Title: Technological investment decisions and disruptive innovations: search for the next best radical innovation

Authors: Asli M. Arikan, Ilgaz Arikan, P. Konstantina Kiousis

Addresses: Robinson College of Business, Georgia State University, 35 Broad Street, Atlanta, GA 30303, USA. ' Robinson College of Business, Georgia State University, 35 Broad Street, Atlanta, GA 30303, USA. ' COX School of Business, Southern Methodist University, 6212 Bishop Blvd. Fincher 125, Dallas, TX 75275-0333, USA

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.

Keywords: search models; radical innovation; technological investments; decision making; uncertainty; disruptive innovations; investment strategies; flexibility; technological trajectories; expected returns; foregone opportunities; rivalry; best options; optimal strategies; strategic change management; knowledge governance.

DOI: 10.1504/IJSCM.2010.035851

International Journal of Strategic Change Management, 2010 Vol.2 No.4, pp.352 - 374

Available online: 06 Oct 2010 *

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