R&D Investment, Patent Length, Uncertainty

In this paper, we systematically analyze the effect of patent length (patent protection period) and market risk as well as technology uncertainty on R&D investment decisions. The optimal control model can preferably reflect the multi-stage characteristic of R&D investment. We firstly derive the closed form expression of capital cost in the situation of two-stage. While in more than two stages case,. solve the model numerically by using numerical iteration algorithm based on dynamic programming. We show that the capital cost is significant differential in the pre-and post patent investment completion. Before patent investment is completed, the capital cost is a decreasing function with respect to patent length, and the number of stages completed and expected future cash flow, while increasing function with respect to market risk. However, after completion the capital cost only is an increasing function with respect to market risk. These results help to make a scientific and reasonable allocate resources and the capital budget R&D decisions.