MOTI: Real Options for Management of Technological Innovations

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9732470 Ramesh Risk is inevitable in management of technological innovations. However, little information exists on the adoption of financial risk management techniques (such as valuation of "real options") to reflect managerial flexibility in R&D projects. In the proposed research, the applicability of option pricing theory to real-world project management in the (recently deregulated) electric utility industry will be tested. In particular, the real options methodologies developed by Dixit & Pindyck, Grenadier & Weiss and by Mitchell & Hamilton will be used to analyze selected electric utility industry innovation management problems. A new real options methodology for evaluating R&D investment alternatives in the utility industry is proposed. This proposed methodology consider factors unique to utility industry including the new competitive environment; the matured nature of technological and the danger of employee resistance to changes in work practices, which may be necessary for adoption of new technology. A software package that implements this methodology will be developed. Graduate courses and seminars based on this work for the interdisciplinary industry-oriented "energy markets" program will be introduced. The findings and the methodology will also be adapted to other management of innovation situations.