The Public Sector R&D Enterprise: A New Approach to Portfolio Valuation

144 Pages·2015·1.148 MB·English

by  Peter D. Linquiti (auth.)

The Public Sector R&D Enterprise
DOI: 10.1057/9781137542090.0001
Science, Technology, and Innovation Policy
Series Editor: Albert N. Link
Managing Editor: Leila Campoli
Science, Technology, and Innovation Policy is a scholarly series for academics and policy makers.
Topics of interest include, but are not limited to, the economic foundations of science, tech-
nology, and innovation policy; the impact of science, technology, and innovation policy on
economic growth and development; science, technology, and innovation policy as a driver of
sustainability and social well-being; and the application of methods and models for quantify-
ing the social consequences of science, technology, and innovation policy.
Titles include:
Peter D. Linquiti
THE PUBLIC SECTOR R&D ENTERPRISE
A New Approach to Portfolio Valuation
Peter D. Blair
CONGRESS’S OWN THINK TANK
Learning from the legacy of the office of technology assessment (1972–1995)
Albert N. Link
BENDING THE ARC OF INNOVATION
Public support of r&d in small, entrepreneurial firms
DOI: 10.1057/9781137542090.0001
The Public Sector
R&D Enterprise: A
New Approach to
Portfolio Valuation
Peter D. Linquiti
George Washington University, USA
DOI: 10.1057/9781137542090.0001
the public sector r&d enterprise
Copyright © Peter D. Linquiti, 2015.
Softcover reprint of the hardcover 1st edition 2015 978-1-137-54208-3
All rights reserved.
First published in 2015 by
PALGRAVE MACMILLAN®
in the United States—a division of St. Martin’s Press LLC,
175 Fift h Avenue, New York, NY 10010.
Where this book is distributed in the UK, Europe and the rest of the world,
this is by Palgrave Macmillan, a division of Macmillan Publishers Limited,
registered in England, company number 785998, of Houndmills, Basingstoke,
Hampshire RG21 6XS.
Palgrave Macmillan is the global academic imprint of the above companies
and has companies and representatives throughout the world.
Palgrave® and Macmillan® are registered trademarks in the United States,
the United Kingdom, Europe and other countries.
ISBN: 978-1-137-54209-0 PDF
ISBN: 978-1-349-50702-3
Library of Congress Cataloging-in-Publication Data is available from
the Library of Congress.
A catalogue record of the book is available from the British Library.
First edition: 2015
www.palgrave.com/pivot
DOI: 10.1057/9781137542090
Contents
List of Figures viii
List of Tables ix
Acknowledgments x
1 Research and Development: Opportunities
and Challenges 1
2 A Primer on the Public Sector R&D
Enterprise 5
2.1 Overview 6
2.2 Mediating factors: policy objectives 9
2.2.1 Correct market failures 9
2.2.2 Strengthen the economy 11
2.2.3 Enhance national
competitiveness 14
2.3 Model component: inputs 16
2.4 Model component: activities 19
2.5 Mediating factors: institutional
conditions 23
2.5.1 Program-specific statutory and
regulatory requirements 23
2.5.2 Government-wide statutory and
regulatory requirements 26
2.5.3 Inter-agency coordination 27
2.5.4 Political oversight 28
2.6 Model component: outputs 30
DOI: 10.1057/9781137542090.0001 v
vi Contents
2.7 Mediating factors: conditions faced
by new technologies 33
2.7.1 The market environment for new
technologies 33
2.7.2 The policy environment for new
technologies 36
2.8 Model component: outcomes 37
2.9 Model component: impacts 40
2.10 Model component: program evaluation 42
3 R&D Portfolio Valuation and Formation 45
3.1 National Research Council method for
prospective evaluation 46
3.2 Potential enhancements to the standard
DT/DCF approach 49
3.2.1 Enhancement #1: treat R&D projects as
real options 49
3.2.2 Enhancement #2: treat groups of R&D
projects as portfolios 53
3.2.3 Enhancement #3: value R&D portfolios as
portfolios of real options 62
3.3 Approaches to portfolio formation 64
3.3.1 Commercial practices for portfolio
formation 64
3.3.2 Public sector practices for portfolio
formation 71
4 Public Sector R&D Valuation: A Practical Example 74
4.1 Research questions 75
4.2 Data 75
4.2.1 R&D project data 76
4.2.2 Energy price data 84
4.3 Methodology 89
4.3.1 Replicate and extend NRC methodology 90
4.3.2 Execute real option analysis with related
projects 90
4.3.3 Sensitivity analyses 93
4.3.4 Measuring portfolio risk 93
DOI: 10.1057/9781137542090.0001
Contents vii
4.4 Results 95
4.4.1 Project valuation 95
4.4.2 Portfolio valuation 97
4.4.3 Sensitivity analyses 99
5 Recommendations for Public Sector R&D Managers 106
6 Next Steps in Valuing R&D Portfolios:
A Research Agenda 111
References 116
Index 129
DOI: 10.1057/9781137542090.0001
List of Figures
2.1 The public sector enterprise for applied
research & development 8
2.2 Entities performing federally funded applied
research in 2012 18
2.3 Annual funding for Advanced Technology
Program 25
2.4 Illustrative market penetration pathways
for new technologies 39
3.1 Payoff to an R&D option 51
3.2 Underlying asset value and option payoff 52
3.3 Relationship between number of projects and
portfolio variance 56
3.4 Effect of project correlation on portfolio risk 57
3.5 Trade-off of risk & return 61
3.6 Effect on portfolio risk of correlation between
projects with conditional payoffs 63
4.1 “Uncertainty surrounding estimates of
program benefits” as presented by National
Research Council 79
4.2 Description of characterization of project
relationships 82
4.3 Comparison of project rankings based on
valuation method 96
4.4 Portfolio value: decision tree/discounted
cash flow method versus real option method 98
4.5 Portfolio value: real option method with
and without project correlations 100
4.6 Portfolio value: effect of project
interdependencies 103
viii DOI: 10.1057/9781137542090.0002
List of Tables
4.1 Taxonomy of R&D projects 77
4.2 Characterization of R&D projects 81
4.3 Technological relationships during R&D 83
4.4 Commercial relationships during deployment 83
4.5 Future energy prices 85
4.6 Historical energy prices 87
4.7 Correlations among historical energy
price changes 88
4.8 Derivation of beta by fuel type 89
4.9 Estimation of risk-neutral price path 90
4.10 Project valuation net of R&D cost 95
4.11 Simulation of portfolio value: decision
tree/discounted cash flow method versus
real option method 97
4.12 Sensitivity analysis: real option valuation
with and without project correlations 100
4.13 Sensitivity analysis: effect of assumed project
correlation on real option valuation 102
DOI: 10.1057/9781137542090.0003 ix