林舒柔台灣大學國際企業研究所

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Corporate Venture Investment Decisions under Corporate Venture Investment Decisions under Uncertainty:Uncertainty:

Real Options Reasoning versus Escalating Real Options Reasoning versus Escalating

Commitment Perspective*Commitment Perspective*

林舒柔台灣大學國際企業研究所

*: This paper has benefited from a substantial discussion with professors Ji-Ren Lee and

Ming-Je Tang. The usual disclaimers apply.

中華民國九十三年十二月四日


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Strategic Investment Decision Strategic Investment Decision Making under UncertaintyMaking 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 reasoningReal options reasoning Escalating commitmentEscalating commitment


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Real options reasoning versus Real options reasoning versus Escalating commitmentEscalating commitment

Bowman & Hurry (1993) : Waiting for signals or not

Adner & Levinthal (2004) McGrath , Ferrier & Mendelow (2004) Zardkoohi (2004)


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Corporate Venture Investment Corporate Venture Investment

Decisions under UncertaintyDecisions under Uncertainty

Corporate Venture Investment : focal firm’s equity investment in an entrepreneur

ial firm Miles & Covin (2002)

Organizationally separate from focal firmOrganizationally separate from focal firm Beyond existing business scopeBeyond existing business scope Start-up or on embryo stageStart-up or on embryo stage

Characterized by

High uncertaintyHigh uncertainty Sequential rather than once-for-all decision makingSequential rather than once-for-all decision making


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Main ObjectivesMain Objectives

Real Options Reasoning versus Escalating Commitment

Investigate corporate venture decision making


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Theoretical BackgroundTheoretical Background

Real Options Reasoning (ROR)

Financial options Real options reasoningReal options pricing

• 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


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Theoretical Gap Theoretical Gap – Real options – 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


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Proposition –Proposition – Real options reasoningReal 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.


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Conceptual Framework--Conceptual Framework-- Real Options ReasoningReal Options Reasoning

Real options reasoning•Expected market growth•Peer-group firm’s action

Subsequent Investment Decision

Escalating Commitment• Negative feedback

Strategic Orientation

•Sunk cost•Past performance


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Theoretical BackgroundTheoretical 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


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Theoretical Gap Theoretical Gap – – Escalating CommitmentEscalating Commitment

The need to identify the organizational determinants


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Proposition Development–Proposition Development– Escalating commitmentEscalating 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.


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Conceptual Framework--Conceptual Framework-- Escalating commitmentEscalating commitment







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Proposition Development–Proposition Development– Strategic orientation as an moderatorStrategic 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.


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Conceptual Framework--Conceptual Framework-- Strategic orientation as an moderatorStrategic orientation as an moderator







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Conceptual Framework--Conceptual Framework-- Real Options ReasoningReal Options Reasoning







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Implications and ConclusionsImplications 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.

林舒柔台灣大學國際企業研究所

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Transcript of 林舒柔台灣大學國際企業研究所

林舒柔 台灣大學國際企業研究所

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Transcript of 林舒柔 台灣大學國際企業研究所

林舒柔台灣大學國際企業研究所

Transcript of 林舒柔台灣大學國際企業研究所