Strategic heuristic and valuation of defence R&D investments: A real options approach

Abstract

A strategic objective of defence R&D investments is the development of the indigenous defence technological capabilities, and the R&D process can be viewed as a capability development process. This paper builds on the literature in technology management and real options theory and presents a framework for defence R&D investments as real options. Defence R&D projects could be treated as one of three types of real options, depending on their degree of technical and application uncertainty. Positioning options are application driven technological options in specific capabilities and offers the opportunity to compete in some future and still unclear technological arena. Scouting options are used to learn about the operational scenario by probing or offering prototypes to potential early adopters. Stepping-stone options are broad-based options which can be framed as a generic set of resources and form platforms for future development and opportunities. Applications of this framework for strategic heuristic and a methodology for the valuation of the real options are discussed.