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Chung-Cheng Lee Department of Business Administration, Chaoyang University of Technology

Adoption Timing of Technology Innovative Investment Project in Economic Rents Perspective ─ The New-Generation TFT-LCD Panel Makers Cases. Chung-Cheng Lee Department of Business Administration, Chaoyang University of Technology May 8 th , 2009

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Chung-Cheng Lee Department of Business Administration, Chaoyang University of Technology

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  1. Adoption Timing of Technology Innovative Investment Project in Economic Rents Perspective ─The New-Generation TFT-LCD Panel Makers Cases Chung-Cheng LeeDepartment of Business Administration, Chaoyang University of Technology May 8th, 2009 The Previous Version Had Been Presented at ACME 2008 Annual Meeting, Toronto, Canada, July 25th, 2008

  2. Outlines • Introduction • Analytical Tool: Economic Rents • Using Real Option Approach for Investment Timing Strategy • Numerical Examples • Conclusions

  3. Introduction (1) • In today’s hyper-competitive marketplace, many products like those that memory chips and TFT-LCD TVs are characterized by short life cycles andrapidly-declining sales prices.

  4. Introduction (2) • An effective strategic management for the technology innovative investment projects involves various decisions such as which new technologyto be adoptedand when to implement.

  5. Analytical Tool : Economic Rent • Innovative Rents are understood here in their Schumpeterian sense of being reward for the first commercialization of an invention • Under rivalry, Rents would exist if the firm has a competitive advantage in realizing the project

  6. Introduction (3) • Economic rents occur only if comparative competitive advantage exists. • A hi-tech firm can capture the economic rents (the above-normal return) if the position with strategic benefit of technology innovative activities has been implemented.

  7. Introduction (4) • There is a decided preference for the maximization of product revenues under the innovative technology adoption timingas an important objective.

  8. Investment Timing Problem (1) Deciding on the appropriate investment timing is a critical issue which raises the substantial questions coming from: • the intrinsic uncertainty surrounding each new technology • the inherently intangible nature of many of expected benefits

  9. Investment Timing Problem (2) • the current and future availability of technical and economic information about new technology • the need to develop new competences and skills • the role played by learning process • the partial or complete irreversibility of innovative investment

  10. Real Option - Uncertainty Embedded Values

  11. Real Option - expected project value might evolve over time

  12. Using Real Option Approach for Investment Timing Strategy • The Investment Timing of Technology Innovation Project is Analogous tothe Timing of Exercising of An American Call Option on a Dividend Paying Stock

  13. Analytical Tool : Economic Rent

  14. The investment Timing Decision Tree for Technology Innovation Project

  15. Numerical Example • A global top-five TFT-LCD panel company in Taiwan, has planned to invest the eighth-generation (8G) production lines to upgrade the technology position. • Together with the current 7G, the start of what is considered to be the world’s most advanced (8G) line will enable to expand production of large screen LCD panels for 50 inch class LCD TVs

  16. Numerical Example (2) • The first 8G production line investment project in Taiwan was announced in the beginning of 2006; however, there was no 8G production line has been constructed in the end of 2007. • Considering the mainstream sizes of LCD TVs in the global market, which keep getting bigger even as LCD TV prices continue going down. • These imply that the amount of revenue generated may be decreasing because of completing a product as its adoption timing is delayed

  17. Numerical Example (3) The Estimated Cash Flows of the 8G TFT-LCD Panel Production Line Investment Project(Unit: Million US$ Dollars)

  18. The investment Timing Decision Tree for Technology Innovation Project with σ=0.2

  19. The investment Timing Decision Tree for Technology Innovation Project with σ=0.4

  20. Conclusions (1) • With the advantage of option pricing approach, decision maker can evaluate the project value and decide the optimal investment timing base on different degree of uncertainty analysis. • The results not only extend the advantage of keeping the future uncertain information simple but also provide the decision maker references to make decision under different level of uncertainty.

  21. Conclusions (2) • If the hi-tech firm is confident in its own management ability as well as future technology development process of the project,this firm will be more talent to take higher uncertainty.

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