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Value maximizing hurdle rates for R&D investment

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  • George Blazenko
  • Andrey Pavlov

Abstract

We show that the value maximizing hurdle rate for research and development (R&D) investments among private firms operating in a market setting is less than for conventional investments despite the fact that R&D has development risk. Because development risk arises only during R&D, entrepreneurs control this risk by deferring or pursuing R&D depending upon profitability. This risk management moderates downside loss and encourages upside gain which increases the value attraction of R&D and decreases the value maximizing hurdle rate below that of conventional investment.

Suggested Citation

  • George Blazenko & Andrey Pavlov, 2010. "Value maximizing hurdle rates for R&D investment," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 19(8), pages 693-717.
    • Handle: RePEc:taf:ecinnt:v:19:y:2010:i:8:p:693-717
    DOI: 10.1080/10438590903003631
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    References listed on IDEAS

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    1. Ciaran Driver & Paul Temple, 2004. "Shareholder Value or Competitive Advantage? Evidence from Hurdle Rates," School of Economics Discussion Papers 0104, School of Economics, University of Surrey.
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