Technological investment decisions and disruptive innovations: search for the next best radical innovation
by Asli M. Arikan, Ilgaz Arikan, P. Konstantina Kiousis
International Journal of Strategic Change Management (IJSCM), Vol. 2, No. 4, 2010

Abstract: When faced with technological opportunities over time, what is the optimal investment strategy for a firm seeking to invest in the very best technology to create radical innovation? We discuss an investment scenario of high uncertainty but limited flexibility and propose a search model to address this specific investment problem. Under such circumstances, because each project (a) arrives sequentially, (b) is a substitute of each other and (c) results in a stark break from the existing technological trajectory, firms have little or no information about the distribution of expected returns from each investment option a priori. Moreover, these firms cannot revisit foregone opportunities due to intense rivalry. The analysis suggests that it is not optimal to spread out investments evenly over all options nor is it optimal to invest fully in options presented early on. Instead, the optimal strategy is for the investing firm to invest fully (all of its endowment) in the relatively best option after a threshold based on the number of observed options.

Online publication date: Wed, 06-Oct-2010

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