‘real Options’ Framework to Assess Public Research Investments

This paper deals with R&D priority setting. It advocates for the introduction of strategic capital budgeting methodologies that will unite the hitherto largely independent processes of strategic planning and capital budgeting. Significant advances in economics and finance theory regarding valuing derivative securities, such as futures and options, and in computing power over the past twenty years make it feasible now to capture in explicit analytical terms the flexibility inherent in active strategy and management of R&D resources. R&D strategies can now be analyzed as chains of ‘real options’. The methodology can, in principle, be applied to all kinds of research investments, including longer-term, more basic research. Published: Science and Public Policy, 2007, 34(10): 699-708. * Generous financial support by the Office of Planning, Office of Science, US Department of Energy is gratefully acknowledged. We would like to thank especially Bill Valdez, Director, and Dr. Ehsan Khan, responsible officer for the project “Real Option Framework to Assess Research Investments at the US Department of Energy” for very valuable discussions and comments.