Real options reasoning and a new look at the R&D investment strategies of pharmaceutical firms

TLDR

Real options reasoning (ROR) is a conceptual approach to strategic investment that accounts for the value of preserving future choice rights under uncertainty. The study investigates firms’ motivations to invest in a new option. Analysis of a large patent sample shows that pharmaceutical firms’ R&D investments align with ROR logic, and that scope of opportunity, prior experience, and competitive effects influence their propensity to invest in new R&D options. © 2003 John Wiley & Sons, Ltd.

Abstract

Abstract Real options reasoning (ROR) is a conceptual approach to strategic investment that takes into account the value of preserving the right to make future choices under uncertain conditions. In this study, we explore firms' motivations to invest in a new option. We find, based on an analysis of a large sample of patents by firms active in the pharmaceutical industry, that their investments in R&D are consistent with the logic of ROR. We identify three constructs—scope of opportunity, prior experience, and competitive effects—which have an influence on firms' propensity to invest in new R&D options and which could usefully be incorporated in a strategic theory of investment. Copyright © 2003 John Wiley & Sons, Ltd.