The measurement and management of risk in R&D and innovation

This paper focuses on the issue of risk in the R&D and innovation processes . It examines the degree of risk suggested by the four main streams of the literature. While risk has not been a major focus of the empirical literatu re, the results suggest that the vast majority of inventions are worth rela tively little, while a small proportion are extremely valuable. The second part of the paper argues that the net present value rule may not be appropr iate in the presence of high risk, and the R&D decision may require an opti mal stopping rule, which gives very different results. Adopting an optimal stopping rule in the face of a normal distribution of annual gross returns, the lifetime distribution of returns are similar to those observed in the real world. In addition, it is possible to use the results to replicate the observed behaviour of patent renewals.