IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v11y2019i11p3178-d237686.html
   My bibliography  Save this article

Internet of Things and Their Coming Perspectives: A Real Options Approach

Author

Listed:
  • Jorge Tarifa-Fernández

    (Department of Economics and Business, University of Almería, 04120 Almería, Spain)

  • Ana María Sánchez-Pérez

    (Department of Economics and Business, University of Almería, 04120 Almería, Spain)

  • Salvador Cruz-Rambaud

    (Department of Economics and Business, University of Almería, 04120 Almería, Spain)

Abstract

Internet of things is developing at a dizzying rate, and companies are forced to implement it in order to maintain their operational efficiency. The high flexibility inherent to these technologies makes it necessary to apply an appropriate measure, which properly assesses risks and rewards. Real options methodology is available as a tool which fits the conditions, both economic and strategic, under which investment in internet of things technologies is developed. The contribution of this paper is twofold. On the one hand, it offers an adequate tool to assess the strategic value of investment in internet of things technologies. On the other hand, it tries to raise awareness among managers of internet of things technologies because of their potential to contribute to economic and social progress. The results of the research described in this paper highlight the importance of taking action as quickly as possible if companies want to obtain the best possible performance. In order to enhance the understanding of internet of things technologies investment, this paper provides a methodology to assess the implementation of internet of things technologies by using the real options approach; in particular, the option to expand has been proposed for use in the decision-making process.

Suggested Citation

  • Jorge Tarifa-Fernández & Ana María Sánchez-Pérez & Salvador Cruz-Rambaud, 2019. "Internet of Things and Their Coming Perspectives: A Real Options Approach," Sustainability, MDPI, vol. 11(11), pages 1-15, June.
    • Handle: RePEc:gam:jsusta:v:11:y:2019:i:11:p:3178-:d:237686
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/11/11/3178/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/11/11/3178/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Ajak, Ajak Duany & Topal, Erkan, 2015. "Real option in action: An example of flexible decision making at a mine operational level," Resources Policy, Elsevier, vol. 45(C), pages 109-120.
    2. Bérard, Céline & Perez, Marie, 2014. "Alliance dynamics through real options: The case of an alliance between competing pharmaceutical companies," European Management Journal, Elsevier, vol. 32(2), pages 337-349.
    3. John Moriarty & Jan Palczewski, 2019. "Imbalance Market Real Options and the Valuation of Storage in Future Energy Systems," Risks, MDPI, vol. 7(2), pages 1-30, April.
    4. Christian Ullrich, 2013. "Valuation of IT Investments Using Real Options Theory," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 5(5), pages 331-341, October.
    5. Hartmann, Marcus & Hassan, Ali, 2006. "Application of real options analysis for pharmaceutical R&D project valuation--Empirical results from a survey," Research Policy, Elsevier, vol. 35(3), pages 343-354, April.
    6. Fama, Eugene F. & French, Kenneth R., 2017. "International tests of a five-factor asset pricing model," Journal of Financial Economics, Elsevier, vol. 123(3), pages 441-463.
    7. van Bekkum, Sjoerd & Pennings, Enrico & Smit, Han, 2009. "A real options perspective on R&D portfolio diversification," Research Policy, Elsevier, vol. 38(7), pages 1150-1158, September.
    8. Kim, Kyeongseok & Park, Hyoungbae & Kim, Hyoungkwan, 2017. "Real options analysis for renewable energy investment decisions in developing countries," Renewable and Sustainable Energy Reviews, Elsevier, vol. 75(C), pages 918-926.
    9. Jiangang Shi & Kaifeng Duan & Shiping Wen & Rui Zhang, 2019. "Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective," Sustainability, MDPI, vol. 11(7), pages 1-18, March.
    10. Lee, In & Lee, Kyoochun, 2015. "The Internet of Things (IoT): Applications, investments, and challenges for enterprises," Business Horizons, Elsevier, vol. 58(4), pages 431-440.
    11. Mahmoud A. Eissa & Boping Tian, 2017. "Lobatto-Milstein Numerical Method in Application of Uncertainty Investment of Solar Power Projects," Energies, MDPI, vol. 10(1), pages 1-19, January.
    12. Luiz E. Brandão & James S. Dyer & Warren J. Hahn, 2005. "Using Binomial Decision Trees to Solve Real-Option Valuation Problems," Decision Analysis, INFORMS, vol. 2(2), pages 69-88, June.
    13. Michel Benaroch & Robert J. Kauffman, 1999. "A Case for Using Real Options Pricing Analysis to Evaluate Information Technology Project Investments," Information Systems Research, INFORMS, vol. 10(1), pages 70-86, March.
    14. Cassimon, D. & De Backer, M. & Engelen, P.J. & Van Wouwe, M. & Yordanov, V., 2011. "Incorporating technical risk in compound real option models to value a pharmaceutical R&D licensing opportunity," Research Policy, Elsevier, vol. 40(9), pages 1200-1216.
    15. Fan, Tijun & Tao, Feng & Deng, Sheng & Li, Shuxia, 2015. "Impact of RFID technology on supply chain decisions with inventory inaccuracies," International Journal of Production Economics, Elsevier, vol. 159(C), pages 117-125.
    16. Lander, Diane M. & Pinches, George E., 1998. "Challenges to the Practical Implementation of Modeling and Valuing Real Options," The Quarterly Review of Economics and Finance, Elsevier, vol. 38(3, Part 2), pages 537-567.
    17. Emily Tyler & Richard Chivaka, 2011. "The use of real options valuation methodology in enhancing the understanding of the impact of climate change on companies," Business Strategy and the Environment, Wiley Blackwell, vol. 20(1), pages 55-70, January.
    18. James E. Smith & Robert F. Nau, 1995. "Valuing Risky Projects: Option Pricing Theory and Decision Analysis," Management Science, INFORMS, vol. 41(5), pages 795-816, May.
    19. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    20. Favato, Giampiero & Vecchiato, Riccardo, 2017. "Embedding real options in scenario planning: A new methodological approach," Technological Forecasting and Social Change, Elsevier, vol. 124(C), pages 135-149.
    21. Pennings, Enrico & Lint, Onno, 2000. "Market entry, phased rollout or abandonment? A real option approach," European Journal of Operational Research, Elsevier, vol. 124(1), pages 125-138, July.
    22. Morreale, Azzurra & Robba, Serena & Lo Nigro, Giovanna & Roma, Paolo, 2017. "A real options game of alliance timing decisions in biopharmaceutical research and development," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1189-1202.
    23. Boomsma, Trine Krogh & Meade, Nigel & Fleten, Stein-Erik, 2012. "Renewable energy investments under different support schemes: A real options approach," European Journal of Operational Research, Elsevier, vol. 220(1), pages 225-237.
    24. Guofeng Ma & Qingjuan Du & Kedi Wang, 2018. "A Concession Period and Price Determination Model for PPP Projects: Based on Real Options and Risk Allocation," Sustainability, MDPI, vol. 10(3), pages 1-21, March.
    25. Céline Bérard & Marie Perez, 2014. "Alliance dynamics through real options: The case of an alliance between competing pharmaceutical companies," Post-Print halshs-00987942, HAL.
    26. Jia-Yue Huang & Yun-Fei Cao & Hui-Ling Zhou & Hong Cao & Bao-Jun Tang & Nan Wang, 2018. "Optimal Investment Timing and Scale Choice of Overseas Oil Projects: A Real Option Approach," Energies, MDPI, vol. 11(11), pages 1-22, October.
    27. Cox, John C. & Ross, Stephen A. & Rubinstein, Mark, 1979. "Option pricing: A simplified approach," Journal of Financial Economics, Elsevier, vol. 7(3), pages 229-263, September.
    28. James E. Smith, 2005. "Alternative Approaches for Solving Real-Options Problems," Decision Analysis, INFORMS, vol. 2(2), pages 89-102, June.
    29. Cruz Rambaud, Salvador & Sánchez Pérez, Ana María, 2017. "The option to expand a project: its assessment with the binomial options pricing model," Operations Research Perspectives, Elsevier, vol. 4(C), pages 12-20.
    30. Daniela Livia Trașcă & George Marian Ștefan & Daniela Nicoleta Sahlian & Răzvan Hoinaru & George-Laurențiu Șerban-Oprescu, 2019. "Digitalization and Business Activity. The Struggle to Catch Up in CEE Countries," Sustainability, MDPI, vol. 11(8), pages 1-17, April.
    31. Marie Perez & Céline Bérard, 2014. "Alliance Dynamics through Real Options: The Case of an Alliance between Competing Pharmaceutical Companies," Post-Print hal-01528951, HAL.
    32. Myers, Stewart C., 1977. "Determinants of corporate borrowing," Journal of Financial Economics, Elsevier, vol. 5(2), pages 147-175, November.
    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. Antonio Di Bari & Giovanni Villani, 2023. "An Options Game approach to valuate broadband projects in a smart city context," Quality & Quantity: International Journal of Methodology, Springer, vol. 57(2), pages 1587-1601, April.
    2. Veronika Jezkova & Zuzana Rowland & Veronika Machova & Jan Hejda, 2020. "The Intrinsic Value of an Enterprise Determined by Means of the FCFE Tool," Sustainability, MDPI, vol. 12(21), pages 1-13, October.
    3. Usama Awan & Robert Sroufe & Muhammad Shahbaz, 2021. "Industry 4.0 and the circular economy: A literature review and recommendations for future research," Business Strategy and the Environment, Wiley Blackwell, vol. 30(4), pages 2038-2060, May.

    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. Raisa Pérez-Vas & Félix Puime Guillén & Joaquín Enríquez-Díaz, 2021. "Valuation of a Company Producing and Trading Seaweed for Human Consumption: Classical Methods vs. Real Options," IJERPH, MDPI, vol. 18(10), pages 1-13, May.
    2. Bettina Freitag & Lukas Häfner & Verena Pfeuffer & Jochen Übelhör, 2020. "Evaluating investments in flexible on-demand production capacity: a real options approach," Business Research, Springer;German Academic Association for Business Research, vol. 13(1), pages 133-161, April.
    3. Carol Alexander & Xi Chen, 2021. "Model risk in real option valuation," Annals of Operations Research, Springer, vol. 299(1), pages 1025-1056, April.
    4. Carlos Andrés Zapata Quimbayo, 2020. "OPCIONES REALES Una guía teórico-práctica para la valoración de inversiones bajo incertidumbre mediante modelos en tiempo discreto y simulación de Monte Carlo," Books, Universidad Externado de Colombia, Facultad de Finanzas, Gobierno y Relaciones Internacionales, number 138, April.
    5. Felipe Isaza Cuervo & Sergio Botero Boterob, 2014. "Aplicación de las opciones reales en la toma de decisiones en los mercados de electricidad," Estudios Gerenciales, Universidad Icesi, November.
    6. Savolainen, Jyrki, 2016. "Real options in metal mining project valuation: Review of literature," Resources Policy, Elsevier, vol. 50(C), pages 49-65.
    7. Collan, Mikael, 2004. "Giga-Investments: Modelling the Valuation of Very Large Industrial Real Investments," MPRA Paper 4328, University Library of Munich, Germany.
    8. Fernandes, Glaucia & Perobelli, Fernanda Finotti Cordeiro & Brandão, Luiz Eduardo T., 2016. "A model for valuing new technologies under a pull incentives environment," Renewable and Sustainable Energy Reviews, Elsevier, vol. 59(C), pages 482-493.
    9. Kim, Amy M. & Li, Huanan, 2020. "Incorporating the impacts of climate change in transportation infrastructure decision models," Transportation Research Part A: Policy and Practice, Elsevier, vol. 134(C), pages 271-287.
    10. Balibrea-Iniesta, José & Rodríguez-Monroy, Carlos & Núñez-Guerrero, Yilsy María, 2021. "Economic analysis of the German regulation for electrical generation projects from biogas applying the theory of real options," Energy, Elsevier, vol. 231(C).
    11. Marcel Philipp Müller & Sebastian Stöckl & Steffen Zimmermann & Bernd Heinrich, 2016. "Decision Support for IT Investment Projects," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 58(6), pages 381-396, December.
    12. Favato, Giampiero & Vecchiato, Riccardo, 2017. "Embedding real options in scenario planning: A new methodological approach," Technological Forecasting and Social Change, Elsevier, vol. 124(C), pages 135-149.
    13. Shaton, Katerina, 2015. "Value of Flexibility in Gas Pipeline Investments," Chapters from the Proceedings of the Hamburg International Conference of Logistics (HICL), in: Kersten, Wolfgang & Blecker, Thorsten & Ringle, Christian M. (ed.), Innovations and Strategies for Logistics and Supply Chains: Technologies, Business Models and Risk Management. Proceedings of the Hamburg Internationa, volume 20, pages 333-357, Hamburg University of Technology (TUHH), Institute of Business Logistics and General Management.
    14. Pendharkar, Parag C., 2010. "Valuing interdependent multi-stage IT investments: A real options approach," European Journal of Operational Research, Elsevier, vol. 201(3), pages 847-859, March.
    15. Kyungwon Kim & Jae Wook Song, 2018. "Managing Bubbles in the Korean Real Estate Market: A Real Options Framework," Sustainability, MDPI, vol. 10(8), pages 1-25, August.
    16. Robert Keller & Lukas Häfner & Thomas Sachs & Gilbert Fridgen, 2020. "Scheduling Flexible Demand in Cloud Computing Spot Markets," Business & Information Systems Engineering: The International Journal of WIRTSCHAFTSINFORMATIK, Springer;Gesellschaft für Informatik e.V. (GI), vol. 62(1), pages 25-39, February.
    17. Warren J. Hahn & James S. Dyer, 2011. "A Discrete Time Approach for Modeling Two-Factor Mean-Reverting Stochastic Processes," Decision Analysis, INFORMS, vol. 8(3), pages 220-232, September.
    18. Martín-Barrera, Gonzalo & Zamora-Ramírez, Constancio & González-González, José M., 2016. "Application of real options valuation for analysing the impact of public R&D financing on renewable energy projects: A company′s perspective," Renewable and Sustainable Energy Reviews, Elsevier, vol. 63(C), pages 292-301.
    19. Azzurra Morreale & Luigi Mittone & Thi-Thanh-Tam Vu & Mikael Collan, 2020. "To Wait or Not to Wait? Use of the Flexibility to Postpone Investment Decisions in Theory and in Practice," Sustainability, MDPI, vol. 12(8), pages 1-19, April.
    20. Jiangang Shi & Kaifeng Duan & Shiping Wen & Rui Zhang, 2019. "Investment Valuation Model of Public Rental Housing PPP Project for Private Sector: A Real Option Perspective," Sustainability, MDPI, vol. 11(7), pages 1-18, March.

    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:gam:jsusta:v:11:y:2019:i:11:p:3178-:d:237686. 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: MDPI Indexing Manager (email available below). General contact details of provider: https://www.mdpi.com .

    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.