Real options investment theory predicts current investment falls as uncertainty about market returns increases. In the case of R&D investment, which is usually considered an irreversible form of investment, this effect should be quite pronounced. This paper tests the real options prediction about the R&D investment-uncertainty relationship and further considers how patent protection influences this relationship. Patent protection, by limiting the threat of market rivalry, should mitigate firm-specific uncertainty and stimulate current R&D investment. Our empirical results support both the prediction of real options theory and the mitigating effect of patent protection.
This Discussion Paper has been updated, the previous version of this paper is available for download from our FTP server.
Czarnitzki, Dirk and Andrew Toole (2006), Patent Protection, Market Uncertainty, and R&D Investment , ZEW Discussion Paper No. 06-056, Mannheim, published in: Review of Economics and Statistics. Download