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The Public Sector R&D Enterprise combines a primer on how government R&D programs actually work with a sophisticated methodology for prospectively putting a dollar figure on the value of R&D investments before they are made.



1. Research and Development: Opportunities and Challenges

Chapter 1 describes the tension between the goals of policymakers who seek to make research and development (R&D) a cornerstone of national economic progress and the reality that R&D programs operate in a complex environment where program design and implementation is challenging and success is difficult to measure. The chapter also summarizes how the rest of the book offers insights and tools to improve the opportunities for success in government R&D programs.

Peter D. Linquiti

2. A Primer on the Public Sector R&D Enterprise

The US government spends $30 billion per year on applied, nondefense R&D. Chapter 2 provides a holistic overview of how this R&D enterprise operates.Context is set with a review of the political, economic, and institutional forces that shape R&D programs. A logic model framework is used to describe the inputs, activities, outputs, outcomes, and impacts of public sector R&D. This expansive approach makes the subject more complex, but protects the reader from analytic myopia—a failure to recognize all of the drivers of success and failure. The primer aspires to provide readers who have a limited background in the field a readily accessible entry point to the world of government R&D programs.

Peter D. Linquiti

3. R&D Portfolio Valuation and Formation

Chapter 3 confronts the challenge ofpredicting the return on R&D investments before they are made. It critiques traditional government methods that apply discounted cash flow analysis to individual R&D projects in isolation. Option theory and portfolio theory are used to identify potential enhancements to traditional methods. Chapter 3 also demonstrates that focusing exclusively on potential returns while ignoring risk is a fundamentally unsound practice. Methods often used by the private sector to form, value, and manage portfolios of R&D projects are summarized, including the “bucket” method, quantitative multi-objective methods, static choice methods, and dynamic management methods. While a portfolio perspective is rarely taken within government R&D programs, a few examples are identified and characterized.

Peter D. Linquiti

4. Public Sector R&D Valuation: A Practical Example

Chapter 4 demonstrates the practical feasibility of prospectively using a real options approach to value a portfolio of government R&D projects characterized by significant technical, commercial, and other interdependencies and uncertainties. The studied R&D projects focused on energy consumption in the chemicals industry and were sponsored by the Department of Energy between 2002 and 2004. Results from this practical example confirm that switching from a discounted cash flow method to a real options method for valuing R&D investments makes a material difference at both the project and portfolio levels. In addition, the risks that are taken with taxpayer money—usually obscured by traditional methods—become plainly visible in the approach that is demonstrated.

Peter D. Linquiti

5. Recommendations for Public Sector R&D Managers

Chapter 5 provides a series of recommendations for public sector R&D managers based both on theoretical analysis and on a practical case study of a portfolio of “real world” R&D projects. In brief, discounted cash flow techniques should be abandoned in favor of real option methods. In addition, individual R&D projects should never be valued in isolation, but only in concert with the other R&D projects comprising a government program. Technical, commercial, and potential “deep” connections among R&D projects must be identified and characterized before meaningful conclusions can be drawn about the risks being taken with taxpayers’ money. Finally, proactive management of government-sponsored R&D, including interim performance reviews, are likely to yield better results than a hands-off style of management.

Peter D. Linquiti

6. Next Steps in Valuing R&D Portfolios: A Research Agenda

Chapter 6 lays out a research agenda for continued investigation of the risks and returns of government R&D programs. Ways of incorporating social benefits, like reduced pollution, need to be further developed. Methods for better simulating the option exercise decisions of multiple firms to deploy a new technology at different points in time are also needed. In addition, more work is warranted to improve the characterization and simulation of the multiple types of potential relationships among the projects in an R&D portfolio. Finally, for R&D programs that apply the stage-gate review process, the method used earlier in the book requires an adjustment to accommodate sequential decision-making.

Peter D. Linquiti


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