The Radical Innovation Investment Decision Refined

26 Pages Posted: 20 Apr 2013

See all articles by Natasa Bilkic

Natasa Bilkic

University of Paderborn

Thomas Gries

University of Paderborn

Wim Naudé

RWTH Aachen University; IZA Institute of Labor Economics; Maastricht School of Management

Abstract

We refine modelling of the radical innovation decision in this paper by extending real option theory to include non-marginal stochastic jump processes. From the model analytics we determine that the average magnitude and frequency of non-marginal stochastic jump processes are the most important parameters in this highly uncertain decision process. We show that these stochastic shocks imply that investment in radical innovation may very often be too time consuming and/or expensive to remain attractive for private entrepreneurs.

Keywords: radical innovation, innovation, entrepreneurship, investment, R&D, risk, real option theory, technology

JEL Classification: D92, D81, L26

Suggested Citation

Bilkic, Natasa and Gries, Thomas and Naudé, Wim, The Radical Innovation Investment Decision Refined. IZA Discussion Paper No. 7338, Available at SSRN: https://ssrn.com/abstract=2254191

Natasa Bilkic (Contact Author)

University of Paderborn ( email )

Thomas Gries

University of Paderborn ( email )

Warburger St. 100
Paderborn, D-33098
Germany

Wim Naudé

RWTH Aachen University ( email )

Templergraben 55
52056 Aachen, 52056
Germany

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Maastricht School of Management ( email )

Endepolsdomein 150
Maastricht, Limburg 6201 BE
Netherlands

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