Funding Research in a World of Controls and Accountability

Stringent demands for accountability with respect to spending funds are resulting in the need for justifying the value of research in science and technology (S&T). The focus appears to be aimed at measuring policy goals against their intended outcomes. Many of these goals, however, are long term and are dependent on a series of complex inter-dependent processes making the direct measurement of impact impractical. For example, funding in S&T activities leads to productivity growth, but the exact causal path is complex. The need to invest in innovation activities coupled with the increased appetite for accountability and goal-oriented funding activities is challenging managers who lack a quantitative tool set to accurately value such activities. Investments in research give the performer the option-with no obligation-to pursue a course of action some time in the future. These sorts of options can be used to create opportunities to take advantage of economic and/or social benefits resulting from R&D activities. Current capital budgeting techniques (e.g., Net Present Value) are not appropriate for assessing such investments - we propose a quantitative assessment technique based on a modification of financial options. Our model can account for the sudden large fluctuation events that occur in the commercialization of R&D output, but that rarely occur in financial markets.