IDEAS home Printed from https://ideas.repec.org/a/gam/jsusta/v15y2022i1p359-d1015211.html
   My bibliography  Save this article

Risk Dominance Analysis of R&D Investment Cooperation in Dynamic Option Game

Author

Listed:
  • Qing He

    (School of Economics, Wuhan University of Technology, Wuhan 430070, China)

  • Yaqin Liu

    (School of Economics, Wuhan Polytechnic University, Wuhan 430023, China)

  • Qian Yu

    (School of Economics, Wuhan University of Technology, Wuhan 430070, China)

  • Chao Wei

    (School of Economics, Wuhan University of Technology, Wuhan 430070, China)

Abstract

Research and development (R&D) investment is very important for firms to gain competitive advantages and sustainable development. Due to the uncertainty of the market and competitors, R&D investment is usually costly and high risk. In such circumstances, firms not only have to figure out the optimal investment timing, but also consider whether to cooperate with competitors to share the risks and costs. In this paper, a two-stage dynamic exchange option game model is proposed for two symmetric competing firms to analyze their R&D investment decision and cooperation. The results show that under uncertainty, the R&D investment timing and cooperation strategy of the two firms depend on the market fluctuation, R&D cost, opportunity benefit of free riding, and the externality of cooperation. If the opportunity benefit of free riding is less than or equal to half of the cooperative research cost, the two firms will invest as early as possible and cooperate. The technology spillover and profits of new products will positively affect the willingness of the competing firms to invest and cooperate in R&D. Moreover, we also calculate the market value thresholds of the investment strategies for the two firms. When the market value is small, the two firms wait for the R&D investment; when the value increases, the firm with a high successful R&D probability will lead the investment, and the other firm follows the investment; when the value is large enough, the two firms will invest at the beginning of the period.

Suggested Citation

  • Qing He & Yaqin Liu & Qian Yu & Chao Wei, 2022. "Risk Dominance Analysis of R&D Investment Cooperation in Dynamic Option Game," Sustainability, MDPI, vol. 15(1), pages 1-21, December.
    • Handle: RePEc:gam:jsusta:v:15:y:2022:i:1:p:359-:d:1015211
    as

    Download full text from publisher

    File URL: https://www.mdpi.com/2071-1050/15/1/359/pdf
    Download Restriction: no
    File URL: https://www.mdpi.com/2071-1050/15/1/359/
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Giovanni Villani & Marta Biancardi, 2022. "Competition and strategic alliance in R&D investments: a real option game approach with multiple experiments," Journal of Economic Interaction and Coordination, Springer;Society for Economic Science with Heterogeneous Interacting Agents, vol. 17(1), pages 63-86, January.
    2. d'Aspremont, Claude & Jacquemin, Alexis, 1988. "Cooperative and Noncooperative R&D in Duopoly with Spillovers," American Economic Review, American Economic Association, vol. 78(5), pages 1133-1137, December.
    3. Terje Aven & Ortwin Renn, 2009. "On risk defined as an event where the outcome is uncertain," Journal of Risk Research, Taylor & Francis Journals, vol. 12(1), pages 1-11, January.
    4. John C. Harsanyi & Reinhard Selten, 1988. "A General Theory of Equilibrium Selection in Games," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262582384, December.
    5. Dickson, Pat H. & Weaver, K. Mark & Hoy, Frank, 2006. "Opportunism in the R&D alliances of SMES: The roles of the institutional environment and SME size," Journal of Business Venturing, Elsevier, vol. 21(4), pages 487-513, July.
    6. Martzoukos, Spiros H. & Zacharias, Eleftherios, 2013. "Real option games with R&D and learning spillovers," Omega, Elsevier, vol. 41(2), pages 236-249.
    7. Luyun Xu & Dong Liang & Zhenjie Duan & Xu Xiao, 2015. "Stability Analysis of R&D Cooperation in a Supply Chain," Mathematical Problems in Engineering, Hindawi, vol. 2015, pages 1-10, October.
    8. Wei Sun & Yonggan Zhao & Leonard MacLean, 2021. "Real Options in a Duopoly with Jump Diffusion Prices," Asia-Pacific Journal of Operational Research (APJOR), World Scientific Publishing Co. Pte. Ltd., vol. 38(06), pages 1-29, December.
    9. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474.
    10. Chiara Conti & Marco A. Marini, 2019. "Are you the right partner? R&D agreement as a screening device," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 28(3), pages 243-264, April.
    11. Van Huyck, John B & Battalio, Raymond C & Beil, Richard O, 1990. "Tacit Coordination Games, Strategic Uncertainty, and Coordination Failure," American Economic Review, American Economic Association, vol. 80(1), pages 234-248, March.
    12. Deming Zeng & Luyun Xu & Xia-an Bi, 2017. "Effects of asymmetric knowledge spillovers on the stability of horizontal and vertical R&D cooperation," Computational and Mathematical Organization Theory, Springer, vol. 23(1), pages 32-60, March.
    13. Li, Shuai & Cai, Hubo, 2017. "Government incentive impacts on private investment behaviors under demand uncertainty," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 101(C), pages 115-129.
    14. Ko, Chuan-Chuan & Lin, Tyrone T. & Yang, Chyan, 2011. "The venture capital entry model on game options with jump-diffusion process," International Journal of Production Economics, Elsevier, vol. 134(1), pages 87-94, November.
    15. repec:bla:jfinan:v:43:y:1988:i:5:p:1235-56 is not listed on IDEAS
    16. Bouis, Romain & Huisman, Kuno J.M. & Kort, Peter M., 2009. "Investment in oligopoly under uncertainty: The accordion effect," International Journal of Industrial Organization, Elsevier, vol. 27(2), pages 320-331, March.
    17. Eilat, Harel & Golany, Boaz & Shtub, Avraham, 2008. "R&D project evaluation: An integrated DEA and balanced scorecard approach," Omega, Elsevier, vol. 36(5), pages 895-912, October.
    18. Baum, Christopher F. & Caglayan, Mustafa & Talavera, Oleksandr, 2010. "On the investment sensitivity of debt under uncertainty," Economics Letters, Elsevier, vol. 106(1), pages 25-27, January.
    19. Suzumura, Kotaro, 1992. "Cooperative and Noncooperative R&D in an Oligopoly with Spillovers," American Economic Review, American Economic Association, vol. 82(5), pages 1307-1320, December.
    20. Azevedo, Alcino & Paxson, Dean, 2014. "Developing real option game models," European Journal of Operational Research, Elsevier, vol. 237(3), pages 909-920.
    21. Chia-Hua Cheng & James J. H. Liou & Chui-Yu Chiu, 2017. "A Consistent Fuzzy Preference Relations Based ANP Model for R&D Project Selection," Sustainability, MDPI, vol. 9(8), pages 1-17, August.
    22. repec:dau:papers:123456789/12655 is not listed on IDEAS
    23. Belderbos, Rene & Carree, Martin & Diederen, Bert & Lokshin, Boris & Veugelers, Reinhilde, 2004. "Heterogeneity in R&D cooperation strategies," International Journal of Industrial Organization, Elsevier, vol. 22(8-9), pages 1237-1263, November.
    24. Kamien, Morton I & Muller, Eitan & Zang, Israel, 1992. "Research Joint Ventures and R&D Cartels," American Economic Review, American Economic Association, vol. 82(5), pages 1293-1306, December.
    25. Khanh Hoang & Thanh Tat Tran, 2022. "Policy uncertainty and intellectual capital investment," Applied Economics Letters, Taylor & Francis Journals, vol. 29(15), pages 1369-1377, September.
    26. Banerjee, Pradip & Dutta, Shantanu, 2022. "The effect of political risk on investment decisions," Economics Letters, Elsevier, vol. 212(C).
    27. Feng Yang & Junjun Kong & Tianzhuo Liu & Sheng Ang, 2022. "Cooperation and coordination in green supply chain with R&D uncertainty," Journal of the Operational Research Society, Taylor & Francis Journals, vol. 73(3), pages 481-496, March.
    28. Ulf von Kalckreuth, 2003. "Exploring the role of uncertainty for corporate investment decisions in Germany," Swiss Journal of Economics and Statistics (SJES), Swiss Society of Economics and Statistics (SSES), vol. 139(II), pages 173-206, June.
    29. Chi Man Leung & Yue Kuen Kwok, 2016. "Real options game models of R&D competition between asymmetric firms with spillovers," Decisions in Economics and Finance, Springer;Associazione per la Matematica, vol. 39(2), pages 259-291, November.
    30. Delaney, Laura, 2022. "The impact of operational delay on irreversible investment under Knightian uncertainty," Economics Letters, Elsevier, vol. 215(C).
    31. McDonald, Robert L & Siegel, Daniel R, 1985. "Investment and the Valuation of Firms When There Is an Option to Shut Down," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 26(2), pages 331-349, June.
    32. Grzegorz Drozdowski, 2021. "Economic Calculus Qua an Instrument to Support Sustainable Development under Increasing Risk," JRFM, MDPI, vol. 14(1), pages 1-12, January.
    33. Andreas Klinke, 2021. "Public understanding of risk and risk governance," Journal of Risk Research, Taylor & Francis Journals, vol. 24(1), pages 2-13, January.
    34. Trigeorgis, Lenos & Tsekrekos, Andrianos E., 2018. "Real Options in Operations Research: A Review," European Journal of Operational Research, Elsevier, vol. 270(1), pages 1-24.
    35. Michal Ramsza & Adam Karbowski & Tadeusz Platkowski, 2021. "Process R&D investment and social dilemmas," Economia e Politica Industriale: Journal of Industrial and Business Economics, Springer;Associazione Amici di Economia e Politica Industriale, vol. 48(3), pages 315-336, September.
    36. Campa, Joe Manuel, 1993. "Entry by Foreign Firms in the United States under Exchange Rate Uncertainty," The Review of Economics and Statistics, MIT Press, vol. 75(4), pages 614-622, November.
    Full references (including those not matched with items on IDEAS)

    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. Brunner, Philipp & Letina, Igor & Schmutzler, Armin, 2024. "Research joint ventures: The role of financial constraints," European Economic Review, Elsevier, vol. 165(C).
    2. Suetens, Sigrid, 2008. "Does R&D cooperation facilitate price collusion? An experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 66(3-4), pages 822-836, June.
    3. Sendstad, Lars Hegnes & Chronopoulos, Michail, 2017. "Strategic Technology Switching under Risk Aversion and Uncertainty," Discussion Papers 2017/10, Norwegian School of Economics, Department of Business and Management Science.
    4. Birgit Aschhoff & Tobias Schmidt, 2008. "Empirical Evidence on the Success of R&D Cooperation—Happy Together?," Review of Industrial Organization, Springer;The Industrial Organization Society, vol. 33(1), pages 41-62, August.
    5. Cary Deck & Nisvan Erkal, 2013. "An Experimental Analysis Of Dynamic Incentives To Share Knowledge," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1622-1639, April.
    6. Abhishek Kabiraj, 2018. "R&D cooperation in a three-firm Cournot industry," Economics Bulletin, AccessEcon, vol. 38(3), pages 1541-1546.
    7. Constantine Manasakis & Emmanuel Petrakis & Vasileios Zikos‡, 2014. "Downstream Research Joint Venture with Upstream Market Power," Southern Economic Journal, John Wiley & Sons, vol. 80(3), pages 782-802, January.
    8. Grunfeld, Leo A., 2003. "Meet me halfway but don't rush: absorptive capacity and strategic R&D investment revisited," International Journal of Industrial Organization, Elsevier, vol. 21(8), pages 1091-1109, October.
    9. Banal-Estañol, Albert & Duso, Tomaso & Seldeslachts, Jo & Szücs, Florian, 2022. "R&D Spillovers through RJV Cooperation," EconStor Open Access Articles and Book Chapters, ZBW - Leibniz Information Centre for Economics, vol. 51(4), pages 1-10.
    10. Joanna Poyago-Theotoky & Ben Ferrett, "undated". "Horizontal Agreements and R&D Complementarities: Merger versus RJV," CRIEFF Discussion Papers 1201, Centre for Research into Industry, Enterprise, Finance and the Firm.
    11. 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).
    12. Buccella, Domenico & Fanti, Luciano & Gori, Luca, 2021. "A contribution to the theory of R&D investments," GLO Discussion Paper Series 940, Global Labor Organization (GLO).
    13. Odagiri, Hiroyuki & Nakamura, Yoshiaki & Shibuya, Minoru, 1997. "Research consortia as a vehicle for basic research: The case of a fifth generation computer project in Japan," Research Policy, Elsevier, vol. 26(2), pages 191-207, May.
    14. Wölfl, Anita, 2000. "Spillover Effects and R&D-Cooperations - The Influence of Market Structure," IWH Discussion Papers 122/2000, Halle Institute for Economic Research (IWH).
    15. Ángel L. López & Xavier Vives, 2019. "Overlapping Ownership, R&D Spillovers, and Antitrust Policy," Journal of Political Economy, University of Chicago Press, vol. 127(5), pages 2394-2437.
    16. Zheng, Shiyuan & Jiang, Changmin & Fu, Xiaowen, 2021. "Investment competition on dedicated terminals under demand ambiguity," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 150(C).
    17. Chatterjee, Rittwik & Kabiraj, Tarun, 2023. "Cooperative vs. Non-cooperative R&D under Uncertain Probability of Success," MPRA Paper 117623, University Library of Munich, Germany.
    18. Michael D. König & Xiaodong Liu & Yves Zenou, 2019. "R&D Networks: Theory, Empirics, and Policy Implications," The Review of Economics and Statistics, MIT Press, vol. 101(3), pages 476-491, July.
    19. Amir, Rabah & Wooders, John, 2000. "One-Way Spillovers, Endogenous Innovator/Imitator Roles, and Research Joint Ventures," Games and Economic Behavior, Elsevier, vol. 31(1), pages 1-25, April.
    20. Amoroso, S., 2013. "Heterogeneity of innovative, collaborative, and productive firm-level processes," Other publications TiSEM f5784a49-7053-401d-855d-1, Tilburg University, School of Economics and Management.

    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:15:y:2022:i:1:p:359-:d:1015211. 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.