2010 International Conference on E-Business and E-Government
Review on methods of new technology valuation
Lou Yan,Zhang Hong,Huang Lucheng
School of economic and management
Beijing University of Technology
Beijing, China
iris214@emails.bjut.edu.cn
Abstract—Technology assessment is an important area in
technology management that has received great attention among
researchers over the past decades. New technology valuation as a
part of technology assessment is to evaluate the economic value
of new technology with the consideration of uncertainties and
risks. In this paper, methods of valuation of new technology are
summarized, and finally the limitations in the current research
and some avenues of further research are suggested.
Keywords-new technology valuation; real options; technology
assessment
I. INTRODUCTION
The valuation of new technology is a major managerial
challenge, and it has attracted considerable interest of
researchers and practitioners for decades.
Under the influence of ever increasing competitive
pressures and shorter product life cycles, many companies are
concerning to both diversify their technology portfolios and
accelerate the introduction of new technologies to the market.
These pressures have lead to an increase of technology
development and trading between companies, with the
associated need to value technology [1].
According to the definition of technology valuation,
different researchers have different views. Yan-Ru Li (2006)
argued that technology valuation was existed under conditions
of risks and uncertainties, appraised by buyers or sellers for its
true worth. Uncertainty refers to the variability of decisions,
and risk refers to the variability of outcomes [2]. On the other
hand, Ranaulo Angelo (2008) found that technology valuation
was the method of valuing technology acquisitions which, in
addition to the purchase price and startup costs, also included
current market value adjustments and the risk premium of the
acquisition [3].Xing Xiaoqiang (2006) thought that technology
was useless until and unless it was used and assessed by its
user. Only if it was commercialized, the value of technology
could be realized. Therefore, it is suggested that new
technology valuation is to evaluate the economic value of new
technology with the consideration of uncertainties and risks in
this paper [4].
There are many valuation techniques and methods applied
in new technology valuation. At the early stage, traditional
approach had been adopted widely, such as cost approach,
market approach and income approach. However, some
researchers argued that the traditional approach could not
assess the future value of technology and deal with managerial
The paper was supported by Key projects of national natural science
foundation (70639002); Beijing innovative talents projects, Beijing science
and technology planning projects (Z07001000560709).
978-0-7695-3997-3/10 $26.00 © 2010 IEEE
DOI 10.1109/ICEE.2010.488
flexibility, and proposed that option-based approach could deal
with the uncertainties and risks in technology valuation [5][6].
Boer F.Peter, Razgaitis, David Probert, Rob Phaal made great
contribution to real option approach applied in new technology
valuation [7,8,9].LI Xuefeng and TONG Yunhuan firstly
proposed the framework of new technology valuation, and
suggested the limitation of using real option approach used in
China [10].
In this paper, based on the analysis of articles published in
journals in the field of technology valuation, methods of
valuation of new technology are summarized, and finally the
limitations in the current research and some avenues of further
research are suggested.
II. TRADITIONAL METHODS FOR NEW TECHNOLOGY
VALUATION
Many different methods for technology valuation have
been used including cost approach, market approach and
discounted cash flow (DCF). Particularly, DCF is the most
often applicable method.
Cost approach estimates the cost of recreating the future
utility of the technology being valuated, and assumes this
value to be the future returns from the technology. However,
market approach requires finding a similar or comparable
technology to the one being evaluated. The inherent weakness
of the two approaches is the difficulty of obtaining data for a
truly novel technology.
Discounted cash flow (DCF) is a method of evaluating an
investment by estimating future cash flows and taking into
consideration the time value of money. It has the disadvantage
of being unable to accurately reflect the value of technology
that does not create a direct profit but, nevertheless, bring
value to the company, or technologies where future profits are
hard to estimate.
In a word, we can see that traditional methods can not
properly capture the economic value of managerial flexibility
to continue or abandon a project at different stages of
development. Therefore, option-based approaches have
emerged to deal with such issues.
III. REAL OPTIONS PRICING METHODS
The real options approach frames the valuation process
differently from the traditional methods. It views a project as a
process that managers can continually reshape in light of
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technological or market changes. This perspective contrasts
with the traditional view of a project as set of decisions made
once at the beginning and unchanged during the life of the
project [11].
In general, real options models can be classified into
discrete time model and continuous time model. Discrete time
model includes binomial tree model and ternary tree model.
However, continuous time model contains Black-Scholes
model, stochastic differential equation and Monte Carlo
simulation. In this sense, different models may suit different
cases.
A. Real Options Methods for New Technology Valuation
In resent years, new methodologies have been sought and
real option-based approaches have emerged.
Trigeorgis (1996) claimed that traditional capital budgeting
methods or discounted cash flow approaches could not cope
with the operation flexibility options and other strategic
aspects of various projects but that the application of option
techniques resulted in the correct solution [12]. Also, Dixit and
Pindyck (1995) stated that the net present value rule was easy,
but it made the false assumption that the investment was either
reversible or that it could not be delayed. In fact, even if a
project has a positive net present value, this does not
necessarily mean that the project should be taken on
immediately [5].
More recently, researchers have emphasized that
compound options and hybrid real options should be used for
the valuation of new technology.
Compound options are options whose value depends on
other options. Geske obtained a close form solution to a
compound option problem by replacing the standard normal
distribution in a simple option model with a bivariate normal
distribution [13]. Geske's compound option is a simultaneous
option because the options are alive at the same time.
Copeland and Antikarov solved this simultaneous compound
option problem using a binomial lattice approach to evaluate a
multi-phased construction project. Particularly, R&D projects
could be viewed as multi-stage investment or sequential
compound options [14].
Hybrid real options proposed by James E. Neely and
Richard de Neufville(2001), and other researches used it for
new technology valuation and R&D project valuation. Hybrid
real options combined the best features of decision and options
analysis. They argued that decision analysis could deal with
project risks, and options methods could deal with the market
risks. Thus, it could be used for valuation of different types of
risks [11,15,16].
Further, volatility and variable estimation is also important
for implementing real options models. Longstaff and Schwartz
(2001) made great contribution for improving the traditional
simulation methods by using least squares. They made this
approach applicable in path-dependent and multifactor
situations where traditional finite difference techniques cannot
be used [17].
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B. Practical Real Options Valuation of New Technology
Many researchers assess the value of new technology,
mostly in the form of new technology projects and patented
technology.
As valuing of new technology projects, most of the articles
discussed were from the categories of biotechnology,
information and communication technology. Robert
J.Kauffman (2005) believed that an important source of value
in information technologies from which had the potential to be
leveraged in the development of future applications. They
presented an analytical model based on real options that
showed the process by which this potential was converted into
business value and discussed middleware as an example
technology [18]. Dai Chun Jing (2008) was on the analysis of
high-tech features of the project life cycle, combination of
different life-cycle stage to analyze the specific risk
characteristics of various periods, establishing a
comprehensive evaluation method about high-tech project
[19].
New technology is always protected by patent, thus patent
valuation also receives great attention in the field of
technology management. Nicolas P.B.Bollen (1999), Schwartz
(2002), Ma Zhongming (2004), Wang Xuedong (2007) applied
real options methods to assess the value of patent, making
some improvement on the basis of the former models
[20,21,22,23]. Recently, Iwan von and Thorsten Teichert
(2008) extended current valuation considerations of patented
technology from a static perspective to include a dynamic view
using nanotechnology as an example. Furthermore, in addition
to single value chain stages as a level of analysis (level A) they
also took into account the complex technology landscapes in
entire value chains (level B) as well as patented technologies’
potential value in different current or future value chains (level
C). Finally, they derived conclusions with respect to valuation
approaches for the discussed levels of analysis from a static
and dynamic perspective [24].
IV. COMBINATIONS REAL OPTIONS VALUATION WITH
OTHER METHODS
In recent year, many researchers suggest real options
valuation approach have so many assumptions which are not
close to reality, or it is too complex for users. Therefore,
combination real options valuation with other methods
received great attention.
A. Combination Real Options Valuation with Fuzzy Set
Theory
Fuzzy set theory is applied to model uncertain and flexible
project information. Since traditional project valuation
methods often underestimate or overestimate the risk of a
project, a fuzzy compound options model is used to evaluate
the value of each R&D project. F.T.S. Chan (2000) described
an application of the theory of fuzzy sets to hierarchical
structural analysis and economic evaluations. To deal
quantitatively with imprecision or uncertainty, cash flows are
modeled as triangular fuzzy numbers, then the ambiguities
involved in the assessment data can be effectively represented
and processed to assure a more convincing and effective
decision-making [25]. Cheng-Few Lee (2005) believed that
when an investor faced an option-pricing problem, the
outcomes of the primary variables depended on the investor’s
estimation. The traditional probabilistic B-S model does not
consider fuzziness to deal with aforementioned problems,and
then proposed a fuzzy B-S option pricing model [26].
B. Combination Real Options Valuation with Scenario
Planning
Another group of technology valuation research combined
scenario planning. Scenario planning and real option analysis
have complementary strengths and weaknesses as tools for
managers making strategic investment decisions under
uncertainty. Miller and Waller (2003) combined these two
approaches in an integrated risk management process which
involved scenario development, exposure identification,
formulating risk management responses, and implementation
steps. In contrast with the predominant emphasis on
quantitative analysis in the real option literature, this study
illustrated qualitative assessment of real options [27]. Chen Jun
(2007) analyzed the characteristics of the process of new
technology project investment under complicated
circumstance, then proposed a simplified framework based on
scenario planning and real options [28].
C. Combination Real Options Valuation with Analytic
Hierarchy Process
Analytic hierarchy process methods were also applied in
this research. Yu-Jing Chiu, Yuh-Wen Chen (2007)
established a patent valuation system from the perspective of a
licensor using AHP in order to determine the importance of
patent valuation indicators. The criteria of AHP methods
included qualitative and quantitative factors. For the quantitive
factors, it is used real option approach as their valuation
methods [29]. Georgios Angelou, Anastasios Economides
(2009) combined the real option models and analytic hierarchy
process (AHP) into a common decision analysis framework
providing an integrated multicriteria model, called ROAHP,
for prioritizing ICT business alternatives. It was argued that
real option models were strictly quantitative and very often
ICT investments might also contain qualitative factors, which
could not be quantified in monetary terms [30].
D. Combination Real Options Valuation with Game Theory
The literature that focuses on the intersection of real
options with game theory shows that competitive forces may
provide an incentive to invest early[5,31]. The timing and
value of many investments depend critically on competitive
interaction. Kulatilaka and Perotti (1998) showed that in a
cournot duopoly setting the first firm to invest could gain a
strategic advantage since market share and the value of early
investment increased more with higher demand uncertainty
than did the value of waiting [31]. Smit and Trigeorgis (2007)
used a combination of real options and games to develop
corporate investment strategies, and illustrated the use of real
options valuation and game theory principles to analyze
prototypical investment opportunities involving important
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competitive or strategic decisions under uncertainty [32]. Dai
Jun (2008) researched duopoly model of the technology
project valuation taking into account technological progress
[33].
V. THE LIMITATIONS OF EXISTING METHODS AND
CONSIDERATION FOR FUTURE RESEARCH
A. Limitations
The valuation methods that have been presented above tend
to still have some limitations.
To our knowledge, prior research has neglected to apply
the real options model and Monte Carlo simulations to
estimate the overall value of new technology projects or R&D
projects rather than the value of a technology itself. However,
the value of an R&D project is in most cases not equal to the
value of a technology. When the entrepreneurial capacity is
limited to purchase the key technology, the model can not
meet the actual application.
On the other hand, real options pricing models are either
overly simplistic by making unrealistic assumptions or too
complex to be applied in many managerial settings, and the
variables have to be estimated beyond personal bias which
may be not accurately.
In addition, from the perspective of a corporate strategy, it
is important to take into account the dynamic interaction
between the current strategy for managing new technology and
future business strategy. Thus, technologies’ values vary
regardless of how valuable they are in the current value chain.
Even if a new technology is not essential in a current value
chain, it may be proved valued to its holder in the future.
Also from this review we can see that researchers are
equipped with a diverse pool of theory-based tools and
methods that are still growing in number and form. However,
there are no universal tools or methods that can be applied in
all technology valuation studies. And it is lack of empirical
study to ensure the effective adoption of new technology.
B. Consideration for Future Research
As much remains to be explored, there is still major scope
for research in this area.
In light of increasing theoretical, managerial, financial, and
political interest in the valuation of new technologies or
patents, further research is required to simplify the model used
in assessment and offer a better understanding for managers
making decisions. It is required that how to choose suitable
models on different cases.
Furthermore, existing methods mostly focusing on
quantitative method, but it is not always precisely. Future work
can be directed to develop and test qualitative techniques such
as the above mentioned approaches AHP and Game Theory,
which integrated with the quantitative method to retain
flexibility.
Other approaches which are rarely used can also applied in
our research. Technometric is used to evaluate the intensity of
technological change which is measured by an indicator,
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