Modeling Sequential International R&D Alliances Under Uncertainty

Abstract

By considering the sequential nature of market entry and the contingency for subsequent reorientation following an initial commitment for research collaboration, we use an option framework to derive a value for the overall flexibility. In particular, we present critical thresholds for timing and termination strategy selection and provide a novel perspective on existing empirical results in the domain of joint ventures. The results show that technological uncertainty promotes the formation of joint ventures. Moreover, we find an ambiguous effect of technological uncertainty on the expected duration of joint ventures. While the model also helps to refine the impact of different types of innovation on longevity of the JV it provides a number of new testable predictions.

Keywords: international joint venture, research and development, foreign direct investment, merger and acquisition, divestment, real options, Levy process

JEL Classification: F23, G31, L24