A systems approach to R&D investment

Abstract

R&D projects carry huge risks which make the potential high payoffs illusive. This thesis aims to propose possible improvements to the selection and management process.Our work customizes the general structure of ODSS for R&D projects into three segments: (1) ONline R&D focus selection, (2) OFFline project valuation, and (3) ONline portfolio selection. At the online level, Real Options thinking is incorporated to deal with the option to defer and the trade-off of gaining competitive advantage. Other options can be examined using DA at the offline project valuation stage, but the use of subjective expert opinions remain a concern. Consequently, the common financial risk measure, VaR, and its associated coherent alternative, ETL, are proposed as a more objective aid to decision making. Our results show that the GPD method is preferred over the parametric method for both the upper and lower-bound VaR.