Non-additivity in portfolios of exploration activities: a real options-based analysis of equity alliances in biotechnology
Article first published online: 23 SEP 2004
Copyright © 2004 John Wiley & Sons, Ltd.
Strategic Management Journal
Volume 25, Issue 11, pages 1045–1061, November 2004
How to Cite
Vassolo, R. S., Anand, J. and Folta, T. B. (2004), Non-additivity in portfolios of exploration activities: a real options-based analysis of equity alliances in biotechnology. Strat. Mgmt. J., 25: 1045–1061. doi: 10.1002/smj.414
- Issue published online: 23 SEP 2004
- Article first published online: 23 SEP 2004
- Manuscript Accepted: 21 JAN 2004
- Manuscript Received: 28 JAN 2002
- real options;
Firms invest in exploration-oriented activities to seek competitive advantage and in response to changing environments. Real options formulations represent an emerging strand of thinking on such investments. In this paper we begin with the observation that firms often simultaneously invest in multiple exploration projects. We identify two sources of potential interactions among these real options investments. First, we investigate the effects of correlations between the outcomes in different options. Second, we analyze the effects of investments that are fungible across project options. We show that under different conditions multiple options can be sub-additive (due to redundancies in outcomes) or super-additive (due to fungible inputs). We test the implications of our model with data from the biotech industry and find supporting evidence. Our model and results have some interesting implications for the exploration literature and real options lens. Copyright © 2004 John Wiley & Sons, Ltd.