality to investment decision-making. At the last chapter we summarize the meanings of real option theory to the R&D management, and future research agenda are adcanced.