A real options reasoning approach to hybrid vehicle investments

Abstract

Long term increases of petrol prices and the threat of a global climate change have created in the automotive industry a new competitive environment based on the development of more sustainable technologies. Using the real option reasoning lens we provide a theoretical framework to better account for the technological and market uncertainties and irreversibilities that impact the investment and innovation decisions of automotive firms supporting the development of more sustainable vehicle technologies. We investigate the case of hybrid vehicles in a transitional perspective by insisting on their potential to influence the dynamic shaping of investment decisions of firms in the car industry. We consider the hybridization strategy as intra-project and inter-project compound growth options to manage the flexibilities and irreversibilities of investment decisions during the transition process. We provide four different–sometimes conflicting–strategic rationales structuring the investment efforts of firms in hybrid vehicles and illustrate them with numerous examples from the automotive industry.