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"A Real Options View of Corporate Venture Capital Investment Decisions: An Empirical Examination"

Yong Li and Joseph T. Mahoney

 

First Author :

Yong Li
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street
339 Wohlers Hall, MC 706
Champaign, IL 61820
USA

217-721-7533

yongli@uiuc.edu

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Second Author :

Joseph T. Mahoney
Business Administration
University of Illinois at Urbana-Champaign
1206 S. Sixth Street
140C Wohlers Hall, MC 706
Champaign, IL 61820
USA

217-244-8257

josephm@uiuc.edu

http://www.business.uiuc.edu/faculty/mahoney.html

 
 
Abstract :
 
This paper joins the strategic management research literature with the entrepreneurial research literature by developing a real options framework to explain and predict corporate venture capital investment decisions. Corporate venture capital is viewed as containing a series of real options.

The initial investment opportunity is analogous to a call option to invest. Upon exercising the call option, the investing firm acquires two additional real options: the abandonment option in adverse market conditions and growth options in favorable market conditions. This paper proposes that established firmsí propensity to make corporate venture capital investments are influenced by the factors that determine the economic value of the real options embedded in corporate venture capital projects. These real options value drivers include uncertainty, usage flexibility, growth potential and competition. Using a large sample of corporate venture capital investments during 1980-2004, this paper finds strong empirical support for a real options view of corporate venture capital investments.
 
 
Keywords :
 
competition, corporate venture capital, growth potential, real options, uncertainty, usage-flexibility
 
 
Footnotes & Acknowledgements :
 
This paper is funded by the Academy for Entrepreneurial Leadership and CIBER at the University of Illinois at Urbana-Champaign. We thank Glenn Hoetker, Huseyin Leblebici, James Mahoney, and Steven Michael for comments on an earlier draft of this paper. We thank participants for their comments on our presentation at the Real Options Conference held at the University of North Carolina at Chapel Hill in June 2006. Finally, we thank those who gave feedback on our presentation at the Annual Academy of Management Conference (AOM) in Atlanta, in August 2006. The usual disclaimer applies.
 
 
Manuscript Received : 2006
Manuscript Published : 2006
 
 
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