R&D Portfolio Allocation & Capital Financing

The paper offers a straightforward method for estimating R&D portfolios that maximize shareholders’ utility. R&D portfolios are generally associated with high returns and high risks. As such, an impressive body of literature has highlighted the risks linked with R&D portfolio allocations. Nevertheless, the role of financing strategies in portfolio allocation has been neglected, and this provides us with the incentive to explore this issue further. As entrepreneurs can feel constrained in terms of budgeting and risk diversification when planning an R&D portfolio, in this paper we propose a linear model which allows us to evaluate the utility of external financing strategies. We discuss the impact of capital budgeting on the choice of R&D portfolio and internal shareholders’ benefits and find optimal solutions under different scenarios of capital markets. Firms get more flexibility in their choice of R&D portfolios and increase internal shareholder benefits with the aid of the modeled optimization process. 1