Optimal R&D investment strategies under the threat of new technology entry

Greater technical uncertainty stimulates initiating exploratory R&D and can result in implementation of more expensive research projects. This is a result of the limited downside risk of the project: it does not matter whether the outcome of an initial R&D stage is disappointing or very disappointing, since in both cases the firm will simply abandon the project. The welfare analysis shows that the threat of entry may reduce welfare in case of entry deterrence.