Real options reasoning and a new look at the R&D investment strategies of pharmaceutical firms

Authors

  • Rita Gunther McGrath,

    Corresponding author
    1. Graduate School of Business, Columbia University, New York, New York, U.S.A.
    • Graduate School of Business, Columbia University, Armstrong Hall, 4th Floor, 2880 Broadway, New York, NY 10025, U.S.A.
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  • Atul Nerkar

    1. Graduate School of Business, Columbia University, New York, New York, U.S.A.
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Abstract

Real options reasoning (ROR) is a conceptual approach to strategic investment that takes into account the value of preserving the right to make future choices under uncertain conditions. In this study, we explore firms' motivations to invest in a new option. We find, based on an analysis of a large sample of patents by firms active in the pharmaceutical industry, that their investments in R&D are consistent with the logic of ROR. We identify three constructs—scope of opportunity, prior experience, and competitive effects—which have an influence on firms' propensity to invest in new R&D options and which could usefully be incorporated in a strategic theory of investment. Copyright © 2003 John Wiley & Sons, Ltd.

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