IDEAS home Printed from https://ideas.repec.org/a/eee/proeco/v252y2022ics0925527322001578.html
   My bibliography  Save this article

Effects of creative destruction on the size and timing of an investment

Author

Listed:
  • Balter, Anne G.
  • Huisman, Kuno J.M.
  • Kort, Peter M.

Abstract

Today’s economy is innovation driven. Besides the launch of new innovative products, this implies that established products have a finite lifetime. This paper investigates its implications for optimal firm investments while explicitly taking into account that an investment decision is not only about timing, but also involves choosing the investment size. Moreover, we also consider strategic implications by implementing the finite product-life assumption in a duopoly framework. We find that in the duopoly setting, the project life being finite reduces the incentive to preempt the investment of the opponent. Furthermore, we obtain that considerable value losses will be achieved when the project life being finite is mistakenly not taken into account when making the investment decision.

Suggested Citation

  • Balter, Anne G. & Huisman, Kuno J.M. & Kort, Peter M., 2022. "Effects of creative destruction on the size and timing of an investment," International Journal of Production Economics, Elsevier, vol. 252(C).
    • Handle: RePEc:eee:proeco:v:252:y:2022:i:c:s0925527322001578
    DOI: 10.1016/j.ijpe.2022.108572
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0925527322001578
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.ijpe.2022.108572?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, vol. 41(2), pages 236-249.
    2. Kuno J.M. Huisman & Peter M. Kort, 2015. "Strategic capacity investment under uncertainty," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 376-408, June.
    3. Thijssen, Jacco J.J. & Huisman, Kuno J.M. & Kort, Peter M., 2012. "Symmetric equilibrium strategies in game theoretic real option models," Journal of Mathematical Economics, Elsevier, vol. 48(4), pages 219-225.
    4. Nick Huberts & Kuno Huisman & Peter Kort & Maria Lavrutich, 2015. "Capacity Choice in (Strategic) Real Options Models: A Survey," Dynamic Games and Applications, Springer, vol. 5(4), pages 424-439, December.
    5. Bar-Ilan, Avner & Strange, William C., 1999. "The Timing and Intensity of Investment," Journal of Macroeconomics, Elsevier, vol. 21(1), pages 57-77, January.
    6. Capozza, Dennis & Li, Yuming, 1994. "The Intensity and Timing of Investment: The Case of Land," American Economic Review, American Economic Association, vol. 84(4), pages 889-904, September.
    7. Ravi Anupindi & Li Jiang, 2008. "Capacity Investment Under Postponement Strategies, Market Competition, and Demand Uncertainty," Management Science, INFORMS, vol. 54(11), pages 1876-1890, November.
    8. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    9. Thomas Geelen & Jakub Hajda & Erwan Morellec, 2019. "Debt, Innovation, and Growth," Swiss Finance Institute Research Paper Series 19-79, Swiss Finance Institute.
    10. Manu Goyal & Serguei Netessine, 2007. "Strategic Technology Choice and Capacity Investment Under Demand Uncertainty," Management Science, INFORMS, vol. 53(2), pages 192-207, February.
    11. Dixit, Avinash, 1993. "Choosing among alternative discrete investment projects under uncertainty," Economics Letters, Elsevier, vol. 41(3), pages 265-268.
    12. J. Anthony Cookson, 2018. "Anticipated Entry and Entry Deterrence: Evidence from the American Casino Industry," Management Science, INFORMS, vol. 64(5), pages 2325-2344, May.
    13. Gryglewicz, Sebastian & Huisman, Kuno J.M. & Kort, Peter M., 2008. "Finite project life and uncertainty effects on investment," Journal of Economic Dynamics and Control, Elsevier, vol. 32(7), pages 2191-2213, July.
    14. Benoît Chevalier‐Roignant & Christoph M. Flath & Lenos Trigeorgis, 2019. "Disruptive Innovation, Market Entry and Production Flexibility in Heterogeneous Oligopoly," Production and Operations Management, Production and Operations Management Society, vol. 28(7), pages 1641-1657, July.
    15. Dangl, Thomas, 1999. "Investment and capacity choice under uncertain demand," European Journal of Operational Research, Elsevier, vol. 117(3), pages 415-428, September.
    16. Zhiguo He & Gregor Matvos, 2016. "Debt and Creative Destruction: Why Could Subsidizing Corporate Debt Be Optimal?," Management Science, INFORMS, vol. 62(2), pages 303-325, February.
    17. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    18. Riedel, Frank & Steg, Jan-Henrik, 2017. "Subgame-perfect equilibria in stochastic timing games," Journal of Mathematical Economics, Elsevier, vol. 72(C), pages 36-50.
    19. Drew Fudenberg & Jean Tirole, 1985. "Preemption and Rent Equalization in the Adoption of New Technology," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 52(3), pages 383-401.
    20. Adkins, Roger & Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2019. "Investment decisions with finite-lived collars," Journal of Economic Dynamics and Control, Elsevier, vol. 103(C), pages 185-204.
    21. Clayton M. Christensen & Fernando F. Suárez & James M. Utterback, 1998. "Strategies for Survival in Fast-Changing Industries," Management Science, INFORMS, vol. 44(12-Part-2), pages 207-220, December.
    22. Jan A. Van Mieghem, 1998. "Investment Strategies for Flexible Resources," Management Science, INFORMS, vol. 44(8), pages 1071-1078, August.
    23. David Besanko & Ulrich Doraszelski & Lauren Xiaoyuan Lu & Mark Satterthwaite, 2010. "Lumpy Capacity Investment and Disinvestment Dynamics," Operations Research, INFORMS, vol. 58(4-part-2), pages 1178-1193, August.
    24. Chevalier-Roignant, Benoît & Flath, Christoph M. & Huchzermeier, Arnd & Trigeorgis, Lenos, 2011. "Strategic investment under uncertainty: A synthesis," European Journal of Operational Research, Elsevier, vol. 215(3), pages 639-650, December.
    25. Hagspiel, Verena & Huisman, Kuno J.M. & Kort, Peter M., 2016. "Volume flexibility and capacity investment under demand uncertainty," International Journal of Production Economics, Elsevier, vol. 178(C), pages 95-108.
    26. Boyan Jovanovic & Chung-Yi Tse, 2010. "Entry and Exit Echoes," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(3), pages 514-536, July.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Baishakhi Ganguly & Bikash Koli Dey & Sarla Pareek & Biswajit Sarkar, 2023. "Cost-Effective Imperfect Production-Inventory System under Variable Production Rate and Remanufacturing," Mathematics, MDPI, vol. 11(15), pages 1-24, August.
    2. Basim S. O. Alsaedi, 2024. "A Sustainable Supply Chain Model with Variable Production Rate and Remanufacturing for Imperfect Production Inventory System under Learning in Fuzzy Environment," Mathematics, MDPI, vol. 12(18), pages 1-49, September.
    3. Ye, Fanglin & Paulson, Nicholas & Khanna, Madhu, 2024. "Strategic innovation and technology adoption under technological uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kuno J.M. Huisman & Peter M. Kort, 2015. "Strategic capacity investment under uncertainty," RAND Journal of Economics, RAND Corporation, vol. 46(2), pages 376-408, June.
    2. Faninam, Farzan & Huisman, Kuno J．M. & Kort, Peter M., 2023. "Strategic investment under uncertainty in a triopoly market: Timing and capacity choice," European Journal of Operational Research, Elsevier, vol. 308(2), pages 897-911.
    3. Balter, Anne G. & Huisman, Kuno J.M. & Kort, Peter M., 2022. "New insights in capacity investment under uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 144(C).
    4. Huberts, Nick F.D. & Rossi Silveira, Rafael, 2023. "How economic depreciation shapes the relationship of uncertainty with investments’ size & timing," International Journal of Production Economics, Elsevier, vol. 260(C).
    5. Lukas, Elmar & Thiergart, Sascha, 2019. "The interaction of debt financing, cash grants and the optimal investment policy under uncertainty," European Journal of Operational Research, Elsevier, vol. 276(1), pages 284-299.
    6. Nick Huberts & Kuno Huisman & Peter Kort & Maria Lavrutich, 2015. "Capacity Choice in (Strategic) Real Options Models: A Survey," Dynamic Games and Applications, Springer, vol. 5(4), pages 424-439, December.
    7. Huberts, N.F.D. & Dawid, H. & Huisman, K.J.M. & Kort, P.M., 2019. "Entry deterrence by timing rather than overinvestment in a strategic real options framework," European Journal of Operational Research, Elsevier, vol. 274(1), pages 165-185.
    8. Xingang Wen & Peter M. Kort & Dolf Talman, 2017. "Volume flexibility and capacity investment: a real options approach," Journal of the Operational Research Society, Palgrave Macmillan;The OR Society, vol. 68(12), pages 1633-1646, December.
    9. Michail Chronopoulos & Verena Hagspiel & Stein-Erik Fleten, 2017. "Stepwise investment and capacity sizing under uncertainty," OR Spectrum: Quantitative Approaches in Management, Springer;Gesellschaft für Operations Research e.V., vol. 39(2), pages 447-472, March.
    10. Ye, Fanglin & Paulson, Nicholas & Khanna, Madhu, 2024. "Strategic innovation and technology adoption under technological uncertainty," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).
    11. Faninam, Farzan, 2024. "Essays on real options : Triopoly dynamics, disconnected investment regions, and multiple investment options," Other publications TiSEM cccc1cad-2899-4b57-9d83-f, Tilburg University, School of Economics and Management.
    12. Balliauw, Matteo & Kort, Peter M. & Zhang, Anming, 2019. "Capacity investment decisions of two competing ports under uncertainty: A strategic real options approach," Transportation Research Part B: Methodological, Elsevier, vol. 122(C), pages 249-264.
    13. Lavrutich, Maria & Hagspiel, Verena & Siddiqui, Afzal S., 2023. "Transmission investment under uncertainty: Reconciling private and public incentives," European Journal of Operational Research, Elsevier, vol. 304(3), pages 1167-1188.
    14. Wen, Xingang, 2017. "Strategic Capacity Investment under Uncertainty with Volume Flexibility," Discussion Paper 2017-019, Tilburg University, Center for Economic Research.
    15. Steg, Jan-Henrik & Thijssen, Jacco J.J., 2023. "Strategic investment with positive externalities," Games and Economic Behavior, Elsevier, vol. 138(C), pages 1-21.
    16. Wen, Xingang, 2017. "Strategic Capacity Investment under Uncertainty with Volume Flexibility," Other publications TiSEM faac3b9c-776e-4b90-a431-2, Tilburg University, School of Economics and Management.
    17. Paxson, Dean & Pereira, Paulo J. & Rodrigues, Artur, 2022. "Investment timing, capacity choice and optimal floors and ceilings," Journal of Economic Dynamics and Control, Elsevier, vol. 139(C).
    18. De Giovanni, Domenico & Massabò, Ivar, 2018. "Capacity investment under uncertainty: The effect of volume flexibility," International Journal of Production Economics, Elsevier, vol. 198(C), pages 165-176.
    19. Zhang, Zixuan & Chronopoulos, Michail & Kyriakou, Ioannis & Dimitrova, Dimitrina S., 2024. "Bi-level optimisation of subsidy and capacity investment under competition and uncertainty," European Journal of Operational Research, Elsevier, vol. 318(1), pages 327-340.
    20. Kort, Peter M. & Murto, Pauli & Pawlina, Grzegorz, 2010. "Uncertainty and stepwise investment," European Journal of Operational Research, Elsevier, vol. 202(1), pages 196-203, April.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:proeco:v:252:y:2022:i:c:s0925527322001578. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/ijpe .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.