Patent Protection, Market Uncertainty, and R&D Investment

Real options investment theory predicts current investment falls as uncertainty about market returns increases. In the case of R&D investment, which is usually considered an irreversible form of investment, this effect should be quite pronounced. This paper tests the real options prediction about the R&D investment-uncertainty relationship and further considers how patent protection influences this relationship. Patent protection, by limiting the threat of market rivalry, should mitigate firm-specific uncertainty and stimulate current R&D investment. Our empirical results support both the prediction of real options theory and the mitigating effect of patent protection.

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Czarnitzki, Dirk and Andrew Toole (2006), Patent Protection, Market Uncertainty, and R&D Investment , ZEW Discussion Paper No. 06-056, Mannheim.