林舒柔 台灣大學國際企業研究所

1. Corporate Venture Investment Decisions under Uncertainty:Real Options Reasoning versus Escalating Commitment Perspective* 林舒柔 台灣大學國際企業研究所 中華民國九十三年十二月四日 *: This paper has benefited from a substantial discussion with professors Ji-Ren Lee and Ming-Je Tang. The usual disclaimers apply. 論文題目/報告人 p1

2. Strategic Investment Decision Making under Uncertainty • Sequential decisions, rather than a one-shot decision • Once a company initiates an investment, how does it make its subsequent investment decision. • Two relevant research streams • Real options reasoning • Escalating commitment 論文題目/報告人 p2

3. Real options reasoning versus Escalating commitment • Bowman & Hurry (1993) : • Waiting for signals or not • Adner & Levinthal (2004) • McGrath , Ferrier & Mendelow (2004) • Zardkoohi (2004) 論文題目/報告人 p3

4. Corporate Venture Investment Decisions under Uncertainty • Corporate Venture Investment : focal firm’s equity investment in an entrepreneurial firm Miles & Covin (2002) • Organizationally separate from focal firm • Beyond existing business scope • Start-up or on embryo stage Characterized by • High uncertainty • Sequential rather than once-for-all decision making 論文題目/報告人 p4

5. Main Objectives • Real Options Reasoning versus Escalating Commitment • Investigate corporate venture decision making 論文題目/報告人 p5

6. Financial options Real options pricing Real options reasoning Theoretical Background • Real Options Reasoning (ROR) • Basic assumptions : bounded rationality • Purchase options : Make small investment initially and wait for the • opportunity • The higher the uncertainty is, the more valuable the flexibility is. • Strike options : Make full investment when the situation is favorable 論文題目/報告人 p6

7. Theoretical Gap – Real options • Focus on the benefit from keeping an option • Less attention paid on the option-strike timing • Bowman & Hurry (1993) • Opportunity-arrival signals • Expiration signals 論文題目/報告人 p7

8. Proposition –Real options reasoning • Proposition 1: In the context of CVI, the investing companies will follow real options decision logic to make their subsequent investment decision on the venture they have initially invested. • Proposition 1a: An expected high growth of the target industry the focal venture is in will serve as an opportunity-arrival signal, which will induce the investing company to increase its commitment to the focal venture. • Proposition 1b: Peer group company’s increasing commitment on a venture of the same industry will serve as either an opportunity-arrival or an expiration signal, which will induce the investing company to increase its commitment to the focal venture. 論文題目/報告人 p8

9. Real options reasoning • Expected market growth • Peer-group firm’s action Subsequent Investment Decision Strategic Orientation • Escalating Commitment • Negative feedback • Sunk cost • Past performance Conceptual Framework--Real Options Reasoning 論文題目/報告人 p9

10. Theoretical Background • Escalating Commitment • People’s escalating tendency • Negative feedback enforce the escalating tendency • Uncertain ultimate outcome • Rational or irrational • Past empirical evidence • Individual decision making & Organizational decision making • Laboratory experiment & Case study • Four categories of determinants (Staw, 1997) • Psychological, social, project and organizational determinants 論文題目/報告人 p10

11. Theoretical Gap – Escalating Commitment • The need to identify the organizational determinants 論文題目/報告人 p11

12. Proposition Development–Escalating commitment • Proposition 2: In the context of CVI, a negative performance feedback of the focal venture will induce the investing company to increase its commitment to the focal venture. • Proposition 2a: When the investment on the focal venture involves substantial sunk cost, the tendency of escalating commitment will be enhanced. • Proposition 2b: The investing company’s previous successful CVI experience will enhance the tendency of its escalating commitment. 論文題目/報告人 p12

13. Subsequent Investment Decision Strategic Orientation • Escalating Commitment • Negative feedback • Sunk cost • Past performance Conceptual Framework--Escalating commitment • Real options reasoning • Expected market growth • Peer-group firm’s action 論文題目/報告人 p13

14. Proposition Development–Strategic orientation as an moderator • Proposition 3: A firm’s strategic orientation will affect its adoption of either internal or external signals as decision reference. Specifically, an investing company pursuing low-cost advantages will tend to take external signal as decision reference, while a company pursuing differentiation advantages will be more likely to escalating its previously made commitment. 論文題目/報告人 p14

15. Conceptual Framework--Strategic orientation as an moderator • Real options reasoning • Expected market growth • Peer-group firm’s action Subsequent Investment Decision Strategic Orientation • Escalating Commitment • Negative feedback • Sunk cost • Past performance 論文題目/報告人 p15

16. Conceptual Framework--Real Options Reasoning • Real options reasoning • Expected market growth • Peer-group firm’s action Subsequent Investment Decision Strategic Orientation • Escalating Commitment • Negative feedback • Sunk cost • Past performance 論文題目/報告人 p16

17. Implications and Conclusions • We provide a multi-determinant view of decision making behavior under uncertainty. • Our conceptual framework has made a further positive conversation between ROR and EC. • Future research opportunities: • Examine the propositions by empirical study • Performance implication of adoption differential decision logics. 論文題目/報告人 p17