R&D Portfolio Management: Real Options Theory in Defense Projects

The capability of developing defense critical technology and its own weapon system is the most important factor for a country’s own national security reasons. The United States, which is a superpower in the world today, spends more than 465 billion dollars as an annual defense budget in 2006 to maintain its dominant military power in the world (Ministry of National Defense [MND], 2006). Other defense advanced countries, especially Japan and Israel, also spend billions of dollars in rebuilding their military strength for their own security reasons, too. Moreover, the US Department of Defense (DoD) allocated over 40 billion dollars as a defense R&D (Research and Development) budget, which is over 13% of the total defense budget, for the development of cutting edge defense technology and high-end weapon systems (MND, 2006). Due to the reluctance of transferring defense critical technologies to even friendly allies and its huge costs from acquisition to maintenance, it is obvious that it will be very costly to acquire the ability to build defense critical technologies and weapon systems for a self-defense capability in the Republic of Korea.