Valuing Managerial Flexibility in Technology R&D

Developing better technologies to adapt to a changing world is crucial for the growth of a knowledge-based economy. Indeed, new products in the areas of energy, pharmaceuticals, and telecommunications generate significant economic benefits. However, in order to maximise those benefits, firms need to devise research and development (R&D) strategies that are responsive to market conditions. We take the real options approach to provide insights about the value of flexibility in managing technology R&D programmes from the perspective of a knowledge-based firm. Specifically, we account for managerial discretion over the pace of R&D effort and timing of new product launches by solving the firm’s optimal stopping time problem.